PolyOne Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The supplied filing is for PolyOne Corporation, not a filing under the name Avient Corp.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $740.2 million | $735.8 million | $2,313.3 million | $2,223.1 million |
| Gross margin | $142.7 million; 19.3% | $114.0 million; 15.5% | $438.1 million; 18.9% | $365.9 million; 16.5% |
| Operating income | $50.4 million | $42.5 million | $148.4 million | $272.8 million |
| Net income | $24.0 million | $21.6 million | $68.8 million | $160.3 million |
| Diluted EPS | $0.27 | $0.23 | $0.76 | $1.69 |
| Operating cash flow | Not separately stated | Not separately stated | $86.9 million | $19.2 million |
- Q3 sales increased 0.6%; gross margin rose substantially, reflecting ColorMatrix’s higher-margin specialty business and improved mix. Operating margin increased to 6.8% from 5.8%.
- Nine-month sales rose 4.1%, but operating income and net income fell year over year. The 2011 comparison included a $128.2 million pretax gain on the SunBelt investment sale; its absence is the principal reason for the decline.
- Cash and cash equivalents were $248.7 million at September 30, 2012, versus $191.9 million at year-end 2011. Total debt was $705.2 million, including $3.0 million current; no revolver borrowings were outstanding.
- Reported liquidity was $427.6 million: cash of $248.7 million plus $178.9 million revolver availability. The company reported compliance with debt covenants.
- Nine-month investing cash use was $14.1 million, including $33.0 million of capital expenditures and $18.9 million proceeds from the SunBelt earn-out and other asset sales. Financing cash use was $16.6 million, including share repurchases and dividends.
Material changes and operating trends
- ColorMatrix, acquired in December 2011 for $486.1 million net of cash acquired, contributed to sales and segment profit growth. Global Color, Additives and Inks sales increased 24.9% in Q3 and 28.9% year to date; the acquisition contributed $6.0 million and $21.8 million of operating income, respectively.
- Management cited weak European demand and unfavorable currency as drags on volume and sales. Q3 company sales also reflected lower pricing, partly offset by ColorMatrix and mix. Nine-month volume declined 4.1% company-wide.
- Interest expense increased, attributed to the higher average debt balance following ColorMatrix financing. Selling and administrative expense also rose, partly due to ColorMatrix, acquired-intangible amortization, and European restructuring costs.
- European capacity realignment and workforce reductions generated $10.5 million of charges in the first nine months of 2012, primarily recorded in selling and administrative expense.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said projected operating cash flow and available revolver capacity should support operations, debt service, and minimum pension funding needs.
- On October 23, 2012, PolyOne agreed to acquire Spartech, subject to customary approvals, with closing expected in Q1 2013. Consideration is $2.67 cash and 0.3167 PolyOne shares per Spartech share; PolyOne expected to issue about 9.9 million shares and pay about $84 million cash. It planned to fund the cash consideration and about $131 million of Spartech debt through cash and new long-term debt, and assume about $11 million additional debt.
- Environmental remediation accruals were $75.8 million at September 30, 2012. The company said additional costs are reasonably possible but cannot currently be estimated, and that its potential liability is not expected to materially harm consolidated results or cash flows.
- PolyOne remained a guarantor of SunBelt notes of $36.6 million, although Olin had agreed to indemnify it. About 58% of company cash was held outside the U.S.; repatriation could incur taxes.
- Disclosed risks include weak demand, foreign-exchange movements, raw-material and energy costs and availability, pricing pressure, customer credit, acquisition integration, environmental matters, and access to capital.
Important facts for investors to verify
- Confirm that the intended issuer is PolyOne Corporation, as named in this 10-Q, rather than Avient Corp.
- Assess how much margin improvement is sustainable apart from acquisition effects, mix, and restructuring.
- Review the financing, dilution, integration risks, and closing conditions for the Spartech acquisition.
- Track European demand, currency impacts, and volume trends across segments.
- Evaluate potential exposure beyond the environmental accrual and the continuing SunBelt guarantee.