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POL > SEC Filings for POL > Form 10-Q on 31-Jul-2013All Recent SEC Filings

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Form 10-Q for POLYONE CORP


31-Jul-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Business
We are a premier provider of specialized polymer materials, services and solutions with operations in specialty polymer formulations, color and additive systems, plastic sheet and packaging solutions and polymer distribution. We are also a highly specialized developer and manufacturer of performance enhancing additives, liquid colorants, and fluoropolymer and silicone colorants. Headquartered in Avon Lake, Ohio, we have employees at manufacturing sites and distribution facilities in North America, South America, Europe and Asia. We provide value to our customers through our ability to link our knowledge of polymers and formulation technology with our manufacturing and supply chain capabilities to provide value added solutions to designers, assemblers and processors of plastics (our customers). When used in this quarterly report on Form 10-Q, the terms "we," "us," "our" and the "Company" mean PolyOne Corporation and its consolidated subsidiaries. Highlights and Executive Summary
A summary of PolyOne's sales, operating income, income from continuing operations and net income attributable to PolyOne common shareholders follows:
                                                   Three Months Ended June 30,           Six Months Ended June 30,

(In millions)                                        2013         Adjusted 2012           2013           Adjusted 2012
Sales                                            $  1,037.6     $         756.6     $      1,838.7     $       1,502.1
Operating income                                       80.7                43.3              121.2                80.7
Net income from continuing operations                  38.3                18.4               49.3                33.7
Net income attributable to PolyOne common
shareholders                                     $    180.9     $          24.6     $        196.2     $          44.8

On July 10, 2013, PolyOne determined that it will close six Spartech North American manufacturing facilities acquired in the March 2013 acquisition and relocate production to other PolyOne facilities over the next 12 to 18 months. These actions are expected to be completed by the end of 2014 and generate annualized pre-tax savings of approximately $25.0 million by 2015. Restructuring charges are expected to approximate $35.0 million over the next 12 to18 months. This includes approximately $20.0 million in restructuring charges, primarily associated with severance and asset relocation costs, and approximately $15.0 million in non-cash charges, primarily associated with accelerated depreciation of exited facilities and equipment. The Company also expects to invest approximately $25.0 million in additional capital expenditures over the next 12 to 18 months at its remaining locations to support these changes. On May 30, 2013, PolyOne sold its vinyl dispersion, blending and suspension resin assets (Resin Business) to Mexichem Specialty Resins Inc. (Mexichem), a wholly-owned subsidiary of Mexichem, S.A.B. de C.V., for $250.0 million cash consideration, subject to a working capital adjustment that is expected to be finalized in the third quarter of 2013. This sale resulted in the recognition of a pre-tax gain of $223.6 million ($138.2 million net of tax) in the second quarter of 2013, which is reflected within the Income from discontinued operations, net of income taxes line of the Condensed Consolidated Statements of Income.

As a result of the sale of our Resin Business, this business has been removed from the Performance Products and Solutions segment and presented as a discontinued operation. Additionally, our Specialty Coatings business, which was previously included in the Performance Products and Solutions segment, is now included within the Global Color, Additives and Inks segment. Historical segment information has been retrospectively adjusted to reflect these changes. On March 13, 2013, pursuant to the terms and conditions of the Agreement and Plan of Merger dated October 23, 2012 (Spartech Merger Agreement), PolyOne acquired Spartech, a supplier of sustainable plastic sheet, color and engineered materials, and packaging solutions, based in Clayton, Missouri. Spartech expands PolyOne's specialty portfolio with adjacent technologies in attractive end markets where we already participate, as well as new end markets such as aerospace and security. By combining Spartech's leading market positions in sheet, rigid barrier packaging and specialty cast acrylics with PolyOne's capabilities, we believe we can better serve our customers and accelerate growth.


