Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002. COMMISSION FILE NUMBER 1-16091.
POLYONE CORPORATION
-------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1730488
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Suite 36-5000, 200 Public Square, Cleveland, Ohio 44114-2304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 589-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of November 11, 2002, there were 91,637,321 common shares outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In millions, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------- ------------ ------------ ------------
Sales $668.5 $ 659.6 $1,973.7 $ 2,064.7
Operating costs and expenses:
Cost of sales 564.7 548.5 1,646.3 1,725.7
Selling and administrative 69.6 73.8 227.0 233.3
Depreciation and amortization 18.9 20.6 56.3 72.9
Employee separation and plant phase-out 0.2 - 1.1 9.8
Merger and integration costs - 0.1 - 5.9
Loss on divestiture of equity investment - - 1.5 -
Income (loss) from equity affiliates and minority interest 11.5 (1.1) 12.8 (8.1)
------------- ------------ ------------ ------------
Operating income 26.6 15.5 54.3 9.0
Interest expense (11.9) (8.9) (32.1) (32.7)
Interest income 0.2 0.6 0.7 2.0
Other expense, net 1.0 (2.6) (2.8) (3.5)
------------- ------------ ------------ ------------
Income (loss) before income taxes and cumulative
effect of change in accounting method 15.9 4.6 20.1 (25.2)
Income tax (expense) benefit (6.1) (1.7) (7.8) 9.2
------------- ------------ ------------ ------------
Income (loss) before cumulative effect of change in accounting 9.8 2.9 12.3 (16.0)
Cumulative effect of a change in goodwill accounting,
net of income tax benefit of $1.0 million - - (53.7) -
------------- ------------ ------------ ------------
Net income (loss) $ 9.8 $ 2.9 $ (41.4) $ (16.0)
============= ============ ============ ============
Income (loss) per common share
Basic income (loss) per share before effect of change in accounting $ .11 $ .03 $ .13 $ (.18)
Cumulative effect of a change in accounting - - (.59) -
------------- ------------ ------------ ------------
Basic income (loss) per share $ .11 $ .03 $ (.46) $ (.18)
============= ============ ============ ============
Diluted income (loss) per share before effect of change in accounting $ .11 $ .03 $ .13 $ (.18)
Cumulative effect of a change in accounting - - (.58) -
------------- ------------ ------------ ------------
Diluted income (loss) per share $ .11 $ .03 $ (.45) $ (.18)
============= ============ ============ ============
Weighted average shares used to compute earnings per share:
Basic 90.7 89.9 90.6 89.8
Diluted 91.7 90.9 92.1 90.4
Dividends paid per share of common stock $ .0625 $ .0625 $ .1875 $ .1875
See Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
1
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions)
September 30, December 31,
2002 2001
----------------------- -----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 53.4 $ 18.2
Accounts receivable, net 217.3 135.6
Other receivables 11.1 11.4
Inventories 292.6 255.3
Deferred income tax assets 50.6 48.6
Other current assets 16.1 16.5
----------------------- -----------------------
Total current assets 641.1 485.6
Property, net 683.2 683.6
Investment in equity affiliates 278.0 287.9
Goodwill, net 446.8 476.3
Other intangible assets, net 32.7 61.0
Other non-current assets 49.2 66.8
----------------------- -----------------------
Total assets $ 2,131.0 $ 2,061.2
======================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank debt $ 14.9 $ 14.7
Accounts payable 296.0 311.4
Accrued expenses 159.4 169.4
Current portion of long-term debt 4.5 4.6
----------------------- -----------------------
Total current liabilities 474.8 500.1
Long-term debt 589.4 426.8
Deferred income tax liabilities 65.4 64.5
Post-retirement benefits other than pensions 124.2 126.2
Other non-current liabilities, including pensions 199.3 214.5
Minority interest in consolidated subsidiaries 16.3 15.7
----------------------- -----------------------
Total liabilities 1,469.4 1,347.8
Shareholders' equity:
Preferred stock, 40.0 shares authorized, no shares issued - -
Common stock, $.01 par, 400.0 shares authorized, 122.2
shares issued at September 30, 2002 and December 31, 2001 1.2 1.2
Other shareholders' equity 660.4 712.2
----------------------- -----------------------
Total shareholders' equity 661.6 713.4
----------------------- -----------------------
Total liabilities and shareholders' equity $ 2,131.0 $ 2,061.2
======================= =======================
See Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
2
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)
Nine Months Ended
September 30,
2002 2001
------------------ -----------------
OPERATING ACTIVITIES
Net loss $ (41.4) $ (16.0)
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Employee separation and plant phase-out charges 1.1 9.8
Cash payments on employee separation and plant phase-out (12.1) (19.1)
Cumulative effect of a change in accounting 53.7 -
Depreciation and amortization 56.3 72.9
Unrealized currency gains (10.8) -
Loss on divestiture of equity investment 1.5 -
Companies carried at equity:
Equity (income) loss, net of minority interest (12.3) 8.1
Dividends received 2.1 2.0
Change in assets and liabilities:
Operating working capital:
Accounts receivable (73.9) 137.3
Inventories (33.4) 55.1
Accounts payable (20.7) 23.6
Accrued expenses and other 11.4 (21.0)
------------------ -----------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (78.5) 252.7
INVESTING ACTIVITIES
Capital expenditures (52.4) (47.6)
Return of cash from equity affiliates 16.2 2.1
Proceeds from sale of assets 1.9 2.8
------------------ -----------------
NET CASH USED BY INVESTING ACTIVITIES (34.3) (42.7)
FINANCING ACTIVITIES
Change in short-term debt (1.3) (200.0)
Change in long-term debt 153.5 (1.5)
Termination of interest rate swap agreements 8.3 4.3
Net proceeds from the exercise of stock options 7.0 -
Dividends (16.9) (17.0)
------------------ -----------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 150.6 (214.2)
Effect of exchange rate on changes on cash (2.6) (0.5)
------------------ -----------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35.2 (4.7)
Cash and cash equivalents at beginning of year 18.2 37.9
------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 53.4 $ 33.2
================== =================
See Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
3
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(IN MILLIONS, SHARES IN THOUSANDS)
Accumulated
Common Common Other Non-
Shares Additional Stock Share Owner
Common Held in Common Paid-In Retained Held in Ownership Equity
Shares Treasury Total Stock Capital Earnings Treasury Trust Changes
-------- --------- --------- --------- ---------- --------- ---------- --------- ------------
BALANCE JANUARY 1, 2001 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 (18.9) (18.9)
Translation adjustment (8.0) (8.0)
---------
Total non-owner equity changes (26.9)
Stock-based compensation and
benefits and exercise
of options 28 2.1 (0.1) (0.1) 5.5 (3.2)
Adjustment to market value - 17.0 (17.0)
Cash dividends (11.3) (11.3)
---------------------------------------------------------------------------------------------
BALANCE JUNE 30, 2001 122,192 28,343 $ 791.5 $ 1.2 $ 1,074.5 $ 139.1 $ (322.0) $ (37.0) $ (64.3)
Non-owner equity changes:
Net income 2.9 2.9
Translation adjustment (5.4) (5.4)
---------
Total non-owner equity changes (2.5)
Stock-based compensation and
benefits and exercise
of options 117 0.5 (1.4) 1.6 0.3
Adjustment to market value - (8.5) 8.5
Cash dividends (5.7) (5.7)
---------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2001 122,192 28,460 $ 783.8 $ 1.2 $ 1,066.0 $ 136.3 $ (323.4) $ (26.9) $ (69.4)
=============================================================================================
BALANCE JANUARY 1, 2002 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 (51.2) (51.2)
Translation adjustment 7.8 7.8
Net unrealized loss on
securities (0.1) (0.1)
---------
Total non-owner equity changes (43.5)
Stock-based compensation and
benefits and exercise
of options (375) 6.6 (2.0) 5.1 2.9 0.6
Adjustment to market value - 2.0 (2.0)
Cash dividends (11.2) (11.2)
=============================================================================================
BALANCE JUNE 30, 2002 122,192 30,800 $ 665.3 $ 1.2 $ 1,072.7 $ 37.9 $ (345.0) $ (4.4) $ (97.1)
Non-owner equity changes:
Net income 9.8 9.8
Translation adjustment (10.4) (10.4)
Net unrealized loss on (0.3) (0.3)
securities
---------
Total non-owner equity changes (0.9)
Stock-based compensation and
benefits and exercise
of options (246) 3.0 (1.0) 3.3 0.3 0.4
Adjustment to market value - (0.5) 0.5
Cash dividends (5.8) (5.8)
---------------------------------------------------------------------------------------------
BALANCE SEPTEMBER 30, 2002 122,192 30,554 $ 661.6 $ 1.2 $ 1,071.2 $ 41.9 $ (341.7) $ (3.6) $ (107.4)
=============================================================================================
See Accompanying Notes to the Unaudited Condensed Consolidated
Financial Statements
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and in the opinion of
management contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position, results of operations and
cash flows for the periods presented. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. These interim statements should be read in
conjunction with the financial statements and notes thereto included in the
Annual Report on Form 10-K for the year ended December 31, 2001 of PolyOne
Corporation.
