PolyOne Corporation (now Avient) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The filing registrant is PolyOne Corporation. Prior-year results are adjusted to present the Resin Business as discontinued operations and reflect revised segment reporting.
Business context
PolyOne provides specialty polymer materials, color and additive systems, plastic sheet and packaging solutions, and polymer distribution. The company acquired Spartech on March 13, 2013, expanding its specialty materials and packaging businesses, and sold its vinyl resin business on May 30, 2013.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 adjusted | Nine months 2013 | Nine months 2012 adjusted |
|---|---|---|---|---|
| Sales | $1,008.9 million | $707.7 million | $2,847.6 million | $2,209.8 million |
| Operating income | $61.6 million | $43.5 million | $182.8 million | $124.2 million |
| Net income from continuing operations | $23.0 million | $19.4 million | $72.3 million | $53.1 million |
| Net income attributable to PolyOne shareholders | $23.0 million | $24.0 million | $219.2 million | $68.8 million |
| Diluted EPS, continuing operations | $0.24 | $0.22 | $0.76 | $0.59 |
Sales rose 42.6% in the quarter and 28.9% year to date, primarily due to acquisitions. For the quarter, management attributed 38.8% growth to Spartech and Glasforms; higher pricing and improved mix also contributed, while volume declined 0.6%. Operating margin was 6.1% in both Q3 periods; gross margin was approximately 18.0% versus 19.1%. For the nine months, operating margin improved to 6.4% from 5.6%, and gross margin to approximately 19.2% from 18.6%.
Nine-month reported net income included a $223.7 million pretax gain ($138.0 million after tax) on the Resin Business sale. Q3 net income was below the prior year despite improved continuing-operations income, partly because the prior-year quarter included $4.6 million of discontinued-operations income.
Cash from operating activities was negative $4.8 million for the first nine months, versus positive $86.9 million a year earlier. Management cited a voluntary $50.0 million pension contribution and higher tax payments. Capital expenditures were $41.8 million; cash and equivalents increased to $322.8 million from $210.0 million at year-end 2012.
At September 30, 2013, debt was $987.7 million, compared with $706.9 million at December 31, 2012. Cash plus reported revolver availability of $307.8 million gave total liquidity of $630.6 million. The $400 million revolving facility had no borrowings outstanding and the company reported compliance with covenants. The quarterly dividend declared was $0.06 per share.
Material changes and management outlook
- Spartech contributed $260.8 million of Q3 sales and $593.0 million of sales since acquisition. Its purchase-price allocation remained preliminary.
- PolyOne sold the Resin Business for $250.0 million cash, subject to a working-capital adjustment expected to be finalized in Q4; management did not expect a material impact from the adjustment.
- The company plans to close six former Spartech North American facilities and shift production over 12–18 months, with completion expected by the end of 2014. Estimated charges are approximately $35 million ($20 million cash and $15 million non-cash); projected annualized pretax savings are approximately $25 million by 2015.
- Management said operating cash flow and available borrowing capacity should support operations, debt service and minimum pension funding requirements. It planned to repurchase at least 10 million shares over 18–24 months beginning March 2013; approximately 3.8 million had been repurchased through Q3.
- Q3 results included $5.2 million of debt-extinguishment costs and a $7.0 million gain from resolution of commercial litigation. Nine-month results also included $20.1 million of environmental insurance recoveries.
Risks, contingencies, and other disclosures
- Environmental reserves were $76.5 million. The company said additional costs above the reserve were reasonably possible but not currently estimable. For the Calvert City site, management could not reasonably estimate a reserve adjustment; a material adverse income-statement impact from a future adjustment was possible.
- Potential Lower Passaic River remediation and natural-resource-damage liabilities related to a Spartech subsidiary could not be assessed or estimated; the scope, cost and allocation remained undetermined.
- PolyOne remained a guarantor of $30.5 million of SunBelt notes, although Olin had agreed to indemnify it. The filing also described a proposed Spartech shareholder-litigation settlement subject to court approval.
- Key forward-looking risks include raw-material prices and supply, demand and pricing, foreign exchange, customer credit, integration of acquisitions, delivery of restructuring savings, environmental matters, and access to capital. Approximately 62.4% of cash was held outside the United States, and repatriation could incur taxes.
- Management’s control assessment excluded Spartech, which represented 24.1% of total assets; management was evaluating the acquisition’s effect on internal controls.
Most important facts for investors to verify
- How much reported sales and earnings growth reflects acquired businesses versus organic volume, pricing and mix, and whether Spartech integration delivers the stated savings.
- The sustainability of cash generation, given negative nine-month operating cash flow and the effects of pension contributions, taxes and working capital.
- Debt-service capacity and the impact of the higher debt balance, including the timing and cost of maturities and any further debt or share repurchases.
- Whether the $35 million restructuring estimate and $25 million annualized savings target remain achievable, and whether facility closures disrupt operations or customer service.
- Developments in environmental exposures, the Calvert City reserve assessment, the Lower Passaic River matter, the Resin Business working-capital adjustment and the proposed litigation settlement.