UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

		For the quarterly period ended March 31, 2010

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

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)
33587 Walker Road, Avon Lake, Ohio		44012
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (440) 930-1000

Former name, former address and former fiscal year, if changed since last report: Not Applicable

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.

þ Yes       o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes       o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes       þ No

The number of outstanding shares of the registrant’s common stock, $0.01 par value, as of April 30, 2010 was 92,750,605.

 

 

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,
						Adjusted
		2010				2009
Sales		$	630.4			$	463.4
Cost of sales			526.9				412.6
Gross margin			103.5				50.8
Selling and administrative			73.9				70.2
Adjustment to impairment of goodwill			—				5.0
Income from equity affiliates			1.5				13.3
Operating income (loss)			31.1				(11.1	)
Interest expense, net			(8.0	)			(8.8	)
Other expense, net			(0.7	)			(6.6	)
Income (loss) before income taxes			22.4				(26.5	)
Income tax (expense) benefit			(4.0	)			8.8
Net income (loss)		$	18.4			$	(17.7	)
Earnings (loss) per common share:
Basic earnings (loss) per common share		$	0.20			$	(0.19	)
Diluted earnings (loss) per common share		$	0.19			$	(0.19	)
Weighted average shares used to compute earnings (loss) per common share:
Basic			92.5				92.2
Diluted			95.3				92.2

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)

		(Unaudited)				Adjusted
		March 31,				December 31,
		2010				2009
Assets
Current assets:
Cash and cash equivalents		$	209.5			$	222.7
Accounts receivable, net			340.6				274.4
Inventories			205.4				183.7
Other current assets			28.1				38.0
Total current assets			783.6				718.8
Property, net			379.1				392.4
Investment in equity affiliates and nonconsolidated subsidiary			5.2				5.8
Goodwill			163.8				163.5
Other intangible assets, net			70.5				71.7
Deferred income tax assets			7.3				8.1
Other non-current assets			57.0				55.7
Total assets		$	1,466.5			$	1,416.0
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt		$	59.8			$	19.9
Short-term debt			0.7				0.5
Accounts payable			310.1				238.3
Accrued expenses			100.7				117.0
Total current liabilities			471.3				375.7
Long-term debt			329.5				389.2
Post-retirement benefits other than pensions			20.8				21.8
Pension benefits			172.6				173.0
Other non-current liabilities			101.2				98.6
Shareholders’ equity			371.1				357.7
Total liabilities and shareholders’ equity		$	1,466.5			$	1,416.0

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)

		Three Months Ended
		March 31,
						Adjusted
		2010				2009
Operating Activities
Net income (loss)		$	18.4			$	(17.7	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			14.0				20.0
Deferred income tax benefit			—				(0.6	)
Provision for doubtful accounts			1.2				1.0
Stock compensation expense			0.9				0.6
Adjustment to impairment of goodwill			—				5.0
Asset write-downs and impairment charges, net of gain on sale of assets			0.1				1.2
Companies carried at equity:
Income from equity affiliates			(1.5	)			(13.3	)
Dividends and distributions received			0.6				1.4
Change in assets and liabilities, net of acquisition:
(Increase) decrease in accounts receivable			(71.3	)			16.0
(Increase) decrease in inventories			(24.3	)			44.2
Increase in accounts payable			75.2				25.7
Decrease in sale of accounts receivable			—				(14.2	)
(Decrease) increase in accrued expenses and other			(10.5	)			1.1
Net cash provided by operating activities			2.8				70.4
Investing Activities
Capital expenditures			(4.3	)			(6.7	)
Proceeds from sale of equity affiliate and other assets			7.8				—
Net cash provided (used) by investing activities			3.5				(6.7	)
Financing Activities
Change in short-term debt			0.2				15.2
Repayment of long-term debt			(20.0	)			—
Proceeds from the exercise of stock options			0.7				—
Net cash (used) provided by financing activities			(19.1	)			15.2
Effect of exchange rate changes on cash			(0.4	)			(0.7	)
(Decrease) increase in cash and cash equivalents			(13.2	)			78.2
Cash and cash equivalents at beginning of period			222.7				44.3
Cash and cash equivalents at end of period		$	209.5			$	122.5

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — 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. Actual results could differ from these estimates. These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2009 of PolyOne Corporation.

Operating results for the three-month period ended March 31, 2010 are not necessarily indicative of the results that may be attained in subsequent periods or for the year ending December 31, 2010.

Note 2 — Change in Accounting Principle

Effective January 1, 2010, we elected to change our method of valuing inventories for certain U.S. businesses to the first-in, first-out (FIFO) method, while in prior years, these inventories were valued using the last-in, first-out (LIFO) method. As a result of this change, all inventories are valued using the FIFO method. Inventories accounted for under the FIFO method as a percent of total consolidated inventories was 76%, with the remainder determined on a LIFO basis at December 31, 2009. We believe the FIFO method is preferable as it conforms the inventory costing methods for all of our inventories to a single method and improves comparability with our industry peers. The FIFO method also better reflects current acquisition cost of those inventories on our consolidated balance sheets. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 250, Accounting Changes and Error Corrections, all prior periods presented have been adjusted to apply the new method retrospectively. The effect of the change in our inventory costing method increased our inventory balance and retained earnings by $42.4 million as of January 1, 2009. There were no tax effects to retained earnings or any of the periods presented below due to the fact that we have a valuation allowance recorded against our net deferred tax assets in the United States.

We have presented the effects of the change in accounting principle for inventory costs on our consolidated financial statements for 2010 and 2009 below. We have condensed the comparative financial statements for financial statement line items that were not affected by the change in accounting principle.