Operating results for the three and nine month periods ended September 30, 2002
are not necessarily indicative of the results expected in subsequent quarters or
for the year ending December 31, 2002.
NOTE B - ACCOUNTING CHANGE
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 as of January 1, 2002, PolyOne completed a
transitional impairment review for goodwill impairment during the first quarter
of 2002 for each of its reporting units. We 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 write-off of all of Engineered
Films' goodwill and an impairment loss of $54.7 million ($53.7 million
after-tax). The Engineered Film 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,
exceed their respective carrying value. The transitional impairment loss is a
one-time charge and will not impact the future cash flows of our businesses.
5
Prior to the adoption of SFAS No. 142, amortization expense was recorded for
goodwill and other intangible assets. The following sets forth a reconciliation
of net income and earnings per share information for the three month and nine
month periods ended September 30, 2002 and 2001, adjusted for the
non-amortization provisions of SFAS No. 142:
Three Months Ended Nine Months Ended
(In millions) September 30, September 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Reported net income (loss) $ 9.8 $ 2.9 $ (41.4) $ (16.0)
Cumulative effect of change in accounting, net of tax - - 53.7 -
Goodwill amortization, net of tax - 3.1 - 9.1
Workforce amortization, net of tax - 0.6 - 1.8
-------------- -------------- -------------- --------------
Adjusted net income (loss) before cumulative effect of
a change in accounting $ 9.8 $ 6.6 $ 12.3 $ (5.1)
============== ============== ============== ==============
Basic income (loss) per share:
As reported $ .11 $ .03 $ (.46) $ (.18)
Cumulative effect of change in accounting, net of tax - - .59 -
Goodwill amortization, net of tax - .03 - .10
Workforce amortization, net of tax - .01 - .02
-------------- -------------- -------------- --------------
Adjusted basic income (loss) per share before
cumulative effect of a change in accounting $ .11 $ .07 $ .13 $ (.06)
============== ============== ============== ==============
Diluted income (loss) per share:
As reported $ .11 $ .03 $ (.45) $ (.18)
Cumulative effect of change in accounting, net of tax - - .58 -
Goodwill amortization, net of tax - .03 - .10
Workforce amortization, net of tax - .01 - .02
-------------- -------------- -------------- --------------
Adjusted diluted income (loss) per share before
cumulative effect of a change in accounting $ .11 $ .07 $ .13 $ (.06)
============== ============== ============== ==============
NOTE C - ACCOUNTING PRONOUNCEMENT
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". PolyOne adopted SFAS No. 144 beginning on January 1,
2002. The adoption did not have any impact on our consolidated financial
position, results of operations or cash flows.
NOTE D - GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the nine months ended September
30, 2002, by business segment are as follows:
Elastomers &
Performance Performance
(In millions) Plastics Additives Distribution Other Total
-------------- -------------- --------------- --------------- ---------------
December 31, 2001 $ 370.1 $ 106.2 $ - $ - $ 476.3
Reclassification of workforce 13.5 8.8 1.6 1.3 25.2
Impairment (54.7) - - - (54.7)
-------------- -------------- --------------- --------------- ---------------
September 30, 2002 $ 328.9 $ 115.0 $ 1.6 $ 1.3 $ 446.8
============== ============== =============== =============== ===============
6
Information regarding PolyOne's other intangible assets follows:
As of December 31, 2001
Acquisition Accumulated Currency
Cost Amortization Translation Net
-------------- -------------- --------------- ---------------
(In millions)
Non-contractual customer
relationships $ 16.4 $ (2.0) $ - $ 14.4
Sales contract 12.9 (2.3) - 10.6
Assembled workforce 30.7 (5.5) - 25.2
Patents, technology and other 14.4 (3.6) - 10.8
-------------- -------------- --------------- ---------------
Total $ 74.4 $ (13.4) $ - $ 61.0
============== ============== =============== ===============
As of September 30, 2002
Acquisition Accumulated Currency
Cost Amortization Translation Net
-------------- -------------- --------------- ---------------
(In millions)
Non-contractual customer
relationships $ 16.4 $ (2.8) $ - $ 13.6
Sales contract 12.9 (3.6) - 9.3
Patents, technology and other 14.4 (5.1) .5 9.8
-------------- -------------- --------------- ---------------
Total $ 43.7 $ (11.5) $ .5 $ 32.7
============== ============== =============== ===============
Amortization of other intangible assets was $1.2 million and $3.6 million for
the three and nine month periods ending September 30, 2002. Excluding
amortization of the assembled workforce intangible in 2001, amortization of
other intangible assets was $1.4 million and $4.2 million for the three and nine
month periods ending September 30, 2001. Amortization expense for each of the
five succeeding fiscal years is expected to be approximately $5 million per
year.
NOTE E - INVENTORIES
Components of inventories are as follows:
September 30, December 31,
(In millions) 2002 2001
--------------- ---------------
Finished products and in-process inventories $ 185.0 $ 154.8
Raw materials and supplies 130.8 117.0
--------------- ---------------
315.8 271.8
LIFO Reserve (23.2) (16.5)
--------------- ---------------
Total Inventories $ 292.6 $ 255.3
=============== ===============
NOTE F - INCOME TAXES
The effective income tax rate was 38.4% for the third quarter 2002 versus 37.0%
for the third quarter 2001 and 38.8% for the nine months ending September 30,
2002 versus 36.5% for the nine months ending September 30, 2001. The difference
in the effective rates for both the quarter and year-to-date is principally due
to the effect of permanent differences such as non-deductible goodwill
amortization in 2001.
7
NOTE G - INVESTMENT IN EQUITY AFFILIATE
PolyOne owns 24% of OxyVinyls LP (OxyVinyls), a manufacturer and marketer of PVC
resins. OxyVinyls is a leading producer of PVC resins in North America. The
following table presents OxyVinyls' summarized results of operations for the
nine months ended September 30, 2002 and 2001, and summarized balance sheet
information as of September 30, 2002 and December 31, 2001.
Nine Months Ended
(In millions) September 30,
2002 2001
------------------ ------------------
Net sales $ 1,045.7 $ 1,269.6
Employee severance, liabilities associated with the temporary idling of a
plant, facility asset write-off and decommissioning costs (20.7) (4.4)
Operating income (loss) 90.8 (1.0)
Partnership income (loss) as reported by OxyVinyls 68.7 (6.7)
PolyOne's ownership of OxyVinyls 24% 24%
------------------ ------------------
PolyOne's proportionate share of OxyVinyls' earnings 16.5 (1.6)
Amortization of the difference between PolyOne's investment and its
underlying share of OxyVinyls' equity 0.5 0.4
------------------ ------------------
Earnings of equity affiliate recorded by PolyOne $ 17.0 $ (1.2)
================== ==================
(In millions) September 30, December 31,
2002 2001
------------------ ------------------
Current assets $ 318.1 $ 287.2
Non-current assets 984.6 1,006.1
------------------ ------------------
Total assets 1,302.7 1,293.3
Current liabilities 164.5 178.7
Non-current liabilities 78.1 81.6
------------------ ------------------
Total liabilities 242.6 260.3
------------------ ------------------
Partnership capital $ 1,060.1 $ 1,033.0
================== ==================
OxyVinyls income during the first nine months of 2002 reported above includes
special, pre-tax charges of $20.7 million. The special charges relate to the
asset write-off and decommissioning cost associated with the permanent closure
of a portion of a plant plus employee severance and costs associated with the
temporary idling of a plant. Our proportionate share of these special items was
$4.9 million. OxyVinyls' loss during the first nine months of 2001 reported
above includes a first quarter special, 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 this special item
was $1.0 million.
PolyOne's Resin and Intermediates segment also includes the SunBelt Chlor-Alkali
Partnership (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 nine month period ended September 30, 2001
and the two month period ended February 28, 2002, the Resin and Intermediates
segment included the results for Australian Vinyls Corporation, an equity
affiliate (owned 37.4%) and the Performance Plastics segment included SPCGeon
PTE Limited (owned 50%). In February 2002, Australian Vinyls Corporation was
sold and SPCGeon PTE Limited was dissolved. Combined summarized financial
information for these equity affiliates is presented below.
