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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MARCH 31, 2003. 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 Identification No.)
of incorporation or organization)
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
As of May 14, 2003, there were 91,708,962 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
March 31,
2003 2002
---------- ----------
Sales $ 645.5 $ 596.3
Operating costs and expenses:
Cost of sales 552.1 490.1
Selling and administrative 71.8 79.4
Depreciation and amortization 18.5 17.8
Employee separation and plant phase-out 24.9 0.9
Loss on divestiture of equity investment - 1.5
(Income) loss from equity affiliates and minority interest (5.6) 2.2
---------- ----------
Operating income (loss) (16.2) 4.4
Interest expense (12.5) (8.5)
Interest income 0.2 0.2
Other expense, net (3.1) (2.6)
---------- ----------
Loss before income taxes, discontinued operations and cumulative effect of change in
accounting (31.6) (6.5)
Income tax benefit 12.3 2.6
---------- ----------
Loss before discontinued operations and cumulative effect of change in accounting (19.3) (3.9)
Discontinued operations:
Income from operations, net of income taxes - 0.3
Cumulative effect of a change in goodwill accounting,
net of income tax benefit of $1.0 million - (53.7)
---------- ----------
Net loss $ (19.3) $ (57.3)
========== ==========
Loss per share of common stock:
Basic loss per share before discontinued operations and effect of change in accounting $ (.21) $ (.04)
Discontinued operations - -
Cumulative effect of a change in accounting - (.60)
---------- ----------
Basic loss per share $ (.21) $ (.64)
========== ==========
Diluted loss per share before discontinued operations and effect of change in
accounting $ (.21) $ (.04)
Discontinued operations - -
Cumulative effect of a change in accounting - (.60)
---------- ----------
Diluted loss per share $ (.21) $ (.64)
========== ==========
Weighted average shares used to compute earnings per share:
Basic 90.9 90.0
Diluted 90.9 90.0
Dividends paid per share of common stock $ - $ .0625
See Accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements
1
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions)
March 31, December 31,
2003 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 50.3 $ 41.4
Accounts receivable, net 204.5 164.3
Inventories 289.7 253.7
Deferred income tax assets 41.9 42.1
Other current assets 16.1 12.7
-------- --------
Total current assets 602.5 514.2
Property, net 672.7 682.1
Investment in equity affiliates 256.8 271.8
Goodwill, net 444.1 444.0
Other intangible assets, net 31.8 32.8
Other non-current assets 51.8 52.6
-------- --------
Total assets $2,059.7 $1,997.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank debt $ 36.2 $ 0.7
Accounts payable 299.4 242.0
Accrued expenses 138.8 160.2
Current portion of long-term debt 91.0 91.0
-------- --------
Total current liabilities 565.4 493.9
Long-term debt 498.4 492.2
Deferred income tax liabilities 23.8 39.0
Post-retirement benefits other than pensions 123.0 122.5
Other non-current liabilities, including pensions 267.2 261.2
Minority interest in consolidated subsidiaries 9.2 9.0
-------- --------
Total liabilities 1,487.0 1,417.8
Shareholders' equity:
Preferred stock, 40.0 shares authorized, no shares issued - -
Common stock, $.01 par, 400.0 shares authorized, 122.2
shares issued at March 31, 2003 and December 31, 2002 1.2 1.2
Other shareholders' equity 571.5 578.5
-------- --------
Total shareholders' equity 572.7 579.7
-------- --------
Total liabilities and shareholders' equity $2,059.7 $1,997.5
======== ========
See Accompanying Notes to the Unaudited Condensed Consolidated Financial
Statements
2
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)
Three Months Ended
March 31,
2003 2002
------- -------
OPERATING ACTIVITIES
Net loss $ (19.3) $ (57.3)
Cumulative effect of a change in accounting - 53.7
Income from discontinued operations - (0.3)
------- -------
Loss from continuing operations (19.3) (3.9)
Adjustments to reconcile net loss to net cash used by
operating activities:
Employee separation and plant phase-out charges 24.9 0.9
Cash payments on employee separation and plant phase-out (12.0) (4.0)
Depreciation and amortization 18.5 17.8
Unrealized currency (gains) losses (6.2) 0.8
Loss on sale of equity affiliate - 1.5
Companies carried at equity and minority interest:
(Income) loss from equity affiliates (6.0) 2.0
Minority interest expense 0.4 0.2
Dividends and distributions received 1.0 0.3
Change in assets and liabilities:
Operating working capital:
Accounts receivable (37.7) (69.5)
Inventories (34.1) (16.8)
Accounts payable 56.2 22.7
Accrued expenses and other (20.3) 17.3
------- -------
NET CASH USED BY OPERATING ACTIVITIES FOR CONTINUING OPERATIONS (34.6) (30.7)
INVESTING ACTIVITIES
Capital expenditures (6.2) (10.5)
Return of cash from equity affiliates 2.4 0.5
Business acquired, net of cash received (15.8) -
Proceeds from sale of assets 22.4 -
------- -------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES FOR CONTINUING OPERATIONS 2.8 (10.0)
FINANCING ACTIVITIES
Change in short-term debt 35.4 49.1
Change in long-term debt 6.1 (0.3)
Net proceeds from the exercise of stock options - 2.7
Dividends - (5.8)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES FOR CONTINUING OPERATIONS 41.5 45.7
NET CASH USED BY DISCONTINUED OPERATIONS - (0.1)
Effect of exchange rate on changes on cash (0.8) (0.6)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 8.9 4.3
Cash and cash equivalents at beginning of period 41.4 18.2
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 50.3 $ 22.5
======= =======
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 Retained Stock Held Share Owner
Common Held in Common Paid-In Earnings in Ownership Equity
Shares Treasury Total Stock Capital (Deficit) Treasury Trust Changes
--------------------------------------------------------------------------------------------
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 (57.3) (57.3)
Translation adjustment (0.3) (0.3)
---------
Total non-owner equity changes (57.6)
Stock-based compensation and
benefits and exercise of options (175) 3.4 (1.1) 2.6 1.6 0.3
Adjustment to market value - 2.3 (2.3)
Cash dividends (5.8) (5.8)
--------------------------------------------------------------------------------------------
BALANCE MARCH 31, 2002 122,192 31,000 $ 653.4 $ 1.2 $ 1,073.9 $ 37.2 $ (347.5) $ (6.0) $(105.4)
============================================================================================
BALANCE JANUARY 1, 2003 122,192 30,517 $ 579.7 $ 1.2 $ 1,069.5 $ 18.7 $ (341.1) $ (1.8) $(166.8)
Non-owner equity changes:
Net loss (19.3) (19.3)
Translation adjustment 11.3 11.3
Net unrealized loss on securities 0.1 0.1
---------
Total non-owner equity changes (7.9)
Stock-based compensation and benefits (35) 0.9 (0.4) 0.4 0.4 0.5
--------------------------------------------------------------------------------------------
BALANCE MARCH 31, 2003 122,192 30,482 $ 572.7 $ 1.2 $ 1,069.1 $ (0.6) $ (340.7) $ (1.4) $(154.9)
============================================================================================
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, 2002 of PolyOne
Corporation.
In December 2002, PolyOne sold its 70% ownership interest in Softer, a leading
Italian compounder of thermoplastic materials, while licensing certain
technologies. With the sale, all historical operating results of this business
have been reported separately as discontinued operations. The business was
previously included within PolyOne's Performance Plastics segment.
Operating results for the three-month period ended March 31, 2003 are not
necessarily indicative of the results expected in subsequent quarters or for the
year ending December 31, 2003.
NOTE B - ACCOUNTING POLICIES
STOCK-BASED COMPENSATION As provided under Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," PolyOne
has elected to account for stock-based compensation under the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." Compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the PolyOne stock at the date of the grant
over the amount an employee must pay to acquire the stock.
The following table illustrates the effect on net loss and loss per share if
PolyOne had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation, using the fair value estimate computed by the
Black-Scholes option-pricing model. The Black-Scholes option-pricing model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected share price volatility. Because PolyOne's share options have
characteristics significantly different from traded options, and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of our share options.
