PolyOne Corporation (now Avient) — Q1 2011 Form 10-Q
Business context and reporting period
Reports the three months ended March 31, 2011; comparative 2010 figures were retrospectively adjusted for a pension accounting change. PolyOne supplied specialty polymer materials, formulations, color and additive systems, and resin distribution. Results include the acquisition of Brazilian business Uniplen, completed January 3, and SunBelt through its February 28 sale.
Key financial metrics
| Metric | Q1 2011 | Q1 2010, adjusted |
|---|---|---|
| Sales | $718.5 million | $630.4 million |
| Gross margin | $122.7 million (17.1% of sales) | $103.7 million (16.5%) |
| Operating income | $179.8 million | $33.7 million |
| Net income | $110.2 million | $21.0 million |
| Diluted EPS | $1.14 | $0.22 |
| Operating cash flow | $(39.4) million | $2.8 million |
| Cash and equivalents, at quarter end | $412.4 million | $209.5 million |
| Long-term debt, at quarter end | $432.9 million | $452.9 million at Dec. 31, 2010 |
Revenue rose 14.0%, reflecting 6.3% volume growth and higher prices associated with raw-material inflation. Management attributed a $17.9 million operating-income improvement to volume, sales mix, and efficiency gains, apart from the SunBelt divestiture gain. Cost of sales declined to 82.9% of sales from 83.6%. Liquidity, defined as cash plus availability under the receivables facility, was $558.0 million. Working capital absorbed $28.7 million as the business grew.
Material changes and unusual items
- SunBelt sale generated $132.3 million cash proceeds, assumption of PolyOne’s guarantee on $42.7 million of SunBelt notes, potential earn-outs, and a $128.2 million pretax gain. Reported operating income and net income therefore include a substantial non-recurring gain; reported operating income also includes $133.9 million of income related to equity affiliates.
- Uniplen was acquired for $21 million cash, with potential additional consideration tied to performance. The purchase-price allocation was preliminary.
- PolyOne repaid $20 million of notes at maturity and repurchased 1 million shares for $13.6 million. The board declared a $0.04-per-share dividend, paid April 7.
- Effective January 1, the company adopted immediate recognition of pension and postretirement actuarial gains and losses, generally in the fourth quarter when measured. Prior periods were restated; the change reduced retained earnings as of January 1, 2010 by $190.6 million, offset in accumulated other comprehensive income.
Outlook, risks and contingencies
Management said operating cash generation and other liquidity sources were expected to support operations, strategic acquisitions, and quarterly dividends. No specific earnings or revenue guidance was provided. Risks cited include raw-material and energy price or supply changes, foreign exchange, demand and industry capacity, customer credit, pricing pressure, production interruptions, and execution of cost and working-capital initiatives.
Environmental remediation accruals were $85.2 million at March 31. The company said additional costs are reasonably possible but could not currently be estimated; it did not expect known environmental liabilities to materially affect consolidated results or financial condition. The receivables facility had $145.6 million available, expires June 2012, and was subject to a fixed-charge coverage covenant; PolyOne reported compliance. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Separate recurring segment performance from the $128.2 million SunBelt gain and other equity-affiliate income when assessing earnings quality.
- Review operating cash flow and receivables growth: cash from operations was negative despite higher reported earnings, partly reflecting growth-related working-capital needs.
- Assess the environmental accrual against potential unestimated remediation costs and future developments.
- Check debt maturities, the June 2012 receivables-facility renewal, covenant headroom, and terms of potential Uniplen earn-outs and SunBelt payments.
- Consider the retrospective pension-accounting change when comparing periods; actuarial gains and losses may affect fourth-quarter results.