PolyOne Corp. 10-K
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2006
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period
from
to
Commission file number 1-16091
PolyOne Corporation
(Exact name of registrant as
specified in its charter)
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OHIO
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34-1730488
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer Identification No.)
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33587 Walker Road,
Avon Lake, Ohio
(Address of principal
executive offices)
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44012
(Zip Code)
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Registrants telephone number,
including area
code (440) 930-1000
Securities registered pursuant to
Section 12(b) of the Act:
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Title of each class
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Name of each
exchange on which registered
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Common Stock, par value
$.01 per share
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New York Stock Exchange
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Securities registered pursuant to
Section 12(g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the
registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for
the past 90 days.
Yes þ No o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the
registrants outstanding common stock held by
non-affiliates on June 30, 2006, determined using a per
share closing price on that date of $8.78, as quoted on the New
York Stock Exchange, was $755,229,000.
The number of shares of common
stock outstanding as of February 20, 2007 was 92,837,543.
DOCUMENTS INCORPORATED BY
REFERENCE
Part III of this Annual Report
on
Form 10-K
incorporates by reference certain information from the
registrants definitive Proxy Statement to be filed on or
about March 26, 2007 with respect to the 2007 Annual
Meeting of Shareholders.
POLYONE
CORPORATION
ITEM 1. BUSINESS
Business
Overview
PolyOne Corporation is a leading global provider of specialized
polymer materials, services and solutions with operations in
thermoplastic compounds, specialty polyvinyl chloride (PVC)
vinyl resins, specialty polymer formulations, color and additive
systems, and thermoplastic resin distribution, with equity
investments in manufacturers of PVC resin and its intermediates
and in a formulator of polyurethane compounds. When used in this
Annual Report on
Form 10-K,
the terms we, us, our and
the Company mean PolyOne Corporation and its
subsidiaries.
We are incorporated in Ohio and our headquarters are in Avon
Lake, Ohio. We employ approximately 4,600 people and have
52 manufacturing sites and 11 distribution facilities in North
America, Europe, Asia and Australia, and joint ventures in North
America and South America. We sell more than 35,000 different
specialty and general purpose products to over 10,000 customers
in 35 countries. In 2006, we had sales of $2.6 billion, 34%
of which were to customers outside the United States.
We provide value to our customers through our ability to link
our knowledge of polymers and formulation technology with our
manufacturing and supply chain processes to provide an essential
link between large chemical producers (our raw material
suppliers) and designers, assemblers and processors of plastics
(our customers). We believe that large chemical producers are
increasingly outsourcing
less-than-railcar
business; polymer and additive producers need multiple channels
to market; processors continue to outsource compounding; and
international companies need suppliers with global reach. Our
goal is to provide our customers with specialized material and
service solutions through our global reach and product
platforms, low-cost manufacturing operations, a fully integrated
information technology network, broad market knowledge and raw
material procurement leverage. Our end markets are primarily in
the building materials, wire and cable, automotive, durable
goods, packaging, electrical and electronics, medical and
telecommunications markets, as well as many industrial
applications.
PolyOne was formed on August 31, 2000 from the
consolidation of The Geon Company (Geon) and M.A. Hanna (Hanna).
Geons roots date back to 1927 when BFGoodrich scientist
Waldo Semon produced the first usable vinyl polymer. In 1948,
BFGoodrich created a vinyl plastic division that was
subsequently spun off through a public offering in 1993,
creating Geon, a separate publicly-held company. Hanna was
formed in 1885 as a privately-held company and became
publicly-held in 1927. In the mid-1980s, Hanna began to divest
its historic mining and shipping businesses to focus on
polymers. Hanna purchased its first polymer company in 1986 and
completed its 26th polymer company acquisition in 2000.
Recent
Developments
Sale of
businesses and discontinued operations
In February 2006, we sold 82% of our Engineered Films business
for $26.7 million. This business is presented in
discontinued operations in these financial statements. We
maintain an 18% ownership interest in this business and it is
reflected in our financial statements on the cost basis of
accounting.
Purchase of
businesses
In October 2006, we purchased the remaining 50% of our equity
investment in DH Compounding Company from a wholly-owned
subsidiary of The Dow Chemical Company for $10.2 million.
This equity investment was previously reflected in the
Consolidated Balance Sheets on the line Investment in
equity affiliates. DH Compounding Company is now
consolidated in our Consolidated Balance Sheet as of
December 31, 2006, and the results of operations are
included in our Consolidated Statement of Operations beginning
October 1, 2006. DH Compounding is included in our Producer
Services operating segment.
In October 2006, we announced that we had entered into a
definitive agreement to acquire the vinyl compounding business
and assets of Ngai Hing PlastChem Company Ltd., a subsidiary of
Ngai Hing Hong Company Limited (NHH), a publicly-held company
listed on the Hong Kong stock exchange. In connection with this
acquisition, we initiated the purchase of certain assets at a
manufacturing facility in Dongguan, China with a deposit of
$2.7 million. This acquisition is expected to be completed
during the first half of 2007, subject to customary closing
conditions.
Board of
Directors changes
In December 2006, our Board of Directors elected Edward J.
Mooney to be a director of PolyOne. Mr. Mooney has
35 years of experience in the specialty chemicals industry
and served as chairman and chief executive officer of Nalco
Chemical Company from 1994 to 2000. Mr. Mooney presently
serves on the boards of FMC Corporation, FMC Technologies, Inc.,
Northern Trust Corporation and Cabot Microelectronics
Corporation.
Restructuring
initiatives and facility closures
During the first quarter of 2006, we completed the closure of
our Manchester, England color additives manufacturing facility
to reduce costs and align capacity with market demand. Key
customer product demand requirements were transitioned to other
company facilities.
During the fourth quarter of 2006, we announced the relocation
of our Commerce, California latex business to our Massillon,
Ohio facility to better support the growth occurring in the
latex business east of the Mississippi River. This transition
will be completed in the first quarter of 2007 and resulted in
charges related to employee separation and plant phaseout of
approximately $0.5 million.
2 POLYONE
CORPORATION
Sale of
assets
During 2006, we sold previously closed facilities as part of our
restructuring initiatives and cost reduction plans for a total
of $8.7 million.
Polymer Industry
Overview
Polymers are a class of organic materials that are generally
produced by converting natural gas or crude oil derivatives into
monomers, such as ethylene, propylene, vinyl chloride and
styrene. These monomers are then polymerized into chains called
polymers, or plastic resin, in its most basic form. Large
petrochemical companies, including some in the petroleum
industry, produce a majority of the monomers and base resins
because they have direct access to the raw materials needed for
production. Monomers make up the majority of the variable cost
of manufacturing the base resin. As a result, the cost of a base
resin tends to move in tandem with the industry market prices
for monomers and the cost of raw materials and energy used
during production. Resin selling prices can move in tandem with
costs, but are largely driven by supply and demand balances.