Three Months Ended
March 31,
------------------------------
(In millions, except per share data) 2003 2002
------------- -------------
Net loss, as reported $ (19.3) $ (57.3)
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards 1.2 0.8
------------- -------------
Pro forma net loss $ (20.5) $ (58.1)
============= =============
Net loss per share:
Basic and diluted - as reported $ (.21) $ (.64)
Basic and diluted - pro forma $ (.22) $ (.65)
NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB)
has issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 requires a cost associated with an exit or disposal
activity, such as the sale or termination of a line of business, the closing of
business activities in a particular location or a change in management
structure, to be recorded as a liability at fair value when it becomes probable
the cost will be incurred and no future economic benefit will be gained by the
company for such cost. Applicable costs include employee termination benefits,
contract termination costs and costs to consolidate facilities or relocate
employees. SFAS No. 146 supersedes Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity," which in some cases required certain costs to be
recognized before a liability was actually incurred. The provisions of SFAS No.
146 are effective for exit or disposal activities initiated after December 31,
2002.
The Financial Accounting Standards Board has issued SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition when a company voluntarily changes to the fair value-based
method of recognizing expense in the income statement for stock-based employee
compensation, including stock options granted to employees. As allowed by SFAS
No. 123, PolyOne has adopted the disclosure-only provisions of the standard and
does not recognize expense for stock options granted to employees.
5
RECLASSIFICATION Certain amounts for 2002 have been reclassified to conform with
the 2003 presentation.
NOTE C - GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the three months ended March 31,
2003, by business segment are as follows:
Elastomers &
Performance Performance
(In millions) Plastics Additives Distribution Other Total
-------------- -------------- --------------- --------------- ---------------
December 31, 2002 $ 329.7 $ 111.9 $ 1.1 $ 1.3 $ 444.0
Reversal of business
combination reserve (0.3) - - - (0.3)
Currency translation 0.4 - - - 0.4
-------------- -------------- --------------- --------------- ---------------
March 31, 2003 $ 329.8 $ 111.9 $ 1.1 $ 1.3 $ 444.1
============== ============== =============== =============== ===============
Information regarding PolyOne's other intangible assets follows:
As of December 31, 2002
Acquisition Accumulated Currency
Cost Amortization Translation Net
-------------- -------------- --------------- ---------------
(In millions)
Non-contractual customer
relationships $ 16.7 $ (3.0) $ - $ 13.7
Sales contract 12.9 (4.1) - 8.8
Patents, technology and other 15.5 (5.6) 0.4 10.3
-------------- -------------- --------------- ---------------
Total $ 45.1 $ (12.7) $ 0.4 $ 32.8
============== ============== =============== ===============
As of March 31, 2003
Acquisition Accumulated Currency
Cost Amortization Translation Net
-------------- -------------- --------------- ---------------
(In millions)
Non-contractual customer
relationships $ 16.7 $ (3.3) $ - $ 13.4
Sales contract 12.9 (4.5) - 8.4
Patents, technology and other 15.5 (6.0) 0.5 10.0
-------------- -------------- --------------- ---------------
Total $ 45.1 $ (13.8) $ 0.5 $ 31.8
============== ============== =============== ===============
Amortization of other intangible assets was $1.1 million for the three-month
period ended March 31, 2003 and $1.1 million for the three-month period ended
March 31, 2002. Amortization expense for each of the five succeeding fiscal
years is expected to be approximately $4.5 million per year.
NOTE D - INVENTORIES
Components of inventories are as follows:
March 31, December 31,
(In millions) 2003 2002
--------------- ---------------
Finished products and in-process inventories $ 186.5 $ 159.1
Raw materials and supplies 130.0 118.5
--------------- ---------------
316.5 277.6
LIFO Reserve (26.8) (23.9)
--------------- ---------------
Total Inventories $ 289.7 $ 253.7
=============== ===============
6
NOTE E - INCOME TAXES
The effective income tax benefit was 39% for the first quarter 2003 compared
with a benefit of 40% for the first quarter 2002. The difference in the
effective benefits for the quarter is principally due to lower foreign income
taxes. The net deferred tax asset as of March 31, 2003 was $18.1 million, which
included a deferred tax asset of $109.2 million related to operating loss
carryforwards for tax purposes. The tax benefit recorded in the first quarter
included a benefit of $15.1 million related to domestic losses because PolyOne
is forecasting income for the year 2003 and therefore, no additional valuation
allowance is deemed necessary at this time.
NOTE F - INVESTMENT IN EQUITY AFFILIATES
PolyOne owns 24% of Oxy Vinyls 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
three months ended March 31, 2003 and 2002, and summarized balance sheet
information as of March 31, 2003 and December 31, 2002.
Three Months Ended
(In millions) March 31,
------------------ ------------------
Net sales $ 413.5 $ 278.8
Employee severance and liabilities associated with the temporary idling of a plant - (3.1)
Operating income 17.2 0.1
Partnership income (loss) as reported by OxyVinyls 12.7 (1.3)
PolyOne's ownership of OxyVinyls 24% 24%
------------------ ------------------
PolyOne's proportionate share of OxyVinyls' earnings 3.0 (0.3)
Amortization of the difference between PolyOne's investment and its underlying
share of OxyVinyls' equity 0.2 0.1
------------------ ------------------
Earnings of equity affiliate recorded by PolyOne $ 3.2 $ (0.2)
================== ==================
(In millions) March 31, December 31,
2003 2002
------------------ ------------------
Current assets $ 342.1 $ 275.1
Non-current assets 962.8 979.1
------------------ ------------------
Total assets 1,304.9 1,254.2
Current liabilities 178.5 164.0
Non-current liabilities 104.8 81.3
------------------ ------------------
Total liabilities 283.3 245.3
------------------ ------------------
Partnership capital $ 1,021.6 $ 1,008.9
================== ==================
OxyVinyls' income during the first quarter of 2003 reported above includes a
charge of $3.4 million in connection with a change in accounting from the
adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations." Our
proportionate share of the charge was $0.8 million. OxyVinyls' loss during the
first quarter of 2002 reported above includes a pre-tax charge of $3.1 million
related to employee severance costs and costs associated with the temporary
idling of a plant. PolyOne's proportionate share of this charge was $0.7
million.
In April 2003, OxyVinyls exercised its purchase option related to its LaPorte,
Texas VCM plant lease for approximately $180 million. As a result, the
implementation of FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," will have no earnings impact on OxyVinyls.
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%) and Geon/Polimeros Andinos (owned 50%) equity affiliates. For the
one-month period ended January 31, 2003, the Performance Plastics segment
included the results for Techmer PM, LLC, an equity affiliate (owned 51%). In
January 2003, we sold our unconsolidated equity ownership interest in Techmer.
Further, for 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.
7
Three Months Ended
March 31,
(In millions) 2003 2002
------------------ ------------------
Net sales $ 41.7 $ 95.2
Operating income 9.4 2.4
Net income (loss) 5.6 (1.7)
NOTE G - EARNINGS PER SHARE COMPUTATION
Weighted average shares outstanding are computed as follows:
Three Months Ended
(Shares in millions) March 31,
------------------------------
2003 2002
-------------- --------------
Weighted-average shares - Basic:
Weighted-average shares outstanding 91.5 90.6
Less unearned portion of restricted stock awards
included in outstanding shares (0.6) (0.6)
-------------- --------------
90.9 90.0
============== ==============
Weighted-average shares - Diluted:
Weighted-average shares outstanding - basic 90.9 90.0
Plus unearned portion of restricted stock awards
included in outstanding shares - -
Plus dilutive impact of stock options - -
-------------- --------------
90.9 90.0
============== ==============
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.
PolyOne had excluded all outstanding options from the calculation of diluted
loss per share because they would have had an anti-dilutive effect (0.9 million
shares in 2002). There was no impact from stock options and stock awards at
March 31, 2003.
NOTE H - BUSINESS COMBINATIONS
On August 31, 2000, PolyOne was formed as a result of the consolidation of Geon
and Hanna, with Geon as the acquiring entity. As a result of the acquisition of
Hanna, PolyOne announced plans to incur employee separation and plant 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 the closing of 12 former Hanna manufacturing plants.
