PolyOne Corporation (now Avient) — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; unaudited. PolyOne supplied specialty polymer materials, formulations, color and additive systems, plastic sheet and packaging solutions, and polymer distribution.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales | $958.4 million | $1,008.9 million | $2,966.2 million | $2,847.6 million |
| Gross margin | $182.6 million; 19.1% of sales | $181.3 million; 18.0% | $555.3 million; 18.7% | $547.3 million; 19.2% |
| Operating income | $63.6 million; 6.6% of sales | $61.6 million; 6.1% | $169.4 million; 5.7% | $182.8 million; 6.4% |
| Continuing-operations net income | $32.3 million | $23.0 million | $92.2 million | $72.3 million |
| Net income attributable to PolyOne shareholders | $32.7 million | $23.0 million | $93.8 million | $219.2 million |
| Diluted EPS | $0.35 | $0.24 | $0.99 | $2.27 |
- Cash flow: Nine-month operating cash flow was $131.8 million, versus cash use of $4.8 million in 2013. Capital expenditures were $60.7 million, producing operating cash flow less capex of $71.1 million. Cash declined $101.6 million to $263.6 million, mainly reflecting share repurchases and dividends.
- Balance sheet and liquidity: Total debt was $978.9 million, including $13.1 million current debt; cash was $263.6 million. Revolver availability was $299.5 million and reported total liquidity was $563.1 million. The company reported covenant compliance and no borrowings under its principal revolving facility.
- Other metrics: The company repurchased $175.0 million of shares in the first nine months and paid $22.5 million in dividends. Shares outstanding were 90.9 million at September 30. Effective tax rates on continuing operations were 30.4% for Q3 and 22.9% year to date.
Changes versus prior period
- Q3 sales fell 5.0%, which management attributed principally to shifting the former Spartech portfolio away from lower-margin products; weaker European demand and exits from some Brazilian product lines also weighed on sales. Growth in North America and targeted markets partly offset the decline.
- Despite lower Q3 sales, gross margin percentage and operating income improved, reflecting specialty mix, Spartech synergies and North American cost reductions. Year-to-date sales rose 4.2%, but operating income declined 7.3%, with elevated restructuring charges and higher corporate costs contributing.
- All five segments reported higher operating income in Q3 and year to date. Designed Structures and Solutions had the sharpest Q3 sales decline (18.9%) as low- or negative-margin business was exited; its year-to-date sales rose with the full-period inclusion of Spartech.
- Year-to-date 2014 net income was far below 2013 primarily because 2013 included a $223.7 million pretax gain ($139.7 million after tax) on the sale of the Resin Business. Continuing-operations earnings increased in both comparison periods.
Outlook, risks and unusual items
- No specific full-year earnings or revenue guidance is provided. Management said operating cash flow and available revolver capacity should support operations, debt service, dividends and continued share repurchases; this depends on its projections and is not a guarantee.
- Restructuring and plant phase-out charges totaled $70.9 million for the first nine months of 2014, including actions involving former Spartech facilities and closures of two Brazil facilities. Management expected remaining announced-action charges not to have a material future impact.
- Environmental reserves were $121.7 million at September 30. The company said additional costs beyond reserves were reasonably possible but could not be estimated. Its potential liability for lower Passaic River remediation, if any, was not estimable; a $24.4 million SunBelt guarantee remained, with Olin indemnifying PolyOne.
- Risks identified include raw-material and energy costs and supply, demand and pricing, foreign exchange and political conditions, restructuring execution and service disruption, integration of Spartech, litigation and environmental matters, and access to capital. About 78.9% of cash was held outside the United States; repatriation could trigger taxes.
- Q3 and year-to-date tax rates benefited from tax benefits related to foreign affiliates; year-to-date results also benefited from $4.0 million of favorable tax-authority settlements. The company noted that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether lower sales from product exits and portfolio repositioning are translating into durable mix and margin improvement.
- Whether restructuring costs, particularly the $70.9 million year-to-date charge, and Spartech synergies develop as management expects.
- The sustainability of operating cash flow and the effect of $175.0 million in year-to-date repurchases on cash, debt and share count.
- Potential changes to the $121.7 million environmental reserve, including developments at Calvert City and the lower Passaic River.
- Future tax rates and the availability and tax consequences of cash held outside the United States.