PolyOne Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The filing is for PolyOne Corporation; the request metadata names Avient Corp.
Business context
PolyOne supplies specialized polymer materials and solutions through four reportable segments: Global Specialty Engineered Materials; Global Color, Additives and Inks; Performance Products and Solutions; and PolyOne Distribution. Results include ColorMatrix, acquired in December 2011. Management cited weak European demand and lower volumes in some markets.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Sales | $792.0 million | $768.8 million | $1,573.0 million | $1,487.3 million |
| Gross margin | $154.7 million; 19.5% of sales | $129.2 million; 16.8% | $295.3 million; 18.8% | $251.9 million; 16.9% |
| Operating income | $53.1 million; 6.7% of sales | $50.5 million; 6.6% | $98.0 million; 6.2% | $230.3 million; 15.5% |
| Net income | $24.6 million | $28.5 million | $44.8 million | $138.7 million |
| Diluted EPS | $0.27 | $0.30 | $0.49 | $1.45 |
Q2 sales rose 3.0%; ColorMatrix acquisition, pricing and mix gains more than offset lower volumes and unfavorable currency. Gross margin improved, reflecting ColorMatrix’s higher-margin specialty business and better price/mix. Q2 operating income increased modestly, while net income fell, partly reflecting higher interest expense. First-half operating income and net income were sharply lower mainly because the 2011 period included a $128.2 million pretax gain on the SunBelt sale.
- Cash flow: First-half operating cash flow was $32.3 million, versus cash use of $8.9 million a year earlier. Investing activities provided $2.2 million; financing activities used $16.6 million. Cash increased $17.4 million to $209.3 million.
- Liquidity: Cash plus revolving-credit availability totaled $402.9 million at June 30, 2012, including $193.6 million of undrawn availability. Approximately 59% of cash was held outside the U.S.; repatriation may incur tax.
- Debt: Debt carrying value was $705.8 million, including $3.0 million current. No revolving-facility borrowings were outstanding, and the company reported covenant compliance.
- Shareholder returns: First-half cash dividends paid were $8.0 million and share repurchases were $15.9 million. The quarterly dividend declared was $0.05 per share.
Material changes and segment trends
- Q2 volumes fell 6.4% overall; management attributed weakness chiefly to Europe and lower Performance Products and Solutions demand, including comparison with elevated 2011 customer inventory purchases in U.S. building and construction.
- Global Color, Additives and Inks sales rose 31.3% in Q2, substantially due to ColorMatrix; segment operating income increased to $22.1 million from $12.6 million.
- Performance Products and Solutions Q2 sales declined 7.7%, while operating income rose to $22.3 million on improved pricing and mix. Global Specialty Engineered Materials sales fell 5.8%; PolyOne Distribution sales increased 1.9%.
- Q2 selling and administrative expense included $8.7 million of plant-closure and employee-separation costs, principally tied to European capacity realignment. The company said these actions were intended to improve returns on invested capital.
Outlook, risks and contingencies
No specific full-year earnings or sales guidance is provided. Management said operating cash flow and available revolver capacity should support operations, debt service and minimum pension funding requirements in the short and long term. A Saudi Arabia joint venture began facility construction in Q2, with operations expected to start in 2013.
- Environmental remediation accruals were $74.3 million at June 30, 2012. Additional costs are reasonably possible but cannot currently be estimated; management did not expect the matter to materially affect consolidated results.
- PolyOne remained obligated under a guarantee of SunBelt notes, with $36.6 million outstanding at June 30, 2012, although Olin had agreed to indemnify PolyOne. The guarantee had not been formally assigned to Olin.
- Management identified risks including weak demand and economic recovery, raw-material and energy prices and supply, currency movements, customer financial condition, credit-market access, environmental and legal contingencies, and ColorMatrix integration and acquisition performance.
- Foreign-exchange options were introduced to hedge a targeted 75% of forecast Euro operating income for up to 12 months; derivatives were not designated as accounting hedges, so gains and losses were recognized in income.
Important facts for investors to verify
- Whether European demand and segment volumes recover, and whether capacity actions deliver expected savings.
- ColorMatrix’s continuing contribution to sales, margins and cash generation, including integration and purchase-price-allocation completion.
- Working-capital demands, cash conversion, and the effect of cash held outside the U.S. on accessible liquidity.
- Environmental remediation estimates and status of the SunBelt guarantee and Olin indemnification.
- Debt-service capacity and compliance with revolving-credit covenants as liquidity or operating performance changes.