PolyOne Corporation (10-Q) — First Quarter 2015
Period: Three months ended March 31, 2015; comparisons are with the three months ended March 31, 2014, unless noted. The filing identifies the issuer as PolyOne Corporation, a provider of specialty polymer materials, formulations, color and additive systems, packaging solutions, and polymer distribution.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Sales | $873.1 million | $1,002.3 million | Down 12.9% |
| Gross margin | $169.8 million; 19.4% of sales | $188.2 million; 18.8% of sales | Down $18.4 million; margin up 0.6 percentage points |
| Operating income | $70.1 million; 8.0% of sales | $56.4 million; 5.6% of sales | Up 24.3% |
| Net income attributable to PolyOne shareholders | $30.2 million | $29.4 million | Up 2.7% |
| Diluted EPS | $0.34 | $0.31 | Up $0.03 |
| Cash from operations | $(57.8) million | $(74.9) million | $17.1 million less cash used |
- Cash and liquidity: Cash was $226.4 million at March 31, down from $238.6 million at December 31, 2014. Reported total liquidity was $375.1 million, versus $475.0 million at year-end. Capital expenditures were $15.1 million. Cash dividends paid were $9.0 million.
- Debt: Total debt was $1,111.1 million, up from $1,023.8 million at year-end. The company reported $132.2 million outstanding under its revolving credit facility and $146.0 million of availability under that facility; it was in compliance with covenants. Weighted-average first-quarter interest on the facility was 2.38%.
- Other balance-sheet metrics: Current assets were $1,053.1 million and current liabilities $554.8 million. Environmental remediation reserves were $120.5 million at quarter-end.
Material changes and operating drivers
- Management attributed the sales decline primarily to customer inventory destocking ahead of anticipated lower raw-material costs, ongoing Spartech integration, and unfavorable currency movements. The company estimated destocking-related industry effects reduced sales; foreign exchange reduced sales by 2.7%, while Accella contributed 0.9%.
- Despite lower sales, operating income rose, reflecting lower selling and administrative expense, reduced restructuring charges, favorable mix in specialty businesses, and lower corporate incentive expense. Cost of sales declined to 80.6% of sales from 81.2%.
- Segment sales and operating income were mixed: Global Color, Additives and Inks generated $208.5 million sales and $33.8 million operating income; Global Specialty Engineered Materials, $141.9 million and $23.1 million; Designed Structures and Solutions, $119.1 million and $3.2 million; Performance Products and Solutions, $175.9 million and $11.5 million; and PolyOne Distribution, $265.7 million and $15.7 million. Designed Structures and Solutions had the steepest sales decline, down 31.4%, and operating income fell 71.4%.
- Operating cash use improved year over year, primarily due to lower tax payments, but remained negative. Working capital as a percentage of sales was 10.1%, unchanged from the prior-year quarter. Net revolving-credit borrowings increased $87.2 million, attributed to seasonal working-capital needs, annual incentive payments, and a $20.0 million voluntary pension contribution.
Outlook, unusual items, and risks
- No specific company-wide sales or earnings guidance is provided in the filing. Management expected approximately $6.0 million of additional Spartech-related restructuring costs, primarily in Q2 2015.
- The effective tax rate was 43.3%, versus 26.8% a year earlier. Foreign court rulings increased the 2015 rate by 14.9 percentage points and resulted in an additional $7.9 million tax liability; amendments to a 2004 U.S. tax return provided a partial offset. The company was evaluating potential foreign-tax-credit benefits for 2005–2012.
- Restructuring charges were $10.6 million in Q1 2015, compared with $17.9 million in Q1 2014. The company reported $113.1 million of cumulative charges for the specified Spartech actions and anticipated the additional costs noted above.
- Environmental matters remain uncertain. The company recorded $120.5 million for probable remediation costs, but said additional costs beyond the reserve are reasonably possible and cannot currently be estimated. A lower Passaic River matter involving a Spartech subsidiary remained unresolved, with the company unable to estimate its potential liability.
- Other risks include continued destocking and raw-material price changes, foreign-exchange exposure, integration and service-quality risks related to acquisitions and facility realignments, customer financial condition, and the outcome of environmental and other contingencies. Approximately 90% of cash was held outside the United States; repatriation could result in taxes.
Important facts for investors to verify
- Whether customer destocking and lower raw-material prices persist, and how they affect sales, pricing, and margins across segments.
- Whether improved operating income is sustainable after lower restructuring and corporate costs, particularly given declines in Designed Structures and Solutions and other segments.
- Cash conversion and working-capital needs, including the reasons for ongoing operating cash outflows and increased revolving-credit borrowing.
- Available borrowing capacity: the liquidity table reports $148.7 million of revolving-credit availability, while the financing note reports $146.0 million; the filing text does not reconcile this difference.
- Potential additional tax benefits or liabilities, remaining restructuring costs, environmental remediation exposure, and the status of the $18.3 million SunBelt guarantee.