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| POL > SEC Filings for POL > Form 10-Q on 4-Nov-2009 | All Recent SEC Filings |
4-Nov-2009
Quarterly Report
Our Business
We are a premier provider of specialized polymer materials, services and
solutions with operations in thermoplastic compounds, specialty polymer
formulations, color and additive systems, thermoplastic resin distribution and
specialty vinyl resins. We also have three equity investments: one in a
manufacturer of caustic soda and chlorine; one in a formulator of polyurethane
compounds; and one in a manufacturer of polyvinyl chloride (PVC) compound
products. Headquartered in Avon Lake, Ohio, we have employees at manufacturing
sites and distribution facilities in North America, Europe and Asia and equity
investments in North America. We provide value to our customers through our
ability to link our knowledge of polymers and formulation technology with our
manufacturing and supply chain to provide an essential link between large
chemical producers (our raw material suppliers) and designers, assemblers and
processors of plastics (our customers).
Highlights and Executive Summary
Selected Financial Data
Three Months Ended September 30, Nine Months Ended September 30,
(In millions) 2009 2008 2009 2008
Sales $ 548.3 $ 735.1 $ 1,508.2 $ 2,196.9
Operating income $ 56.2 $ 1.3 $ 72.8 $ 45.4
Net income (loss) $ 49.6 $ (5.6 ) $ 43.8 $ 9.7
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Sales in the third quarter and first nine months of 2009 declined 25.4% and
31.3%, respectively, versus the corresponding periods in 2008. Volumes in the
third quarter and first nine months of 2009 declined 20.1% and 28.0%,
respectively, compared to the corresponding periods in 2008. These results
reflect the adverse impact of the global recession on demand levels across all
end markets. Particularly hardest hit were the transportation and building and
construction end markets. Changes in currency exchange rates had a negative
impact on sales of 3.6% and 5.4% for the third quarter and first nine months of
2009, respectively.
Operating income in the third quarter and first nine months of 2009 increased
$54.9 million and $27.4 million, respectively, versus the corresponding periods
in 2008 primarily as a result of third quarter 2009 gains of $21.1 million
associated with the curtailment of our postretirement healthcare plan and
$23.9 million related to the reimbursement of previously incurred environmental
costs. Additionally, operating income was favorably impacted by improved mix,
lower raw material costs, the realization of restructuring savings, and an
incremental benefit from LIFO related to the significant inventory reduction in
the United States in the first nine months of 2009. The impact of the previously
noted volume declines partially offset these favorable items in the third
quarter and first nine months of 2009 compared to the corresponding periods in
2008. Additionally, we recognized charges of $12.1 million and $25.2 million
related to restructuring and employee separation in the third quarter and first
nine months of 2009, respectively, as compared to $11.6 million and
$13.1 million in the corresponding periods in 2008. Our operating income for the
first nine months of 2009 was also negatively impacted by the $5.0 million
adjustment to our estimated 2008 year-end goodwill impairment charge. Changes in
currency exchange rates unfavorably impacted operating income by $1.0 million
and $4.5 million, respectively, in the third quarter and first nine months of
2009 as compared to the corresponding periods in 2008, driven mainly by the
strengthening of the U.S. dollar versus the Euro and Canadian dollar.
Net income increased $55.2 million and $34.1 million during the third quarter
and first nine months of 2009, respectively, as compared to the same periods in
2008 primarily due to the items discussed in the paragraph above. Net interest
expense was lower than in comparable prior periods primarily due to lower
average borrowing levels and lower average interest rates on our variable rate
debt. Income tax benefit for the first nine months of 2009 included
$13.2 million of income tax benefits and related interest income due to the
favorable settlement of a foreign tax audit and a state tax refund. These items
were partially offset by $8.3 million of charges for similar items in the second
and third quarters of 2009.
Liquidity
September 30, 2009 December 31, 2008
Cash and cash equivalents $ 241.0 $ 44.3
Accounts receivable facility availability 103.4 121.4
Liquidity $ 344.4 $ 165.7
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Since December 31, 2008, our liquidity increased by $178.7 million to
$344.4 million as the increase in our cash balance has more than offset the
decline in our borrowing capacity on the accounts receivable facility. The
increase in cash and cash equivalents of $196.7 million was driven by
substantially lower working capital investment in the first nine months of 2009
as compared to year-end 2008.