Through our equity interests in Oxy Vinyls, LP (OxyVinyls) and
SunBelt Chlor-Alkali Partnership (SunBelt), we realize a portion
of the economic benefits of a base resin producer for PVC resin,
one of our major raw materials.
Thermoplastic polymers make up a substantial majority of the
resin market and are characterized by their ability to be
reshaped repeatedly into new forms after heat and pressure are
applied. Thermoplastics offer versatility and a wide range of
applications. The major types of thermoplastics include
polyethylene, polyvinyl chloride, polypropylene, polystyrene,
polyester and a range of specialized engineering resins. Each
type of thermoplastic has unique qualities and characteristics
that make it appropriate for use in a particular product.
Thermoplastic resins are found in a number of end-use products
and in a variety of markets, including packaging, building and
construction, wire and cable, automotive, medical, furniture and
furnishings, durable goods, institutional products, electrical
and electronics, adhesives, inks and coatings. Each type of
thermoplastic resin has unique characteristics (such as
flexibility, strength or durability) suitable for use in a
particular end-use application. The packaging industry, the
largest consumer of plastics, requires plastics that help keep
food fresh and free of contamination while providing a variety
of options for product display, and offering advantages in terms
of weight and user-friendliness. In the building and
construction industry, plastic provides an economical and energy
efficient replacement for other traditional materials in piping
applications, siding, flooring, insulation, windows and doors,
as well as structural and interior or decorative uses. In the
wire and cable industry, thermoplastics serve to protect by
providing electrical insulation, flame resistance, durability,
water resistance, and color coding to wire coatings and
connectors. In the automotive industry, plastic has proved to be
durable, lightweight and corrosion resistant while offering fuel
savings, design flexibility and high performance. In the medical
industry, plastics help save lives by safely providing a range
of transparent and opaque thermoplastics that are used for a
vast array of devices including blood and intravenous bags,
medical tubing, masks, clamps and connectors to bed frames,
curtains and sheeting, and electronic enclosures. In the
electronics industry, plastic enclosures and connectors not only
enhance safety through electrical insulation, but thermally and
electrically conductive plastics provide heat transferring,
cooling, antistatic, electostatic discharge, and electromagnetic
shielding performance for critical applications including
integrated circuit chip packaging.
Various additives can be combined with a base resin to provide
it with greater versatility and performance. These combinations
are known as plastic compounds. Plastic compounds have
advantages over metals, wood, rubber and other traditional
materials, which have resulted in the replacement of these
materials across a wide spectrum of applications that range from
automobile parts to construction materials. Plastic compounds
offer advantages compared to traditional materials that include
processability, weight reduction, chemical resistance, flame
retardance and lower cost. Plastics have a reputation for
durability, aesthetics, ease of handling and recyclability.
PolyOne
Segments
We operate within four reportable segments: Vinyl Business,
International Color and Engineered Materials, PolyOne
Distribution, and Resin and Intermediates. The All Other segment
includes our North American Color and Additives, North American
Engineered Materials, Producer Services and Polymer Coating
Systems operating segments. For more information about our
segments, see Note R to the Consolidated Financial
Statements, which is incorporated by reference into this
Item 1.
Vinyl
Business:
Our Vinyl Business operating segment is a global leader offering
an extensive array of products and services for vinyl coating,
molding and extrusion processors. Our product offerings include
rigid, flexible and dry blend vinyl compounds as well as
industry-leading dispersion, blending and specialty suspension
grade vinyl resins to a wide variety of manufacturers of plastic
parts and consumer-oriented products. We also offer a wide range
of polymer services to meet the ever changing needs of our
multi-market customer base. These services include materials
testing and component analysis, color management, custom
compound development, colorant and additive services, design
assistance, structural analyses, process simulations, extruder
screw design and specialty products.
Vinyl is one of the most widely used plastics, utilized in a
wide range of applications in building and construction, wire
and cable, consumer and recreation markets, automotive,
packaging and healthcare. Vinyl resin can be combined with a
broad range of additives, resulting in performance versatility,
particularly when fire resistance, chemical resistance or
weatherability is required. We are well-positioned to meet the
stringent quality, service and innovation requirements of this
diverse and highly competitive marketplace.
POLYONE
CORPORATION 3
Our Vinyl Business segment had total sales of
$925.8 million, of which sales to external customers were
$788.3 million, with operating income of $65.3 million
in 2006 and total assets of $412.3 million as of
December 31, 2006.
International
Color and Engineered Materials:
Our International Color and Engineered Materials operating
segment combines the strong regional heritage of our color
additive masterbatches and engineered materials operations to
create global capabilities with plants, sales and service
facilities located throughout Europe and Asia.
Working in conjunction with our North American Color and
Additives and North American Engineered Materials segments, we
provide solutions that meet our international customers
demands for both global and local manufacturing, service and
technical support.
Our International Color and Engineered Materials segment had
sales to external customers of $539.9 million, with
operating income of $22.3 million in 2006 and total assets
of $379.6 million as of December 31, 2006.
PolyOne
Distribution:
Our PolyOne Distribution operating segment distributes more than
3,500 grades of engineering and commodity grade resins,
including PolyOne-produced compounds, to the North American
market. These products are sold to over 5,000 custom injection
molders and extruders who, in turn, convert them into plastic
parts that are sold to end-users in a wide range of industries.
Representing over 20 major suppliers, we offer our customers a
broad product portfolio,
just-in-time
delivery from multiple stocking locations, and local technical
support.
Our PolyOne Distribution segment had total sales of
$732.8 million, of which sales to external customers were
$724.1 million, with operating income of $19.2 million
in 2006 and total assets of $164.6 million as of
December 31, 2006.
Resin and
Intermediates:
We report the results of our Resin and Intermediates segment on
the equity method. This segment consists almost entirely of our
24% equity interest in OxyVinyls and our 50% equity interest in
SunBelt. OxyVinyls, a producer of PVC resins, vinyl chloride
monomer (VCM), and chlorine and caustic soda, is a partnership
with Occidental Chemical Corporation and is our principal
supplier of PVC resin. SunBelt, a producer of chlorine and
caustic soda, is a partnership with Olin Corporation. OxyVinyls
is North Americas second largest and the worlds
third largest producer of PVC resin. In 2006, OxyVinyls had
production capacity of approximately 4.3 billion pounds of
PVC resin, 6.2 billion pounds of VCM (an intermediate
chemical in the production of PVC), 580 thousand tons of
chlorine and 667 thousand tons of caustic soda. The
6.2 billion pounds of VCM capacity includes approximately
2.4 billion pounds owned by OxyMar, a partnership that is
50% owned by OxyVinyls. In 2006, SunBelt had production capacity
of approximately 320 thousand tons of chlorine and 358 thousand
tons of caustic soda. Most of the chlorine manufactured by
OxyVinyls and SunBelt is consumed by OxyVinyls to produce PVC
resin. Caustic soda is sold on the merchant market to customers
in the pulp and paper, chemical, construction and consumer
products industries.