Of the announced sites for closings, nine were in the Performance Plastics
business segment and three were in the Elastomers & Performance Additives
segment. In 2001, one Performance Plastics and all designated Elastomers &
Performance Additives plants were closed. In 2002, five Performance Plastics
manufacturing sites closed. In January 2003, PolyOne committed to a refinement
to the original 2001 plan and decided to continue operating the remaining
facility. Accordingly, in the first quarter of 2003, the reserve of
approximately $0.3 million associated with this facility (which relates to an
acquired business) was reversed and recognized as a reduction to goodwill of the
acquired business. The two remaining facilities are scheduled to be closed by
the third quarter of 2003.
8
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, 2002 159 $5.0 $1.5 $0.3 $6.8
Utilized in 2003 (15) (0.9) (0.6) - (1.5)
Reserve reversal - (0.3) - - (0.3)
---- ---- ---- ---- ----
Balance at March 31, 2003 144 $3.8 $0.9 $0.3 $5.0
==== ==== ==== ==== ====
NOTE I - EMPLOYEE SEPARATION AND PLANT PHASE-OUT
PolyOne has undertaken various restructuring initiatives and incurred various
employee separation and plant phase-out costs. These costs include severance,
employee outplacement, external consulting, lease termination, facility closing
and the write-down of the carrying value of plants and equipment. These employee
separation and plant phase-out costs have been accrued and recognized as expense
in the Consolidated Statements of Operations.
2003 CHARGES Operating income in the first three months of 2003 was reduced by
charges of $24.9 million ($15.2 million after tax). Of the 2003 expense, $20.4
million relates to the January 16, 2003 announcement to reduce approximately 400
staff personnel. The costs were for employee separation, which consisted of
severance and other employee benefits. The remaining $4.5 million relates to the
March 26, 2003 announcement to exit an Engineering Films plant by the end of the
second quarter of 2003. Restructuring costs related to the Engineered Films
plant are projected to total $6.3 million, of which $2.8 million would be cash
closure costs. The first quarter 2003 charge related to the plant was $4.5
million, which primarily related to the impairment of plant and equipment and
related exiting costs. See Note L for the breakdown of the first-quarter charge
by segment.
2002 CHARGES Operating income in 2002 was reduced by charges of $1.1 million
($0.6 million after tax) for costs associated with the consolidation of certain
activities related to the Formulator operations in the Performance Plastics
segment. The costs were for employee separation, which consisted of severance
and other employee benefits. All 43 employees were terminated in 2002.
The following table summarizes the provisions, payments and remaining reserves
associated with these initiatives:
(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, 2003 40 $ 13.5 $ 1.1 $ - $ 14.6
2003 Charges 400 24.9 - - 24.9
Utilized in 2003 (392) (9.6) (0.9) - (10.5)
--------------- -------------- -------------- -------------- --------------
Balance at March 31, 2003 48 $ 28.8 $ 0.2 $ - $ 29.0
=============== ============== ============== ============== ==============
NOTE J - FINANCING ARRANGEMENTS
On May 6, 2003, we completed a debt refinancing. The refinancing provides the
necessary liquidity to repay $87.8 million of senior debt that matures in
September 2003, as well as to support normal operations and fund previously
announced restructuring initiatives intended to improve earnings. As part of
this refinancing, we issued $300 million of 10.625% unsecured senior notes that
mature in 2010, entered into a new three-year $225 million receivables sale
facility and amended and restated our revolving credit facility. The new
receivables sale facility replaced our former receivables sale facility. The
security that had been extended in February 2003 to our existing senior notes
and debentures and our guarantee of the SunBelt notes terminated as part of the
debt refinancing. The 10.625% unsecured senior notes rank equally with all of
our other senior unsecured indebtedness.
Also on May 6, 2003, we amended and restated our revolving credit facility. As
amended and restated, it has a three-year term and provides for up to $50.0
million in borrowings. However, the maximum amount that we may borrow will be
limited to 95% of the amount that may be borrowed and secured from time to time
under the revolving credit facility without triggering the security provisions
of the indentures governing the existing unsecured senior notes and debentures.
The amended and restated revolving credit facility makes available up to $35.0
million for the issuance of standby letters of credit. Our obligations under the
revolving credit facility are secured by substantially all of our domestic
intellectual property and inventory and some of our domestic real property.
Our amended and restated revolving credit facility and our new receivables sale
facility require, among other things, that we comply with interest coverage and
borrowed debt-to-adjusted EBITDA earnings ratios. Further, our financing
arrangements contain various restrictions and limit payments for purposes such
as capital expenditures, acquisitions and dividends.
9
NOTE K - SALE OF ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
(In millions) March 31, December 31,
2003 2002
----------------- -----------------
Trade accounts receivable $ 146.9 $ 120.1
Retained interest in securitized accounts receivable 70.8 56.5
Allowance for doubtful accounts (13.2) (12.3)
----------------- -----------------
$ 204.5 $ 164.3
================= =================
As of March 31, 2003, PolyOne participated in a receivables sale program that
provides liquidity through the sale of certain domestic trade accounts
receivable at a cost similar to high-grade commercial paper, as noted above.
Through our former receivables sale facility, we sold 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
bankruptcy-remote subsidiary. At March 31, 2003, accounts receivable totaling
$266.9 million were sold to PFC, and were included as a reduction of trade
accounts receivable within accounts receivable on the PolyOne Condensed
Consolidated Balance Sheet. Further, at March 31, 2003, PFC had sold undivided
interests in accounts receivable totaling $196.1 million to a third-party
financial conduit. PolyOne retains an interest in the $70.8 million difference
between the amount of trade receivables sold by PolyOne to PFC and the undivided
interests sold by PFC to the third-party financial conduit. This interest
retained by PolyOne is included in accounts receivable in the PolyOne Condensed
Consolidated Balance Sheet at March 31, 2003. The third party financial conduit
has a security interest in the unsold accounts receivable held by PFC. PolyOne
recorded the net change in the undivided interests sold under our former
receivables sale facility as operating cash flows in the Consolidated Statements
of Cash Flows.
As of March 31, 2003 the accounts receivable were sold at a discount from the
face amount to pay investor yield (generally 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, for the three months ended March 31, 2003 was $1.3 million and was included
in other expense, net, in the Consolidated Statements of Operations.
As part of the May 6, 2003 debt refinancing, previously discussed in Note J, we
terminated the former program and entered into a new receivables sale facility.
Under the terms of the new facility, we sell our accounts receivable to PFC. PFC
in turn sells to certain purchasers an undivided interest in our receivables and
realizes proceeds of up to $225.0 million, with the maximum amount of proceeds
that PFC may receive under the facility limited to 85% of the then-current
amount of our eligible domestic accounts receivable. The new receivables sale
facility will also make available up to $50.0 million for the issuance of
standby letters of credit, as a sub-limit within the $225 million limit under
the facility. Unlike our former receivables sale facility, this new facility
does not have termination provisions tied to our senior debt rating.
Under this new arrangement, we receive the proceeds from collection of the
receivables after deduction for the aggregate yield payable on the undivided
interests in the receivables sold by PFC, a servicer's fee, an unused commitment
fee (between 0.5% and 0.75% depending upon the amount of the unused portion of
the facility), fees for any outstanding letters of credit, and an administration
and monitoring fee ($150,000/annum).
Under this new arrangement, PolyOne continues to service the underlying accounts
receivable and we receive a service fee of 1% per annum on the average daily
amount of the outstanding interests in our receivables. As payment of the
receivables occurs, PFC purchases additional receivables from us. PolyOne,
through PFC, retains the risk of credit loss on the receivables and, accordingly
the full amount of the allowance for doubtful accounts has been retained in the
PolyOne Condensed Consolidated Balance Sheet. The conduit has collection rights
to recover payments from the receivables in the designated pool.
NOTE L - SEGMENT INFORMATION
PolyOne operates primarily in four business segments: the Performance Plastics
segment, the Elastomers & Performance Additives segment, the Distribution
segment, and the Resin and Intermediates 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.
Senior management uses operating income before special items and EBITDA (defined
as operating income plus depreciation and amortization) before special items to
assess performance and allocate resources to business segments. Senior
10
management believes such metrics are useful in its assessment of the underlying
earnings power and operating cash flow of each business segment. EBITDA is a
metric used by stock market analysts, financial institutions and investors.
Special items include gains and losses associated with specific strategic
initiatives such as restructuring or consolidation of operations, gains and
losses attributable to divestment of joint ventures, and certain one-time items.