Nine Months Ended
September 30,
(In millions) 2002 2001
---------------- -------------
Net sales $ 223.1 $ 276.3
Operating income 8.1 10.8
Net income (loss) (3.1) (0.2)
8
NOTE H - EARNINGS PER SHARE COMPUTATION
Weighted average shares outstanding are computed as follows:
Three Months Ended Nine Months Ended
(Shares in millions) September 30, September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Weighted-average shares - Basic:
Weighted-average shares outstanding 91.3 90.4 91.2 90.3
Less unearned portion of restricted stock awards
included in outstanding shares (0.6) (0.5) (0.6) (0.5)
-------------- -------------- -------------- --------------
90.7 89.9 90.6 89.8
============== ============== ============== ==============
Weighted-average shares - Diluted:
Weighted-average shares outstanding - basic 90.7 89.9 90.6 89.8
Plus unearned portion of restricted stock awards
included in outstanding shares 0.6 0.5 0.6 0.5
Plus dilutive impact of stock options 0.4 0.5 0.9 0.1
-------------- -------------- -------------- --------------
91.7 90.9 92.1 90.4
============== ============== ============== ==============
Basic earnings (loss) per common share is computed as net income (loss)
available to common shareholders divided by weighted average basic shares
outstanding. Diluted earnings (loss) per common share is computed as net income
(loss) available to common shareholders divided by weighted average diluted
shares outstanding.
NOTE I - BUSINESS COMBINATIONS
On August 31, 2000, PolyOne was formed as a result of the consolidation of The
Geon Company (Geon) and M.A. Hanna Company (Hanna), with Geon as the acquiring
entity. As a result of the acquisition of Hanna, PolyOne announced plans to
incur employee separation and plant phase-out 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 plans to close 8 former Hanna manufacturing plants in
2002. During the first nine months of 2002, 3 plants were closed and the
closures of 3 plants have been deferred to mid-2003. As of September 30, 2002,
the net property carrying value to be realized for the plants closed or to be
closed was $14.1 million (some assets will be transferred to other locations
as production ceases). In addition, PolyOne projects that cash spending for
restructuring initiatives announced and accrued in 2001 in relation to
employee separation and plant phase-out costs will range between $6 million
and $9 million over the last three months of 2002.
The components of the acquisition integration liabilities are as follows:
(In millions, except employee
numbers) Employee Separation Plant Phase-Out Costs
------------------------------- ------------------------------
Number of Cash Asset Write-
Employees Costs Closure Downs Total
--------------- -------------- -------------- -------------- --------------
Balance at December 31, 2001 404 $ 11.8 $ 6.6 $ .4 $ 18.8
Utilized in 2002 (160) (5.0) (3.8) (.1) (8.9)
--------------- -------------- -------------- -------------- --------------
Balance at September 30, 2002 244 $ 6.8 $ 2.8 $ .3 $ 9.9
=============== ============== ============== ============== ==============
NOTE J - EMPLOYEE SEPARATION AND PLANT PHASE-OUT
Operating income in the first nine months of 2002 for the Performance Plastics
segment was reduced by charges of $1.0 million ($0.6 million after-tax) for
costs associated with the consolidation of certain activities related to the
formulator operations. The costs were for employee separation, which consisted
of severance and other employee benefits. In 2001, PolyOne recognized an expense
for employee separation and plant phase-out totaling $36.1 million, of which
$9.8 million was recognized in the first nine months of 2001. These costs
related to restructuring initiatives at plastic compounds and colors,
formulators and engineered films operations.
In 2001, PolyOne announced plans to close 3 former Geon manufacturing plants in
2002, of which none were closed during the first nine months of 2002. As of
September 30, 2002, the net property carrying value to be realized for the
plants closed or to be closed was $20.4 million (some assets will be transferred
to other locations as production ceases). In addition,
9
PolyOne projects that cash spending for restructuring initiatives announced and
accrued in 2001 in relation to employee separation and plant phase-out costs
will range between $3 million and $6 million over the last three months of 2002.
The following table summarizes the provisions, payments and remaining reserves
associated with these initiatives:
(In millions, except employee Employee Separation Plant Phase-Out Costs
numbers)
------------------------------- ------------------------------
Number of Cash Asset Write-
Employees Costs Closure Downs Total
--------------- -------------- -------------- -------------- --------------
Balance at December 31, 2001 300 $ 17.0 $ 1.9 $ - $ 18.9
2002 Charges 43 1.1 - - 1.1
Utilized in 2002 (110) (2.7) (.6) (3.3)
--------------- -------------- -------------- -------------- --------------
Balance at September 30, 2002 233 $ 15.4 $ 1.3 $ - $ 16.7
=============== ============== ============== ============== ==============
NOTE K - FINANCING ARRANGEMENTS
On March 28, 2002, PolyOne amended and restated the $150 million credit
agreement governing the revolving credit facility. The amended and restated
credit agreement revised the 2002 borrowed debt-to-EBITDA compliance ratios and
required that we secure any obligations under the revolving credit facility upon
the issuance of $200 million unsecured senior notes discussed below.
Additionally, obligations under the revolving credit facility became guaranteed
by some of our domestic subsidiaries upon issuance of the unsecured senior
notes. Security on the revolving credit facility will terminate when the
borrowed debt-to-EBITDA ratio is less than 3.5:1 for any two consecutive fiscal
quarters. Under the amended and restated revolving credit facility, certain
restrictions exist relating to the increased payment of dividends, capital
expenditures and new acquisition investments.
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. We used the proceeds from the offering to repay amounts outstanding
under our revolving bank credit facility; to repay a loan held by one of our
German subsidiaries; to reduce a portion of the amount sold under our
receivables sale facility; to repay borrowings under our short-term lines of
credit; and to pay related fees and expenses. The senior notes rank equally with
all of PolyOne's other senior unsecured indebtedness.
During the third quarter of 2002, PolyOne terminated all outstanding interest
rate swap contracts and received $8.3 million in cash. This deferred gain has
been classified as long-term debt and is being amortized over the remaining life
of the original swap contracts.
NOTE L - SALE OF ACCOUNTS RECEIVABLE Accounts receivable consist of the
following:
(In millions) September 30, December 31,
2002 2001
----------------- -----------------
Trade accounts receivable $ 155.9 $ 145.1
Retained interest in securitized accounts receivable 73.8 -
Allowance for doubtful accounts (12.4) (9.5)
----------------- -----------------
$ 217.3 $ 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.
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 September 30, 2002,
accounts receivable totaling $266.1 million were sold by PolyOne to PFC, and
are included as a reduction of trade accounts receivable within accounts
receivable on the PolyOne Condensed Consolidated Balance Sheet. Further, at
September 30, 2002, PFC had sold undivided interests in accounts receivable
totaling $192.3 million to a third-party financial conduit. PolyOne retains an
interest in the $73.8 million difference between the amount of
10
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 Condensed Consolidated Balance
Sheet at September 30, 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.
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 (.25% of the undivided interests sold), and for
program fees (.50% of the total commitment). The discount from the face amount
for accounts receivable sold, net of a servicing fee, in the three months ended
September 30, 2002 is $1.2 million, for the nine months ended September 30, 2002
is $2.5 million and is included in other expense, net, in the Consolidated
Statements of Operations.
In September 2002, PolyOne's public debt was downgraded by Standard & Poor's
(S&P) from BBB- to BB+ or non-investment grade. Moody's Investors Service
affirmed PolyOne's investment grade public debt rating of Baa3. Both ratings
carry a negative outlook. The downgrade by S&P triggered higher reserve
requirements (reducing available borrowings) and additional facility fees
associated with our receivables sale facility. At the current facility level,
the higher reserve requirements approximate $16 million and the additional fees
will approximate $0.8 million per year.
The arrangement provides that PolyOne remain responsible for servicing the
underlying accounts receivable and 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 M - SEGMENT INFORMATION
PolyOne operates primarily in four business segments: The Performance Plastics
segment, the Elastomers and Performance Additives segment, the Distribution
segment, and the Resin and Intermediates (R&I) segment. Inter-segment sales are
accounted for at prices generally approximating those for similar transactions
with unaffiliated customers and the elimination of inter-segment sales revenue
is included in the "Other" segment. Certain other corporate expenses and
eliminations are included in the "Other" segment. Business segment assets
consist primarily of customer receivables, inventories, net property and
goodwill. Cash, accounts receivable sold to a third party and certain other
assets not identified with a specific segment are included in the "Other"
segment.
