PolyOne Corporation (company identified in request as Avient Corp.) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The filing registrant is PolyOne Corporation; the supplied company name differs from the filing name.
Business context and financial results
PolyOne provides specialized polymer materials, services and solutions, with operations spanning engineered materials, color and additives, performance products and distribution. Unless noted, amounts are in millions of dollars. Prior-year comparisons are adjusted for a retrospective accounting change.
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Sales | $768.8 | $692.9 | $1,487.3 | $1,323.3 |
| Gross margin | $129.2; 16.8% | $126.8; 18.3% | $251.9; 16.9% | $230.5; 17.4% |
| Operating income | $50.5 | $63.9 | $230.3 | $97.6 |
| Net income | $28.5 | $48.1 | $138.7 | $69.1 |
| Diluted earnings per share | $0.30 | $0.50 | $1.45 | $0.72 |
| Operating cash flow | Not separately reported | Not separately reported | $(8.9) | $41.2 |
Q2 operating margin was 6.6%, versus 9.2% a year earlier; H1 operating income included a substantial divestiture gain. Cash and equivalents were $416.8 at June 30, up from $378.1 at year-end 2010. Total debt was $432.9, including $22.9 current; reported liquidity, including available receivables-facility capacity, was $579.4. Shareholders’ equity was $629.6.
Material changes and management commentary
- Sales rose 11.0% in Q2 and 12.4% in H1. Management attributed the gains mainly to improved mix and higher pricing amid raw-material inflation, with contributions from foreign exchange and acquisitions. Q2 volume declined 2.1%; H1 organic volume grew 1.3%.
- Q2 operating income fell $13.4 year over year. The prior-year quarter included $7.8 of equity-affiliate income and $18.4 of insurance and legal-settlement gains; neither comparable benefit was present in Q2 2011. Higher selling and administrative costs also weighed on results.
- H1 operating income rose $132.7, primarily because of a $128.2 pretax gain on the February sale of PolyOne’s 50% SunBelt interest. The sale generated $132.3 cash, transferred a $42.7 guarantee of SunBelt debt to the buyer, and may provide performance-based earn-outs.
- All four continuing operating segments reported higher Q2 and H1 operating income. Performance Products and Solutions and PolyOne Distribution showed particularly strong year-over-year improvement. Segment results exclude certain corporate items and the SunBelt divestiture gain.
- Q2 cost of sales was 83.2% of sales versus 81.7% a year earlier; management noted that Q2 2010 included $15.9 of insurance-settlement gains. H1 cost of sales was 83.1% of sales versus 82.6%.
- H1 operating cash flow was negative despite higher reported net income, reflecting working-capital investment and other cash-flow adjustments. Working capital investment to support growth was $36.1; working capital as a percentage of sales improved to 9.3% from 10.7%.
Liquidity, outlook, risks and unusual items
- Investing cash flow was $93.5 in H1, including SunBelt sale proceeds, offset by $21.8 for the Uniplen acquisition and $20.5 of capital expenditures. Financing cash outflow was $47.9, including $20.0 of debt repayment, $28.0 of share repurchases and $3.8 of dividends paid.
- The $200 receivables sale facility expires in June 2012; $162.6 was available at quarter-end, and $12.9 of its letter-of-credit sublimit was in use. PolyOne reported compliance with the applicable covenants. Its $22.9 of 8.875% senior notes mature in 2012; other principal maturities include $50.0 in 2015 and $360.0 thereafter, principally 2020 notes.
- Management stated that operating cash generation and other liquidity sources were expected to support strategic acquisitions, operating needs, debt service, quarterly dividends and potential share repurchases. The filing provides no specific earnings or revenue guidance.
- Environmental remediation accruals were $82.7 at June 30. The company said additional costs are reasonably possible but could not be estimated; it did not expect current environmental matters to materially affect its financial position, results or cash flows.
- Effective January 1, 2011, PolyOne changed its pension and postretirement actuarial gain-and-loss recognition method to recognize such amounts in operating results in the year incurred, generally in Q4. Prior periods were retrospectively adjusted. The change reduced retained earnings by $190.6 as of January 1, 2010, with an offset in accumulated other comprehensive income, and did not change total shareholders’ equity.
- Other disclosed risks include raw-material and energy price or supply volatility, pricing and demand conditions, foreign-exchange exposure, customer credit, economic and housing-market recovery, environmental and legal contingencies, and access to capital. Management reported no material change in market risk and no material change in internal controls during the quarter.
Important facts for investors to verify
- Separate recurring segment performance from the $128.2 SunBelt sale gain and prior-year insurance and legal-settlement benefits when assessing earnings trends.
- Track whether pricing and mix offset raw-material inflation and whether volume performance improves, particularly in segments reporting customer-pruning or market-related volume declines.
- Assess cash conversion and working-capital needs, given negative H1 operating cash flow despite reported net income growth.
- Review refinancing and covenant capacity ahead of the June 2012 receivables-facility expiry and the 2012 note maturity.
- Monitor environmental remediation costs, pension-related actuarial effects, and any SunBelt earn-out payments.