Operating income before special items and EBITDA before special items are
non-GAAP measures, and may not be comparable to financial performance measures
presented by other companies.
(In millions) ELASTOMERS &
PERFORMANCE PERFORMANCE
THREE MONTHS ENDED MARCH 31, 2003 TOTAL PLASTICS ADDITIVES
-------- ----------- ------------
Sales to external customers $ 645.5 $ 417.4 $ 94.0
Inter-segment sales - 30.2 -
-------- -------- --------
$ 645.5 $ 447.6 $ 94.0
======== ======== ========
Operating income (loss) $ (16.2) $ (11.5) $ 0.3
Employee separation and plant phase-out costs 24.9 15.4 1.9
Period plant phase-out costs incurred 0.9 0.9 -
Equity affiliate cumulative effect of a change in accounting 0.8 - -
-------- -------- --------
Operating income (loss) before employee separation, plant phase-out
costs and equity affiliate change in accounting 10.4 4.8 2.2
Depreciation and amortization 18.5 14.7 3.1
-------- -------- --------
EBITDA before employee separation, plant phase-out costs and equity
affiliate change in accounting $ 28.9 $ 19.5 $ 5.3
======== ======== ========
Total assets $2,059.7 $1,452.6 $ 265.5
Capital expenditures $ 6.2 $ 5.3 $ 0.7
(In millions)
RESIN AND
THREE MONTHS ENDED MARCH 31, 2003 DISTRIBUTION INTERMEDIATES OTHER
------------ ------------- -----
Sales to external customers $ 134.1 $ - $ -
Inter-segment sales 1.8 - (32.0)
-------- -------- --------
$ 135.9 $ - $ (32.0)
======== ======== ========
Operating income (loss) $ 2.2 $ 3.2 $ (10.4)
Employee separation and plant phase-out costs 0.7 - 6.9
Period plant phase-out costs incurred - - -
Equity affiliate cumulative effect of a change in accounting - 0.8 -
-------- -------- --------
Operating income (loss) before employee separation, plant phase-out
costs and equity affiliate change in accounting 2.9 4.0 (3.5)
Depreciation and amortization 0.4 0.1 0.2
-------- -------- --------
EBITDA before employee separation, plant phase-out costs and equity
affiliate change in accounting $ 3.3 $ 4.1 $ (3.3)
======== ======== ========
Total assets $ 164.6 $ 234.1 $ (57.1)
Capital expenditures $ 0.2 $ - $ -
(In millions) ELASTOMERS &
PERFORMANCE PERFORMANCE
THREE MONTHS ENDED MARCH 31, 2002 TOTAL PLASTICS ADDITIVES
-------- -------- --------
Sales to external customers $ 596.3 $ 386.1 $ 91.6
Inter-segment sales - 20.6 0.1
-------- -------- --------
$ 596.3 $ 406.7 $ 91.7
======== ======== ========
Operating income (loss) $ 4.4 $ 11.8 $ 2.3
Employee separation and plant phase-out costs 0.9 0.9 -
Period plant phase-out costs incurred 0.1 0.1 -
Plant phase-out accelerated depreciation 0.5 0.5 -
Restructuring and plant idling costs incurred by equity affiliates* 0.7 - -
Loss on divestiture of equity investments 1.5 - -
-------- -------- --------
Operating income (loss) before employee separation, plant phase-out costs,
plant idling costs and loss on equity investment
8.1 13.3 2.3
Depreciation and amortization 17.3 13.4 3.2
-------- -------- --------
EBITDA before employee separation, plant phase-out costs, and loss on
equity investment $ 25.4 $ 26.7 $ 5.5
======== ======== ========
Total assets $2,058.5 $1,450.6 $ 286.4
Capital expenditures $ 10.5 $ 5.9 $ 1.4
RESIN AND
DISTRIBUTION INTERMEDIATES OTHER
------------ ------------- -----
Sales to external customers $ 118.6 $ - $ -
Inter-segment sales 1.8 - (22.5)
-------- -------- --------
$ 120.4 $ - $ (22.5)
======== ======== ========
Operating income (loss) $ 1.6 $ (7.5) $ (3.8)
Employee separation and plant phase-out costs - - -
Period plant phase-out costs incurred - - -
Plant phase-out accelerated depreciation - - -
Restructuring and plant idling costs incurred by equity affiliates* - 0.7 -
Loss on divestiture of equity investments - 1.5 -
-------- -------- --------
Operating income (loss) before employee separation, plant phase-out costs,
plant idling costs and loss on equity investment
1.6 (5.3) (3.8)
Depreciation and amortization 0.5 - 0.2
-------- -------- --------
EBITDA before employee separation, plant phase-out costs, and loss on
equity investment $ 2.1 $ (5.3) $ (3.6)
======== ======== ========
Total assets $ 142.9 $ 236.8 $ (58.2)
Capital expenditures $ 0.1 $ - $ 3.1
* 2002 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.
11
A breakdown of the Performance Plastics segment's sales for the three months
ended March 31, 2003 and the changes versus the same period in 2002, by primary
product group, is as follows:
Three Months Ended March 31,
2003 vs. 2002
----------------------------------------------
2003 2003 2003
Sales $ Sales $ Shipment Lbs.
% of % Change vs. % Change
Total 2002 vs. 2002
-------------- -------------- ---------------
North American Plastics
Compounds and Colors (PC&C):
Vinyl Compounds 34% 6% 4%
Colors and Additives 11% 6% 13%
Engineered Materials 8% 3% -4%
International PC&C 24% 40% 28%
Specialty Resin and Formulators 15% - -2%
Engineered Films 8% -4% 2%
-------------- -------------- ---------------
Performance Plastics 100% 10% 5%
NOTE M - 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. In addition, we
have been named in various lawsuits involving multiple claimants and defendants
relating to alleged asbestos exposure in the past by, among others, workers and
their families at plants owned by us or our predecessors or on board ships owned
or operated by us or our predecessors. 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 $53.6 million at March 31, 2003, 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 March 31, 2003. 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 P to the consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2002.
In connection with the formation of OxyVinyls, PolyOne has guaranteed $42.3
million of OxyVinyls' borrowings from Occidental Petroleum Corporation. This
guarantee terminates when OxyVinyls attains a defined amount of cumulative
earnings before income taxes, depreciation and amortization. PolyOne also has
guaranteed $91.4 million of SunBelt's outstanding senior secured notes in
connection with the construction of the chlor-alkali facility in Macintosh,
Alabama. The debt and guarantee thereon mature in 2017.
12
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 and M.A. Hanna Company.
Below is a summary of consolidated operating results for the three-month periods
ended March 31, 2003 and 2002. Also summarized are the special items included in
these periods.
Summary of Consolidated Operating Results
Three Months Ended
March 31,
-------------------------
(In millions, except per share data) 2003 2002
-------- --------
Sales $ 645.5 $ 596.3
Operating income (loss) $ (16.2) $ 4.4
Net loss $ (19.3) $ (57.3)
(Income) from discontinued operations, net of taxes - (0.3)
Cumulative effect of a change in accounting, net of taxes - 53.7
-------- --------
Loss before discontinued operations and cumulative effect of a change
in accounting (19.3) (3.9)
Loss per share, diluted $ (0.21) $ (0.64)
Loss per share before discontinued operations and cumulative effect of
a change in accounting $ (0.21) $ (0.04)
Per share effect of excluding special costs, increase (1) $ 0.18 $ 0.03
Other data:
Net cash provided (used) by:
Operating activities of continuing operations $ (34.6) $ (30.7)
Investing activities of continuing operations 2.8 (10.0)
Financing activities of continuing operations 41.5 45.7
EBITDA (2) $ 2.3 $ 22.2
Reconciliation (2):
Loss before discontinued operations and cumulative effect of a
change in accounting $ (19.3) $ (3.9)
Income tax benefit (12.3) (2.6)
Interest expense, net 12.3 8.3
Other expense, net 3.1 2.6
Depreciation and amortization 18.5 17.8
-------- --------
EBITDA $ 2.3 $ 22.2
======== ========
(1) Special items in all years related primarily to restructuring
initiatives, the sale of equity investments, and equity affiliate
charge for cumulative effect of a change in accounting, and are
summarized and explained in the table that follows.
