PolyOne Corporation (filed as PolyOne; company metadata identifies Avient Corp.) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The filing describes PolyOne as a provider of specialized polymer materials, services and solutions. Results are not directly comparable with Q1 2013: Spartech was acquired on March 13, 2013, and the Resin Business was sold in May 2013 and is presented as discontinued operations in the prior period.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Sales | $1,002.3 million | $801.1 million |
| Gross margin | $188.2 million; 18.8% of sales | $162.3 million; 20.3% of sales |
| Operating income / margin | $56.4 million / 5.6% | $40.5 million / 5.1% |
| Continuing-operations net income | $29.2 million | $11.0 million |
| Net income attributable to PolyOne shareholders | $29.4 million; diluted EPS $0.31 | $15.3 million; diluted EPS $0.16 |
| Cash from operating activities | $(74.9) million | $(91.5) million |
| Capital expenditures | $17.5 million | $12.9 million |
Sales rose 25.1%, driven mainly by Spartech (24.1 percentage points) and improved price and mix (2.7 points), partly offset by a 1.7% volume decline. Cost of sales rose to 81.2% of sales from 79.7%, reflecting Spartech’s lower margins and $11.0 million of restructuring charges in cost of sales. Operating income increased 39.3%. Q1 2013 included $10.6 million of debt-extinguishment costs and $4.1 million of after-tax income from discontinued operations; Q1 2014 had neither.
Segment operating income increased in Global Color, Additives and Inks ($30.4 million versus $24.2 million), Global Specialty Engineered Materials ($18.3 million versus $15.8 million), Designed Structures and Solutions ($11.2 million versus $1.5 million), Performance Products and Solutions ($16.0 million versus $13.6 million), and PolyOne Distribution ($17.2 million versus $16.2 million). Designed Structures and Solutions’ comparison is especially affected by the partial-quarter inclusion of Spartech in 2013.
Balance sheet, debt and liquidity
At March 31, 2014, cash was $238.3 million, down from $365.2 million at year-end 2013. Total debt was $980.9 million, including $968.1 million long-term debt net of current portion; net debt was approximately $742.6 million. The debt portfolio included $600 million of 5.25% senior notes due 2023 and $316.6 million of 7.375% notes due 2020. The revolving facility had no outstanding borrowings; the company reported covenant compliance and availability of $323.9 million in the debt note. The liquidity table reports revolving availability of $327.3 million and total liquidity of $565.6 million, versus $650.9 million at December 31, 2013; the filing does not explain the difference between the two availability figures.
Operating cash outflow improved by $16.6 million year over year but remained substantial, with working-capital movements and accrued liabilities weighing on cash. Investing activities provided $9.3 million, including the final $26.8 million SunBelt earn-out, offset by capital spending. Financing activities used $61.2 million, including $51.0 million of share repurchases and $7.6 million of dividends. Cash declined by $126.9 million during the quarter. Approximately 84.1% of cash was held outside the United States; repatriation could trigger taxes.
Management commentary, outlook and risks
Management said operating cash flow and available revolver capacity should support operations, debt service and continued share repurchases, subject to working-capital, discretionary-spending and capital-expenditure management. No specific full-year earnings or revenue guidance is provided. The filing cautions that first-quarter results are not necessarily indicative of full-year performance.
PolyOne expected Spartech integration actions—including facility closures and production transfers—to be completed by the end of 2014. The company anticipated approximately $70 million of charges for the announced Spartech actions and expected approximately $10.1 million of additional restructuring charges in 2014. It recorded $17.9 million of restructuring charges in Q1 2014.
Environmental reserves were $122.1 million at March 31, 2014. The company said additional costs above the reserve were reasonably possible but not estimable. Its potential liability for Lower Passaic River remediation could not be assessed because the remedy and allocation were undetermined. A remaining $24.4 million SunBelt debt guarantee remained in place, although Olin had agreed to indemnify PolyOne. The Spartech merger litigation settlement was approved and dismissed with prejudice, and the appeal deadline had passed.
Key risks identified include raw-material and energy price or supply changes, foreign-exchange and broader economic conditions, demand and pricing, customer financial health, execution of Spartech integration and expected savings, facility closures and production shifts, access to credit, and environmental or litigation developments. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported growth and operating improvement is organic versus attributable to Spartech, and how quickly Spartech margins and synergies are expected to improve.
- Why liquidity is reported with two different revolver-availability figures ($327.3 million and $323.9 million).
- Whether operating cash flow and working capital improve after the quarter’s large cash use and whether repurchases continue at the reported pace.
- The timing and final cost of Spartech restructuring, including the expected additional 2014 charges and facility-transition risks.
- Potential changes to the $122.1 million environmental reserve, Lower Passaic River exposure, and the $24.4 million SunBelt guarantee.
- The amount and tax consequences of overseas cash that may be needed in the United States.