In addition to providing us with a secure and high-quality
supply of PVC resin, our Resin and Intermediates segment
provides us with some of the economic and technology development
benefits of backward integration through our ownership position
and contractual arrangements. First, our purchases of PVC resin
and VCM from OxyVinyls are at competitive prices based on
long-term supply contracts. The PVC resin is used to make our
vinyl compounds, and the VCM is used to make our specialty vinyl
resins. Second, our equity investment in OxyVinyls provides a
hedge against a portion of raw material price increases to the
extent that OxyVinyls can pass on increased raw material costs
to its other customers. Finally, our equity position in chlorine
and caustic soda through OxyVinyls and SunBelt provides partial
economic integration with the chlorine chain.
Our Resin and Intermediates segment had operating income of
$102.5 million in 2006 and had total assets of $270.9 as of
December 31, 2006. We also received $92.6 million of
cash from dividends and distributions from our Resin and
Intermediates segment equity affiliates in 2006.
All
Other:
Our All Other segment includes our North American Color and
Additives, North American Engineered Materials, Producer
Services and Polymer Coating Systems operating segments.
Our North American Color and Additives operating segment is a
leading provider of specialized colorants and additive
concentrates that offers an innovative array of colors, special
effects and performance-enhancing solutions. Our color
masterbatches contain a high concentration of color pigments
and/or
additives that are dispersed in a polymer carrier medium and are
sold in pellet, liquid, flake or powder form. When combined with
non pre-colored base resins, our colorants help our customers
achieve a wide array of specialized colors and effects that are
targeted at the demands of todays highly design-oriented
consumer and industrial end markets. Our additive masterbatches
encompass a wide variety of performance enhancing
characteristics and are commonly categorized by the function
that they perform, such as UV stabilization, anti-static,
chemical blowing, antioxidant and lubricant, and processing
enhancement.
Our colorant and additives masterbatches are used in most
plastics manufacturing processes, including injection molding,
extrusion, sheet, film, rotational molding and blow molding
throughout the plastics industry, particularly in the packaging,
automotive, consumer, outdoor decking, pipe, and wire and cable
markets. They are also incorporated into such end-use products
as stadium seating, toys, housewares, vinyl siding, pipe, food
packaging and medical packaging.
4 POLYONE
CORPORATION
Our North American Engineered Materials operating segment is a
leading provider of custom plastic compounding services and
solutions for processors of thermoplastic materials across a
wide variety of markets and end-use applications. Our product
portfolio, one of the broadest in our industry, includes
standard and custom formulated high-performance polymer
compounds that we manufacture using a full range of
thermoplastic compounds and elastomers, which are then combined
with advanced polymer additive, reinforcement, filler and
colorant technologies.
Our depth of compounding expertise helps us expand the
performance range and structural properties of traditional
engineering-grade thermoplastic resins that meet our
customers unique performance requirements. Our product
development and application reach is further enhanced by the
capabilities of our Solutions Center, which produces and
evaluates prototype and sample parts to help assess end-use
performance and guide product development. Our manufacturing
capabilities, which include a new facility located in Avon Lake,
Ohio, are targeted at meeting our customers demand for
speed, flexibility and critical quality.
Our Producer Services operating segment offers custom
compounding services to resin producers and processors that
design and develop their own compound recipes. We also offer a
complete product line of custom black masterbatch products for
use in the pressure pipe industry. Customers often require high
quality, cost effective and confidential services. As a
strategic and integrated supply chain partner, Producer Services
offers resin producers a way to develop custom products for
niche markets by using our compounding expertise and multiple
manufacturing platforms.
Our Polymer Coating Systems operating segment provides
custom-formulated liquid systems that meet a variety of customer
needs and chemistries, including vinyl, natural rubber and
latex, polyurethane, and silicone. Our products and services are
designed to meet the specific requirements of our
customers applications by providing unique solutions to
their market needs. Products also include proprietary fabric
screen-printing inks, powders, latexes, specialty additives and
colorants. We serve diversified markets that include
recreational and athletic apparel, automotive, construction,
flooring, material handling, filtration, outdoor furniture and
medical/health care. We also have a 50% interest in BayOne, a
joint venture between PolyOne and Bayer Corporation, which sells
polyurethane systems into many of the same markets.
Our All Other segment had total sales of $598.6 million, of
which sales to external customers were $570.1 million, with
an operating loss of $0.2 million in 2006 and total assets
of $374.5 million as of December 31, 2006.
Competition
The production of compounded plastics and the manufacture of
custom and proprietary formulated color and additives systems
for the plastics industry is highly competitive. Competition is
based on speed, delivery, service, performance, product
innovation, product recognition, quality and price. The relative
importance of these factors varies among our products and
services. We believe that we are the largest independent
compounder of plastics and producer of custom and proprietary
formulated color and additive masterbatch systems in the United
States and Europe, with a growing presence in Asia. Our
competitors range from large international companies with broad
product offerings to local independent custom compounders whose
focus is a specific market niche or product offering.
The distribution of polymer resin is also highly competitive.
Speed, delivery, service, brand recognition, quality and price
are the principal factors affecting competition. In
less-than-truckload
thermoplastic resin and compound distribution, we believe that
we are the second largest independent thermoplastic resin
distributor in North America. We compete against other national
independent resin distributors in North America, along with
other regional distributors. Growth in the thermoplastic resin
and compound distribution market is directly correlated with
growth in the base polymer resins market.
We believe that the strength of our company name and reputation,
the broad range of product offerings from our suppliers and our
speed and responsiveness, coupled with the quality of products
and flexibility of our distribution network, allow us to compete
effectively.
Raw
Materials
The primary raw materials used by our manufacturing operations
are PVC resin, VCM, polyolefin and other thermoplastic resins,
plasticizers, inorganic and organic pigments, all of which are
in adequate supply. We have long-term supply contracts with
OxyVinyls under which the majority of our PVC resin and all of
our VCM is supplied. These contracts will expire in 2013,
although they contain two five-year renewal provisions that are
at our option. We believe these contracts should assure the
availability of adequate amounts of PVC resin and VCM. We also
believe that the pricing under these contracts provides PVC
resins and VCM to us at a competitive cost.