(2) EBITDA is defined as income before discontinued operations and
cumulative effect of a change in accounting, income taxes, net interest
expense, net other expense and depreciation and amortization expense.
EBITDA excludes net other expense because the financing cost of the
receivables sale facility is the largest component. EBITDA is a
non-GAAP measure and should not be considered an alternative to any
other measure of performance in accordance with GAAP. PolyOne presents
EBITDA because management believes that EBITDA could be useful for
investors in assessing our operating performance and our performance
relative to our financial obligations. Additionally, EBITDA is a
measure commonly used by financial analysts because of its usefulness
in evaluating operating performance. EBITDA, as used by PolyOne, is not
necessarily comparable with similarly titled measures of other
companies. The table above presents a reconciliation from loss before
discontinued operations and cumulative effect of a change in accounting
to EBITDA.
13
Summary of Special Items Three Months Ended
(In millions) March 31,
------------------------------
2003 2002
-------------- --------------
Employee separation and plant phase-out cost (1) $ (24.9) $ (0.9)
Period plant phase-out costs incurred (2) (0.9) (0.1)
Equity affiliate - employee severance, liabilities
associated with the temporary idling of a plant and
cumulative effect of a change in accounting (3) (0.8) (0.7)
Loss on divestiture of equity investment (4) - (1.5)
-------------- --------------
Subtotal - impact on EBITDA (expense) (26.6) (3.2)
Plant phase-out accelerated depreciation (2) - (0.5)
-------------- --------------
Total - impact on operating (expense) and pre-tax
(expense) (26.6) (3.7)
Income tax benefit 10.4 1.4
-------------- --------------
Total after-tax (expense) before discontinued operations
and cumulative effect of a change in accounting $ (16.2) $ (2.3)
============== ==============
(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. The 2003 expense relates to the January 16, 2003 announcement
to reduce approximately 400 staff personnel and the March 26, 2003
announcement to exit an Engineering Films plant. The 2002 expense was
associated with the consolidation of certain activities related to the
Formulator operations in the Performance Plastics business segment.
(2) These are plant phase-out costs associated with the 2001 Geon restructuring
initiatives that are to be recognized as period costs versus when the
restructuring initiative was approved. 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 former Geon plants and Hanna plants would be closed. The
initiatives also included the termination of corporate and other positions
at Geon and former Hanna locations. These plans and activities related to
the former Geon plants and personnel were finalized and approved during
2001.
(3) The 2003 expense relates to the cumulative effect of a change in accounting
upon OxyVinyls' adoption of SFAS No. 143, "Accounting for Asset Retirement
Obligations." The 2002 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.
(4) Includes the 2002 first quarter loss on our divestiture of our 37.4%
investment in the PVC resin operations of Australian Vinyls Corporation and
we recognized a loss on the divestiture of the investment.
14
TOTAL COMPANY REPORTED RESULTS
The weakness in the manufacturing sector of the U.S. economy continued in the
first quarter of 2003. The U.S. industrial manufacturing economic index
(excluding high technology) for the first quarter of 2003 was slightly below the
same quarter in 2002 and the previous quarter. The 2003 first quarter U.S.
industrial manufacturing economic index (excluding high technology) was
approximately 8% below the peak in the second quarter of 2000.
Europe realized minimal economic growth in the first quarter of 2003 versus a
current forecast for the year of approximately 1%. In Asia, 2003 economic growth
continues at a strong pace although some forecasts are being revised downward
due in part to the SARS illness.
First quarter 2003 sales of $645.5 million were $49.2 million, or 8%, higher
than first quarter 2002, representing the first year-over-year quarterly sales
increase of over 1% since the U.S. economic slowdown began in the third quarter
2000. All business segments reported sales increases in the first quarter of
2003 compared to the same period a year ago. The International Plastic Compounds
and Colors product group within the Performance Plastics segment realized a 40%
sales increase in the first quarter 2003, which included the effects of the
December 2002 Transcolor acquisition and currency translation. Excluding the
effects of the Transcolor acquisition and currency translation, the
International Plastic Compounds and Colors product group's sales increase was 6%
and for PolyOne in total the sales increase in the first quarter 2003 compared
to the first quarter 2002 was 4%.
PolyOne reported an operating loss of $16.2 million for the first quarter 2003,
a decrease of $20.6 million over the same period last year. In the first
quarter, EBITDA was $2.3 million in 2003 and $22.2 million in 2002. Exceeding
the decrease in EBITDA was the 2003 increased costs of special items of $23.4
million between the quarters. The special items in the periods primarily relate
to restructuring initiatives, loss on the sale of an equity investment and a
change in an equity affiliate's accounting. The 2003 first quarter $3.5 million
increase in EBITDA before special items was a result of a $9.4 million increase
in the Resin and Intermediates (R&I) business segment, which was partially
offset by a $7.2 million decrease in the Performance Plastics business segment.
Within PolyOne's consolidated businesses (all business segments excluding R&I),
lower product material margins, particularly in vinyl compounds and specialty
resins, more than offset benefits from the previously announced strategic value
capture initiatives, which included approximately $3 million in selling and
administrative cost savings from the staff reductions announced in January 2003
and the incremental margin on increased sales. In comparing the first quarter
2003 versus first quarter 2002, the strategic value capture initiatives are
estimated to have contributed $23 million to pre-tax earnings, of which $5
million was from growth efforts and approximately $18 million from cost
reduction programs. The largest cost reductions came from the initiatives to
restructure our North American manufacturing operations and material sourcing
programs.
Interest expense in the first quarter 2003 of $12.5 million increased $4 million
compared to the same quarter in 2002. Impacting 2003 interest expense was the
second quarter 2002 issuance of $200 million of 8.875% senior debt, net of the
debt retired upon issuance, offset by reduced average amounts outstanding under
the revolver in 2003 compared to 2002.
The effective income tax rate benefit for the first quarter 2003 was 39%
compared with a benefit of 40% for the first quarter 2002. The difference in the
effective benefits for the quarter is principally due to lower foreign income
taxes.
The first quarter 2003 net loss was $19.3 million versus a net loss of $57.3
million in the first quarter of 2002. The first quarter 2002 net loss included
an after-tax charge for the cumulative effect of a change in accounting of $53.7
million and income of $0.3 million from discontinued operations. The first
quarter 2003 loss included special charges of $16.2 million compared to the
first quarter 2002 charges of $2.3 million.
15
BUSINESS SEGMENT INFORMATION
Senior management uses operating income before special items and EBITDA before
special items to assess performance and allocate resources to business segments.
For a reconciliation from operating income to operating income before special
items to EBITDA before special items and EBITDA to EBITDA before special items,
see the following table. Operating income before special items and EBITDA before
special items are non-GAAP measures and should not be considered an alternative
to any other measure of performance in accordance with GAAP. Senior management
presents operating income before special items and EBITDA before special items
when discussing the results of operations of the business segments because
senior management believes such measures are useful in assessing the underlying
earnings power and operating cash flows of each business segment. Special items
include gains and losses associated with the specific strategic initiatives such
as restructuring or consolidation of operations, gains and losses attributable
to divestment of joint ventures, and certain one-time items. Accordingly, senior
management believes that excluding special items provides insight into the
underlying results of operations of each of PolyOne's business segments.
Operating income before special items and EBITDA before special items may not be
comparable to financial performance measures presented by other companies.
(In millions) Three Months Ended
March 31,
------------------------
2003 2002
------- -------
Sales:
Performance Plastics $ 447.6 $ 406.7
Elastomers & Performance Additives 94.0 91.7
Distribution 135.9 120.4
Resin and Intermediates - -
Other (32.0) (22.5)
------- -------
$ 645.5 $ 596.3
======= =======
EBITDA before special items:
Performance Plastics $ 19.5 $ 26.7
Elastomers & Performance Additives 5.3 5.5
Distribution 3.3 2.1
Resin and Intermediates 4.1 (5.3)
Other (3.3) (3.6)
------- -------
$ 28.9 $ 25.4
======= =======
Operating income (loss) before special items:
Performance Plastics $ 4.8 $ 13.3
Elastomers & Additives 2.2 2.3
Distribution 2.9 1.6
Resin and Intermediates 4.0 (5.3)
Other (3.5) (3.8)
------- -------
$ 10.4 $ 8.1
======= =======
Reconciliation:
Operating income (loss) $ (16.2) $ 4.4
Special items, expense 26.6 3.7
------- -------
Operating income before special items 10.4 8.1
Depreciation and amortization 18.5 17.8
Accelerated depreciation in special items - (0.5)
------- -------
EBITDA before special items $ 28.9 $ 25.4
======= =======
EBITDA $ 2.3 $ 22.2
Impact of special items, expense 26.6 3.2
------- -------
EBITDA before special items $ 28.9 $ 25.4
======= =======
16
COMMENTARY ON BUSINESS SEGMENT OPERATING RESULTS
PERFORMANCE PLASTICS had first quarter 2003 sales of $447.6 million, an increase
of $40.9 million or 10%, over the first quarter 2002. Excluding foreign currency
impacts and the Transcolor acquisition, this increase was $15.1 million, or 4%.