At the effective time of the merger, each issued and outstanding share of Spartech common stock was canceled and converted into the right to receive consideration equal to $2.67 in cash and 0.3167 shares of PolyOne common stock. PolyOne paid $83.4 million in cash and issued approximately 10.0 million shares of its common stock to Spartech's stockholders. PolyOne funded the cash portion of the consideration, and the repayment of certain of Spartech's debt, with a portion of the net proceeds of its issuance of 5.25% senior notes due 2023, discussed in Note 11, Financing Arrangements.
Spartech's results have been reflected within our Condensed Consolidated Statements of Income and within our newly created segment Designed Structures and Solutions, as well as our existing Global Specialty Engineered Materials, Global Color, Additives and Inks and Performance Products and Solutions segments, since the date of acquisition.
Results of Operations - Three and six months ended June 30, 2013 compared to three and six months ended June 30, 2012:

                                                                    Variances - Favorable                                                Variances - Favorable
                              Three Months Ended June 30,               (Unfavorable)               Six Months Ended June 30,                (Unfavorable)
(In millions, except per                                                               %                                                                   %
share data)                     2013            Adjusted 2012        Change         Change           2013           Adjusted 2012        Change          Change
Sales                    $       1,037.6       $        756.6     $    281.0         37.1  %   $     1,838.7       $      1,502.1     $    336.6          22.4  %
Cost of sales                      833.9                612.6         (221.3 )      (36.1 )%         1,472.7              1,225.8         (246.9 )       (20.1 )%
Gross margin                       203.7                144.0           59.7         41.5  %           366.0                276.3           89.7          32.5  %
Selling and
administrative expense             123.0                100.7          (22.3 )      (22.1 )%           244.9                196.0          (48.9 )       (24.9 )%
Income related to
previously owned equity
affiliates                             -                    -              -            -                0.1                  0.4           (0.3 )       (75.0 )%
Operating income                    80.7                 43.3           37.4         86.4  %           121.2                 80.7           40.5          50.2  %
Interest expense, net              (16.6 )              (12.4 )         (4.2 )      (33.9 )%           (32.2 )              (24.7 )         (7.5 )       (30.4 )%
Premium on early
extinguishment of debt                 -                    -              -            -              (10.6 )                  -          (10.6 )         nm*
Other income (expense),
net                                 (1.2 )               (0.9 )         (0.3 )      (33.3 )%             0.2                 (2.2 )          2.4         109.1  %
Income from continuing
operations before income
taxes                               62.9                 30.0           32.9        109.7  %            78.6                 53.8           24.8          46.1  %
Income tax expense                 (24.6 )              (11.6 )        (13.0 )     (112.1 )%           (29.3 )              (20.1 )         (9.2 )       (45.8 )%
Net income from
continuing operations               38.3                 18.4           19.9        108.2  %            49.3                 33.7           15.6          46.3  %
Income from discontinued
operations, net of
income taxes                       142.3                  6.2          136.1          nm*              146.4                 11.1          135.3           nm*
Net income               $         180.6       $         24.6     $    156.0        634.1  %   $       195.7       $         44.8     $    150.9         336.8  %
 Net loss attributable
to noncontrolling
interests                            0.3                    -            0.3          nm*                0.5                    -            0.5           nm*
Net income attributable
to PolyOne common
shareholders             $         180.9       $         24.6     $    156.3        635.4  %   $       196.2       $         44.8     $    151.4         337.9  %

Earnings per common share attributable to PolyOne common shareholders - Basic:
Continuing operations    $          0.39       $         0.21                                  $        0.52       $         0.38
Discontinued operations             1.46                 0.07                                           1.55                 0.12
Total                    $          1.85       $         0.28                                  $        2.07       $         0.50

Earnings per common share attributable to PolyOne common shareholders - Diluted:
Continuing operations    $          0.39       $         0.20                                  $        0.52       $         0.37
Discontinued operations             1.44                 0.07                                           1.53                 0.12
Total                    $          1.83       $         0.27                                  $        2.05       $         0.49

*Not meaningful.
Sales
Sales increased 37.1% in the second quarter of 2013 compared to the second quarter of 2012 driven by a 37.9% increase due to the acquisitions of Spartech and Glasforms Inc. (Glasforms). Increased pricing, primarily associated with higher raw material costs combined with improved mix increased sales 1.3% while favorable currency exchange rates impacted sales by 0.1%. These increases were partially offset by volume declines of 2.2%, primarily related to lower demand in Europe.