Patents and
Trademarks
We own and maintain a large number of U.S. and foreign patents
and trademarks that contribute to our competitiveness in the
markets we serve because they protect our inventions and product
names against infringement by others. Patents vary in duration
up to 20 years, and trademarks have an indefinite life
based upon continued use. While we view our patents and
trademarks to be valuable because of the broad scope of our
products and services and brand recognition we enjoy, we do not
believe that the loss or expiration of any single patent or
trademark would have a material adverse effect on our results of
operations, financial position or the continuation of our
business. Nevertheless, we have implemented management processes
designed to protect our inventions and trademarks.
Seasonality and
Backlog
Sales of our products and services are slightly seasonal as
demand is generally slower in the first and fourth calendar
quarters of the
POLYONE
CORPORATION 5
year. Because of the nature of our business, we do not believe
that our backlog is a meaningful indicator of the level of our
present or future business.
Working Capital
Practices
The nature of our business does not require us to carry
significant amounts of inventories to meet the delivery
requirements for our products or services or assure ourselves of
a continuous allotment of goods from suppliers. Our products are
generally manufactured with a short turnaround time, and the
scheduling of manufacturing activities from customer orders
generally includes enough lead time to assure delivery of an
adequate supply of raw materials. We offer payment terms to our
customers that are competitive. We generally allow our customers
to return merchandise if pre-agreed quality standards or
specifications are not met; however, we employ quality assurance
practices that seek to minimize customer returns.
Significant
Customers
No customer accounts for more than three percent of our
consolidated revenues, and neither we nor any of our operating
segments would suffer a material adverse effect were we to lose
any single customer.
Research and
Development
We have substantial technology development capabilities. Our
efforts are largely devoted to developing new product
formulations to satisfy defined market needs, providing quality
technical services to evaluate alternative raw materials,
assuring the continued success of our products for customer
applications, providing technology to improve our products,
processes and applications, and providing support to our
manufacturing plants for cost reduction, productivity and
quality improvement programs. We operate research and
development centers that support our commercial development
activities and manufacturing operations. These facilities are
equipped with
state-of-the-art
analytical, synthesis, polymer characterization and testing
equipment, along with pilot plants and polymer compounding
operations that simulate specific production processes that
allow us to rapidly translate new technologies into new products.
Our investment in product research and development totaled
$20.3 million in 2006, $19.5 million in 2005 and
$16.7 million in 2004. In 2007, we expect our investment in
research and development to increase as we deploy greater
resources to increase and accelerate material and service
innovations.
Methods of
Distribution
We sell products primarily through direct sales personnel,
distributors, including our PolyOne Distribution segment, and
commissioned sales agents. We primarily use truck carriers to
transport our products to customers, although some customers
pick up product at our operating facilities or warehouses for
each of these segments. We also ship some of our manufactured
products to customers by railroad cars.
Employees
As of February 19, 2007, we employed approximately
4,600 people. Approximately 60 employees were represented
by labor unions under collective bargaining agreements that
expire on October 31, 2007, May 31, 2008 and
December 31, 2011, respectively, and approximately another
115 employees are currently in negotiations to enter into a
collective bargaining agreement. We believe that relations with
our employees are good, and we do not anticipate significant
operating issues to occur as a result of current negotiations or
when we renegotiate collective bargaining agreements as they
expire.
Environmental,
Health and Safety
We are subject to various environmental laws and regulations
that apply to the production, use and sale of chemicals,
emissions into the air, discharges into waterways and other
releases of materials into the environment, and the generation,
handling, storage, transportation, treatment and disposal of
waste material. We endeavor to ensure the safe and lawful
operation of our facilities in the manufacture and distribution
of products, and we believe we are in material compliance with
all applicable laws and regulations.
We maintain a disciplined environmental and occupational safety
and health compliance program and conduct periodic internal and
external regulatory audits at our facilities to identify and
categorize potential environmental exposures, including
compliance issues and any actions that may be required to
address them. This effort can result in process or operational
modifications, the installation of pollution control devices or
cleaning up grounds or facilities. We believe that we are in
material compliance with all applicable requirements. We
incurred environmental expense of $2.5 million in 2006,
$0.2 million in 2005 and $10.3 million in 2004,
respectively, of which $2.5 million in 2006,
$0.9 million in 2005 and $8.7 million in 2004 relates
to inactive or formerly owned sites. Environmental expense is
presented net of insurance recoveries of $8.1 million in
2006, $2.2 million in 2005 and $1.8 million in 2004.
The insurance recoveries all relate to inactive or formerly
owned sites. We expect future environmental remediation expense
will be approximately $3 million to $5 million per
year.
We are strongly committed to safety as evidenced by the fact
that our injury incidence rate was 1.30 in 2006, an improvement
from 1.38 in 2005. The 2005 average injury incidence rate for
our SIC Code (30 Rubber and Miscellaneous Plastic Products) was
8.5. The U.S. Department of Labor defines the incidence
rate as the number of injuries per 100 full-time workers
per year.
We believe that compliance with all current governmental
regulations will not have a material adverse effect on our
results of operations or financial condition. The risk of
additional costs and liabilities, however, is inherent in
certain plant operations and certain products produced at these
plants, as is the case with other companies in the plastics
industry. Therefore, we may incur additional costs or
liabilities in the future. Other developments, such as
increasingly strict environmental, safety and health laws,
regulations and related enforcement policies, discovery of
unknown
6 POLYONE
CORPORATION
conditions, and claims for damages to property, persons or
natural resources resulting from plant emissions or products
could also result in additional costs or liabilities.
A number of foreign countries and domestic communities have
enacted, or are considering enacting, laws and regulations
concerning the use and disposal of plastic materials. Widespread
adoption of these laws and regulations, along with public
perception, may have an adverse impact on sales of plastic
materials. Although many of our major markets are in durable,
longer-life applications that could reduce the impact of these
kinds of environmental regulations, more stringent regulation of
the use and disposal of plastics may have an adverse effect on
our business.
The European business community (EU) has adopted REACH, a
legislative act to cover Registration, Evaluation, Authorization
and Restriction of Chemicals. The goal of this legislation,
which will become effective in June 2007, is to minimize risk to
human health and to the environment. We have a global team of
experts to provide our customers with compliance solutions to
adapt to these regulations. As these regulations evolve, we will
endeavor to remain in compliance with REACH.
We have been notified by federal and state environmental
agencies and by private parties that we may be a potentially
responsible party (PRP) in connection with the investigation and
remediation of a number of environmental waste disposal sites.
While government agencies assert that PRPs are jointly and
severally liable at these sites, in our experience, interim and
final allocations of liability costs are generally made based on
the relative contribution of waste. However, even when
allocations of costs based on relative contribution of waste
have been made, we cannot assure that our allocation will not
increase if other PRPs do not pay their allocated share of these
costs.