(In millions) Elastomers
&
Performance Performance Resin &
THREE MONTHS ENDED SEPTEMBER 30, 2002 Total Plastics Additives Distribution Intermediates Other
--------- ------------ ------------ ------------ ------------- ----------
Sales to external customers $ 668.5 $ 439.9 $ 95.2 $ 133.4 $ - $ -
Inter-segment sales - 26.3 - 2.4 - (28.7)
--------- ------------ ------------ ---------- ------------- ----------
$ 668.5 $ 466.2 $ 95.2 $ 135.8 $ - $ (28.7)
========= ============ ============ ========== ============= ==========
Operating income (loss) $ 26.6 $ 15.9 $ 5.0 $ 2.4 $ 7.3 $ (4.0)
Employee separation and plant phase-out
costs 0.2 0.2 - - - -
Period plant phase-out costs incurred 0.5 0.5 - - - -
Plant phase-out accelerated depreciation 0.5 0.5 - - - -
Equity affiliate-restructuring, plant
phase-out and plant idling costs* 4.1 - - - 4.1 -
--------- ------------ ------------ ---------- ------------- ----------
Operating income (loss) before employee
separation, plant phase-out and plant
idling costs 31.9 17.1 5.0 2.4 11.4 (4.0)
Depreciation and amortization 18.4 14.6 2.7 0.4 0.6 0.1
--------- ------------ ------------ ---------- ------------- ----------
Operating income (loss) before employee
separation, plant phase-out, plant
idling costs and depreciation and
amortization $ 50.3 $ 31.7 $ 7.7 $ 2.8 $ 12.0 $ (3.9)
========= ============ ============ ========== ============= ==========
Total assets $ 2,131.0 $ 1,487.6 $ 276.5 $ 157.9 $ 233.1 $ (24.1)
Capital expenditures $ 18.6 $ 16.0 $ 0.9 $ 0.2 $ - $ 1.5
* 2002 year-to-date costs include PolyOne's share of OxyVinyls employee
severance, plant phase-out costs and liabilities associated with the
temporary idling of a plant in December 2001 plus the asset write-off and
decommissioning costs related to the permanent closure of a portion of a
plant in 2002. The costs in the first nine months of 2001 related to
OxyVinyls employee severance costs and Australia Vinyls Corporation employee
severance and restructuring costs.
11
(In millions) ELASTOMERS
&
PERFORMANCE PERFORMANCE RESIN &
THREE MONTHS ENDED SEPTEMBER 30, 2001 TOTAL PLASTICS ADDITIVES DISTRIBUTION INTERMEDIATES OTHER
--------- ------------ ------------ ------------ ------------- ----------
Sales to external customers $ 659.6 $ 447.9 $ 98.3 $ 113.4 $ - $ -
Inter-segment sales - 8.8 0.1 2.2 - (11.1)
--------- ------------ ------------ ---------- ------------- ----------
$ 659.6 $ 456.7 $ 98.4 $ 115.6 $ - $ (11.1)
========= ============ ============ ========== ============= ==========
Operating income (loss) $ 15.5 $ 21.6 $ 2.1 $ 0.3 $ (4.5) $ (4.0)
Merger and integration costs 0.1 0.1 - - - -
Equity affiliate-employee severance
restructuring costs* 5.1 - - - 5.1 -
--------- ------------ ------------ ---------- ------------- ----------
Operating income (loss) before merger and
integration and restructuring costs 20.7 21.7 2.1 0.3 0.6 (4.0)
Depreciation and amortization 20.6 15.0 4.2 0.8 - 0.6
--------- ------------ ------------ ---------- ------------- ----------
Operating income (loss) before merger and
integration, restructuring costs and
depreciation and amortization $ 41.3 $ 36.7 $ 6.3 $ 1.1 $ 0.6 $ (3.4)
========= ============ ============ ========== ============= ==========
Total assets $ 2,230.5 $ 1,579.6 $ 296.9 $ 143.3 $ 243.9 $ (33.2)
Capital expenditures $ 11.6 $ 5.4 $ 0.8 $ 0.2 $ - $ 5.2
* 2002 year-to-date costs include PolyOne's share of OxyVinyls employee
severance, plant phase-out costs and liabilities associated with the
temporary idling of a plant in December 2001 plus the asset write-off and
decommissioning costs related to the permanent closure of a portion of a
plant in 2002. The costs in the first nine months of 2001 related to
OxyVinyls employee severance costs and Australia Vinyls Corporation employee
severance and restructuring costs.
(In millions) Elastomers
&
Performance Performance Resin &
NINE MONTHS ENDED SEPTEMBER 30, 2002 Total Plastics Additives Distribution Intermediates Other
--------- ------------ ------------ ------------ ------------- ----------
Sales to external customers $ 1,973.7 $ 1,303.2 $ 282.7 $ 387.8 $ - $ -
Inter-segment revenues - 73.0 - 6.0 - (79.0)
--------- ------------ ------------ ---------- ------------- ----------
$ 1,973.7 $ 1,376.2 $ 282.7 $ 393.8 $ - $ (79.0)
========= ============ ============ ========== ============= ==========
Operating income (loss) $ 54.3 $ 47.3 $ 11.7 $ 8.1 $ 0.5 $ (13.3)
Employee separation and plant phase-out
costs 1.1 1.1 - - - -
Period plant phase-out costs incurred 0.7 0.7 - - - -
Plant phase-out accelerated depreciation 1.5 1.5 - - - -
Loss on divestiture of equity investment 1.5 - - - 1.5 -
Equity affiliate-employee severance,
restructuring, plant phase-out and plant
idling costs* 4.9 - - - 4.9 -
--------- ------------ ------------ ---------- ------------- ----------
Operating income (loss) before employee
separation, plant phase-out, divestment
and plant idling costs 64.0 50.6 11.7 8.1 6.9 (13.3)
Depreciation and amortization 54.8 43.2 9.1 1.4 0.6 0.5
--------- ------------ ------------ ---------- ------------- ----------
Operating income (loss) before employee
separation, plant phase-out, divestment,
plant idling costs and depreciation and
amortization $ 118.8 $ 93.8 $ 20.8 $ 9.5 $ 7.5 $ (12.8)
========= ============ ============ ========== ============= ==========
Capital expenditures $ 52.4 $ 39.9 $ 3.2 $ 0.5 $ - $ 8.8
* 2002 year-to-date costs include PolyOne's share of OxyVinyls employee
severance, plant phase-out costs and liabilities associated with the
temporary idling of a plant in December 2001 plus the asset write-off and
decommissioning costs related to the permanent closure of a portion of a
plant in 2002. The costs in the first nine months of 2001 related to
OxyVinyls employee severance costs and Australia Vinyls Corporation employee
severance and restructuring costs.
12
(In millions) Elastomers
&
Performance Performance Resin &
NINE MONTHS ENDED SEPTEMBER 30, 2001 Total Plastics Additives Distribution Intermediates Other
--------- ------------ ------------ ------------ ------------- ----------
Sales to external customers $ 2,064.7 $ 1,402.9 $ 313.6 $ 348.2 $ - $ -
Inter-segment sales - 27.2 0.3 6.3 - (33.8)
--------- ------------ ------------ ---------- ------------- ----------
$ 2,064.7 $ 1,430.1 $ 313.9 $ 354.5 $ - $ (33.8)
========= ============ ============ ========== ============= ==========
Operating income (loss) $ 9.0 $ 35.8 $ 8.0 $ 1.4 $ (17.8) $ (18.4)
Employee separation and plant phase-out
costs 9.8 9.8 - - - -
Period cost of closed facilities 0.2 0.2 - - - -
Merger and integration costs 1.1 0.1 - - - 1.0
Executive separation cost 4.8 - - - - 4.8
Equity affiliate employee severance and
restructuring costs* 6.1 - - - 6.1 -
--------- ------------ ------------ ---------- ------------- ----------
Operating income (loss) before employee
separation, plant phase-out, merger and
integration and restructuring costs 31.0 45.9 8.0 1.4 (11.7) (12.6)
Depreciation and amortization 72.9 55.3 13.3 2.5 - 1.8
--------- ------------ ------------ ---------- ------------- ----------
Operating income (loss) before employee
separation, plant phase-out, merger and
integration, restructuring costs and
depreciation and amortization $ 103.9 $ 101.2 $ 21.3 $ 3.9 $ (11.7) $ (10.8)
========= ============ ============ ========== ============= ==========
Capital expenditures $ 47.6 $ 16.1 $ 7.3 $ 0.6 $ - $ 23.6
* 2002 year-to-date costs include PolyOne's share of OxyVinyls employee
severance, plant phase-out costs and liabilities associated with the
temporary idling of a plant in December 2001 plus the asset write-off and
decommissioning costs related to the permanent closure of a portion of a
plant in 2002. The costs in the first nine months of 2001 related to
OxyVinyls employee severance costs and Australia Vinyls Corporation employee
severance and restructuring costs.
A breakdown of the Performance Plastics segment's sales for the three months and
nine months ended September 30, 2002 and the changes versus the same periods in
2001, by primary product group, is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2002 vs. 2001 2002 vs. 2001
-------------------------------------------- -------------------------------------------
% %
% Change % Change
% of Change in in Sales % of Change in in Sales
Sales $ Sales $ Lbs. Sales $ Sales $ Lbs.