Condensed Consolidated Statements of Operations

		Three months ended March 31, 2010
		Computed				Change				Reported
(In millions, except per share data)		under LIFO				to FIFO				under FIFO
Sales		$	630.4			$	—			$	630.4
Cost of sales			527.4				(0.5	)			526.9
Gross margin			103.0				0.5				103.5
Selling and administrative			73.9				—				73.9
Income from equity affiliates			1.5				—				1.5
Operating income			30.6				0.5				31.1
Interest and other expense, net			(8.7	)			—				(8.7	)
Income before income taxes			21.9				0.5				22.4
Income tax expense			(4.0	)			—				(4.0	)
Net income		$	17.9			$	0.5			$	18.4
Earnings per common share:
Basic earnings per common share		$	0.19			$	0.01			$	0.20
Diluted earnings per common share		$	0.19			$	0.00			$	0.19

		Three months ended March 31, 2009
		Originally				Change
(In millions, except per share data)		Reported				to FIFO				Adjusted
Sales		$	463.4			$	—			$	463.4
Cost of sales			404.2				8.4				412.6
Gross margin			59.2				(8.4	)			50.8
Selling and administrative			70.2				—				70.2
Other income, net			8.3				—				8.3
Operating loss			(2.7	)			(8.4	)			(11.1	)
Interest and other expense, net			(15.4	)			—				(15.4	)
Loss before income taxes			(18.1	)			(8.4	)			(26.5	)
Income tax benefit			8.8				—				8.8
Net loss		$	(9.3	)		$	(8.4	)		$	(17.7	)
Basic and diluted loss per common share		$	(0.10	)		$	(0.09	)		$	(0.19	)

Condensed Consolidated Balance Sheets

		March 31, 2010
		Computed				Change				Reported
(In millions)		under LIFO				to FIFO				under FIFO
Assets
Current assets:
Inventories		$	180.8			$	24.6			$	205.4
Other current assets			578.2				—				578.2
Total current assets			759.0				24.6				783.6
Other non-current assets			682.9				—				682.9
Total assets		$	1,441.9			$	24.6			$	1,466.5
Liabilities and Shareholders’ Equity
Current liabilities		$	471.3			$	—			$	471.3
Non-current liabilities			624.1				—				624.1
Shareholders’ equity			346.5				24.6				371.1
Total liabilities and shareholders’ equity		$	1,441.9			$	24.6			$	1,466.5

		December 31, 2009
		Originally				Change
(In millions)		Reported				to FIFO				Adjusted
Assets
Current assets:
Inventories		$	159.6			$	24.1			$	183.7
Other current assets			535.1				—				535.1
Total current assets			694.7				24.1				718.8
Other non-current assets			697.2				—				697.2
Total assets		$	1,391.9			$	24.1			$	1,416.0
Liabilities and Shareholders’ Equity
Current liabilities		$	375.7			$	—			$	375.7
Non-current liabilities			682.6				—				682.6
Shareholders’ equity			333.6				24.1				357.7
Total liabilities and shareholders’ equity		$	1,391.9			$	24.1			$	1,416.0

Condensed Consolidated Statement of Cash Flows

		Three months ended March 31, 2010
		Computed				Change				Reported
(In millions)		under LIFO				to FIFO				under FIFO
Operating Activities
Net income		$	17.9			$	0.5			$	18.4
Adjustments to reconcile net income to net cash provided by operating activities:
Other adjustments, net			15.3				—				15.3
Change in assets and liabilities, net of acquisition:
Increase in inventories			(23.8	)			(0.5	)			(24.3	)
Decrease in other			(6.6	)			—				(6.6	)
Net cash provided by operating activities			2.8				—				2.8
Net cash provided by investing activities			3.5				—				3.5
Net cash used by financing activities			(19.1	)			—				(19.1	)
Effect of exchange rate changes on cash			(0.4	)			—				(0.4	)
Decrease in cash and cash equivalents			(13.2	)			—				(13.2	)
Cash and cash equivalents at beginning of period			222.7				—				222.7
Cash and cash equivalents at end of period		$	209.5				—			$	209.5

		Three months ended March 31, 2009
		Originally				Change
(In millions)		Reported				to FIFO				Adjusted
Operating Activities
Net loss		$	(9.3	)		$	(8.4	)		$	(17.7	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Other adjustments, net			15.3				—				15.3
Change in assets and liabilities, net of acquisition:
Decrease in inventories			35.8				8.4				44.2
Increase in other			28.6				—				28.6
Net cash provided by operating activities			70.4				—				70.4
Net cash used by investing activities			(6.7	)			—				(6.7	)
Net cash provided by financing activities			15.2				—				15.2
Effect of exchange rate changes on cash			(0.7	)			—				(0.7	)
Increase in cash and cash equivalents			78.2				—				78.2
Cash and cash equivalents at beginning of period			44.3				—				44.3
Cash and cash equivalents at end of period		$	122.5				—			$	122.5

Note 3 — Goodwill

Goodwill as of March 31, 2010 and December 31, 2009, by operating segment, was as follows:

		March 31,				December 31,
(In millions)		2010				2009
Global Specialty Engineered Materials		$	82.6			$	82.4
Global Color, Additives and Inks			72.2				72.1
Performance Products and Solutions			7.4				7.4
PolyOne Distribution			1.6				1.6
Total		$	163.8			$	163.5

Note 4 — Inventories

As discussed in Note 2, Change in Accounting Principle, effective January 1, 2010, we elected to change our costing method for certain inventories. We applied this change in accounting principle by adjusting all prior periods presented retrospectively. Components of inventories are as follows:

						Adjusted
		March 31,				December 31,
(In millions)		2010				2009
At FIFO cost:
Finished products		$	125.8			$	108.4
Work in process			3.3				2.4
Raw materials and supplies			76.3				72.9
		$	205.4			$	183.7

Note 5 — Property

		March 31,				December 31,
(In millions)		2010				2009
Land and land improvements		$	41.3			$	40.7
Buildings			280.5				277.0
Machinery and equipment			904.0				916.5
			1,225.8				1,234.2
Less accumulated depreciation and amortization			(846.7	)			(841.8	)
		$	379.1			$	392.4

Note 6 — Income Taxes

For the first quarter of 2010, we recognized income tax expense of $4.0 million compared to a benefit of $8.8 million in the first quarter of 2009. We record our interim provision for income taxes based on our estimated annual effective tax rate as well as certain items discrete to the current period. Our interim provision as well as our estimated annual effective tax rate are impacted by a number of factors including our U.S. federal, state and foreign income tax loss carryforwards, our ability to use them, as well as changes to our unrealized tax benefits.