We also conduct investigations and remediation at several of our
active and inactive facilities and have assumed responsibility
for the resulting environmental liabilities from operations at
sites formerly owned or operated by us or our predecessors. We
believe that our potential continuing liability at these sites
will not have a material adverse effect on our results of
operations or financial position. In addition, we voluntarily
initiate corrective and preventive environmental projects at our
facilities. Based on current information and estimates prepared
by our environmental engineers and consultants, we had reserves
on our December 31, 2006 Consolidated Balance Sheet
totaling $59.5 million to cover probable future
environmental expenditures related to previously contaminated
sites. This figure represents managements best estimate of
costs for probable remediation, based upon the information and
technology currently available and managements view of the
most likely remedy.
Depending upon the results of future testing, the ultimate
remediation alternatives undertaken, changes in regulations, new
information, newly discovered conditions and other factors, it
is reasonably possible that we could incur additional costs in
excess of the amount accrued at December 31, 2006. Such
costs, if any, cannot be currently estimated. We may revise our
estimate of this liability as new regulations or technologies
are developed or additional information is obtained.
International
Operations
Our international operations are subject to a variety of risks,
including currency fluctuations and devaluations, exchange
controls, currency restrictions and changes in local economic
conditions. While the impact of these risks is difficult to
predict, any one or more of them could adversely affect our
future operations. For more information about our international
operations, see Note R to the Consolidated Financial
Statements, which is incorporated by reference into this
Item 1.
Available
Information
Our Internet address is www.polyone.com. Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 are available, free of charge, on our website or upon
written request, as soon as reasonably practicable after we
electronically file or furnish them to the SEC. These reports
are also available on the SECs website at www.sec.gov.
ITEM 1A. RISK
FACTORS
The following are certain risk factors that could affect our
business, results of operations and financial condition. These
risk factors should be considered along with the forward-looking
statements contained in this Annual Report on
Form 10-K
because these factors could cause our actual results or
financial condition to differ materially from those projected in
forward-looking statements. Before you invest in us, you should
understand that making such an investment involves some risks,
including the risks we describe below. The risks that are
discussed below are not the only ones we face. If any of the
following risks occur, our business, results of operations or
financial condition could be negatively affected.
In 2006, we developed an enterprise risk management (ERM)
process to manage risks we face in a holistic and integrated
approach. The purpose of this process is to manage risks that
can prevent us from achieving our strategic, operational and
financial goals. It is important to understand that this process
is designed to manage risks and not to eliminate risks.
The ERM process addresses many of the risks outlined below.
Senior management identifies and reviews with our Board of
Directors potential risk uncertainties and develops risk
management strategies for those strategic, operating and
financial risks that may affect our business at the
enterprise-level. Similarly, each of our operating segments
identifies risk uncertainties and develops risk management
strategies for those risks that may prevent it from realizing
strategic, operating and financial objectives.
Each of the risks discussed below is considered in the ERM
process. However, it is not possible to evaluate and manage
every risk that our business faces and further, it may not be
possible to
POLYONE
CORPORATION 7
adequately manage risks even when a risk management plan has
been developed and implemented.
Demand for and
supply of our products and services may be adversely affected by
several factors, some of which we cannot predict or control,
that could adversely affect our results of
operations.
Several factors may affect the demand for and supply of our
products and services, including:
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end of application life-cycle, model change-over or obsolescence
due to more cost effective alternative materials;
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changes in the market acceptance of our products and services;
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competition from other polymer and chemical companies;
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declines in the general level of industrial production;
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declines in general economic conditions, both domestically and
globally;
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changes in world or regional plastic consumption growth rates;
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changes in the PVC, VCM or chlor-alkali industry capacities and
changes to price structures as a result of potential
supply/demand dislocations;
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changes in environmental regulations that would limit our
ability to sell our products and services in specific
markets; and
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inability to obtain raw materials or supply products to
customers due to factors such as weather (especially situations
where weather-related events create production or transportation
dislocations similar to what our industry faced in 2005 as a
result of Hurricanes Katrina and Rita), supplier work stoppages,
supply shortages, plant outages or regulatory changes that may
limit or prohibit overland transportation of certain hazardous
materials.
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If any of these factors occur, the demand for and supply of our
products and services could suffer, which would adversely affect
our results of operations.
Increased
energy costs could reduce our income.
Any increases in energy costs will increase our production costs
and those of our suppliers. Although we attempt to pass on
higher raw material and energy costs to our customers, given our
competitive markets, it is often not possible to pass on all of
these increases in a timely manner.
Our
participation in joint ventures may adversely affect our results
of operations.
We participate in joint ventures in the United States and
Colombia and we may enter into additional joint ventures in the
future. The nature of a joint venture requires us to share
control with unaffiliated third parties. If our joint venture
partners do not fulfill their obligations, the joint venture may
not be able to operate as planned. If this happens, our results
of operations may be adversely affected or we may be required to
increase our financial commitment to the joint venture.
OxyVinyls and SunBelt are our two largest equity investments.
The earnings of each of these partnerships may be significantly
affected by changes in the commodity cycle for hydrocarbon
feedstocks and for chlor-alkali products. If the profitability
of either OxyVinyls or SunBelt is adversely affected, we may
receive less cash distributions from that partnership or we may
choose to make additional cash contributions to that
partnership, either of which could adversely affect our
financial condition.
A major
failure of our information systems could harm our
business.
We depend on integrated information systems to conduct our
business. We may experience operating problems with our
information systems as a result of system failures, viruses,
computer hackers or other causes. Any significant
disruption or slowdown of our systems could cause customers to
cancel orders or cause standard business processes to become
ineffective, which could adversely affect our results of
operations.
Our
manufacturing operations are subject to hazards and other risks
associated with polymer production and the related storage and
transportation of raw materials, products and
wastes.
Our manufacturing operations are subject to the usual hazards
and risks associated with polymer production and the related
storage and transportation of raw materials, products and
wastes. These hazards and risks include, but are not limited to:
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explosions, fires, inclement weather and natural disasters;
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mechanical failure resulting in protracted or short duration
unscheduled downtime;
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labor difficulties;
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regulatory changes that effect or limit the transportation of
raw materials;
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inability to obtain or maintain any required licenses or permits;
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interruptions and environmental hazards such as chemical spills,
discharges or releases of toxic or hazardous substances or gases
into the environment or workplace; and
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storage tank leaks or other issues resulting from remedial
activities.
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The occurrence of any of these operating problems at our
facilities may have a material adverse effect on the
productivity and profitability of a particular manufacturing
facility, or on our operations as a whole, during and after the
period of these operating difficulties. These operating problems
may also cause personal injury and loss of life, severe damage
to or destruction of property and equipment, and environmental
damage. We are
8 POLYONE
CORPORATION
subject to present and potential future claims with respect to
workplace exposure, workers compensation and other
matters. Although we maintain property and casualty insurance of
the types and in the amounts that we believe are customary for
the industry, we are not fully insured against all potential
hazards that are incident to our business.
