PolyOne Corporation (now Avient) — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. PolyOne supplied specialized polymer materials, formulations, color and additive systems, plastic sheet and packaging solutions, and polymer distribution. Dollar amounts below are in millions except per-share data.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Sales | $841.6 | $958.4 | $2,601.8 | $2,966.2 |
| Gross margin | $169.1 (20.1%) | $182.6 (19.1%) | $524.6 (20.2%) | $555.3 (18.7%) |
| Operating income | $69.2 (8.2%) | $63.6 (6.6%) | $219.6 (8.4%) | $169.4 (5.7%) |
| Net income from continuing operations | $44.5 | $32.3 | $141.7 | $92.2 |
| Diluted EPS from continuing operations | $0.50 | $0.35 | $1.58 | $0.98 |
For the nine-month period, operating cash flow was $128.6 versus $131.8; capital expenditures were $61.6 versus $60.7. Cash declined $2.9 to $235.7. At September 30, total debt was $1,099.8, including $61.8 current debt, compared with $1,023.8 at year-end 2014. Reported liquidity was $421.2, comprising cash of $235.7 and revolver availability of $185.5. Share repurchases were $117.8 and dividends paid were $26.8 in the first nine months.
Changes and operating drivers
- Sales fell 12.2% in Q3 and 12.3% for the first nine months. Management attributed the declines to lower volume, unfavorable foreign exchange, and lower average selling prices as hydrocarbon raw-material costs fell; the Accella acquisition partly offset the declines.
- Operating income rose 8.8% in Q3 and 29.6% year to date despite lower sales. Management cited improved mix and cost reductions, including lower restructuring costs; lower corporate and elimination costs also contributed.
- Designed Structures and Solutions was a notable weakness: nine-month sales fell 30.0% and operating income fell 67.7%, chiefly from lower volume and pricing. Global Color, Additives and Inks and Global Specialty Engineered Materials increased operating income year over year.
- Cost of sales as a share of sales improved to 79.9% in Q3 from 80.9%, and to 79.8% year to date from 81.3%. Selling and administrative expense fell $19.1 in Q3 and $80.9 year to date, reflecting restructuring, currency and cost-structure effects.
Outlook, unusual items and risks
- Management planned to refinance 2015 debentures, 2020 senior notes and revolver borrowings with new long-term debt in Q4 2015, while noting there was no assurance refinancing could be completed.
- The Granby, Quebec facility closure and equipment upgrades generated $10.5 of Q3 charges. Management expected approximately $2.0 of annual cash savings beginning in Q4 2015 and approximately $3.0 of additional cash charges, primarily in Q4.
- The effective tax rate was 13.4% in Q3 and 15.7% year to date, versus 30.4% and 22.9%, respectively, in 2014. Results included tax benefits from amended returns and the reversal of an uncertain tax position; the nine-month benefit from amended returns was $30.4.
- Environmental reserves were $120.6 at September 30. Potential additional remediation costs could not be estimated; the filing also discusses the Calvert City matter and uncertainty over potential liability for the lower Passaic River site. A separate SunBelt guarantee was $18.3, with Olin having agreed to indemnify PolyOne.
- Other stated risks include currency and raw-material volatility, customer demand and destocking, integration and realignment execution, access to credit and refinancing, and environmental or legal developments. About 92% of cash was held outside the United States; repatriation could result in taxes.
Important facts for investors to verify
- Confirm the refinancing was completed as intended and review resulting maturities, rates, covenants and revolver availability.
- Track volume, pricing and margins—especially the recovery or continued weakness of Designed Structures and Solutions and legacy Spartech products.
- Assess whether restructuring savings are realized and whether remaining charges or execution disruptions exceed management’s expectations.
- Review the assumptions and potential range of exposure behind the $120.6 environmental reserve and the unaccrued Passaic River matter.
- Reconcile revolver availability: the liquidity table reports $185.5, while the financing discussion states $182.9. Also assess the sustainability of earnings given material tax benefits in the period.