-------------- -------------- ------------- ------------- ------------- -------------
North American Plastics
Compounds and Colors (PC&C) 54 -6 1 54 -10 -5
International PC&C 23 25 11 23 10 6
Specialty Resin and Formulators 15 4 3 15 2 3
Engineered Films 8 2 3 8 -3 -4
-------------- -------------- ------------- ------------- ------------- -------------
Performance Plastics 100 2 3 100 -4 -2
NOTE N - COMMITMENTS AND CONTINGENCIES
There are pending or threatened against PolyOne or our subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the ordinary
course of business with respect to employment, commercial, product liability and
environmental matters, which seek damages or other remedies. We believe that any
liability that may finally be determined should not have a material adverse
effect on our consolidated financial position.
PolyOne has accrued for environmental liabilities based upon estimates prepared
by our environmental engineers and consultants to cover probable future
environmental expenditures related to previously contaminated sites. The
accrual, totaling approximately $52.2 million at September 30, 2002, represents
our best estimate for the remaining remediation costs based upon information and
technology currently available. Depending upon the results of future testing,
the ultimate remediation alternatives to be undertaken, changes in regulations,
new information, and other factors, it is possible that the ultimate costs to be
incurred could be in excess of the accrual recorded at September 30, 2002. Our
estimate of the liability may be revised as new regulations and technologies are
developed or additional information is obtained. Additional information related
to our environmental liabilities is included in Note N to the consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2001.
13
NOTE O - RECLASSIFICATIONS
The first quarter 2002 loss on divestiture of the Australian Vinyls Corporation
PVC resin operations of $1.5 million pre-tax has been reclassified in the
year-to-date operating results. The reclassification is from other expense to a
separate line above operating income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PolyOne is a leading global polymer services company, which was formed on August
31, 2000 from the consolidation of The Geon Company (Geon) and M.A. Hanna
Company (Hanna).
Senior management uses (1) operating income before special items and/or (2)
operating income before special items and depreciation and amortization (similar
to EBITDA, which is used by stock market analysts) to assess performance and
allocate resources to business segments. Special items include gains and losses
associated with specific strategic initiatives such as restructuring or
consolidation of operations, gains or losses attributable to acquisitions or
formation of joint ventures, and certain other one-time items. In addition,
management uses net income before special items as a measure of our overall
earnings performance. Operating income before special items and net income
before special items are non-GAAP measures and may not be comparable to
financial performance measures presented by other companies.
Below is a summary of consolidated operating results for the three and nine
month periods ended September 30, 2002 and 2001. Also summarized are the special
items included in these periods.
Summary of Consolidated Operating Results Three Months Ended Nine Months Ended
(In millions, except per share data) September 30, September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Sales $ 668.5 $ 659.6 $ 1,973.7 $ 2,064.7
Operating income $ 26.6 $ 15.5 $ 54.3 $ 9.0
Operating income before special items 31.9 20.7 64.0 31.0
Operating income before special items, depreciation
and amortization 50.3 41.3 118.8 103.9
Net income (loss) $ 9.8 $ 2.9 $ (41.4) $ (16.0)
Cumulative effect of a change in accounting - - 53.7 -
-------------- -------------- -------------- --------------
Income (loss) before cumulative effect of a change
in accounting 9.8 2.9 12.3 (16.0)
Special items, expense - after-tax 3.4 3.2 6.2 11.3
-------------- -------------- -------------- --------------
Net income (loss) before cumulative effect of a
change in accounting and special items $ 13.2 $ 6.1 $ 18.5 $ (4.7)
============== ============== ============== ==============
Income (loss) per share, diluted $ 0.11 $ 0.03 $ (0.45) $ (0.18)
Per share effect of change in accounting - - 0.58 -
-------------- -------------- -------------- --------------
Income (loss) per share before cumulative effect of a
change in accounting $ 0.11 $ 0.03 $ 0.13 $ (0.18)
Per share effect of excluding special costs, increase $ 0.03 $ 0.04 $ 0.07 $ 0.13
14
Summary of Special Items Three Months Ended Nine Months Ended
(In millions) September 30, September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Employee separation and plant phase-out cost (1) $ (0.2) $ - $ (1.1) $ (9.8)
Period plant phase-out costs incurred (2) (0.5) - (0.7) (0.2)
Plant phase out accelerated depreciation (2) (0.5) - (1.5) -
Equity affiliate - restructuring, plant phase-out and
plant idling costs (3) (4.1) (5.1) (4.9) (6.1)
Merger and integration cost (4) - (0.1) - (5.9)
Loss on divestiture of equity investment (5) - - (1.5) -
-------------- -------------- -------------- --------------
Subtotal - operating income (loss) (5.3) (5.2) (9.7) (22.0)
Litigation settlement gain - - - 4.1
Investment write-down - - - (0.6)
-------------- -------------- -------------- --------------
Total pre-tax expense (5.3) (5.2) (9.7) (18.5)
Income tax benefit 1.9 2.0 3.5 7.2
-------------- -------------- -------------- --------------
Total after-tax expense $ (3.4) $ (3.2) $ (6.2) $ (11.3)
============== ============== ============== ==============
(1) These costs include severance, employee outplacement, external outplacement
consulting, lease termination, facility closing costs and the write-down 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 was the closing of excess manufacturing capacity of the
Elastomers business and establishing centers of manufacturing excellence
within the North American Plastics Compounds and Colors operations. This
resulted in several announcements in 2001 that 3 former Geon plants and 8
former Hanna plants would be closed. The initiatives also included the
termination of corporate and other positions at 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
phase-out.
(2) These are plant and phase-out costs associated with the Geon restructuring
initiatives described in (1) above that are to be recognized as period
costs versus when the restructuring initiative was approved.
(3) 2002 year-to-date costs include PolyOne's share of OxyVinyls employee
severance, plant phase-out costs and liabilities associated with the
temporary idling of a plant in December 2001 plus the asset write-off and
decommissioning costs related to the permanent closure of a portion of a
plant in 2002. The costs in the first nine months of 2001 related to
OxyVinyls employee severance costs and Australia Vinyls Corporation
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 divestiture of our 37.4% investment in the PVC
resin operations of Australian Vinyls Corporation (AVC). 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, which was announced on January 11,
2002 and we recognized a loss on the divestiture of the investment.
TOTAL COMPANY REPORTED RESULTS
The North American manufacturing sector lost momentum in the latter half of the
third quarter of 2002, reflecting a broad trend of economic weakness and a
resultant softening of customer demand. For third quarter 2002, average U.S.
industrial
15
production was essentially flat with the third quarter of 2001. The last two
months of the third quarter 2002 saw decreasing manufacturing capacity
utilization after seven months of consecutive increases since the beginning of
the year. Average manufacturing capacity utilization in the U.S. for the third
quarter 2002 was 76%, slightly below the third quarter 2001 average. Business
conditions continue to show a general trend of economic weakness compared to
last year. For the first nine months of 2002, average U.S. industrial production
was almost 1.5% below the first nine months of 2001. Average manufacturing
capacity utilization for the first nine months of 2002 was down 2.5% from the
first nine months of 2001. European domestic demand, as reported in the Blue
Chip Economic Indicators Report, has been flat for over a year. However, trends
in Asia, as experienced by our operations, have demonstrated continued growth
throughout 2002.
Third quarter 2002 sales of $668.5 million were $8.9 million higher than third
quarter 2001 sales, representing the first year-over-year increase in quarterly
sales since the U.S. economic slowdown began in the third quarter of 2000. The
third quarter 2002 increase in sales revenue from the third quarter of 2001
reflects higher sales in the Distribution segment, partially offset by slightly
lower Elastomers and Performance Additives sales. In 2002, the inter-segment
sales elimination increased as a result of our Distribution segment selling
substantially more products from Performance Plastics, especially our vinyl
compounds. Sales through the first nine months of 2002 were $1,973.7 million, 4%
or $91.0 million less than the first nine months of 2001. The Distribution
business, with the addition of vinyl compounds from Performance Plastics, was
the only segment to demonstrate 2002 year-to-date sales improvements as compared
to 2001.
PolyOne reported operating income of $26.6 million for the third quarter 2002,
an improvement of $11.1 million over the same period last year. As compared to
2001, the 2002 results include a $4.4 million pre-tax benefit related to the
non-amortization of goodwill effective from January 1, 2002. During the third
quarter of 2002, operating income was reduced by special charges consisting of
$1.2 million related to previously announced restructuring initiatives and $4.1
million related to PolyOne's equity investment in OxyVinyls. The OxyVinyls
charge consists of the write-off of property, plant and equipment as well as
decommissioning costs associated with the decision not to restart a specific
production unit at the joint venture's Deer Park chlor-alkali facility, which
was part of the operations that were temporarily idled in December 2001. Other
production units on the site, which were shutdown as a result of weak industry
conditions, are expected to restart when industry conditions and margins
improve. Operating income for the first nine months of 2002 was $54.3 million
versus $9.0 million for the first nine months of 2001. The year-to-date 2002
results include a pre-tax benefit of $13.3 million related to the
non-amortization of goodwill effective January 1, 2002. In addition, special
charges incurred at the operating income line in 2002 were $9.7 million, $12.3
million less than the same period last year.