A breakdown of the 2003 first quarter segment sales, by primary product group,
is as follows:
Three Months Ended March 31,
2003 vs. 2002
----------------------------------------------
2003 2003 2003
Sales $ Sales $ Shipment Lbs.
% of % Change vs. % Change
Total 2002 vs. 2002
-------------- -------------- ---------------
North American Plastics
Compounds and Colors (PC&C):
Vinyl Compounds 34% 6% 4%
Colors and Additives 11% 6% 13%
Engineered Materials 8% 3% -4%
International PC&C 24% 40% 28%
Specialty Resin and Formulators 15% - -2%
Engineered Films 8% -4% 2%
-------------- -------------- ---------------
Performance Plastics 100% 10% 5%
Leading the 2003 first quarter sales growth was the International PC&C product
group. The International PC&C group sales increase benefited $10.4 million from
the December 2002 acquisition of Transcolor and approximately $15.4 million from
favorable Euro to U.S. dollar currency exchange. Before the effects of the
Transcolor acquisition and currency translation, the 2003 first quarter
International PC&C sales were 6% above the 2002 first quarter. The increased
Vinyl Compound sales were primarily due to increased demand in the dry blend and
pipe & fittings market and a 2% increase in the average sales price. The North
America Colors and Additives sales growth was largely attributable to increased
sales of general purpose color products, specifically those sold into the pipe &
fittings and film markets. The lower 2003 first quarter sales for Engineered
Films was primarily the result of lower automotive sales due to changes in
platform programs partially offset by increases in custom films from new
products. EBITDA before special items in the first quarter 2003 was $19.5
million, a decrease of $7.2 million compared to the first quarter 2002. The
decrease in EBITDA before special items resulted from margin compression in
Vinyl Compounds, Specialty Resins and Engineered Films due to the impact of
higher PVC resin and VCM costs and was partially offset by the incremental
margin on increased sales and lower costs from restructuring initiatives. The
first quarter 2003 U.S. industry average PVC resin selling price was
approximately 11.5 cents per pound, or nearly 50% above the same period in 2002.
ELASTOMERS & PERFORMANCE ADDITIVES sales were $94.0 million in the first quarter
2003, a $2.3 million increase compared to the same quarter in 2002. In the first
quarter 2003 compared to the first quarter 2002, compounding sales increased
$3.1 million, primarily due to growth in captive conversion, partially offset by
small sales decreases in rolls and performance additives.
EBITDA before special items in the first quarter 2003 was $5.3 million, or
$0.2 million below the same quarter in 2002. The incremental margin from
increased sales was offset by lower average margins resulting from product mix,
competitive price reductions and energy related higher raw material costs.
DISTRIBUTION sales in the first quarter 2003 were $135.9 million, 13% higher
than the same quarter in 2002. The sales improvement resulted largely from using
our Distribution business segment for small-volume sales of our vinyl compounds
instead of relying on a third-party distributor.
EBITDA before special items in the first quarter 2003 was $3.3 million, $1.2
million above first quarter 2002. The 2003 increased EBITDA before special
items was primarily due to the incremental margin on higher sales and to lower
selling and administrative costs, partially offset by lower material margins.
While product selling prices in general have increased, they have not yet kept
pace with material cost increases, particularly for commodity resins and vinyl
compounds.
RESIN AND INTERMEDIATES EBITDA before special items, consisting of equity
income from joint ventures, allocated overhead support cost and costs associated
with past operations, was $4.1 million for the first quarter 2003, $9.4 million
higher than the first quarter 2002. PolyOne's share of equity earnings before
special items in the first quarter 2003 compared to the first quarter 2002
increased from OxyVinyls and SunBelt by $3.5 million and $5.4 million,
respectively.
17
OxyVinyls first quarter 2003 versus first quarter 2002 earnings benefited from
higher average industry PVC resin selling prices of approximately 11.5 cents per
pound. However, much of the benefit from higher resin selling prices was offset
by increased ethylene and chlorine costs. The net result was an increase of
approximately 2.5 cents per pound in the average industry spread of resin
selling prices over ethylene and chlorine costs. The run-up in higher natural
gas costs in the first quarter 2003, which averaged $3.85 per million BTU's
above the same quarter in 2002, offset a portion of the improved resin spread.
The SunBelt earnings improvement was primarily driven by an increase in the
selling price of chlorine of approximately $180 per ton in the first quarter
2003 versus the same period a year ago.
OTHER consists primarily of corporate governance costs that are not allocated to
business segments and inter-segment profit elimination. EBITDA before special
items was an expense of $3.3 million in the first quarter 2003 compared to
$3.6 million of expense in the same quarter of 2002.
CASH FLOWS
For the first three months of 2003, operating activities utilized $34.6 million
of cash, driven by a seasonal increase in sales that resulted in a $57.8 million
increase in commercial working capital (trade accounts receivable before
receivables sold, FIFO inventories and accounts payable) and by cash
restructuring costs of $12.0 million. Also providing cash was $36.2 million
increase in the level of receivables sold during the quarter.
Investing activities for the first three months of 2003 provided $2.8 million,
consisting primarily of the proceeds from the sale of an equity affiliate,
offset by capital expenditures and the final funding related to the acquisition
of Transcolor.
Cash provided by financing activities during the first three months of 2003 was
$41.5 million primarily reflecting borrowings made on the revolving credit
facility. No dividends were paid in the first quarter 2003.
CAPITAL RESOURCES AND LIQUIDITY
As of March 31, 2003, we had existing facilities to access capital resources
(former receivables sale facility, revolving credit facility, uncommitted
short-term credit lines and senior unsecured notes and debentures) totaling
approximately $966 million. As of March 31, 2003, we had utilized approximately
$822 million of these facilities (long-term debt of $589.3 million, short-term
debt of $36.1 million, capital leases of $0.2 million and receivables sold of
$196.1 million), including $571.1 million of senior unsecured notes and
debentures, of which $87.8 million is payable in September 2003 and, therefore,
is classified as a current liability.
Of the capital resource facilities available to us as of March 31, 2002, only
the portion of the receivables sale facility that was actually sold provided
security in connection with the transfer of ownership of these receivables. Each
indenture governing our senior unsecured notes and debentures and our guarantee
of the SunBelt notes allows for a specific level of secured debt, above which
security must be provided on each such indenture. The former receivables sale
facility did not constitute debt under our senior unsecured notes and
debentures. As of March 31, 2003, we had guaranteed unconsolidated equity
affiliate debt of $91.4 million for SunBelt and $42.3 million for OxyVinyls. The
OxyVinyls guarantee is expected to expire in the second quarter 2003.
On May 6, 2003, we completed a debt refinancing. The refinancing provides the
necessary liquidity to repay $87.8 million of senior debt that matures in
September 2003, as well as to support normal operations and fund previously
announced restructuring initiatives intended to improve earnings. As part of
this comprehensive refinancing, we issued $300 million of 10.625% unsecured
senior notes, entered into a new three-year $225 million receivables sale
facility and amended and restated our revolving credit facility. The new
receivables sale facility replaced our former receivables sale facility. The
security that had been extended in February 2003 to our existing senior notes
and debentures and our guarantee of the SunBelt notes terminated as part of the
debt refinancing. The 10.625% unsecured senior notes rank equally with all of
our other senior unsecured indebtedness.