We decreased existing valuation allowances against our deferred tax assets by $11.7 million in the first quarter of 2010. The related non-cash benefit to income tax expense was $2.9 million and related to various U.S. federal, state, local and foreign deferred tax assets. The remaining decrease is related to changes in our deferred tax balances associated with changing our costing method for certain inventories as noted in Note 2, Change in Accounting Principle. We review all valuation allowances related to deferred tax assets and will reverse these charges, partially or totally, when appropriate.

Note 7 — Investment in Equity Affiliates

The results of operations of SunBelt Chlor-Alkali Partnership (SunBelt), our significant equity investment, are included in the SunBelt Joint Venture segment. We own 50% of SunBelt.

The following table presents SunBelt’s summarized financial results for the periods indicated:

		Three Months Ended
		March 31,
(Dollars in millions)		2010				2009
SunBelt:
Sales		$	27.6			$	52.5
Operating income			3.4				27.5
Partnership income as reported by SunBelt			1.6				25.5
PolyOne’s ownership of SunBelt			50	%			50	%
Earnings of SunBelt recorded by PolyOne		$	0.8			$	12.8

		March 31,				December 31,
(In millions)		2010				2009
Current assets		$	23.0			$	16.1
Non-current assets			90.4				94.1
Total assets			113.4				110.2
Current liabilities			23.0				21.4
Non-current liabilities			85.3				85.3
Total liabilities			108.3				106.7
Partnership capital		$	5.1			$	3.5

Other investments in equity affiliates are discussed below.

We own 50% of BayOne Urethane Systems, L.L.C. (BayOne), which is included in the Global Color, Additives and Inks operating segment. Through its disposition on October 13, 2009, the former Geon Polimeros Andinos equity affiliate (owned 50%) was included in the Performance Products and Solutions operating segment. Combined summarized financial information for these equity affiliates follows.

		Three Months Ended
		March 31,
(In millions)		2010				2009
As reported by other equity affiliates:
Net sales		$	12.6			$	20.2
Operating income			1.4				1.1
Partnership income			1.4				1.0
Equity affiliate earnings recorded by PolyOne		$	0.7			$	0.5

Note 8 — Weighted-Average Shares Used in Computing Earnings Per Share

		Three Months Ended
		March 31,
(In millions)		2010				2009
Weighted-average shares outstanding — basic			92.5				92.2
Weighted-average shares — diluted:
Weighted-average shares outstanding — basic			92.5				92.2
Plus dilutive impact of stock options and stock awards			2.8				—
			95.3				92.2

Basic earnings per common share is computed as net income available to common shareholders divided by the weighted average basic shares outstanding. Diluted earnings per common share is computed as net income available to common shareholders divided by the weighted average diluted shares outstanding. Pursuant to FASB ASC Topic 260, Earnings Per Share, when a loss is reported the denominator of diluted earnings per share cannot be adjusted for the dilutive impact of stock options and awards because doing so will result in anti-dilution. Therefore, for the quarter ended March 31, 2009, basic weighted-average shares outstanding are used in calculating diluted earnings per share.

Outstanding stock options with exercise prices greater than the average price of the common shares and certain other awards are anti-dilutive and are not included in the computation of diluted earnings per share. For the quarter ended March 31, 2010, 2.4 million of these options and awards were excluded from the computation of diluted earnings per share. Since we reported a net loss for the first quarter of 2009, all stock options and awards outstanding, which totaled 7.8 million at March 31, 2009, have been excluded from the computation of the diluted loss per share because their effect would have been anti-dilutive.

Note 9 — Employee Separation and Plant Phaseout

Management has undertaken certain restructuring initiatives to improve profitability and, as a result, we incurred employee separation and plant phaseout costs. Employee separation and plant phaseout costs are reflected on the line Corporate and eliminations in Note 13, Segment Information. For further discussion of these initiatives, see Note 3, Employee Separation and Plant Phaseout, of the consolidated financial statements and the accompanying notes included in PolyOne’s Annual Report on Form 10-K for the year ended December 31, 2009.

During the three-month period ended March 31, 2010, expense recorded for employee separation and plant phaseout was immaterial. A summary of total employee separation and plant phaseout costs for the three-month period ended March 31, 2009, including where the charges are recorded in the accompanying condensed consolidated statements of operations, follows:

		Three Months
		Ended
		March 31,
(In millions)		2009
Cost of sales		$	9.8
Selling and administrative			0.3
Total employee separation and plant phaseout		$	10.1

Cash payments during the three-month periods ended March 31, 2010 and 2009 were $2.1 million and $8.1 million, respectively.

In July 2008, we announced the restructuring of certain manufacturing assets, including the closure of seven production facilities in North America and one in the United Kingdom. In January 2009, we announced further cost saving measures that included eliminating approximately 370 positions worldwide, implementing reduced work schedules for another 100 to 300 employees, closing our Niagara, Ontario facility and idling certain other capacity. We recognized charges of

$26.9 million in 2009 related to these actions. We do not expect to incur significant expenses associated with these activities in 2010.