Operating income before special items, depreciation and amortization (OIBSIDA)
during the third quarter of 2002 was $50.3 million, a $9.0 million improvement
over the third quarter of 2001. The primary driver for the higher OIBSIDA versus
the third quarter of 2001 was an $11.4 million improvement in the Resin &
Intermediates (R&I) segment earnings. OIBSIDA year-to-date in 2002 was $118.8
million, $14.9 million above the first nine months of 2001. The improved
earnings were driven by higher R&I segment OIBSIDA and the benefit of value
capture initiatives and economy-driven cost reduction programs, which were
offset by lower sales and by margin compression primarily in vinyl compounds and
specialty resins. Value capture initiatives represent initiatives for on-going
structural changes to capture strategic value, including, for example, the
initiative to expand and modernize a number of manufacturing facilities.
Interest expense increased $3.0 million in the third quarter 2002 compared to
the same quarter in 2001. For the nine month period ended September 30, the 2002
expense was $0.6 million below 2001. Impacting both periods was the second
quarter 2002 issuance of $200 million of senior debt at 8.875%, net of the debt
retired upon issuance, offset by the settlement of all interest rate swap
agreements in September 2002. Further, the average amount outstanding under the
revolver was reduced in 2002 compared to 2001.
Other expense, net, includes the finance costs associated with the receivables
sale facility, foreign currency gains and losses and other miscellaneous
expenses. For the third quarter 2002, other expense, net, was income of $1.0
million compared to expense of $2.6 million for the third quarter 2001. The
decrease in expense from the prior year was the result of favorable changes in
foreign currency rates and a decrease in the finance costs associated with the
receivables sale facility. The decrease in finance costs resulted from lower
interest rates in 2002 along with lower average usage in the third quarter of
2002 as compared to the third quarter of 2001. For the nine months ended
September 30, 2002, other expense, net, was expense of $2.8 million compared to
expense of $3.5 million for the nine months ended September 30, 2001. The
decrease in expense year-over-year was driven by the same factors as the third
quarter comparisons and partially offset by a litigation settlement gain
recognized in 2001.
The effective income tax rate was 38.4% for the third quarter 2002 versus 37.0%
for the third quarter 2001 and 38.8% for the nine months ending September 30,
2002 versus 36.5% for the nine months ending September 30, 2001. The difference
in the
16
effective rates for both the quarter and year-to-date is principally due 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 2002, we also completed the
transitional review for goodwill impairment required under SFAS 142. The review
indicated that goodwill related to the 1999 acquisition of our Engineered Films
operation 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 third quarter of 2001
included pre-tax goodwill amortization of $4.4 million ($3.7 million after-tax)
and the first nine months of 2002 included pre-tax goodwill amortization of
$13.3 million ($10.9 million after-tax).
The third quarter 2002 net income was $9.8 million, $6.9 million better than the
same quarter in 2001. Before special items and the 2001 goodwill amortization,
the 2002 third quarter increase was $3.4 million. For the nine months ended
September 30, 2002, net income before cumulative effect of a change in
accounting, special items and the 2001 amortization was $18.5 million and $12.3
million higher when compared to the same period of 2001.
BUSINESS SEGMENT INFORMATION
Below is a summary of business segment information for the three and nine months
ended September 30, 2002 and 2001.
(In millions) Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Sales:
Performance Plastics $ 466.2 $ 456.7 $ 1,376.2 $ 1,430.1
Elastomers & Additives 95.2 98.4 282.7 313.9
Distribution 135.8 115.6 393.8 354.5
Resin & Intermediates - - - -
Other (28.7) (11.1) (79.0) (33.8)
-------------- -------------- -------------- --------------
$ 668.5 $ 659.6 $ 1,973.7 $ 2,064.7
============== ============== ============== ==============
Operating income (loss) before special items:
Performance Plastics $ 17.1 $ 21.7 $ 50.6 $ 45.9
Elastomers & Additives 5.0 2.1 11.7 8.0
Distribution 2.4 0.3 8.1 1.4
Resin & Intermediates 11.4 0.6 6.9 (11.7)
Other (4.0) (4.0) (13.3) (12.6)
-------------- -------------- -------------- --------------
$ 31.9 $ 20.7 $ 64.0 $ 31.0
============== ============== ============== ==============
Operating income (loss) before special items,
depreciation and amortization:
Performance Plastics $ 31.7 $ 36.7 $ 93.8 $ 101.2
Elastomers & Additives 7.7 6.3 20.8 21.3
Distribution 2.8 1.1 9.5 3.9
Resin & Intermediates 12.0 0.6 7.5 (11.7)
Other (3.9) (3.4) (12.8) (10.8)
-------------- -------------- -------------- --------------
$ 50.3 $ 41.3 $ 118.8 $ 103.9
============== ============== ============== ==============
17
COMMENTARY ON BUSINESS SEGMENT OPERATING RESULTS
PERFORMANCE PLASTICS had third quarter 2002 sales of $466.2 million, compared
with sales of $456.7 million in the third quarter 2001. For the nine month
period ended September 30, 2002, sales totaled $1,376.2 million or $53.9 million
below the same period in 2001. A breakdown of the 2002 third quarter and nine
months segment sales, by primary product group, is as follows:
Quarter 2002 vs. 2001 Nine Months 2002 vs. 2001
-------------------------------------------- -------------------------------------------
% %
% Change % Change
% of Change in in Sales % of Change in in Sales
Sales $ Sales $ Lbs. Sales $ Sales $ Lbs.
-------------- -------------- ------------- ------------- ------------- -------------
North American Plastics
Compounds and Colors (PC&C) 54 -6 1 54 -10 -5
International PC&C 23 25 11 23 10 6
Specialty Resin and Formulators 15 4 3 15 2 3
Engineered Films 8 2 3 8 -3 -4
-------------- -------------- ------------- ------------- ------------- -------------
Performance Plastics 100 2 3 100 -4 -2
Third quarter 2002 sales were $9.5 million higher than the third quarter of
2001. Third quarter sales volumes for International PC&C's Asian operations were
up a combined 43% versus last year. European sales volumes were 8% favorable to
the same period last year, while European sales revenues as reported in U.S.
dollars benefited approximately 10% or $9.2 million due to the favorable Euro to
dollar currency exchange during the third quarter 2002 over the third quarter
2001. North American car and light truck production increased approximately 8%
over the same period last year and housing starts were up slightly more than 1%,
pacing Engineered Films and Specialty Resins & Formulators sales volume gains in
automotive and flooring applications. North American PC&C sales volumes
increased 1% versus the third quarter of 2001. However, a change in the mix of
products sold resulted in lower sales revenues versus last year. Average vinyl
compound selling prices for the third quarter of 2002, despite the realization
of a $0.03/lb price increase during the quarter, were flat versus the third
quarter of 2001. The sales comparison for the first nine months of 2002 versus
the first nine months of 2001 primarily reflects lower sales in North American
PC&C offset by strong demand in Asia and the favorable Euro currency exchange
impact, which increased U.S. dollar reported sales by $10.3 million or 4%. North
American PC&C has experienced softened demand in nearly all markets for vinyl
compounds, most notably wire and cable applications, which are down 13% in sales
volume and 21% in sales revenue.
Despite the 2% sales revenue improvement, OIBSIDA declined $5 million to $31.7
million in the quarter as compared to the third quarter of 2001. The decrease in
OIBSIDA is primarily a result of margin compression in vinyl compounds and
specialty resins due to the impact of higher PVC resin and VCM costs. OIBSIDA
for the first nine months of 2002 was $93.8 million, a $7.4 million decline from
the first nine months of 2001, reflecting lower segment sales and lower vinyl
compound and specialty resin margins, offset by the impact of value capture
initiatives and economy-driven cost reduction programs.
ELASTOMERS & PERFORMANCE ADDITIVES sales were $95.2 million in the third quarter
of 2002, a 3% decline compared to the third quarter 2001, as sales volumes were
down 2%. The decline in third quarter 2002 sales versus the same period last
year is due to lower additive sales and the loss of some Canadian sales
following the closure of our Canadian operation in the fourth quarter of 2001.
Sales of core elastomers products were flat. Year-to-date 2002 sales of $282.7
million were 10% below the same period in 2001. The decline in year-over-year
sales for the first nine months of 2002 is the result of lower sales volumes in
the compounding and tire tolling platforms. In addition, we have lost
approximately $3.5 million in market share in Canada as a result of closing our
Canadian operation in the fourth quarter of 2001.