Sales increased 22.4% in the first half of 2013 compared to the first half of 2012 driven by a 23.4% increase due to the acquisitions of Spartech and Glasforms, and a 2.4% increase due to higher pricing primarily associated with raw material inflation and improved mix. These increases were partially offset by a 3.4% decrease in volumes, primarily related to lower demand in Europe. Cost of sales
As a percent of sales, cost of sales declined from 81.0% in the second quarter of 2012 to 80.4% in the second quarter of 2013 and from 81.6% in the first half of 2012 to 80.1% in the first half of 2013. The improvement in margins was driven primarily by improved organic mix in our specialty segments and insurance recoveries of $14.9 million and $20.1 million during the second quarter and first half of 2013, respectively. These improvements were partially offset by the mix effect of Spartech sales which currently have lower margins than organic PolyOne.
Selling and administrative expense
Selling and administrative expense increased $22.3 million during the three months ended June 30, 2013 compared to the three months ended June 30, 2012, primarily related to acquisitions and acquisition-related costs totaling $21.7 million.
Selling and administrative expense increased $48.9 million during the first half of 2013 compared to the first half of 2012, primarily related to increased acquisitions and acquisition-related costs totaling $32.1 million, increased restructuring costs of $4.0 million and increased stock based compensation expense of $5.1 million. The remaining increase primarily relates to additional commercial resources and inflation.
Interest expense, net
Interest expense, net increased in the second quarter and first half of 2013 as compared to the second quarter and first half of 2012 due to a higher average debt balance during 2013 as a result of $600.0 million aggregate principal of senior notes due 2023 issued on February 28, 2013, which more than offset the $297.0 million repayment of our senior secured term loan. Additionally, we recognized $1.9 million of interest expense related to the commitment for bridge financing entered into in connection with the Spartech acquisition in the first quarter of 2013.
Debt extinguishment
Premiums on early extinguishment of debt of $10.6 million were recognized during the first quarter of 2013 due to the repayment of the outstanding principal amount of $297.0 million under our senior secured term loan. Income tax (expense) benefit
Income tax expense from continuing operations was $24.6 million for the second quarter of 2013 compared to $11.6 million in the second quarter of 2012. Income tax expense was $29.3 million for the first half of 2013 compared to $20.1 million in the first half of 2012. These income tax increases were driven by increased earnings in 2013.
Discontinued Operations
On May 30, 2013, PolyOne sold its Resin Business to Mexichem for $250.0 million cash consideration which resulted in the recognition of a pre-tax gain of $223.6 million ($138.2 million net of tax) in the second quarter of 2013. Sales from the Resin Business were $22.9 million and $55.3 million for the three and six months ended June 30, 2013, respectively. This gain, net of tax, along with the operating results through the date of sale, are reflected within the Income from discontinued operations, net of income taxes line of the Condensed Consolidated Statements of Income.
SEGMENT INFORMATION
Operating income is the primary financial measure that is reported to the chief operating decision makers for purposes of allocating resources to segments and assessing segment performance. Operating income at the segment level 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 and goodwill 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 the measure of segment profit or loss that is reported to and reviewed by the chief operating decision makers. These costs are included in Corporate and eliminations.


Sales and Operating Income - Three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012

                                                                      Variances - Favorable                                               Variances - Favorable
                                Three Months Ended June 30,               (Unfavorable)               Six Months Ended June 30,               (Unfavorable)
(Dollars in millions)             2013            Adjusted 2012       Change       %  Change           2013           Adjusted 2012       Change       %  Change
Sales:
Global Specialty
Engineered Materials       $         192.2       $        138.9     $    53.3          38.4  %   $       352.0       $        280.9     $    71.1          25.3  %
Global Color, Additives
and Inks                             229.4                211.5          17.9           8.5  %           434.7                413.9          20.8           5.0  %
Designed Structures and
Solutions                            198.9                    -         198.9           nm*              240.4                    -         240.4           nm*
Performance Products and
Solutions                            177.0                167.5           9.5           5.7  %           336.7                336.0           0.7           0.2  %
PolyOne Distribution                 275.1                270.6           4.5           1.7  %           543.1                533.6           9.5           1.8  %
Corporate and eliminations           (35.0 )              (31.9 )        (3.1 )        (9.7 )%           (68.2 )              (62.3 )        (5.9 )        (9.5 )%
Total Sales                $       1,037.6       $        756.6     $   281.0          37.1  %   $     1,838.7       $      1,502.1     $   336.6          22.4  %