Extensive
environmental, health and safety laws and regulations impact our
operations and assets, and compliance with these regulations
could adversely affect our results of operations.
Our operations on and ownership of real property are subject to
extensive environmental, health and safety laws and regulations
at the national, state and local governmental levels. The nature
of our business exposes us to risks of liability under these
laws and regulations due to the production, storage,
transportation, recycling or disposal
and/or sale
of materials that can cause contamination or personal injury if
they are released into the environment or workplace.
Environmental laws may have a significant effect on the costs of
these activities involving raw materials, finished products and
wastes. We may incur substantial costs, including fines,
damages, criminal or civil sanctions, remediation costs, or
experience interruptions in our operations for violations of
these laws.
Also, federal and state environmental statutes impose strict,
and under some circumstances, joint and several liability for
the cost of investigations and remedial actions on any company
that generated the waste, arranged for disposal of the waste,
transported the waste to the disposal site or selected the
disposal site, as well as on the owners and operators of these
sites. Any or all of the responsible parties may be required to
bear all of the costs of clean up, regardless of fault or
legality of the waste disposal or ownership of the site, and may
also be subject to liability for natural resource damages. We
have been notified by federal and state environmental agencies
and private parties that we may be a potentially responsible
party in connection with several sites. We may incur substantial
costs for some of these sites. It is possible that we will be
identified as a potentially responsible party at more sites in
the future, which could result in our being assessed substantial
investigation or cleanup costs.
During 2007, the European business community will be required to
follow new legislation called REACH, which covers Registration,
Evaluation, Authorization and Restriction of Chemicals. REACH
will apply to all chemical substances manufactured or imported
and placed on the European market. These regulations will
require us to adapt to the regulatory environment as well as
provide compliance solutions to our customers. We already have
the ability to do this through a global team of experts. As the
regulatory environment changes, the extent to which REACH may
impact us is not expected to be material. Even though we do not
believe complying with existing REACH directives will have a
material effect on our results of operations or financial
condition, we may incur substantial costs to comply with the new
regulations.
We also conduct investigations and remediation at some of our
active and inactive facilities, and have assumed responsibility
for environmental liabilities based on operations at sites
formerly owned or operated by our predecessors or by us.
We accrue costs for environmental matters that have been
identified when it is probable that these costs will be required
and when they can be reasonably estimated. However, accruals for
estimated costs, including, among other things, the ranges
associated with our accruals for future environmental compliance
and remediation, may be too low or we may not be able to
quantify the potential costs. We may be subject to additional
environmental liabilities or potential liabilities that have not
been identified. We expect that we will continue to be subject
to increasingly stringent environmental, health and safety laws
and regulations. We anticipate that compliance with these laws
and regulations will continue to require capital expenditures
and operating costs, which could adversely affect our results of
operations or financial condition.
Because our
operations are conducted worldwide, they are inherently affected
by risk.
As noted above in Item 1. Business, we have
extensive operations outside of the United States. Revenue from
these operations (principally from Canada, Mexico, Europe and
Asia) was 34% in 2006, 33% in 2005 and 34% in 2004 of our total
revenue during these periods. Long-lived assets of our foreign
operations represented 32% in 2006, 31% in 2005 and 31% in 2004
of our total long-lived assets.
International operations are subject to risks, which include,
but not limited to, the following:
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Changes in local government regulations and policies, including,
but not limited to foreign currency exchange controls or
monetary policy; repatriation of earnings; expropriation of
property; duty or tariff restrictions; investment limitations;
and tax policies;
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political and economic instability and disruptions, including
labor unrest, civil strife, acts of war, guerilla activities,
insurrection and terrorism;
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legislation that regulates the use of chemicals;
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disadvantages of competing against companies from countries that
are not subject to U.S. laws and regulations, including the
Foreign Corrupt Practices Act;
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difficulties in staffing and managing multi-national operations;
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limitations on our ability to enforce legal rights and remedies;
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reduced protection of intellectual property rights; and
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other risks arising out of foreign sovereignty over the areas
where our operations are conducted.
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POLYONE
CORPORATION 9
Any of these events could have an adverse effect on our
international operations by reducing the demand for our products
or reducing the prices at which we can sell our products, which
could result in an adverse effect on our business, financial
condition or results of operations. We may not be able to
continue to operate in compliance with applicable customs,
currency exchange control regulations, transfer pricing
regulations or any other laws or regulations that we may be
subject to. In addition, these laws or regulations may be
modified in the future, and we may not be able to operate in
compliance with those modifications.
We have a
significant amount of goodwill, and any future goodwill
impairment charges could adversely impact our results of
operations.
As of December 31, 2006, we had goodwill of
$287.0 million. We completed the annual impairment review
required by Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142), as of July 1, 2006 and determined
that there was no impairment. However, the occurrence of a
potential indicator of impairment, such as a significant adverse
change in legal factors or business climate, an adverse action
or assessment by a regulator, unanticipated competition, loss of
key personnel or a more likely than not expectation that a
reporting unit or a significant portion of a reporting unit will
be sold or disposed of, would require us to perform another
valuation analysis, as required under SFAS No. 142,
for some or all of our reporting units prior to the next
required annual assessment. These types of events and the
resulting analysis could result in additional charges for
goodwill, which could adversely impact our results of operations.
Lower
investment performance by our pension plan assets may require us
to increase our pension liability and expense.
Lower investment performance by our pension plan assets or a
decline in investment grade bond interest rates could result in
an increase in our defined benefit pension plan obligations. As
a result, we may need to modify our capital expenditure plans to
meet our obligations.
An inability
to collect the remaining amounts owed to us from purchasers of
our former businesses could adversely affect our results of
operations or financial condition.
In the third quarter of 2004, we sold our Elastomers and
Performance Additives business, and in February 2006 we sold our
Engineered Films business. These transactions included seller
financing, where we retained notes receivable for a portion of
the purchase price that is owed to us. The ability to collect
these funds from the purchasers of these businesses depends on
the future results of operations, financial position and cash
flows of the purchasers. The purchasers may not have the funds
necessary to repay the principal and interest due to us on these
notes when they become due, which could adversely affect our
results of operations or financial condition.
The guarantee
of our SunBelt joint ventures debt could result in our
having to pay the outstanding principal and interest if SunBelt
cannot make these payments when due.
We guaranteed $67.0 million of SunBelts outstanding
senior secured notes at December 31, 2006 in connection
with the construction of a chlor-alkali facility. These notes
mature in 2017. If SunBelt is unable to make the future payments
required on this debt as they come due, it could result in our
having to make those payments on SunBelts behalf, which
could adversely impact our financial condition and cash flows.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
We have no outstanding or unresolved comments from the staff of
the SEC.