On May 6, 2003, we amended and restated our revolving credit facility. As
amended and restated, it has a three-year term and provides for up to $50.0
million in borrowings. However, the maximum amount that we may borrow will be
limited to 95% of the amount that may be borrowed and secured from time to time
under the revolving credit facility without triggering the security provisions
of the indentures governing the existing senior unsecured notes and debentures.
The amended and restated revolving credit facility makes available up to $35.0
million for the issuance of standby letters of credit. Our obligations
18
under the revolving credit facility are secured by substantially all of our
domestic intellectual property and inventory and some of our domestic real
property.
Our amended and restated revolving credit facility and our new receivables sale
facility require, among other things, that we comply with interest coverage and
borrowed debt-to-adjusted EBITDA earnings ratios. Further, our financing
arrangements limit payments for purposes such as capital expenditures,
acquisitions and dividends. The following table summarizes the defined financial
covenant ratios for the remainder of 2003 under the amended and restated
revolving credit facility and the new receivables sale facility:
Borrowed
Debt-to
Interest Adjusted
Coverage Ratio EBITDA Ratio
(Minimum) (Maximum)
-------------- ------------
Agreement compliance
Second quarter of 2003 None None
Third quarter of 2003 1.00 11.00
Fourth quarter of 2003 1.00 9.00
On May 6, 2003, we terminated our former receivables sale facility and entered
into a new receivables sale facility. Under the terms of the agreement governing
the new facility, we are allowed to sell accounts receivable and realize
proceeds of up to $225.0 million. However, the maximum amount of proceeds that
we may receive is limited to 85% of the amount of eligible domestic accounts
receivable sold. The new receivables sale facility also makes available up to
$50.0 million for the issuance of standby letters of credit. Although our former
receivables sale facility contained a provision that would allow the purchasers
of the accounts receivable to terminate the facility if our senior debt ratings
fell below specified levels, the new receivables sale facility does not contain
such a provision.
The effective available funds under the new or revised facilities can vary,
depending on the level of qualified receivables outstanding, and debt-related
financial ratios. As of May 6, 2003, after giving effect to the completed debt
refinancing and related uses of proceeds in May 2003, approximately $130 million
of the existing capital resource facilities were available and not yet drawn.
The realization of profitable operations will be important to (1) maintaining
the existing levels of available capital resources, (2) executing our announced
restructuring initiatives, and (3) repaying and/or refinancing any existing
obligations as they come due. In 2002, EBITDA was $111.4 million and special
items included in EBITDA were expense of $12.2 million. Together, EBITDA and
special items totaled approximately $124 million. In the first quarter of 2003,
EBITDA was $2.3 million and special items included in EBITDA were expense of
$26.6 million. Together, EBITDA and special items totaled $28.9 million, or $3.5
million above the comparable amount for the first quarter of 2002. The value
capture initiatives and the 2003 reduction in selling and administrative costs,
net of 2003 estimated specific program cost increases, are projected to increase
the 2003 cash flow of operations by between $57 million and $77 million. EBITDA
must cover expenditures for financing costs (interest expense and discount on
sale of accounts receivable, which are projected to be approximately $72 million
in 2003), spending associated with restructuring, capital expenditures and cash
to fund sales growth through increased working capital requirements. Cash
spending for the previously announced restructuring programs (North American
Plastic Compounds and Colors manufacturing improvements, business unit
initiatives and the recent selling and administrative cost-reduction program)
are projected to be between $40 million and $45 million for 2003. Additionally,
on March 26, 2003, we announced that we intend to exit our Yerington, Nevada
Engineered Films plant. If we are unable to quickly sell this plant, our plant
closure costs are projected to be approximately $2.7 million. Capital
expenditures for 2003 are projected to be approximately $50 million. In December
2002, we announced that we would discontinue the payment of dividends commencing
in the first quarter of 2003.
We currently estimate minimum funding requirements for our qualified defined
benefit pension plans of approximately $1 million in 2003 and $5 million in
2004. Market asset performance in 2003 will impact the final minimum funding
requirements in 2005. As of December 31, 2002, we decreased by 25 basis points
our assumption regarding the long-term rate of return on pension assets to
8.75%. An 8.75% return on assets in 2003, combined with the minimum
contributions required in 2003 and 2004, would produce a projected minimum
funding requirement by September 15, 2005 of approximately $45 million (each 1%
return on asset variance in 2003 from 8.75% impacts the 2005 minimum funding by
approximately $1 million). However, we intend to continue funding in excess of
the minimum required for the qualified defined benefit pension plans during
calendar 2003 and 2004, which would reduce any otherwise required funding by
September 15, 2005.
19
Based on our current projected operations, our management believes that we
should be able to continue to manage and control working capital, discretionary
spending and capital expenditures, and that cash flow that we generate from
operations, along with borrowing capacity under our revised revolving credit
facility and our new receivables sale facility, will be adequate to fund our
operations and meet our debt service requirements for the foreseeable future.
ACCOUNTING POLICIES AND ESTIMATES
Note C of the 2002 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 2002 Annual Consolidated
Financial Statements and the Quarterly Condensed Consolidated Financial
Statements for the three-month period ended March 31, 2003 (Unaudited).
ENVIRONMENTAL ACCRUED LIABILITY. PolyOne has accrued $53.6 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 P to the Annual Consolidated Financial Statements and
to Note M to the Quarterly Condensed Consolidated Financial Statements.
RESTRUCTURING COSTS. In 2001, PolyOne announced several manufacturing
improvements and restructuring plans to close 17 U.S. and Canadian facilities.
As of December 31, 2002, all but four of these facilities had been closed. In
January 2003, we decided to continue operating the fourth facility. Accordingly,
in the first quarter of 2003, the reserve of approximately $0.3 million
associated with this facility (which relates to an acquired business) was
reversed and recognized as a reduction to goodwill of the acquired business. The
three remaining facilities are projected to cease operations by mid-2003. As of
March 31, 2003, an accrued liability of $34.0 million existed for future
employee severance and plant closing costs. In addition, as of March 31, 2002,
the net property carrying value to be realized for the plants closed or to be
closed was $10.8 million (some assets will be transferred to other locations as
production ceases).
EQUITY INVESTMENT. In December 2001, OxyVinyls, of which PolyOne owns 24%
interest, announced the temporary idling of its Deer Park, Texas, chlor-alkali
plant due to low industry capacity utilization and low product market selling
prices. As of December 31, 2001, OxyVinyls had accrued $13.8 million for future
employee severance and liabilities associated with the temporary idling of the
Deer Park plant. In 2002, OxyVinyls recognized an additional $2.2 million of
expense associated with the temporary plant idling, plus an additional expense
of $17.0 million in the third quarter related to the permanent closing of
specific production assets included in the idled plant. The permanent closing
costs included $14.5 million for the impairment of the fixed assets as well as
$2.5 million for decommissioning costs. As of March 31, 2003, OxyVinyls had a
remaining accrual of $3.1 million for future employee severance liabilities and
decommissioning costs. The plant had a net property carrying value by OxyVinyls
at March 31, 2003 of approximately $120.7 million, which is anticipated to be
realized through future operations upon the restart of the plant. Although
chlorine demand in all major market segments increased steadily in 2002,
particularly vinyl chloride monomer (VCM), domestic demand for co-product
caustic soda was flat year over year and exports from the U.S. declined. In the
first quarter of 2003, selling prices of chlorine remained generally in line
with the previous quarter while caustic soda selling prices increased modestly
from historically low levels. OxyVinyls will maintain the Deer Park chlor-alkali
plant in a standby mode pending further strengthening in overall economic
conditions and improved demand for caustic soda.
GOODWILL. As of March 31, 2003, PolyOne's recorded goodwill totaled $444.1
million. During the first quarter of 2003, we recorded a reduction to goodwill
of $0.3 million for the reversal of a business combination reserve associated
with a facility no longer being closed. This reduction was offset by an increase
to goodwill due to currency translation. We intend to complete our 2003 annual
impairment test for goodwill during the third quarter of 2003.
DEFERRED TAX BENEFIT FOR OPERATING LOSS CARRYFORWARDS. As of March 31, 2003,
PolyOne had a net deferred tax asset of $18.1 million, which included a deferred
tax asset of $109.2 million for operating loss carryforwards for tax purposes.
