PolyOne Corporation 2012 Form 10-K
Company identification: The filing is for PolyOne Corporation, the company identified in the supplied text; it does not report under the name Avient. It covers the fiscal year ended December 31, 2012. Fourth-quarter figures are unaudited. Amounts are in millions of dollars unless stated otherwise.
Business context
PolyOne supplied specialized polymer materials, color and additive systems, specialty vinyl products, and polymer distribution services. It operated through four reportable segments and reported approximately $3.0 billion in annual sales; 39% of revenue came from outside the United States. The company acquired Glasforms in December 2012, expanding into advanced composites, and had agreed to acquire Spartech, subject to approvals.
Key financial metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Sales | $2,992.6 | $2,863.5 |
| Gross margin | $564.3; 18.9% of sales | $462.7; 16.2% of sales |
| Operating income | $167.1; 5.6% of sales | $233.0; 8.1% of sales |
| Net income attributable to common shareholders | $71.9 | $172.6 |
| Diluted earnings per share | $0.80 | $1.83 |
| Cash provided by operating activities | $106.9 | $72.5 |
| Capital expenditures | $57.4 | $54.1 |
| Total debt | $706.9 | $707.0 |
| Cash and cash equivalents | $210.0 | $191.9 |
| Liquidity, including revolving-credit availability | $381.2 | $340.1 |
Fourth-quarter 2012 sales were $679.4, operating income was $18.7, and net income attributable to shareholders was $3.1. Fourth-quarter 2011 sales were $640.4, operating loss was $39.8, and net income was $12.3.
Changes versus prior year
- Sales rose 4.5%, reflecting the ColorMatrix acquisition and improved pricing and mix; volume fell 3.0%, primarily because of weak European demand, and currency reduced sales by 1.4%.
- Gross margin improved, with management citing ColorMatrix’s specialty-business mix and better product mix.
- Operating income fell 28.3% and attributable net income fell 58.3%. The comparison was affected by the much larger SunBelt divestiture gain recognized in 2011: $146.3 versus a $23.4 earn-out-related gain in 2012.
- Operating cash flow increased $34.4. Debt was essentially unchanged. Year-end liquidity increased to $381.2.
- Segment operating income increased in all four segments, but corporate and unallocated items drove the decline in consolidated operating income.
Outlook, unusual items and risks
- Management’s stated priorities included sales growth, protecting the cost/price relationship as input costs change, working-capital efficiency, and margin improvement. No numerical earnings guidance was provided.
- For 2013, PolyOne estimated capital expenditures of $50–$55 and pension contributions of approximately $75, including $50 above estimated minimum requirements. It expected approximately $11 of environmental-remediation cash spending.
- The proposed Spartech purchase was estimated at approximately $438 based on PolyOne’s January 18, 2013 share price. Management intended to use cash and new long-term debt; a $250 bridge facility was committed, while permanent financing and a proposed revolving-credit increase were not finalized. Closing was expected in the first quarter of 2013, subject to customary conditions.
- 2012 operating results included a $42.0 pension and other post-retirement mark-to-market loss, $12.8 of environmental remediation expense, $11.5 of plant closure and workforce-reduction costs, and $9.3 of acquisition-related costs, partly offset by the $23.4 SunBelt-related gain.
- Environmental remediation reserves were $75.4; the company said additional costs were reasonably possible but could not be estimated. Five purported shareholder class actions challenged the proposed Spartech deal; the company said it could not estimate any possible loss. PolyOne also disclosed an unresolved EPA proposal for $1.3 in penalties concerning alleged violations at two facilities.
- Key risks include demand weakness, raw-material and energy price volatility, foreign-exchange exposure, environmental and legal liabilities, pension funding and assumptions, debt covenants and refinancing, acquisition financing and integration, and exposure to European economic conditions. The company reported compliance with debt covenants at year-end and stated that its controls were effective; the auditors gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Separate underlying operating performance from the SunBelt gain, pension mark-to-market loss, restructuring, environmental, and acquisition charges; review segment results and corporate costs.
- Confirm the completion, financing terms, final purchase price, and integration results of the Spartech acquisition, which was pending at the filing date.
- Track cash conversion, working capital, capital spending, and the availability and covenant terms of revolving credit after any acquisition-related financing.
- Monitor pension contributions and assumptions, including discount rates and asset returns, and compare actual environmental remediation spending and liabilities with the recorded reserve.
- Assess whether demand and volume recover, particularly in Europe, and whether pricing continues to offset raw-material and energy cost changes.