PolyOne Corporation (now Avient Corporation) — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing is by PolyOne Corporation; it describes the specialty polymer materials, services and solutions business. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Sales | $1,005.5 | $1,037.6 | $2,007.8 | $1,838.7 |
| Gross margin | $184.5 (18.4%) | $203.7 (19.6%) | $372.7 (18.6%) | $366.0 (19.9%) |
| Operating income | $49.4 (4.9%) | $80.7 (7.8%) | $105.8 (5.3%) | $121.2 (6.6%) |
| Income from continuing operations | $30.7 | $38.3 | $59.9 | $49.3 |
| Net income attributable to PolyOne shareholders | $31.7 | $180.9 | $61.1 | $196.2 |
| Diluted EPS | $0.34 | $1.83 | $0.64 | $2.05 |
Q2 sales fell 3.1%, primarily from an 8.2% volume decline, partly offset by 4.7% improved mix and price and 0.4% favorable currency. First-half sales rose 9.2%, including a 10.5% contribution from Spartech, although volume declined 4.9%. The first-half 2013 comparison included a $223.6 gain on the sale of the Resin Business; that divestiture gain largely explains the much lower 2014 reported net income and EPS.
Operating results were weighed down by restructuring charges: $35.1 in Q2 and $53.0 in the first half. Q2 also compared with $14.9 of environmental insurance recoveries in the prior-year quarter; first-half 2013 recoveries were $20.1. Lower 2014 tax rates supported continuing earnings: 7.8% in Q2 and 18.2% for the first half, versus 39.1% and 37.3%, respectively. Benefits included foreign-affiliate and amended-state-return tax items, favorable earnings mix, and first-quarter tax settlements.
Cash flow, liquidity and debt
- First-half operating cash flow was $43.8, versus cash use of $25.2 in 2013. Management attributed the improvement chiefly to lower pension contributions and improved working capital, partly offset by higher interest, tax and restructuring payments.
- Capital expenditures were $38.0; investing cash use was $10.7, including $26.8 of final SunBelt sale earn-out proceeds.
- Financing cash use was $136.7, including $119.9 of share repurchases, $15.1 of dividends and $8.0 of debt repayment. Cash declined $103.7 to $261.5.
- At June 30, debt was $980.6, compared with $988.9 at December 31, 2013. Cash plus reported revolving-credit availability totaled $574.7, down from $650.9. The company reported no borrowings on its principal revolver, $309.8 of availability under that facility, and compliance with its covenants.
- About 80% of cash was held outside the United States; repatriation could result in foreign and domestic taxes. The filing reports a $24.4 guarantee related to SunBelt notes, with Olin indemnifying PolyOne although the guarantee had not been formally assigned.
Material changes, outlook and risks
- Q2 operating income decreased 38.8% year over year; first-half operating income decreased 12.7%. Total operating margin contracted 2.9 percentage points in Q2 and 1.3 points in the first half. Higher restructuring charges and the prior-year environmental recoveries were significant comparability factors.
- Segment operating income increased year over year in all five reported segments. Designed Structures and Solutions sales fell 17.5% in Q2 as the company pruned low- or negative-margin volume; first-half sales benefited from Spartech being included for the full period. Management cited improved mix, pricing, synergies and cost reductions in several segments. Global Specialty Engineered Materials reported volume weakness, particularly in Brazil.
- The company expected to complete Spartech facility and office closures by year-end 2014, with approximately $10.0 of additional related restructuring charges expected in 2014. It expected a total of approximately $90.0 of charges for the Spartech actions. Brazil facility closures were expected to result in total charges of $17.0, with $2.7 remaining for the second half of 2014.
- No specific full-year earnings or sales guidance is provided. Management said operating cash flow and available borrowing capacity should support operations, debt service, dividends and share repurchases, subject to its projections.
- Environmental reserves were $120.5 at June 30 for probable future remediation costs. Additional costs are reasonably possible but cannot presently be estimated. The Lower Passaic River investigation has unresolved scope and allocation, and the company said it could not estimate any potential liability. The filing also discusses the Calvert City site and continuing insurance recovery efforts.
- Other stated risks include raw-material and energy price or supply changes, foreign exchange and political risks, demand and customer credit conditions, pricing pressure, production disruptions, integration and synergy execution, facility realignment, litigation and environmental contingencies, and access to capital.
Important facts for investors to verify
- Whether volume trends and mix/pricing improvements persist, especially in Designed Structures and Solutions and Brazil.
- Actual timing, costs, cash impact and savings from Spartech and Brazil restructuring and facility closures.
- How recurring earnings compare after separating restructuring charges, tax benefits, and the 2013 divestiture gain and environmental recoveries.
- Working-capital and operating-cash-flow trends, offshore cash accessibility, and the company’s use of repurchases and dividends.
- Changes in the $120.5 environmental reserve, Lower Passaic River exposure, Calvert City remediation, and the SunBelt guarantee.