OIBSIDA in the third quarter of 2002 was $7.7 million compared to $6.3 million
in the third quarter of 2001. Increased OIBSIDA compared to prior year is
primarily due to material cost savings associated with value capture initiatives
and the closure of three plants and an administrative facility from previously
announced restructuring initiatives, partially offset by lower sales volumes.
OIBSIDA in the first nine months of 2002 was $20.8 million versus $21.3 million
in the first nine months of 2001, resulting from the aforementioned sales
decline partially offset by the savings from the plant shutdowns noted
previously.
DISTRIBUTION sales in the third quarter of 2002 were $135.8 million, 17% higher
than third quarter 2001. The third quarter 2002 sales improvement versus same
period prior year largely reflected increased vinyl compound sales plus
increased volumes in other products, offset by slightly lower average selling
prices. Sales in the first nine months of 2002 were $393.8
18
million, 11% above the same period last year. Year-to-date 2002 sales volume
improvements, which included the shift to using the Distribution segment for
PolyOne's vinyl compounds, more than offset lower average selling prices.
OIBSIDA in the third quarter of 2002 was $2.8 million, $1.7 million above third
quarter of 2001. Increased OIBSIDA for the third quarter of 2002 compared to the
third quarter of 2001 is primarily associated with the margin impact of the
increased sales volumes. OIBSIDA in the first nine months of 2002 was $9.5
million, $5.6 million higher than the same period last year. The 2002
improvement in year-to-date OIBSIDA versus 2001 is primarily due to higher sales
volumes in this volume sensitive business.
RESIN & INTERMEDIATES (R&I) operating income before special items, consisting of
equity income from joint ventures, allocated overhead support cost and costs
associated with past operations was $11.4 million for the third quarter of 2002,
$10.8 million higher than the third quarter of 2001. This improvement is
primarily related to equity earnings from PolyOne's 24% interest in OxyVinyls
($10.0 million) and 50% interest in SunBelt ($1.8 million). Compared to the
third quarter 2001, PVC resin market selling prices increased an average
$0.07/lb and the industry was able to increase the spread of PVC resin selling
prices over the cost of ethylene and chlorine by approximately $0.03/lb.
The Resin and Intermediates business segment generated operating income before
special items of $6.9 million for the first nine months of 2002, an $18.6
million improvement over the same period last year. The 2002 nine months results
were positively impacted by the improvement in the equity earnings of OxyVinyls
by $22.0 million, which was offset by increased losses generated by SunBelt
($3.4 million). The improvement in the equity earnings of OxyVinyls was mainly
due to falling energy prices, which lowered conversion costs and ethylene
acquisition costs. Average PVC resin market selling prices were $0.01/lb lower
in the first nine months of 2002 versus the same period last year.
OTHER consists primarily of corporate governance costs and inter-segment profit
elimination that is not allocated to business segments. These unallocated costs
before special items were $4.0 million in the third quarter of 2002 and $13.3
million for the first nine months of 2002. The first nine months of 2002 include
the elimination of $1.6 million pre-tax inter-segment profit in the Distribution
segment inventories relating primarily to PolyOne vinyl compounds.
19
CAPITAL RESOURCES AND LIQUIDITY
For the first nine months of 2002, operating activities utilized $78.5 million
of cash, driven by a $115.8 million increase in commercial working capital
(trade accounts receivable before receivables sold, FIFO inventories and
accounts payable) related primarily to higher sales levels. Partially offsetting
the increase in commercial working capital was the pre-tax earnings before
depreciation and amortization of $76.4 million for the first nine months of
2002.
Investing activities for the first nine months of 2002 used $34.3 million,
consisting primarily of capital expenditures of $52.4 million. Nearly half of
the projected capital spending is associated with the North American PC&C
manufacturing restructuring and the new business information system.
Cash provided by financing activities during the first nine months of 2002 was
$150.6 million reflecting an increase in long-term debt from the $200 million
senior debt offering completed in April 2002, partially offset by the funds used
to repay a loan held by one of our German subsidiaries. Further, dividends of
$16.9 million were paid and net proceeds of $7.0 million were received from the
exercise of stock options.
As of September 30, 2002, PolyOne had existing facilities to access capital
resources (receivables sale facility, revolving credit agreement, uncommitted
short-term credit lines and long-term debt) totaling approximately $1 billion.
At the end of the third quarter of 2002, PolyOne had utilized approximately $801
million of these facilities, including $594 million of long-term debt. The
effective available funds under these facilities can vary, depending on the
level of qualified receivables outstanding, ratings on public debt and
debt-related financial ratios. As of September 30, 2002, approximately $114
million of the existing capital resource facilities were available to be drawn
while remaining in compliance with the facilities.
In September 2002, PolyOne's public debt was downgraded by Standard & Poor's
(S&P) from BBB- to BB+ or non-investment grade. Moody's Investors Service
affirmed PolyOne's investment grade public debt rating of Baa3. Both ratings
carry a negative outlook. The downgrade by S&P triggered higher reserve
requirements (deducting available borrowings) and additional facility fees
associated with our receivables sale facility. At the current facility level,
the higher reserve requirements approximate $16 million and the additional fees
will approximate $0.8 million per year. The downgrade does not affect the
revolver, uncommitted short-term line of credit or outstanding fixed debt
pricing or covenants.
On March 28, 2002, PolyOne amended and restated the credit agreement governing
the revolving credit facility. The amended and restated credit agreement revised
our 2002 borrowed debt-to-EBITDA compliance ratios and requires that we secure
any obligations under our revolving credit facility. For a summary of the
borrowed debt-to-EBITDA compliance ratios and other financial ratios, 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 September 30,
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 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. Security is granted under the
terms of the amended and restated revolving credit agreement; however, PolyOne
does not anticipate borrowings in 2002 under the revolving credit agreement
which would result in security being provided to the outstanding public
unsecured debt. Security on the revolving credit agreement and public debt, if
applicable, will terminate when the borrowed debt-to-EBITDA ratio is less than
3.50 to 1.0 for any two consecutive fiscal quarters. As of September 30, 2002,
PolyOne had guaranteed unconsolidated equity affiliate debt of $97.5 million for
SunBelt and $42.3 million for OxyVinyls.
On April 23, 2002, PolyOne issued $200 million of 8.875% senior notes that
mature in 2012. We used the proceeds from the offering to repay all amounts
outstanding under our revolving bank credit facility; to repay a loan held by
one of our German subsidiaries; to reduce a portion of the amount sold under our
receivables sale facility; to repay borrowings under our short-term lines of
credit; and to pay related fees and expenses. The senior notes rank equally with
all of PolyOne's other senior unsecured indebtedness. This financing was to
provide additional liquidity and reduce the risk associated with refinancing
approximately $128 million of existing long-term debt that matures in 2003.
20
The following table summarizes the defined financial ratios for 2002 as amended
and restated in March 2002.
Borrowed Tangible Assets-
Interest Debt-to- to-Indebtedness
Coverage Ratio EBITDA Ratio Ratio
(Minimum) (Maximum) (Minimum)
----------------- ------------------ -----------------
Agreement compliance
First quarter of 2002 2.75 Waived 1.00
Second quarter of 2002 2.75 5.70 1.00
Third quarter of 2002 2.75 5.50 1.00
Fourth quarter of 2002 3.00 5.25 1.00
Limitations on dividends and stock repurchases
(1), capital expenditures (2) and acquisitions (3)
Each quarter 3.99
(1) Payments for dividends and stock repurchases would be restricted to
$6.0 million per quarter, excluding certain allowable stock repurchase
transactions as defined in the revolving credit agreement, as amended
March 28, 2002.
(2) Capital expenditures would be restricted to $33.0 million in a quarter
and $88.0 million in a fiscal year.
(3) New acquisition investments would be limited to $25.0 million in 2002
and $37.0 million in 2003 for specific transactions.
The realization of profitable operations will be important to maintaining the
existing levels of available capital resources and the execution of PolyOne's
announced restructuring initiatives. PolyOne's operating income before special
items and depreciation and amortization (which approximates the free cash flow
of ongoing operations) was approximately $126 million in the year 2001and
approximately $119 million in the first nine months of 2002. The free cash flow
must cover expenditures for financing costs (interest expense and discount on
sale of receivables), dividends and capital expenditures. These expenditures
totaled approximately $150 million in 2001 and approximately $101 million in
the first nine months of 2002. Capital expenditures for 2002 are projected to
be between $75 million and $80 million. Nearly half of the projected
capital spending is associated with the North American Plastic Compounds and
Colors manufacturing restructuring and the new business information system.
