PolyOne Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; balance-sheet comparisons are with December 31, 2015. The filing identifies the registrant as PolyOne Corporation, although the request metadata names Avient Corp.
Business context and financial results
PolyOne provides specialized polymer materials, formulations, color and additive systems, plastic sheet and packaging solutions, and polymer distribution. It reports five operating segments.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Sales | $861.5 million | $887.1 million | $1,708.5 million | $1,760.2 million |
| Gross margin | $192.3 million | $185.7 million | $377.8 million | $355.5 million |
| Gross margin % | 22.3% | 20.9% | 22.1% | 20.2% |
| Operating income | $81.5 million | $80.3 million | $152.8 million | $150.4 million |
| Operating margin | 9.5% | 9.1% | 8.9% | 8.5% |
| Net income | $50.0 million | $67.0 million | $89.0 million | $97.2 million |
| Diluted EPS | $0.59 | $0.74 | $1.05 | $1.08 |
Cash flow, debt and liquidity
- First-half operating cash flow was $49.4 million, down from $59.9 million. Capital expenditures were $39.6 million, versus $39.1 million; operating cash flow less capital expenditures was $9.8 million.
- Investing cash outflow was $103.4 million, including $72.8 million for Kraton assets. Financing cash outflow was $63.1 million, including $39.6 million of share repurchases and $20.7 million of dividends. Cash declined $118.4 million to $161.4 million.
- At June 30, principal debt was $1,160.5 million; balance-sheet debt, net of discounts and issuance costs, was $1,144.6 million. Cash plus reported revolving-credit availability totaled $544.4 million. The revolving facility had no borrowings and $379.8 million of availability; the company reported compliance with debt covenants.
- Approximately 92% of cash was held outside the United States; repatriation could result in taxes.
Material changes and management commentary
- Sales fell 2.9% in both the quarter and first half. Management attributed the decline mainly to lower selling prices as hydrocarbon-based raw material costs fell, legacy Spartech volume declines, and unfavorable foreign exchange. Underlying sales growth and acquisitions partly offset these factors.
- Gross and operating margins improved, which management attributed to lower input costs, product mix, and operating efficiencies, as well as lower restructuring charges. Selling and administrative expense increased, including higher compensation and investment in commercial resources.
- Net income declined despite higher operating income. Q2 2015 included a $3.6 million income-tax benefit; Q2 2016 had $16.6 million of tax expense. The 2016 effective tax rate was favorably affected by foreign tax-rate differences and a tax-return adjustment.
- Segment results were mixed. First-half operating income rose in Performance Products and Solutions ($41.0 million versus $27.8 million) and Specialty Engineered Materials ($44.8 million versus $43.2 million), but fell in Designed Structures and Solutions ($1.4 million versus $7.7 million). The latter segment’s sales and profit were affected by lower selling prices, weaker sales and mix.
- PolyOne acquired certain Kraton TPE assets for approximately $72.8 million in January 2016. On July 26, after quarter-end, it acquired Gordon Composites and Polystrand for $85.5 million, initially funded with revolver borrowings. Management intended a $100 million term-loan add-on to repay those borrowings and estimated post-financing liquidity of approximately $560 million.
Outlook, risks and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management expected $3.3 million of remaining accelerated depreciation and ongoing costs related to certain facility closures in Q3 2016; it stated that remaining restructuring charges or benefits were not expected to materially affect results going forward.
- Environmental accruals were $119.4 million at June 30. The company stated that additional costs were reasonably possible but not estimable. It had not accrued remediation costs for the lower Passaic River matter, where the EPA selected a remedy estimated at $1.4 billion for an eight-mile area; PolyOne said its allocation, if any, was undetermined.
- PolyOne remained contingently obligated on a $12.2 million guarantee of SunBelt notes, although Olin had agreed to indemnify it. The filing also cites risks from raw-material and energy prices, foreign exchange, customer credit, market conditions, acquisitions and integration, operational disruptions, and environmental or legal contingencies.
- Other notable items included $11.9 million of first-half restructuring charges and a $0.4 million debt-extinguishment charge associated with amending the term loan. The amendment reduced the term-loan spread by 25 basis points.
Important facts for investors to verify
- Whether lower raw-material prices and selling prices, and legacy Spartech volume declines, continued to affect sales and segment profitability.
- Cash conversion and working-capital trends: first-half operating cash flow fell, while working capital as a percentage of sales rose to 10.7% from 9.8%.
- Final purchase accounting and integration results for the Kraton, Gordon Composites and Polystrand acquisitions, and the completion and terms of the planned term-loan add-on.
- Developments in environmental matters, particularly the Passaic River allocation and the adequacy of the recorded $119.4 million environmental accrual.
- Tax effects and the sustainability of reported earnings, given the favorable tax adjustments and the prior-year tax benefit.