The following table details the charges and changes to the reserves associated with these initiatives for the quarter ended March 31, 2010:

		Employee				Plant Phaseout Costs
		Separation				Cash				Asset
(In millions, except employee numbers)		Costs				Closure				Write-downs				Total
Realignment of certain manufacturing plants
Balance at January 1, 2010		$	3.0			$	1.7			$	—			$	4.7
Charge			(0.1	)			—				0.1				—
Utilized			(1.6	)			(0.4	)			(0.1	)			(2.1	)
Impact of foreign currency translation			—				0.1				—				0.1
Balance at March 31, 2010		$	1.3			$	1.4			$	—			$	2.7

Note 10 — Employee Benefit Plans

Components of defined benefit pension plan costs and post-retirement health care benefit plan costs are as follows:

		Three Months Ended March 31,
		Pension Benefits								Health Care Benefits
(In millions)		2010				2009				2010				2009
Service cost		$	0.4			$	0.3			$	—			$	0.1
Interest cost			7.4				7.8				0.4				1.4
Expected return on plan assets			(6.5	)			(5.3	)			—				—
Amortization of unrecognized losses, transition obligation and prior service costs, including curtailment gain recognized in 2009			2.5				5.1				(4.2	)			(0.9	)
		$	3.8			$	7.9			$	(3.8	)		$	0.6

On January 15, 2009, our Board of Directors approved and adopted changes to the Geon Pension Plan (Geon Plan), the Benefit Restoration Plan (BRP), the voluntary retirement savings plan (RSP) and the Supplemental Retirement Benefit Plan (SRP). Effective March 20, 2009, the amendments permanently froze future benefit accruals and provided that participants will not receive credit under the Geon Plan or the BRP for any eligible earnings paid on or after that date.

Note 11 — Financing Arrangements

Short-term debt — At March 31, 2010, $0.7 million of short-term notes issued by certain of our European subsidiaries were outstanding.

Long-term debt — Long-term debt consisted of the following:

		March 31,				December 31,
(Dollars in millions)		2010 (1)				2009 (1)
8.875% senior notes due May 2012		$	279.5			$	279.5
7.500% debentures due December 2015			50.0				50.0
Medium-term notes:
6.52% medium-term notes due February 2010			—				19.9
6.58% medium-term notes due February 2011			19.8				19.7
Credit facility borrowings, facility expires March 2011			40.0				40.0
Total long-term debt		$	389.3			$	409.1
Less current portion			59.8				19.9
Total long-term debt, net of current portion		$	329.5			$	389.2

Current maturities of long-term debt at March 31, 2010 includes $19.8 million of our 6.58% medium-term notes due February 2011 and $40.0 million of borrowings on our credit facility, which expires March 2011.

We are exposed to market risk from changes in interest rates on debt obligations and from changes in foreign currency exchange rates. Information about these risks and exposure management is included in Item 7A “Qualitative and Quantitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no material changes in the market risk faced by PolyOne from December 31, 2009 to March 31, 2010.

Note 12 — Sale of Accounts Receivable

Accounts receivable consist of the following:

		March 31,				December 31,
(In millions)		2010				2009
Trade accounts receivable		$	153.6			$	129.2
Retained interest in securitized accounts receivable			193.2				151.1
Allowance for doubtful accounts			(6.2	)			(5.9	)
		$	340.6			$	274.4

Sale of Accounts Receivable — Under the terms of our receivables sale facility, we sell accounts receivable to PolyOne Funding Corporation (PFC) and PolyOne Funding Canada Corporation (PFCC), both wholly-owned, bankruptcy-remote subsidiaries. PFC and PFCC, in turn, may sell an undivided interest in up to $175.0 million and $25.0 million of these accounts receivable, respectively, to certain investors. The receivables sale facility matures in June 2012. As of March 31, 2010 and December 31, 2009, accounts receivable totaling $193.2 million and $151.1 million, respectively, were sold by us to PFC and PFCC. The maximum proceeds that PFC and PFCC may receive under the facility is limited to the lesser of $200.0 million or 85% of the eligible domestic and Canadian accounts receivable sold. As of March 31, 2010 and December 31, 2009, neither PFC nor PFCC had sold any of their undivided interests in accounts receivable.

The receivables sale facility also makes up to $40.0 million available for the issuance of standby letters of credit as a sub-limit within the $200.0 million limit under the facility, of which $13.8 million was used at March 31, 2010. The level of availability under the receivables sale facility is based on the prior month’s total accounts receivable sold to PFC and PFCC, as reduced by outstanding letters of credit. Additionally, availability is dependent upon compliance with a fixed charge coverage ratio covenant related primarily to operating performance that is set forth in the related agreements. As of March 31, 2010, we were in compliance with these covenants. As of March 31, 2010, $129.5 million of securitized accounts receivable were available for sale.

Note 13 — Segment Information

On February 4, 2010, we announced a new global organization structure that will help us better serve our global customers, drive our earnings growth, better execute our strategy, and leverage our strong geographic footprint. Our former International Color and Engineered Materials operating segment has been split and is now reported within the Global Specialty Engineered Materials operating segment and the Global Color, Additives and Inks operating segment. In addition, our former Resins and Intermediates segment is now referred to as the SunBelt Joint Venture. We now have five reportable segments: (1) Global Color, Additives and Inks; (2) Global Specialty Engineered Materials; (3) Performance Products and Solutions; (4) PolyOne Distribution; and (5) SunBelt Joint Venture.

As a result of these changes to PolyOne’s segment structure, prior period segment information was reclassified to conform to the 2010 presentation. These changes did not impact total segment results.