Operating income:
Global Specialty
Engineered Materials       $          16.1       $         12.8     $     3.3          25.8  %   $        32.5       $         24.6     $     7.9          32.1  %
Global Color, Additives
and Inks                              30.5                 24.4           6.1          25.0  %            54.7                 44.0          10.7          24.3  %
Designed Structures and
Solutions                              9.0                    -           9.0           nm*               10.5                    -          10.5           nm*
Performance Products and
Solutions                             14.5                 10.8           3.7          34.3  %            27.5                 19.3           8.2          42.5  %
PolyOne Distribution                  16.9                 16.7           0.2           1.2  %            33.1                 33.4          (0.3 )        (0.9 )%
Corporate and eliminations            (6.3 )              (21.4 )        15.1          70.6  %           (37.1 )              (40.6 )         3.5           8.6  %
Total Operating Income     $          80.7       $         43.3     $    37.4          86.4  %   $       121.2       $         80.7     $    40.5          50.2  %

Operating income as a percentage of sales:
Global Specialty
Engineered Materials                   8.4 %                9.2 %        (0.8 )   % points                 9.2 %                8.8 %         0.4     % points
Global Color, Additives
and Inks                              13.3 %               11.5 %         1.8     % points                12.6 %               10.6 %         2.0     % points
Designed Structures and
Solutions                              4.5 %                  - %         nm*           nm*                4.4 %                  - %         nm*           nm*
Performance Products and
Solutions                              8.2 %                6.4 %         1.8     % points                 8.2 %                5.7 %         2.5     % points
PolyOne Distribution                   6.1 %                6.2 %        (0.1 )   % points                 6.1 %                6.3 %        (0.2 )   % points
Total                                  7.8 %                5.7 %         2.1     % points                 6.6 %                5.4 %         1.2     % points

*Not meaningful.
Global Specialty Engineered Materials
Sales increased $53.3 million, or 38.4%, in the second quarter of 2013 compared to the second quarter of 2012. Sales increased 35.1% due to the Spartech and Glasforms acquisitions and 4.8% due to increased volume in the health care, industrial and packaging end markets. These increases were partially offset by decreased pricing mix of 1.4% and unfavorable currency exchange rates of 0.1%. Sales increased $71.1 million, or 25.3%, in the first half of 2013 compared to the first half of 2012. Sales increased 23.8% due to Spartech and Glasforms acquisitions and 1.8% due to increased volume. These increases were partially offset by unfavorable currency exchange rates of 0.3%.
Operating income increased $3.3 million in the second quarter of 2013 as compared to the second quarter of 2012, and $7.9 million in the first half of 2013 as compared to the first half of 2012. Operating income improvement was driven by acquisitions, margin expansion resulting from improved mix, as well as cost reductions from previously


announced restructuring actions primarily in Europe. Operating income of 8.4% of sales was 0.8% lower for the three months ended June 30, 2013 compared to the three months ended June 30, 2012, due to the impact of Spartech sales which currently have lower margins than organic Global Specialty Engineered Materials. Organically, quarterly operating income improved from 9.2% of sales in 2012 to 10.7% of sales in 2013.

Global Color, Additives and Inks
Sales increased $17.9 million, or 8.5%, in the second quarter of 2013 compared to the second quarter of 2012. Sales increased 10.3% as a result of acquisitions, 5.0% due to improved mix and 0.2% due to favorable exchange rates. These increases were partially offset by volume declines of 7.0%, associated with weak demand in Europe and lower volume primarily in the industrial and packaging end markets. Sales increased $20.8 million, or 5.0%, in the first half of 2013 compared to the first half of 2012. Sales increased 6.2% as a result of acquisitions, 6.8% due to increased pricing and mix and 0.3% due to favorable exchange rates. This increase was partially offset by decrease in volumes of 8.3%, primarily related to decreased demand in Europe.
Operating income increased $6.1 million in the second quarter of 2013 as compared to the second quarter of 2012 and $10.7 million in the first half of 2013 compared to the first half of 2012. The increase is due to acquisitions, a mix shift in specialty products and cost reductions as a result of previously announced restructuring actions, primarily in Europe. Operating income of 13.3% of sales was 1.8% higher for the three months ended June 30, 2013 compared to the three months ended June 30, 2012, due to organic mix improvement partially offset by Spartech sales which have lower margins. Designed Structures and Solutions
The Designed Structures and Solutions segment is comprised of the former Spartech Custom Sheet and Rollstock and Packaging Technology segments. Sales for this segment were $198.9 million and $240.4 million in the second quarter of 2013 and since the date of acquisition, respectively.
Operating income for this segment was $9.0 million and $10.5 million in the second quarter of 2013 and since the date of acquisition, respectively.