Results of Operations - Three-Month Period Ended September 30, 2009 versus the
Three-Month Period Ended September 30, 2008
Variances-Favorable
Three Months Ended September 30, (Unfavorable)
(Dollars in millions, except per share data) 2009 2008 Change % Change
Sales $ 548.3 $ 735.1 $ (186.8 ) (25.4 )%
Cost of sales 441.0 669.9 228.9 34.2 %
Gross margin 107.3 65.2 42.1 64.6 %
Selling and administrative 56.3 69.7 13.4 19.2 %
Income from equity affiliates and minority
interest 5.2 5.8 (0.6 ) (10.3 )%
Operating income 56.2 1.3 54.9 NM
Interest expense, net (8.5 ) (9.7 ) 1.2 12.4 %
Other expense, net (1.2 ) - (1.2 ) NM
Income (loss) before income taxes 46.5 (8.4 ) 54.9 NM
Income tax benefit 3.1 2.8 0.3 10.7 %
Net income (loss) $ 49.6 $ (5.6 ) $ 55.2 NM
Earnings (loss) per common share:
Basic earnings (loss) $ 0.54 $ (0.06 )
Diluted earnings (loss) $ 0.53 $ (0.06 )
NM - Not meaningful
Sales
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savings from our restructuring activities and decreases in insurance and bad
debt expense, which were partially offset by increases in pension and incentive
compensation expenses.
Income from Equity Affiliates
Income from equity affiliates is summarized as follows:
Three Months Ended
September 30,
(In millions) 2009 2008
SunBelt $ 4.8 $ 10.2
Other equity affiliates $ 0.4 $ (4.4 )
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During the third quarter of 2009, income from equity affiliates declined
$0.6 million. Lower earnings from our SunBelt joint venture were due primarily
to lower pricing for caustic soda, partially offset by an increase in pricing
and volume for chlorine as compared to the third quarter of 2008. Also, in the
third quarter of 2008, we recognized charges of $4.7 million related to our
investment in Geon Polimeros Andinos, a 50% owned equity affiliate.
Interest Expense, net
Interest expense, net declined $1.2 million in the third quarter of 2009 versus
the third quarter of 2008 due primarily to lower average borrowings and lower
interest rates on our variable rate debt. Included in interest expense, net for
the third quarter of 2009 and 2008 was interest income of $0.9 million and
$0.8 million, respectively.
Other Expense, net
Three Months Ended
September 30,
(In millions) 2009 2008
Currency exchange gain $ 1.7 $ 1.2
Foreign exchange contracts loss (2.3 ) (0.4 )
Fees and discount on sale of trade receivables (0.4 ) (0.6 )
Other loss (0.2 ) (0.2 )
Other expense, net $ (1.2 ) $ -
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The expense related to the discount on sale of trade receivables was lower in
the third quarter of 2009 as we had no borrowings under our receivables sale
facility.
Income Tax (Expense) Benefit
For the third quarter of 2009, we recognized an income tax benefit of
$3.1 million compared to a benefit of $2.8 million in the third quarter of 2008.
We record our interim provision for income taxes based on our estimated annual
effective tax rate as well as certain items discrete to the current period. Our
interim provision as well as our estimated annual effective tax rate is impacted
by a number of factors including our U.S. federal, state and foreign income tax
loss carryforwards and our ability to use them, as well as changes to our
unrealized tax benefits.
We decreased existing valuation allowances against our deferred tax assets by
$28.4 million in the third quarter of 2009. The non-cash benefit to income tax
expense was $15.3 million and related to various U.S. federal, state, local and
foreign deferred tax assets. The remaining decrease of $13.1 million related to
pension and postretirement health care liabilities and was recorded as an
increase to accumulated other comprehensive income. We review all valuation
allowances related to deferred tax assets and will adjust these reserves when
appropriate.
During the third quarter of 2009, we recognized $3.4 million of benefit related
to a state tax refund.
Results of Operations - Nine-Month Period Ended September 30, 2009 versus the
Nine-Month Period Ended September 30, 2008
Variances-Favorable
Nine Months Ended September 30, (Unfavorable)
(Dollars in millions, except per share data) 2009 2008 Change % Change
Sales $ 1,508.2 $ 2,196.9 $ (688.7 ) (31.3 )%
Cost of sales 1,255.4 1,958.3 702.9 35.9 %
Gross margin 252.8 238.6 14.2 6.0 %
Selling and administrative 203.6 217.6 14.0 6.4 %
Adjustment to impairment of goodwill 5.0 - (5.0 ) NM
Income from equity affiliates and minority
interest 28.6 24.4 4.2 17.2 %
Operating income 72.8 45.4 27.4 60.4 %
Interest expense, net (26.1 ) (27.9 ) 1.8 6.5 %
Other expense, net (8.5 ) (2.7 ) (5.8 ) (214.8 )%
Income before income taxes 38.2 14.8 23.4 158.1 %
Income tax benefit (expense) 5.6 (5.1 ) 10.7 NM
Net income $ 43.8 $ 9.7 $ 34.1 351.5 %
Basic and diluted earnings per common share $ 0.47 $ 0.10
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NM - Not meaningful
Sales
Sales declined $688.7 million, or 31.3%, in the first nine months of 2009 due to
the effects of the global recession. The components of this decrease include the
unfavorable impact of the decline in volumes of 28.0% and the unfavorable impact
of foreign exchange on sales of 5.4%. All operating segments experienced
declines in sales and volumes reflecting the significant impact of the global
recession on our end markets, particularly transportation and building and
construction.