Segment information for the three-month periods ended March 31, 2010 and 2009, adjusted to reflect our new segment reporting structure and change in accounting principle follows:

														Adjusted
		Three Months Ended March 31, 2010												Three Months Ended March 31, 2009
										Segment												Segment
		Sales to								Operating				Sales to								Operating
		External								Income				External								Income
(In millions)		Customers				Total Sales				(Loss)				Customers				Total Sales				(Loss)
Global Specialty Engineered Materials		$	119.0			$	126.3			$	12.1			$	81.1			$	86.6			$	(1.5	)
Global Color, Additives and Inks			130.0				130.9				8.9				103.2				103.7				1.4
Performance Products and Solutions			166.4				183.7				12.1				142.6				158.8				1.1
PolyOne Distribution			215.0				215.9				8.6				136.5				136.9				4.9
SunBelt Joint Venture			—				—				(0.3	)			—				—				11.7
Corporate and eliminations			—				(26.4	)			(10.3	)			—				(22.6	)			(28.7	)
Total		$	630.4			$	630.4			$	31.1			$	463.4			$	463.4			$	(11.1	)

		Total Assets
						Adjusted
		March 31,				December 31,
		2010				2009
Global Specialty Engineered Materials		$	346.9			$	324.1
Global Color, Additives and Inks			352.6				344.7
Performance Products and Solutions			306.3				282.6
PolyOne Distribution			179.0				152.9
SunBelt Joint Venture			3.2				2.0
Corporate and eliminations			278.5				309.7
Total		$	1,466.5			$	1,416.0

Note 14 — Commitments and Contingencies

We have been notified by certain federal and state environmental agencies and by private parties that we may be a potentially responsible party (PRP) in connection with the investigation and remediation of certain environmental waste disposal sites. While government agencies frequently assert that PRPs are jointly and severally liable at these sites, in our experience, the interim and final allocations of liability costs are generally made based on the relative contribution of waste. We believe that our potential continuing liability with respect to these sites will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. In addition, we initiate corrective and preventive environmental projects of our own to ensure safe and lawful activities at our operations. We believe that compliance with current governmental regulations at all levels will not have a material adverse effect on our financial condition.

During the three-month periods ended March 31, 2010 and 2009, we recorded $3.1 million and $1.5 million, respectively, of expense related to environmental activities at all of our active and inactive sites. During these same periods, we did not receive any proceeds from insurance recoveries.

Based on estimates that were prepared by our environmental engineers and consultants, we had accruals totaling $81.3 million at March 31, 2010 and $81.7 million at December 31, 2009 to cover probable future environmental expenditures related to previously contaminated sites. The accruals represent our best estimate of the remaining probable remediation costs, based upon information and technology that is currently available and our view of the most likely remedy. Depending upon the results of future testing, the ultimate remediation alternatives undertaken, changes in regulations, new information, newly discovered conditions and other factors, it is reasonably possible that we could incur additional costs in excess of the amount accrued at March 31, 2010. However, such additional costs, if any, cannot be currently estimated. Our estimate of the liability may be revised as new regulations or technologies are developed or additional information is obtained. Additional information related to environmental liabilities is in Note 12, Commitments and

Related-Party Information, to the consolidated financial statements included in PolyOne’s Annual Report on Form 10-K for the year ended December 31, 2009.

We guarantee $48.8 million of SunBelt’s outstanding senior secured notes issued in connection with the construction of a chlor-alkali facility in McIntosh, Alabama. This debt matures in equal installments annually until 2017.

Note 15 — Financial Instruments

The estimated fair values of financial instruments were principally based on market prices where such prices were available and, where unavailable, fair values were estimated based on market prices of similar instruments. Short-term foreign exchange contracts are the only asset or liability recorded at fair value on a recurring basis. These contracts are measured based on exchange rates at March 31, 2010 and classified as a level 2 fair value measurement within the fair value hierarchy.

The following table summarizes the contractual amounts of our foreign exchange contracts as of March 31, 2010. Foreign currency amounts are translated at exchange rates as of March 31, 2010. The “Buy” amounts represent the U.S. dollar equivalent of commitments to purchase currencies, and the “Sell” amounts represent the U.S. dollar equivalent of commitments to sell currencies.

		March 31, 2010
Currency (In millions)		Buy				Sell
U.S. Dollar		$	58.6
Euro						$	54.6
British pound							4.0

The carrying amounts and fair values of our financial instruments as of March 31, 2010 and December 31, 2009 are as follows:

		March 31, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
(In millions)		Amount				Value				Amount				Value
Cash and cash equivalents		$	209.5			$	209.5			$	222.7			$	222.7
Long-term debt
Credit facility borrowings			40.0				40.0				40.0				40.0
7.500% debentures			50.0				46.3				50.0				45.8
8.875% senior notes			279.5				296.1				279.5				285.1
Medium-term notes			19.8				19.8				39.6				38.4
Foreign exchange contracts			0.3				0.3				0.5				0.5

Note 16 — Comprehensive Income

The following table sets forth the reconciliation of net income (loss) to comprehensive income:

		Three Months Ended
		March 31,
(In millions)		2010				Adjusted 2009
Net income (loss)		$	18.4			$	(17.7	)
Amortization of unrecognized losses, transition obligation and prior service costs			(1.7	)			3.9
Net gain occurring in the year due to plan amendments			—				18.5
Translation adjustment			(4.9	)			(8.4	)
Total comprehensive income		$	11.8			$	(3.7	)

Note 17 — Subsequent Events

We have evaluated events subsequent to March 31, 2010, through the date the financial statements were issued, and have determined that no events have occurred that require adjustment of or disclosure in the condensed consolidated financial statements.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Business

We are a premier provider of specialized polymer materials, services and solutions with operations in thermoplastic compounds, specialty polymer formulations, color and additive systems, thermoplastic resin distribution and specialty vinyl resins. We also have two equity investments: one in a manufacturer of caustic soda and chlorine and one in a formulator of polyurethane compounds. Headquartered in Avon Lake, Ohio, we have employees at manufacturing sites and distribution facilities in North America, Europe and Asia and joint ventures in North America. We provide value to our customers through our ability to link our knowledge of polymers and formulation technology with our manufacturing and supply chain to provide an essential link between large chemical producers (our raw material suppliers) and designers, assemblers and processors of plastics (our customers).