PolyOne also projects that cash spending for restructuring initiatives announced
and accrued in 2001 in relation to employee separation and plant phase-out costs
will range between $9 million and $15 million over the last three months of
2002. Free cash flow is projected to increase in the last three months of 2002,
in part from the seasonal decline in sales and the resulting reduction in
commercial working capital. During the first nine months of 2002, commercial
working capital increased $115.8 million primarily due to sales increases. Any
shortfall in cash flow is expected to be covered by (1) utilizing the available
capital resource facilities noted previously, (2) securing additional capital
resources, (3) managing and redeploying assets and/or (4) revising the
expenditures noted previously. If it were 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.
Management believes that it should be able to continue to manage and control
working capital, discretionary spending and capital expenditures in order to
assure adequate levels of liquidity in 2002 and beyond to support normal
operations, to complete a previously announced acquisition in December 2002 and
to execute the announced restructuring initiatives that are projected to enhance
PolyOne's future profitability.
ACCOUNTING POLICIES AND ESTIMATES
Note B of the 2001 Annual Consolidated Financial Statements contains a summary
of PolyOne's accounting policies and commentary on the nature of estimates made
in the preparation of the financial statements. Following is a description of
important management judgments relating to the PolyOne 2001 Annual Consolidated
Financial Statements and the Quarterly Condensed Consolidated Financial
Statements for the three and nine month periods ended September 30, 2002
(Unaudited).
ENVIRONMENTAL ACCRUED LIABILITY. PolyOne has accrued $52.2 million to cover
future environmental remediation expenditures, and believes none of these
matters, either individually or in the aggregate, should 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. For additional
discussion, refer to Note N to the Annual Consolidated Financial Statements and
to Note N to the Quarterly Condensed Consolidated Financial Statements
(Unaudited).
RESTRUCTURING COSTS. In 2001, PolyOne announced plans to close 11 manufacturing
plants in 2002. In the first nine months of 2002, 3 plants were closed. During
October 2002, 2 additional plants were closed and 3 more plants are scheduled
to be closed during
21
the remainder of the fourth quarter of 2002. The closure of 3 plants has been
deferred to mid-2003. As of September 30, 2002, an accrued liability of $26.6
million existed for future employee severance and plant closing costs. In
addition, as of September 30, 2002, the net property carrying value to be
realized for the plants closed or to be closed was $34.5 million (some assets
will be transferred to other locations as production ceases). (Unaudited)
EQUITY INVESTMENT. In December 2001, OxyVinyls (of which PolyOne owns 24%)
announced the temporary idling of its Deer Park, Texas, chlor-alkali plant due
to low industry capacity utilization and low product market selling prices. In
September 2002, OxyVinyls announced that it had decided to permanently close a
specific production unit of the Deer Park, Texas, chlor-alkali plant. PolyOne's
share of the third-quarter pre-tax charge is approximately $4.1 million,
relating to the write-off of property, plant and equipment as well as
decommissioning costs of the closed production unit. The remaining operations at
the Deer Park facility, which have been temporarily idled, are expected to
restart when industry conditions and margins improve. As of September 30, 2002,
OxyVinyls had a remaining accrual $4.2 million for future employee severance,
liabilities associated with the temporary idling of a plant, facility asset
write-off and decommissioning costs. The plant had a net property carrying value
on OxyVinyls as of September 30, 2002 of approximately $124 million, which is
anticipated to be realized through future operations upon the restart of the
plant. (Unaudited)
GOODWILL. As of September 30, 2002, PolyOne's recorded goodwill totaled $446.8
million. During the first quarter of 2002, we completed our transitional
impairment assessment of any potential impairment under the new provisions of
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets," which resulted in the write-off of all of Engineered
Films' goodwill and an impairment loss of $54.7 million ($53.7 million
after-tax), as further explained in Note B to the Quarterly Condensed
Consolidated Financial Statement (Unaudited).
Although we completed an assessment of goodwill impairment, any additional
future goodwill impairment could result in:
- Violation of financial ratios required by our debt agreements;
- Limitation of dividend payments and/or company stock repurchases;
and/or
- Extending security to the existing public debt outstanding.
DEFERRED TAX BENEFIT FOR OPERATING LOSS CARRYFORWARDS. As of September 30, 2002,
PolyOne had a net deferred tax liability of $24.2 million, which included a
deferred tax asset of $82.3 million for operating loss carryforwards for tax
purposes. The operating loss carryforwards are expected to be utilized against
future earnings, thereby reducing taxes that would otherwise be paid. See the
discussion in Note P to the Annual Consolidated Financial Statements.
OUTLOOK
For most of PolyOne's businesses, the fourth quarter is historically the slowest
demand period of the year. In 2000 and 2001, fourth-quarter revenues fell
approximately 10 percent and 11 percent, respectively, from third-quarter
levels. PolyOne projects that revenues in fourth-quarter 2002 will be higher
than in fourth-quarter 2001, with the current view being that the revenue
decline from third-quarter to fourth-quarter 2002 should be less than in 2001.
Additionally, several factors could reduce the equity contribution from R&I by
$9 million to $11 million in the fourth quarter of 2002 compared with the third
quarter of 2002. Typical seasonal slowing will likely result in lower PVC resin
demand, and could lead to reduced market prices. Moreover, industry forecasts
call for somewhat higher costs for natural gas and ethylene into the fourth
quarter. The combined price for chlorine and caustic soda is anticipated to
improve modestly.
With the outlook for decreased customer demand and a lower contribution from
R&I, PolyOne could realize net income before special items that is only slightly
profitable in the fourth quarter. Value capture initiatives are expected to
provide only minimal benefit in the fourth quarter, with the next significant
increase in benefit from these initiatives occurring in early 2003.
As planned, PolyOne expects to complete its previously announced acquisition of
TRANSCOLOR, S.A., a color concentrates producer near Pamplona, Spain, in
December 2002. With the North American PCC manufacturing asset reconfiguration
progressing and with business conditions slowing, working capital should
continue to decline through the end of the year.
22
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
In this report on Form 10-Q, 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 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
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 Forms 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.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PolyOne is exposed to market risk from changes in interest rates on debt
obligations and from changes in foreign currency exchange rates. Information
related to these risks and our management of the exposure is included in
"Management's Analysis - Consolidated Statements of Cash Flows" in the 2001
Annual Report under the caption "Market Risk Disclosures" included in our Annual
Report on Form 10-K. PolyOne periodically enters into interest rate swap
agreements that convert fixed-rate obligations to floating rates. As of
September 30, 2002, PolyOne had terminated all outstanding interest rate swap
agreements. Upon termination, PolyOne received $8.3 million of cash. There have
been no material changes in the market risk faced by us from December 31, 2001
to September 30, 2002. We have updated the disclosure concerning our financing
arrangements, which is included in Note K in this form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Principal Executive Officer and Principal Financial
Officer, we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-14(c)
and 15d-14(c) under the Exchange Act, as of a date (the "Evaluation
Date") within 90 days prior to the filing date of this report. Based
upon that evaluation, the Principal Executive Officer and Principal
Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective in timely alerting
them to the material information relating to us (or our consolidated
subsidiaries) required to be included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during
the period covered by this report or, to our knowledge, in other
factors that could significantly affect these controls subsequent to
the date of their evaluation.
24
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
- Exhibit 99.1 Certificate Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, as signed by Thomas A. Waltermire, Chairman of the
Board, President and Chief Executive Officer
- Exhibit 99.2 Certificate Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, as signed by W. David Wilson, Vice President and
Chief Financial Officer
(b) Reports on Form 8-K from July 1, 2002 through September 30, 2002:
- Form 8-K filed on August 1, 2002 announced a press release
dated July 31, 2002, whereby we announced second quarter
2002 earnings.
- Form 8-K filed on August 12, 2002 announced that on August
8, 2002, the Principal Executive Officer and the Principal
Financial Officer of PolyOne forwarded to the Securities and
Exchange Commission sworn statements pursuant to the
Securities and Exchange Commission's Order No. 4-460.
- Form 8-K filed on August 13, 2002 announced a press release
dated August 7, 2002, whereby we announced the declaration
of a dividend to be paid in September 2002.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 14, 2002 POLYONE CORPORATION
/s/ W. DAVID WILSON
------------------------------------------
W. David Wilson
Vice President and Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
/s/ GREGORY P. SMITH
--------------------------------------------
Gregory P. Smith
Corporate Controller and Assistant Treasurer
(Principal Accounting Officer)
26
CERTIFICATION
I, Thomas A. Waltermire, Chairman of the Board, President and Chief Executive
Officer of PolyOne Corporation ("registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
November 14, 2002
/s/ THOMAS A. WALTERMIRE
- ----------------------------------------
Thomas A. Waltermire
Chairman of the Board, President and
Chief Executive Officer
27
CERTIFICATION
I, W. David Wilson, Vice President and Chief Financial Officer of PolyOne
Corporation ("registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
November 14, 2002
/s/ W. DAVID WILSON
- ----------------------------------------
W. David Wilson
Vice President and Chief Financial
Officer
28