PolyOne Corporation (now Avient) — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing is under the name PolyOne Corporation and reports unaudited results. PolyOne describes its business as specialty polymer materials, formulations, color and additive systems, packaging solutions, and polymer distribution.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Sales | $887.1 million | $1,005.5 million | $1,760.2 million | $2,007.8 million |
| Gross margin | $185.7 million; 20.9% of sales | $184.5 million; 18.4% | $355.5 million; 20.2% | $372.7 million; 18.6% |
| Operating income | $80.3 million; 9.1% | $49.4 million; 4.9% | $150.4 million; 8.5% | $105.8 million; 5.3% |
| Net income attributable to common shareholders | $66.8 million | $31.7 million | $97.0 million | $61.1 million |
| Diluted EPS | $0.74 | $0.34 | $1.08 | $0.64 |
For the first half, operating cash flow was $59.9 million, capital expenditures were $39.1 million, and cash at period-end was $236.8 million. Total debt was $1,058.2 million, up from $1,023.8 million at year-end 2014; cash less total debt was approximately negative $821.4 million. The balance sheet showed current assets of $1,052.9 million and current liabilities of $595.2 million. Reported liquidity was $486.5 million.
Changes versus prior periods
- Sales declined 11.8% in Q2 and 12.3% in the first half. Management attributed the declines primarily to integration of legacy Spartech operations, lower hydrocarbon-based raw material prices, foreign exchange, and, in some businesses, customer destocking.
- Operating income rose 62.6% in Q2 and 42.2% in the first half, despite lower sales. Management cited lower restructuring costs, improved mix in specialty segments, and reduced selling and administrative costs. The overall operating margin increased 4.2 percentage points in Q2 and 3.2 points in the first half.
- Segment performance was mixed. Global Color, Additives and Inks and Global Specialty Engineered Materials increased operating income; Designed Structures and Solutions reported lower sales and operating income. Performance Products and Solutions also had lower operating income, while PolyOne Distribution’s operating income was broadly stable.
- First-half operating cash flow increased $16.1 million year over year, primarily from working-capital improvement and lower tax payments, partly offset by higher pension contributions. Share repurchases were $42.8 million, versus $119.9 million in the first half of 2014; dividends paid were $17.9 million.
Outlook, unusual items, and risks
- The filing provides no specific numerical earnings or sales guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Q2 income tax benefit of $3.6 million included a $26.0 million benefit associated with plans to amend prior U.S. federal tax returns to use foreign tax credits. The first-half effective tax rate was 16.7%, also affected by a $29.4 million tax benefit and an unfavorable $7.9 million adjustment related to foreign court rulings. These items materially influenced reported earnings and tax rates.
- Restructuring charges were $7.5 million in Q2 and $18.1 million in the first half of 2015, versus $35.1 million and $53.0 million, respectively, in 2014. The company said remaining charges from the identified Spartech and Brazil actions were not expected to be material.
- Environmental remediation reserves were $119.4 million at June 30, 2015. The company stated that additional costs beyond accrued amounts were reasonably possible but could not be estimated. No lower Passaic River remediation reserve was recorded because liability and allocation remained uncertain. A separate SunBelt guarantee exposure was $18.3 million; Olin had agreed to indemnify PolyOne, but the guarantee had not been formally assigned.
- Key disclosed risks include currency and raw-material volatility, customer demand and credit conditions, integration of Spartech and Accella, execution of facility realignments, environmental and legal contingencies, and access to credit markets. About 90% of cash was held outside the United States; repatriation could result in taxes.
Important facts for investors to verify
- Assess earnings excluding the substantial prior-year tax-return benefit and other tax adjustments; reported tax rates are not directly comparable.
- Track whether Spartech integration, particularly in Designed Structures and Solutions, improves sales, quality, efficiency, and on-time delivery.
- Monitor the sustainability of margin gains amid lower selling prices, raw-material costs, foreign-exchange movements, and customer destocking.
- Review the environmental reserve and developments at Calvert City and the lower Passaic River, as potential excess costs were not estimable.
- Reconcile revolving-credit availability: the liquidity table reports $249.7 million, while the debt discussion reports $247.0 million available.
- Confirm debt maturities, revolver availability and covenant compliance; the company reported compliance at June 30, 2015 and $79.4 million drawn on its revolving facility.