Recent Developments

Change in Accounting Principle

Effective January 1, 2010, we elected to change our method of valuing inventories for certain U.S. businesses to the first-in, first-out (FIFO) method, while in prior years, these inventories were valued using the last-in, first-out (LIFO) method. As a result of this change, all inventories are valued using the FIFO method. We believe the FIFO method is preferable as it conforms the inventory costing methods for all of our inventories to a single method and improves comparability with our industry peers. The FIFO method also better reflects current acquisition cost of those inventories on our consolidated balance sheets. All prior periods presented herein have been adjusted to apply the new method retrospectively and conform to the current costing methodology.

Highlights and Executive Summary

Selected Financial Data

		Three-month period ended
		March 31,
(In millions)		2010				2009 Adjusted
Sales		$	630.4			$	463.4
Operating income (loss)			31.1				(11.1	)
Net income (loss)			18.4				(17.7	)

Sales increased 36.0% in the first quarter of 2010 as compared to the first quarter of 2009 due to an increase in total volume of 26.8%, increased market pricing associated with higher commodity costs, most notably as it relates to the PolyOne Distribution segment.

Operating income in the first quarter of 2010 increased as compared to the first quarter of 2009 reflecting an increase in volumes, the favorable impact of improved mix and new business gains, and the realization of restructuring savings. In addition, charges related to environmental remediation and plant related restructuring were $3.1 million in the first quarter of 2010 versus $11.6 million in the first quarter of 2009.

These positive items were partially offset by an increase in selling and administrative expenses due to higher incentive compensation expense associated with the improved performance results and lower income from our equity investment in SunBelt of $12.0 million. Additionally, operating income for the first quarter of 2009 reflected a $5.0 million charge related to the adjustment to our 2008 estimated year-end goodwill impairment charge as compared to no such charge in the first quarter of 2010.

Net income increased due to the items discussed in the paragraph above and lower Other expense, net due to decreased foreign exchange losses. Income tax expense was $4.0 million in the first quarter of 2010 as compared to benefit of $8.8 million in the first quarter of 2009. The benefit recorded in the first quarter of 2009 reflects $10.0 million of income tax benefits and related interest income due to the favorable settlement of a foreign tax audit as compared to no such benefits in the first quarter of 2010.

		March 31, 2010				December 31, 2009
Cash and cash equivalents		$	209.5			$	222.7
Accounts receivable facility availability			129.5				112.8
Liquidity		$	339.0			$	335.5
Debt, short- and long-term		$	390.0			$	409.6

In the first quarter of 2010, liquidity increased due to improved sales, and higher accounts receivable, which more than offset the decline in cash. The decrease in our cash balance of $13.2 million reflects the repayment of $20.0 million aggregate principal of our 6.52% medium term notes, which was partially offset by the $9.8 million of cash received from to the sale of our investment in, and related seller note receivable from, O’Sullivan Films.

Results of Operations

										Variances—Favorable
		Three Months Ended March 31,								(Unfavorable)
(Dollars in millions, except per share data)		2010				Adjusted 2009				Change				% Change
Sales		$	630.4			$	463.4			$	167.0				36.0	%
Cost of sales			526.9				412.6				(114.3	)			(27.7	)%
Gross margin			103.5				50.8				52.7				103.7	%
Selling and administrative			73.9				70.2				(3.7	)			(5.3	)%
Adjustment to impairment of goodwill			—				5.0				5.0			NM
Income from equity affiliates			1.5				13.3				(11.8	)			(88.7	)%
Operating income (loss)			31.1				(11.1	)			42.2			NM
Interest expense, net			(8.0	)			(8.8	)			0.8				9.1	%
Other expense, net			(0.7	)			(6.6	)			5.9			NM
Income (loss) before income taxes			22.4				(26.5	)			48.9			NM
Income tax (expense) benefit			(4.0	)			8.8				(12.8	)		NM
Net income (loss)		$	18.4			$	(17.7	)		$	36.1			NM
Basic earnings (loss) per common share		$	0.20			$	(0.19	)
Diluted earnings (loss) per common share		$	0.19			$	(0.19	)

Sales

Sales increased in the first quarter of 2010 as compared to the first quarter of 2009 due to an increase in total volume of 26.8% and increased market pricing associated with higher commodity and other raw material costs, most notably in our Distribution segment.

Cost of Sales

These costs include raw materials, plant conversion, distribution, environmental remediation and plant related restructuring charges. As a percentage of sales, these costs declined to 83.6% of sales in the first quarter of 2010 as compared to 87.2% in the first quarter of 2009. Charges related to environmental remediation and plant related restructuring were $3.1 million in the first quarter of 2010 as compared to $11.3 million in the first quarter of 2009. The primary drivers of the remaining decrease were improved mix of products sold and the realization of savings associated with the previously announced plant realignment activities.

Selling and Administrative

These costs include selling, technology, administrative functions, corporate and general expenses and amortization of intangible assets. Selling and administrative costs increased in the first quarter of 2010 as compared to the first quarter of 2009 due to increased incentive compensation expense resulting from improved performance results, and changes in

currency exchange rates. These items were partially offset by restructuring savings and lower pension and other post-employment expenses.

Adjustment to Impairment of Goodwill (2009)

During the fourth quarter of 2008, we identified indicators of potential impairment and evaluated the carrying values of goodwill and other intangible and long-lived assets. Due to the extensive work involved in performing the related asset appraisals, we initially recognized a preliminary estimate of the impairment loss of $170.0 million in 2008. Upon completion of the analysis in the first quarter of 2009, we revised our estimate of goodwill impairment to $175.0 million, and, accordingly, we recorded $5.0 million of additional goodwill impairment. There were no such charges in the first quarter of 2010.