10 POLYONE
CORPORATION
ITEM 2. PROPERTIES
As of December 31, 2006, we operated facilities in the
United States and internationally. We own substantially all of
our facilities. During 2006, we made effective use of our
productive capacity at our principal facilities. We believe that
the quality and production capacity of our facilities is
sufficient to maintain our competitive position for the
foreseeable future. Following are the principal facilities of
our segments:
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International
Color and
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North American
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Vinyl
Business
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Engineered
Materials
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Color and
Additives
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Polymer Coating
Systems
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Long Beach, California Terre Haute, Indiana Louisville, Kentucky Plaquemine, Louisiana Avon Lake, Ohio Pasadena, Texas Niagara Falls, Ontario, Canada Orangeville, Ontario, Canada St. Remi de Napierville, Quebec, Canada Cartagena, Colombia (joint venture) Henry, Illinois Pedricktown, New Jersey
Producer
Services Dyersburg, Tennessee Seabrook, Texas Clinton, Tennessee
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Pudong (Shanghai), China
Shenzhen, China
Glostrup, Denmark
Cergy, France
Tossiat, France
Bendorf, Germany
Gyor, Hungary
Gaggenau, Germany
Pamplona, Spain
Angered, Sweden
Bangkok, Thailand
Suzhou, China
Jurong, Singapore
Istanbul, Turkey
Assesse, Belgium
Barbastro, Spain
Melle, Germany
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Glendale, Arizona Suwanee, Georgia Elk Grove Village, Illinois St. Peters, Missouri Norwalk, Ohio Lehigh, Pennsylvania Vonore, Tennessee Toluca, Mexico
North American Engineered Materials
Avon Lake, Ohio Macedonia, Ohio Dyersburg, Tennessee Valleyfield, Quebec, Canada
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Los Angeles, California
Kennesaw, Georgia
St. Louis, Missouri
Sullivan, Missouri
Massillon, Ohio
North Baltimore, Ohio
Sussex, Wisconsin
Melbourne, Australia
Bolton, England
Shenzhen, China
Hyde, England
Widnes, England
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PolyOne Distribution
Facilities
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Lemont, Illinois
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Chesterfield Township, Michigan
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Ayer, Massachusetts
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Eagan, Minnesota
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Massillon, Ohio
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Hazelwood, Missouri
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Rancho Cucamonga, California
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La Porte, Texas
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Statesville, North Carolina
Denver, Colorado
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Mississauga, Ontario, Canada
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Resin and Intermediates
Facilities
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OxyVinyls joint venture
various locations in North America
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SunBelt joint venture
McIntosh, Alabama
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ITEM 3. LEGAL
PROCEEDINGS
In addition to the matters regarding the environment described
in Item 1 under the heading Environmental, Health and
Safety, we are involved in various pending or threatened
claims, lawsuits and administrative proceedings, all arising
from the ordinary course of business concerning commercial,
product liability, employment and environmental matters that
seek remedies or damages. We believe that the probability is
remote that losses in excess of the amounts we have accrued
could be materially adverse to our financial condition, results
of operations or cash flows.
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ITEM 4.
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SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during
the fourth quarter of 2006.
EXECUTIVE
OFFICERS OF THE REGISTRANT
(Included pursuant to Instruction 3 to
paragraph (b) of Item 401 of
Regulation S-K)
The following lists information, as of February 28, 2007,
about each of our executive officers, including his or her
position with us as of that date and other positions held by him
or her for at least the past five years. Executive officers are
elected by our Board of Directors to serve one-year terms.
POLYONE
CORPORATION 11
Stephen D. Newlin
Age: 54
Chairman, President and Chief Executive Officer,
February 21, 2006 to date. President Industrial
Sector of Ecolab Inc. (a global developer and marketer of
cleaning and sanitizing specialty chemicals, products and
services) from 2003 to 2006. Mr. Newlin served as President
and a Director of Nalco Chemical Company (a manufacturer of
specialty chemicals, services and systems) from 1998 to 2001 and
was Chief Operating Officer and Vice Chairman from 2000 to 2001.
Mr. Newlin serves on the Board of Directors of Black Hills
Corporation.
Bernard Baert
Age: 57
Vice President and General Manager, Colors and Engineered
Materials, Europe and Asia, September 2000 upon formation of
PolyOne, named Senior Vice President and General Manager, Colors
and Engineered Materials, Europe and Asia, May 2006 to date.
General Manager, Color Europe, M.A. Hanna Company, 1997 to
August 2000.
Michael E. Kahler
Age: 49
Senior Vice President, Commercial Development, May 2006 to date.
President, Process Technology Division, Alfa Laval Inc. (a
global provider of heat transfer, separation and fluid handling
products and engineering solutions) from January 2004 to March
2006. Group Vice President, Nalco Chemical Company (a
manufacturer of specialty chemicals, services and systems) from
December 1999 to October 2002.
Michael L. Rademacher
Age: 56
Vice President and General Manager, PolyOne Distribution,
September 2000 upon formation of PolyOne, named Senior Vice
President and General Manager, PolyOne Distribution, May 2006 to
date. Senior Vice President Plastics Americas, M.A.
Hanna Company, January 2000 to August 2000. Vice President and
General Manager, Industrial Chemical and Solvents Division,
Ashland Chemical Company (chemical manufacturing and
distribution), 1998 to January 2000.
Robert M. Rosenau
Age: 52
Vice President and General Manager, Vinyl Business, January
2003, named Senior Vice President and General Manager, Vinyl
Business, May 2006 to date. General Manager, Extrusion Products,
September 2000 to December 2002. General Manager, Custom Profile
Compounds, The Geon Company, April 1998 to August 2000.
Wendy C. Shiba
Age: 56
Chief Legal Officer, November 2001 to date, and Vice President
and Secretary, December 2001, named Senior Vice President, May
2006 to date. Vice President, Bowater Incorporated (a pulp and
paper company), 1997 to November 2001, and Secretary and
Assistant General Counsel, 1993 to November 2001.
Kenneth M. Smith
Age: 52
Chief Human Resources Officer, January 2003 to date, and Vice
President and Chief Information Officer, September 2000 upon
formation of PolyOne, named Senior Vice President and Chief
Information Officer, May 2006 to date. Vice President,
Information Technology, The Geon Company, May 1999 to August
2000, and Chief Information Officer, August 1997 to May 1999.
W. David Wilson
Age: 53
Vice President and Chief Financial Officer, September 2000 upon
formation, named Senior Vice President May 2006 to date. Vice
President and Chief Financial Officer, The Geon Company, May
1997 to August 2000.
