Business context and reporting period
PolyOne Corporation, a global provider of specialized polymer materials, services and solutions, reported unaudited results for the quarter and six months ended June 30, 2019. The company had four reportable segments: Color, Additives and Inks; Specialty Engineered Materials; Performance Products and Solutions; and Distribution.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Sales | $903.8 million | $914.8 million | $1,803.7 million | $1,816.4 million |
| Gross margin | $205.5 million; 22.7% | $196.5 million; 21.5% | $401.8 million; 22.3% | $395.0 million; 21.8% |
| Operating income | $71.6 million; 7.9% | $77.4 million; 8.5% | $139.9 million; 7.8% | $156.2 million; 8.6% |
| Net income | $42.1 million | $51.2 million | $80.4 million | $98.1 million |
| Diluted EPS | $0.54 | $0.63 | $1.03 | $1.21 |
| Operating cash flow | Not separately reported | Not separately reported | $99.4 million | $108.9 million |
Q2 selling and administrative expense rose to $133.9 million from $119.1 million, while net interest expense was $16.2 million. The effective tax rate was 25.1% for Q2 and 26.1% for the first half, compared with 16.4% and 21.3%, respectively, in 2018.
Cash, debt and liquidity
At June 30, 2019, cash and cash equivalents were $125.5 million, down from $170.9 million at year-end 2018. Revolver availability was $262.7 million, for reported total liquidity of $388.2 million, versus $451.6 million at year-end. Principal debt totaled $1,425.8 million; balance-sheet debt, net of discounts and issuance costs, was $1,411.2 million. The company reported covenant compliance. About 91% of cash was held outside the United States.
First-half cash flow included $142.2 million used in investing, chiefly $119.6 million for acquisitions and $26.5 million in capital expenditures. Financing activities used $4.5 million, including $30.7 million of dividends and $26.9 million of share repurchases, partly offset by $58.5 million in net revolver borrowings.
Material changes versus the prior comparable period
- Q2 sales declined 1.2% and first-half sales declined 0.7%. Management attributed the decreases to unfavorable foreign exchange and weakness in certain end markets, including automotive and North American construction; acquisition contributions partly offset these factors.
- Gross margin improved, with cost of sales falling as a percentage of sales, primarily due to lower environmental remediation costs. However, operating income fell 7.5% in Q2 and 10.4% in the first half, as higher selling and administrative costs outweighed gross-margin improvement.
- Net income declined 17.8% in Q2 and 18.0% in the first half. Higher effective tax rates contributed to the decline.
- Specialty Engineered Materials sales increased 18.0% in Q2, largely reflecting acquisitions, including Fiber-Line; its operating income rose 21.8%. Performance Products and Solutions sales fell 8.9% and operating income fell 13.7%, mainly on lower demand in North American building, construction and transportation markets.
- Color, Additives and Inks Q2 sales and operating income declined 2.3% and 6.6%, respectively. Distribution sales fell 5.2%, but operating income rose 7.5% on improved mix and pricing.
Outlook, management commentary and risks
- The filing gives no specific company-wide earnings or revenue guidance. Management said Fiber-Line is expected to add approximately $100 million in annual sales; it contributed $29.1 million in Q2 and $55.9 million in the first half.
- Acquisition-related earnouts were remeasured, resulting in a $10.7 million Q2 charge in selling and administrative expense, primarily due to higher-than-anticipated acquired-business earnings. Recorded contingent liabilities for the PlastiComp and Fiber-Line earnouts totaled $62.2 million at quarter-end.
- Environmental accruals totaled $112.8 million at June 30, including a $103.2 million reserve for the former Goodrich Calvert City site. The company said additional remediation costs are reasonably possible but cannot currently be estimated. No liability was accrued for the lower Passaic River matter because allocation and potential responsibility remain uncertain.
- Risks identified include foreign exchange, tariffs and other international risks; market and polymer-demand changes; raw-material and energy prices and availability; pricing pressure; acquisition integration and expected benefits; environmental and litigation contingencies; cyberattacks and information-system failures; and access to credit. Management reported no material change in market-risk exposures and stated disclosure controls were effective.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recording operating lease assets and obligations; management reported no material beginning retained-earnings adjustment.
Important facts for investors to verify
- Whether weaker automotive, construction and transportation demand and unfavorable currency effects persist, and how they affect segment sales and margins.
- Whether acquisition-driven Specialty Engineered Materials growth and Fiber-Line’s expected annual sales contribution translate into earnings after integration and earnout costs.
- The drivers of higher corporate and administrative costs, including the $10.7 million earnout charge, and the assumptions behind the $62.2 million contingent liability.
- Potential cash requirements for environmental remediation beyond the $112.8 million recorded accrual, particularly at Calvert City and the lower Passaic River.
- Liquidity and refinancing exposure given total principal debt of $1,425.8 million, the maturity schedule, and the decline in reported liquidity from year-end.