Income from Equity Affiliates

Income from equity affiliates is summarized as follows:

		Three Months Ended March 31,
(In millions)		2010				2009
SunBelt		$	0.8			$	12.8
Other equity affiliates			0.7				0.5
		$	1.5			$	13.3

During the first quarter of 2010, Income from equity affiliates decreased as compared to the corresponding period in 2009 due to lower earnings from our SunBelt joint venture driven primarily by lower caustic soda prices.

Interest Expense, Net

Interest expense, net decreased in the first quarter of 2010 as compared to the first quarter of 2009 due to lower average borrowing levels and lower interest rates on our variable rate debt.

Included in Interest expense, net for each of the three months ended March 31, 2010 and 2009 is interest income of $0.8 million.

Other Expense, Net

Financing costs associated with our receivables sale facility, foreign currency gains and losses and other miscellaneous items are as follows:

		Three Months Ended March 31,
(In millions)		2010				2009
Currency exchange loss		$	(4.0	)		$	(4.2	)
Foreign exchange contracts gains (losses), net			3.6				(2.2	)
Receivable sale facility fees			(0.3	)			(0.3	)
Other income, net			—				0.1
Other expense, net		$	(0.7	)		$	(6.6	)

Income Tax (Expense) Benefit

For the first quarter of 2010, we recorded income tax expense of $4.0 million compared to an income tax benefit of $8.8 million in the first quarter of 2009.

We decreased existing valuation allowances against our deferred tax assets by $11.7 million in the first quarter of 2010. The related non-cash benefit to income tax expense was $2.9 million and related to various U.S. federal, state, local and foreign deferred tax assets. The remaining decrease is related to changes in our deferred tax balances associated with changing our costing method for certain inventories as noted in Note 2, Change in Accounting Principle.

In the first quarter of 2009, we recorded $10.0 million of income tax benefits and related interest income related to the favorable settlement of a foreign tax audit. No such benefits were recorded in the first quarter of 2010.

SEGMENT INFORMATION

Operating income is the primary financial measure that is reported to the chief operating decision maker for purposes of allocating resources to the segment and assessing its performance. Operating income at the segment level does not include: corporate general and administrative costs that are not allocated to segments; intersegment sales and profit eliminations; charges related to specific strategic initiatives, such as the consolidation of operations; restructuring activities, including employee separation costs resulting from personnel reduction programs, plant closure and phaseout costs; executive separation agreements; share-based compensation costs; asset and goodwill impairments; environmental remediation costs for facilities no longer owned or closed in prior years; gains and losses on the divestiture of joint ventures and equity investments; and certain other items that are not included in the measure of segment profit or loss that is reported to and reviewed by the chief operating decision maker. These costs are included in Corporate and eliminations.

During the first quarter of 2010, we announced our new global organization structure that will help us better serve our global customers, drive our earnings growth, better execute our strategy, and leverage our strong geographic footprint. As a result, our former International Color and Engineered Materials operating segment has been split and is now reported within the Global Specialty Engineered Materials operating segment and the Global Color, Additives and Inks operating segment. In addition, our former Resin and Intermediates segment is now referred to as the SunBelt Joint Venture. As a result of these changes, we now have five reportable segments: (1) Global Color, Additives and Inks; (2) Global Specialty Engineered Materials; (3) Performance Products and Solutions; (4) PolyOne Distribution; and (5) SunBelt Joint Venture.

As a result of these changes to PolyOne’s segment structure, all prior period segment information was reclassified to conform to the 2010 presentation. These changes did not impact total segment results.

Sales and Operating Income (Loss) — Three Months Ended March 31, 2010 compared to Three Months Ended March 31, 2009:

		Three Months Ended
		March 31,
(Dollars in millions)		2010				2009				Change				% Change
Sales:
Global Specialty Engineered Materials		$	126.3			$	86.6			$	39.7				45.8	%
Global Color, Additives and Inks			130.9				103.7				27.2				26.2	%
Performance Products and Solutions			183.7				158.8				24.9				15.7	%
PolyOne Distribution			215.9				136.9				79.0				57.7	%
Corporate and eliminations			(26.4	)			(22.6	)			(3.8	)			16.8	%
		$	630.4			$	463.4			$	167.0				36.0	%
Operating income (loss):
Global Specialty Engineered Materials		$	12.1			$	(1.5	)		$	13.6			NM
Global Color, Additives and Inks			8.9				1.4				7.5				535.7	%
Performance Products and Solutions			12.1				1.1				11.0			NM
PolyOne Distribution			8.6				4.9				3.7				75.5	%
SunBelt Joint Venture			(0.3	)			11.7				(12.0	)		NM
Corporate and eliminations			(10.3	)			(28.7	)			18.4				64.1	%
		$	31.1			$	(11.1	)		$	42.2			NM
Operating income (loss) as a percentage of sales:
Global Specialty Engineered Materials			9.6	%			(1.7	)%		11.3% points
Global Color, Additives and Inks			6.8	%			1.4	%		5.4% points
Performance Products and Solutions			6.6	%			0.7	%		5.9% points
PolyOne Distribution			4.0	%			3.6	%		0.4% points
Total			4.9	%			(2.4	)%		7.3% points

Global Specialty Engineered Materials

Sales increased $39.7 million, or 45.8%, in the first quarter of 2010 compared to the first quarter of 2009 primarily due to the improved demand in our end markets and the favorable impact of changes in currency exchange rates. Volumes increased 41.5% as compared to the first quarter of 2009, with the largest percentage increases occurring in Europe and Asia. The end markets that experienced the highest growth include consumer products, wire & cable, transportation and electronics.

Operating income increased to $12.1 million in the first quarter of 2010 from an operating loss of $1.5 million in the first quarter of 2009 primarily due to increased volumes, the benefits of profitable new business gains, lower raw material costs in certain product lines and the realization of savings from our restructuring activities. These items were partially offset by an increase in selling and administrative costs, primarily associated with increased incentive compensation expenses associated with the improved performance results.