Cost of Sales
Cost of sales includes raw material, plant conversion, distribution and
environmental remediation related costs and plant related restructuring charges.
These costs, as a percentage of sales, declined to 83.2% of sales in the first
nine months of 2009 as compared to 89.1% in the first nine months of 2008. Cost
of sales for the first nine months of 2009 includes a gain of $23.9 million
associated with the reimbursement of previously incurred environmental costs.
Restructuring charges in cost of sales were $23.2 million in the first nine
months of 2009 and $11.9 million in the same period in 2008. Lower raw material
costs, the realization of restructuring savings and a benefit from LIFO related
to inventory reductions in the United States favorably impacted cost of good
sold in the first nine months of 2009 as compared to the same period in 2008.
Selling and Administrative
Selling and administrative includes selling, technology, administrative, and
general corporate expenses. These costs were $14.0 million lower in the first
nine months of 2009 due to a $21.1 million curtailment gain, a decrease in
insurance and bad debt expense and savings from our restructuring activities,
partially offset by increases in pension and incentive compensation expenses.
Adjustment to Impairment of Goodwill
As previously disclosed in our 2008 Annual Report on Form 10-K, during the
fourth quarter of 2008, we identified indicators of potential impairment and
evaluated the carrying values of goodwill and other intangible and long-lived
assets. The measurement of goodwill impairment consists of two steps. In the
first step, we compared the fair value of each reporting unit to its carrying
value, and determined that the fair value of both the Geon Compounds and
Specialty Coatings reporting units (reporting units within Performance Products
and Solutions) was less than their corresponding
carrying values. Following that determination, we performed a second step in
order to measure the amount of the impairment by comparing the implied fair
value of each reporting unit's goodwill to its carrying value. The calculation
of the goodwill impairment in this second step includes a hypothetical
allocation of the fair value of the assets and liabilities as if the reporting
units had been acquired. Due to the extensive work involved in performing the
related asset appraisals, we initially recognized an estimated impairment loss
of $170.0 million in our 2008 Annual Report on Form 10-K.
Subsequently, in the first quarter of 2009, we completed the second step of the
analysis and determined the final goodwill impairment charge as of December 31,
2008 was $175.0 million, reflecting impairments of $147.8 million and
$27.2 million for the Geon Compounds and Specialty Coatings reporting units,
respectively. This represented an increase in the goodwill impairment charge for
Specialty Coatings of approximately $12.4 million and a decrease for Geon
Compounds of $7.4 million, as compared to the preliminary estimates recorded in
the fourth quarter of 2008. The total difference of approximately $5.0 million
from our preliminary estimate was recorded in the first quarter of 2009.
This adjustment is recorded in the accompanying consolidated statements of
operations and is reflected within Corporate and eliminations in Note 13 to the
accompanying consolidated financial statements.
Income from Equity Affiliates
Income from equity affiliates is summarized as follows:
Nine Months Ended
September 30,
(In millions) 2009 2008
SunBelt $ 26.6 $ 26.8
Other equity affiliates $ 2.0 $ (2.4 )
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Income from other equity affiliates increased $4.2 million in the first nine
months of 2009. In the first nine months of 2008 we recorded $4.7 million of
charges related to our investment in Geon Polimeros Andinos, a 50% owned equity
affiliate.
Interest Expense, Net
The decrease in interest expense, net of $1.8 million for the first nine months
of 2009 as compared to the first nine months of 2008 was the result of lower
average borrowing levels and lower interest rates on our variable rate debt.
Included in interest expense, net for the nine months of 2009 and 2008 was
interest income of $2.4 million and $2.5 million, respectively.
Other Expense, Net
Financing costs associated with our receivables sale facility, foreign currency
gains and losses and other miscellaneous items were as follows:
Nine Months Ended
September 30,
(In millions) 2009 2008
Currency exchange gain $ 1.3 $ 1.4
Foreign exchange contracts loss (8.4 ) (0.9 )
Fees and discount on sale of trade receivables (1.0 ) (2.8 )
Other loss (0.4 ) (0.4 )
Other expense, net $ (8.5 ) $ (2.7 )
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In the first quarter of 2009, we recorded $7.1 million in foreign
currency-related losses, which were primarily attributable to Euro-denominated
exposures that were not hedged in connection with the transition of treasury
management services to new providers.