The tax benefit recorded in the first quarter included a benefit of $15.1
million related to domestic losses because PolyOne is forecasting income for the
year 2003 and therefore, no additional valuation allowance is deemed necessary
at this time. 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 R to the Annual Consolidated Financial Statements.
20
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 estimated and actual
savings related to consolidation and restructuring programs
- delays in achieving or inability to achieve our strategic value
capture initiatives, including cost reduction and employee
productivity goals, or achievement of less than the anticipated
financial benefit from the initiatives
- the effect on foreign operations of currency fluctuations, tariffs,
nationalization, exchange controls, limitations on foreign investment
in local businesses and other political, economic and regulatory risks
- changes in U.S., regional or world polymer and/or rubber consumption
growth rates affecting our markets
- changes in global industry capacity or in the rate at which
anticipated changes in industry capacity come online in the polyvinyl
chloride (PVC), chlor-alkali, vinyl chloride monomer (VCM) or other
industries in which we participate
- fluctuations in raw material prices, quality and supply and in energy
prices and supply; in particular, fluctuations outside the normal
range of industry cycles
- production outages or material costs associated with scheduled or
unscheduled maintenance programs
- costs or difficulties and delays related to the operation of joint
venture entities
- lack of day-to-day operating control, including procurement of raw
materials, of equity or joint venture affiliates
- partial control over investment decisions and dividend distribution
policy of the OxyVinyls partnership and our other minority equity
holdings
- an inability to launch new products and/or services that strategically
fit our businesses
- the possibility of goodwill impairment
- an inability to maintain any required licenses or permits
- an inability to comply with any environmental laws and regulations
- a delay or inability to achieve targeted debt levels through
divestitures or other means
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could vary
materially from those anticipated, estimated or projected. Investors should bear
this in mind as they consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our 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.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PolyOne is exposed to market risk from changes in foreign currency exchange
rates. Information related to this risk and our management of the exposure is
included in "Management's Analysis - Consolidated Statements of Cash Flows" in
the 2002 Annual Report under the caption "Market Risk Disclosures" included in
our Annual Report on Form 10-K. There have been no material changes in the
market risk faced by us from December 31, 2002 to March 31, 2003. 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, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The following information is being provided under Item 11 of Form 8-K,
pursuant to SEC Release Nos. 33-8216; 34-47583 (03/27/03):
(a) Information specified under 17 C.F.R. 240.104(b):
(i) The Registrant's retirement savings plans will be subject to
blackout periods to allow for the change of administrators.
(ii) All investment allocations, contribution levels, loan
requests, distributions and withdrawals and any other
transactions or changes in the participants' individual
accounts will be temporarily suspended during the blackout
periods.
(iii) The registrant's common stock is the registrant's equity
security subject to the blackout periods, in addition to all
other investment options available under the plans.
(iv) The blackout periods for the four plans commence on May 24,
2003; May 24, 2003; May 27, 2003; and May 30, 2003,
respectively, and end on June 30, 2003 for all four plans.
Participants in all four plans were advised that May 13, 2003
is the last date on which participant's could change their
allocation to the registrant's common stock fund in order for
the change to take effect as soon as administratively
possible after June 1, 2003.
(b) To registrant's knowledge, registrant received no notice under
section 101(i)(2)(E) of the Employment Retirement Income Security Act
of 1974 (29 U.S.C. 1021(i)(2)(E)).
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No.
Under Reg. Form 10-Q
S-K, Item 601 Exhibit No. Description of Exhibit
(4) 4.1 Indenture, dated May 6, 2003, by and between PolyOne Corporation, as
issuer, and The Bank of New York, as trustee, including the form of
PolyOne's 10 5/8% Senior Notes due May 15, 2010 is incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-4
as filed with the Securities and Exchange Commission on May 9, 2003
(Reg. No. 333-105125)
(10) 10.1 $50 million Five Year Credit Agreement dated October 30, 2000, among
PolyOne Corporation, Citicorp USA, Inc. and the other banks
signatory thereto, as amended and restated as of May 6, 2003
(10) 10.2 U.S. $225 million Trade Receivables Purchase Agreement, dated as of
May 6, 2003 among PolyOne Funding Corporation, as the Seller,
PolyOne Corporation, as the Servicer, the Banks and other Financial
Institutions party thereto, as Purchasers, Citicorp USA, Inc. as the
Agent, and National City Commercial Finance, Inc., as the
Syndication Agent
(10) 10.3 Registration Rights Agreement, dated as of May 6, 2003, by and among
PolyOne Corporation and Citigroup Global Markets Inc., as
representative of the initial purchasers, is incorporated by
reference to Exhibit 10.1 to the Registration Statement on Form S-4
as filed with the Securities and Exchange Commission on May 9, 2003
(Reg. No. 333-105125)
(99) 99.1 Certificate of Thomas A. Waltermire, Chairman of the Board,
President and Chief Executive Officer, pursuant to 18 U.S.C. Section
1350
(99) 99.2 Certificate of W. David Wilson, Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K from January 1, 2003 through March 31,
2003:
- Form 8-K filed on January 15, 2003 announced a press
release dated January 15, 2003, whereby we announced steps
to reduce our cost structure, including the elimination of
approximately 400 salaried positions.
- Form 8-K filed on January 16, 2003 announced a press
release dated January 15, 2003, whereby we had completed
the funding of our December 19, 2002 acquisition of
Transformacion de Pigmentos y Colorantes, S.A.
(TRANSCOLOR), a large color concentrates producer
operating near Pamplona in northern Spain.
- Form 8-K filed on January 31, 2003 announced a press
release dated January 30, 2003, whereby we announced our
earnings for the 2002 fourth quarter and full year.
- Form 8-K filed on February 18, 2003 announced a press
release dated February 14, 2003, whereby we announced that
we had created an alliance to market electrostatic
dissipative compounds for the electronics industry with
Noveon, Inc.
- Form 8-K filed on March 25, 2003 announced a press release
dated March 24, 2003, whereby we announced that we had
begun negotiations to replace our existing receivables
sale facility following the March 21, 2003 downgrade of
our senior debt by Moody's Investor Services.
- Form 8-K filed on March 28, 2003 announced a press release
dated March 26, 2003, whereby we announced our intention
to close our Engineered Films plant in Yerington, Nevada
by the end of the second quarter of 2003.
23
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.
May 15, 2003 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)
24
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 officers 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 officers 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 officers 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.
May 15, 2003
/s/ Thomas A. Waltermire
- ----------------------------------------
Thomas A. Waltermire
Chairman of the Board, President and
Chief Executive Officer
25
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 officers 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 officers 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 officers 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.
May 15, 2003
/s/ W. David Wilson
- ----------------------------------------
W. David Wilson
Vice President and Chief Financial
Officer
26
POLYONE CORPORATION
Index to Exhibits
EXHIBIT DESCRIPTION
4.1 Indenture, dated May 6, 2003, by and between PolyOne Corporation, as
issuer, and The Bank of New York, as trustee, including the form of
PolyOne's 10 5/8% Senior Notes due May 15, 2010 is incorporated by
reference to Exhibit 4.1 to the Registration Statement on Form S-4
as filed with the Securities and Exchange Commission on May 9, 2003
(Reg. No. 333-105125)
10.1 $50 million Five Year Credit Agreement dated October 30, 2000, among
PolyOne Corporation, Citicorp USA, Inc. and the other banks
signatory thereto, as amended and restated as of May 6, 2003
10.2 U.S. $225 million Trade Receivables Purchase Agreement, dated as of
May 6, 2003 among PolyOne Funding Corporation, as the Seller,
PolyOne Corporation, as the Servicer, the Banks and other Financial
Institutions party thereto, as Purchasers, Citicorp USA, Inc. as the
Agent, and National City Commercial Finance, Inc., as the
Syndication Agent
10.3 Registration Rights Agreement, dated as of May 6, 2003, by and among
PolyOne Corporation and Citigroup Global Markets Inc., as
representative of the initial purchasers, is incorporated by
reference to Exhibit 10.1 to the Registration Statement on Form S-4
as filed with the Securities and Exchange Commission on May 9, 2003
(Reg. No. 333-105125)
99.1 Certificate of Thomas A. Waltermire, Chairman of the Board,
President and Chief Executive Officer, pursuant to 18 U.S.C. Section
1350
99.2 Certificate of W. David Wilson, Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350
27