Global Color, Additives and Inks

Sales increased $27.2 million, or 26.2%, in the first quarter of 2010 compared to the first quarter of 2009 due to an increase in volumes, a higher value sales mix and the favorable impact of changes in currency exchange rates. Volumes increased 20.4% as compared to the first quarter of 2009, with the largest percentage increases in North America and Europe. In North America, sales increased across most of our end markets, led by industrial and transportation. In Europe, the increase in sales is primarily attributable to the building & construction, packaging and wire & cable end markets.

Operating income increased $7.5 million in the first quarter of 2010 as compared to the first quarter of 2009 driven by increased volumes, cost reductions from our restructuring initiatives, improved sales mix and lower raw material costs. These items were partially offset by an increase in selling and administrative costs, primarily associated with increased incentive compensation expenses associated with the improved performance results.

Performance Products and Solutions

Sales increased $24.9 million, or 15.7%, in the first quarter of 2010 compared to the first quarter of 2009 due to an increase in volumes and the favorable impact of changes in currency exchange rates. Volumes increased 21.6% as compared to the first quarter of 2009, driven primarily by improvements in the transportation and industrial end markets. Sales did not increase as much as volumes primarily due to the impact of a higher mix of tolling services provided by our Producer Services business for the automotive industry.

Operating income increased in the first quarter of 2010 compared to the first quarter of 2009 due to the increase in volumes and savings from our restructuring activities. These items were partially offset by an increase in selling and administrative costs, primarily associated with increased incentive compensation expenses associated with the improved performance results.

PolyOne Distribution

PolyOne Distribution sales increased $79.0 million, or 57.7%, in the first quarter of 2010 compared to the first quarter of 2009, reflecting a 29.2% increase in volume and improved mix. Additionally, sales were favorably impacted by increased market pricing associated with raw material inflation in the North American plastics and chemicals industry, as our Distribution business is largely a pass through for raw material costs from our suppliers.

Operating income increased in the first quarter of 2010 compared to the first quarter of 2009 due to the increase in volume and a more profitable mix of products sold. These items were partially offset by an increase in selling and administrative costs, primarily associated with increased incentive compensation expenses associated with the improved performance results.

SunBelt Joint Venture

Income from the SunBelt Joint Venture declined in the first quarter of 2010 compared to the first quarter of 2009 primarily due to lower caustic soda prices. The negative impact of these items was partially offset by the favorable impact of improved pricing for chlorine as compared to the first quarter of 2009.

Corporate and Eliminations

Operating loss from Corporate and eliminations improved in the first quarter of 2010 as compared to the first quarter of 2009 due mainly to a decrease in restructuring charges, as the activities associated with the previously announced plant realignment were completed in 2009, partially offset by increased incentive compensation expense due to improved performance. The following table breaks down Corporate and eliminations into its various components:

		Three Months Ended March 31,
(In millions)		2010				2009
Environmental remediation costs, net of recoveries		$	(3.1	)		$	(1.5	)
Employee separation and plant phaseout (a)			—				(10.1	)
Share-based compensation			(0.9	)			(0.6	)
Incentive compensation			(8.4	)			(0.8	)
Unallocated pension and other post-retirement expense			1.1				(7.4	)
Adjustment to impairment of goodwill (b)			—				(5.0	)
Insurance settlement			3.2				—
All other and eliminations (c)			(2.2	)			(3.3	)
Total Corporate and eliminations		$	(10.3	)		$	(28.7	)

Liquidity and Capital Resources

(In millions)		March 31, 2010				December 31, 2009
Cash and cash equivalents		$	209.5			$	222.7
Accounts receivable facility availability			129.5				112.8
Liquidity		$	339.0			$	335.5

Liquidity is defined as an enterprise’s ability to generate adequate amounts of cash to meet both current and future needs. These needs include paying obligations as they mature, maintaining production capacity and providing for planned growth. Capital resources are sources of funds other than those generated by operations.

In the first quarter of 2010, liquidity increased due to improved sales, and higher accounts receivable, which more than offset the decline in cash. The decrease in our cash balance of $13.2 million reflects the repayment of $20.0 million aggregate principal of our 6.52% medium-term notes, which was partially offset by the $9.8 million of cash received from to the sale of our investment in, and related seller note receivable from, O’Sullivan Films.

Cash Flows

The following discussion focuses on the material components of cash flows from operating, investing and financing activities for the first quarter of 2010.

Operating Activities — Cash provided by operating activities was $2.8 million in the first quarter of 2010 as compared to $70.4 million in the first quarter of 2009. In the first quarter of 2010, working capital (defined as accounts receivable plus inventory less accounts payable) increased, reflecting our investment in support of our sales growth. However, working capital as a percentage of sales continued to improve and for the first quarter of 2010 was 9.1% versus 16.1% in the first quarter of 2009.

Investing Activities — Cash provided by investing activities during the first quarter of 2010 was $3.5 million, which was primarily comprised of cash proceeds from the sale of our investment in O’Sullivan and the collection of the principal on the related note receivable. Partially offsetting these proceeds was capital expenditures of $4.3 million. Cash used by investing activities in the first quarter of 2009 included $6.7 million of capital expenditures.

Financing Activities — Net cash used by financing activities in the first quarter of 2010 reflects the repayment of $20.0 million aggregate principal amount of our 6.52% medium term notes. In the first quarter of 2009, net cash provided by financing activities reflected a $15.2 million increase in short-term borrowings.

Capital Resources

As of March 31, 2010, we had existing facilities to access available capital resources totaling $519.5 million. The following table summarizes our available and outstanding facilities as of March 31, 2010:

(In millions)		Outstanding				Available
Long-term debt, including current maturities		$	389.3			$	—
Receivables sale facility			—				129.5
Short-term debt			0.7				—
		$	390.0			$	129.5