Performance Products and Solutions
Sales increased $9.5 million, or 5.7%, in the second quarter of 2013 compared to the second quarter of 2012. Sales increased 10.5% due to acquisitions and 1.6% due to improved pricing. Volume decreased 6.4% primarily in the packaging and transportation end markets. Sales increased $0.7 million, or 0.2%, in the first half of 2013 compared to the first half of 2012. Sales increased 5.7% due to acquisitions and 0.3% due to favorable pricing associated with raw material costs. The increase in sales was partially offset by volume decreases of 5.8% primarily related to contract manufacturing for the transportation end market. Operating income increased $3.7 million in the second quarter of 2013 compared to the second quarter of 2012 and $8.2 million in the first half of 2013 compared to the first half of 2012, primarily due to acquisitions and improved mix and price.
PolyOne Distribution
Sales increased $4.5 million, or 1.7%, in the second quarter of 2013 compared to the second quarter of 2012 related primarily to increased volume of 1.4% and increased pricing, and improved mix of 0.3%. Sales increased $9.5 million, or 1.8%, in the first half of 2013 compared to the first half of 2012. Increased pricing, associated with raw material inflation, and improved mix increased sales by 1.7%, while volume increases favorably impacted sales by 0.1%. Operating income increased $0.2 million in the second quarter of 2013 compared to the second quarter of 2012 due to increased sales. Operating income decreased $0.3 million in the first half of 2013 compared to the first half of 2012, primarily due to favorable raw material cost dynamics in the first half of 2012 that did not repeat in the first half of 2013.


Corporate and Eliminations
The following table breaks down Corporate and eliminations into its various
components for the three and six months ended June 30, 2013 and 2012:
                                                    Three Months Ended June 30,          Six Months Ended June 30,
(In millions)                                         2013          Adjusted 2012         2013           Adjusted 2012
Environmental remediation costs                  $      (1.3 )     $        (2.9 )   $       (3.3 )     $        (4.5 )
Employee separation and plant phase-out costs           (2.9 )              (8.7 )          (12.8 )              (9.2 )
Stock compensation                                      (3.1 )              (3.0 )          (10.1 )              (5.0 )
Incentive compensation                                  (6.0 )              (5.2 )          (12.9 )             (12.5 )
Acquisition related costs, including inventory
fair value adjustments                                  (4.9 )              (0.9 )          (13.6 )              (7.2 )
Insurance settlements                                   14.9                   -             20.1                   -
All other and eliminations (1)                          (3.0 )              (0.7 )           (4.5 )              (2.2 )
   Total Corporate and eliminations              $      (6.3 )     $       (21.4 )   $      (37.1 )     $       (40.6 )

(1) All other and eliminations is comprised of intersegment eliminations and corporate general and administrative costs that are not allocated to segments. Liquidity and Capital Resources
Our objective is to finance our business through operating cash flow and an appropriate mix of debt. By staggering maturities, we avoid concentrations of debt, reducing liquidity risk. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Over a period of 18 to 24 months beginning March 13, 2013, we plan to repurchase at least 10.0 million shares of our common stock, which is approximately the number of shares that we issued in conjunction with the Spartech acquisition. We have repurchased approximately 3.0 million under this plan through the second quarter of 2013. Such repurchases or exchanges, if any, and the timing thereof, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The following table summarizes our liquidity as of June 30, 2013 and December 31, 2012:

(In millions)                  June 30, 2013      December 31, 2012
Cash and cash equivalents     $         392.4    $             210.0
Revolving credit availability           309.9                  171.2
Liquidity                     $         702.3    $             381.2

As of June 30, 2013, approximately 44.0% of the Company's cash and cash equivalents reside outside the United States. Repatriation of these funds could be negatively impacted by potential foreign and domestic taxes. Based on current projections, we believe that we will be able to continue to manage and control working capital, discretionary spending and capital expenditures and that cash provided by operating activities, along with available borrowing capacity under our revolving credit facilities, should allow us to maintain adequate levels of available liquidity to fund our operations, meet debt service and minimum . . .

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