Income Tax (Expense) Benefit
For the first nine months of 2009, we recorded an income tax benefit of
$5.6 million compared to income tax expense of $5.1 million in the first nine
months of 2008. We record our interim provision for income taxes based on our
estimated annual effective tax rate as well as certain items discrete to the
current period. Our interim provision as well as our estimated annual effective
tax rate is impacted by a number of factors including our U.S. federal, state,
and foreign income tax loss carryforwards, our ability to use them, as well as
changes to our unrealized tax benefits.
We decreased existing valuation allowances against our deferred tax assets by
$34.6 million in the first nine months of 2009. The non-cash benefit to income
tax expense was $12.6 million and related to various U.S. federal, state, local
and foreign deferred tax assets. The remaining decrease of $22.0 million related
to pension and postretirement health care liabilities and was recorded as an
increase to accumulated other comprehensive income. We review all valuation
allowances related to deferred tax assets and will adjust these reserves when
appropriate.
During the third quarter of 2009, we recognized $3.4 million of benefit related
to a state tax refund.
SEGMENT INFORMATION
Operating income is the primary financial measure reported to the chief
operating decision maker for purposes of making decisions, allocating resources
to our segments and assessing their performance. Operating income at the segment
level (segment operating income) does not include: corporate general and
administrative costs that are not allocated to segments; intersegment sales and
profit eliminations; charges related to specific strategic initiatives, such as
the consolidation of operations; restructuring activities, including employee
separation costs resulting from personnel reduction programs, plant closure and
phaseout costs; executive separation agreements; share-based compensation costs;
asset impairments; environmental remediation costs for facilities no longer
owned or closed in prior years; gains and losses on the divestiture of joint
ventures and equity investments; and certain other items that are not included
in segment operating income. These costs are included in Corporate and
eliminations.
Sales and Operating Income - Three Months Ended September 30, 2009 versus the
Three Months Ended September 30, 2008:
Three Months Ended September 30,
(Dollars in millions) 2009 2008 Change % Change
Sales:
International Color and Engineered $ 124.4 $ 153.7 $ (29.3 ) (19.1 )%
Materials
Specialty Engineered Materials 53.6 66.1 (12.5 ) (18.9 )%
Specialty Color, Additives and Inks 52.2 60.1 (7.9 ) (13.1 )%
Performance Products and Solutions 180.9 274.4 (93.5 ) (34.1 )%
PolyOne Distribution 163.1 214.7 (51.6 ) (24.0 )%
Corporate and eliminations (25.9 ) (33.9 ) 8.0 23.6 %
$ 548.3 $ 735.1 $ (186.8 ) (25.4 )%
Operating income (loss):
International Color and Engineered $ 8.4 $ 4.6 $ 3.8 82.6 %
Materials
Specialty Engineered Materials 5.9 5.0 0.9 18.0 %
Specialty Color, Additives and Inks 5.2 4.7 0.5 10.6 %
Performance Products and Solutions 12.0 5.3 6.7 126.4 %
PolyOne Distribution 6.5 9.4 (2.9 ) (30.9 )%
Resin and Intermediates 3.8 9.6 (5.8 ) (60.4 )%
Corporate and eliminations 14.4 (37.3 ) 51.7 NM
$ 56.2 $ 1.3 $ 54.9 NM
Operating income as a percentage of
sales:
International Color and Engineered 6.8 % 3.0 % 3.8 %
Materials points
Specialty Engineered Materials 11.0 % 7.6 % 3.4 % points
Specialty Color, Additives and Inks 10.0 % 7.8 % 2.2 % points
Performance Products and Solutions 6.6 % 1.9 % 4.7 % points
PolyOne Distribution 4.0 % 4.4 % (0.4)% points
Total 10.2 % 0.2 % 10.0 % points
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International Color and Engineered Materials
Sales decreased $29.3 million, or 19.1%, in the third quarter of 2009 compared
to the third quarter of 2008. Approximately 15.5% of the decrease was due to
lower volumes as a result of the effects of the global recession on demand
levels in Europe and Asia. Changes in currency exchange rates in the quarter
resulted in a decrease in sales of approximately 6.1%. These unfavorable items
were partially offset by the benefit of a slight improvement in the price and
mix of products sold.
Operating income increased by $3.8 million, or 82.6%, in the third quarter of
2009 compared to the third quarter of 2008 driven by declining raw material
costs, the realization of savings from our restructuring programs and reduced
. . .
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