PolyOne Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The filing identifies the registrant as PolyOne Corporation; it does not identify the company as Avient Corp. Amounts are in millions except per-share data.
Business context and key financial metrics
PolyOne provides specialized polymer materials, services and solutions. Results include Spartech from its March 13, 2013 acquisition; the vinyl resin business sold May 30 is presented as discontinued operations. Prior-period figures are adjusted for segment and discontinued-operations presentation changes.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Sales | $1,037.6 | $756.6 | $1,838.7 | $1,502.1 |
| Gross margin | $203.7 | $144.0 | $366.0 | $276.3 |
| Operating income | $80.7 | $43.3 | $121.2 | $80.7 |
| Continuing-operations net income | $38.3 | $18.4 | $49.3 | $33.7 |
| Net income attributable to PolyOne shareholders | $180.9 | $24.6 | $196.2 | $44.8 |
| Diluted EPS, continuing operations | $0.39 | $0.20 | $0.52 | $0.37 |
| Diluted EPS, total | $1.83 | $0.27 | $2.05 | $0.49 |
Gross margin was approximately 19.6% in Q2 and 19.9% in the first half, versus 19.0% and 18.4%, respectively, a year earlier. Operating margin was 7.8% in Q2 and 6.6% in the first half, compared with 5.7% and 5.4%. Improvements reflected specialty-product mix and insurance recoveries, partly offset by lower-margin acquired sales.
- Cash flow: First-half operating cash flow was negative $25.2, versus positive $32.3 in 2012. Investing cash flow was negative $12.0 and financing cash flow positive $219.7. Cash increased $182.4 to $392.4.
- Liquidity and debt: Cash plus revolving-credit availability totaled $702.3 at June 30; the facility had $309.9 of availability and no outstanding borrowings. Total debt was $1,031.2, versus $706.9 at year-end 2012. The company reported covenant compliance.
- Balance sheet: Total assets were $3,073.4 and shareholders’ equity was $995.7. Cash dividends declared were $0.06 per share for Q2.
Material changes versus the prior comparable period
- Q2 sales rose 37.1% and first-half sales rose 22.4%. The filing attributes most of the increase to Spartech and Glasforms acquisitions; organic volumes declined 2.2% in Q2 and 3.4% in the first half, primarily reflecting weaker European demand.
- Operating income rose 86.4% in Q2 and 50.2% in the first half. Higher acquisition-related expenses and selling and administrative costs partly offset improved operating performance.
- Total net income includes a $223.6 pre-tax ($138.2 after-tax) gain on the resin-business sale. Excluding discontinued operations, continuing-operations income was $38.3 in Q2 and $49.3 for the half-year; total EPS comparisons therefore substantially reflect the divestiture gain.
- The company issued $600.0 of 5.25% senior notes due 2023, used proceeds in part to fund Spartech and repay its $297.0 term loan, and recorded $10.6 of early-debt-extinguishment costs in the first half. It repurchased approximately 3.0 million shares for $71.2 during the first half.
Outlook, commentary, risks and unusual items
- On July 10, 2013, PolyOne announced plans to close six acquired Spartech facilities and shift production over 12–18 months. It expects approximately $25.0 of annual pre-tax savings by 2015, approximately $35.0 of restructuring charges, and approximately $25.0 of additional capital expenditures. These are estimates, not guaranteed outcomes.
- Management said available cash, operating cash flow and borrowing capacity should support operations, debt service and pension funding. It also noted that approximately 44% of cash was held outside the United States and repatriation could incur taxes.
- Operating risks include weaker demand, especially in Europe; raw-material and energy price or supply changes; pricing pressure; acquisition integration and synergy execution; and potential service or quality disruption during facility closures.
- Environmental reserves were $74.1 at June 30. Additional costs may be possible but could not be estimated. The Lower Passaic River matter involving an acquired Spartech subsidiary also remained unquantified; the filing says remediation scope and allocation were undetermined.
- A proposed settlement of remaining Spartech merger litigation was subject to court approval. PolyOne also remained liable under a SunBelt debt guarantee of $30.5, while Olin had agreed to indemnify it. A tentative EPA settlement involving former resin facilities was expected to be finalized in 2013.
- First-half operating cash use was attributed principally to a voluntary $50.0 pension contribution, higher incentive payments and taxes. The company received $20.1 of environmental insurance proceeds in the first half, which benefited results.
Important facts for investors to verify
- How much of continuing-operations growth and margins is organic, given acquisition contributions, lower-margin Spartech sales and insurance recoveries?
- Whether the $25.0 annual savings target, $35.0 restructuring estimate and $25.0 capital spending plan remain on schedule and within budget.
- Post-acquisition debt levels, interest expense, cash generation and working-capital needs, including the use and availability of revolving credit.
- Final Spartech purchase-price allocations and the outcome of environmental, legal and other contingent liabilities.
- The final working-capital adjustment on the resin-business sale and the sustainability of earnings excluding its one-time gain.