12 POLYONE
CORPORATION
PART II
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ITEM 5.
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MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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The following table sets forth the range of the high and low
sale prices for our common stock, $.01 par value per share,
as reported by the New York Stock Exchange, where the shares are
traded under the symbol POL, for the periods
indicated.
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2006
Quarters
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2005
Quarters
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Fourth
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Third
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Second
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First
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Fourth
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Third
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Second
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First
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Common stock price:
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High
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$
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8.76
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$
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9.18
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$
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9.89
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$
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9.88
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$
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6.57
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$
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7.73
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$
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9.40
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$
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10.25
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Low
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$
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6.71
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$
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7.70
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$
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7.45
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$
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6.31
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$
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5.31
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$
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5.75
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$
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6.00
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$
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8.05
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As of February 20, 2007, there were 2,781 holders of record
of our common stock.
Effective with the first quarter of 2003, we suspended payment
of our quarterly dividend. Future declarations of dividends on
common stock are at the discretion of the Board of Directors,
and the declaration of any dividends will depend on, among other
things, earnings, capital requirements and our financial
condition. The Board of Directors has not declared any dividends
on common stock since 2003. Additionally, the indenture
governing our 10.625% senior notes due in 2010 and the
agreements that govern our receivables sale facility contain
restrictions that could limit our ability to pay future
dividends.
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ITEM 6.
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SELECTED
FINANCIAL DATA
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(In millions,
except per share data)
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2006
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2005
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2004
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2003
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2002
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Sales
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$
|
2,622.4
|
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$
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2,450.6
|
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$
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2,267.7
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$
|
2,048.1
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$
|
1,981.1
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Operating income (loss)
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$
|
190.2
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$
|
140.3
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$
|
128.4
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$
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(43.2
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)
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$
|
13.7
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Income (loss) before discontinued
operations and change in accounting
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$
|
125.9
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$
|
62.2
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$
|
27.6
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|
|
$
|
(134.7
|
)
|
|
$
|
(18.9
|
)
|
Discontinued operations
|
|
|
(2.7
|
)
|
|
|
(15.3
|
)
|
|
|
(4.1
|
)
|
|
|
(144.7
|
)
|
|
|
13.7
|
|
Change in method of accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53.7
|
)
|
|
Net income (loss)
|
|
$
|
123.2
|
|
|
$
|
46.9
|
|
|
$
|
23.5
|
|
|
$
|
(279.4
|
)
|
|
$
|
(58.9
|
)
|
|
|
Basic and diluted earnings (loss)
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before discontinued operations and
change in method of accounting
|
|
$
|
1.36
|
|
|
$
|
0.68
|
|
|
$
|
0.30
|
|
|
$
|
(1.48
|
)
|
|
$
|
(0.21
|
)
|
Discontinued operations
|
|
|
(0.03
|
)
|
|
|
(0.17
|
)
|
|
|
(0.04
|
)
|
|
|
(1.59
|
)
|
|
|
0.15
|
|
Change in method of accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.59
|
)
|
|
Basic and diluted earnings (loss)
per common share
|
|
$
|
1.33
|
|
|
$
|
0.51
|
|
|
$
|
0.26
|
|
|
$
|
(3.07
|
)
|
|
$
|
(0.65
|
)
|
|
|
Dividends per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.25
|
|
|
|
Total assets
|
|
$
|
1,773.6
|
|
|
$
|
1,687.7
|
|
|
$
|
1,746.5
|
|
|
$
|
1,872.6
|
|
|
$
|
1,997.5
|
|
Long-term debt, net of current
portion
|
|
$
|
567.7
|
|
|
$
|
638.7
|
|
|
$
|
640.5
|
|
|
$
|
757.1
|
|
|
$
|
492.2
|
|
In August 2004, we sold our Elastomers and Performance Additives
business. This business was previously reported as a
discontinued operation and is reflected as such in our
historical results.
In February 2006, we sold 82% of our Engineered Films business.
This business was previously reported as discontinued operations
and is reflected as such in our historical results. The retained
ownership of 18% is reported on the cost method of accounting
and is reflected in the financial statements as such.
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
Purpose of
Managements Discussion and Analysis (MD&A)
The purpose of the following discussion is to provide relevant
information to investors who use our financial statements so
they can assess our financial condition and results of
operations by evaluating the amounts and certainty of cash flows
from our operations and from outside sources.
The three principal objectives of MD&A are: to provide a
narrative explanation of financial statements that enables
investors to see our company through the eyes of management; to
enhance overall financial disclosure and provide the context
within which financial information should be analyzed; and to
provide information
POLYONE
CORPORATION 13
about the quality and potential variability of earnings and cash
flows so that investors can judge the likelihood that past
performance is indicative of future performance.
Business
Overview
We are a leading global provider of specialized polymer
materials, services and solutions with operations in
thermoplastic compounds, specialty vinyl resins, specialty
polymer formulations, color and additive systems, and
thermoplastic resin distribution with equity investments in
manufacturers of PVC resin and its intermediates. Headquartered
in Avon Lake, Ohio, with 2006 sales of $2.6 billion, we
have manufacturing sites and distribution facilities in North
America, Europe and Asia, and joint ventures in North America
and South America. We employ approximately 4,600 people and
sell more than 35,000 different specialty and general purpose
products to over 10,000 customers in 35 countries. We provide
value to our customers through our ability to link our knowledge
of polymers and formulation technology with our manufacturing
and supply chain to provide an essential link between large
chemical producers (our raw material suppliers) and designers,
assemblers and processors of plastics (our customers).
Recent
Developments
Sale of
businesses and discontinued operations
In February 2006, we sold 82% of our Engineered Films business
for $26.7 million. This business is presented as a
discontinued operation in these financial statements. We
maintain an 18% ownership interest in this business that is
reflected in our 2006 financial statements on the cost basis of
accounting. Unless otherwise noted, disclosures contained in
this Annual Report on
Form 10-K
relate to continuing operations. For more information about our
discontinued operations, see Note B to the Consolidated
Financial Statements.
Purchase of
businesses
In October 2006, we purchased the remaining 50% of our equity
investment in DH Compounding Company from a wholly-owned
subsidiary of The Dow Chemical Company for $10.2 million.
Our equity investment was previously reflected in the
Consolidated Balance Sheets on the line Investment in
equity affiliates. DH Compounding Company is now
consolidated in our Consolidated Balance Sheet as of
December 31, 2006, and the results of operations are
included in our Consolidated Statement of Operations beginning
October 1, 2006. DH Compounding is included in our Producer
Services operating segment.
In October 2006, we announced that we had entered into a
definitive agreement to acquire the vinyl compounding business
and assets of Ngai Hing PlastChem Company Ltd., a subsidiary of
NHH. In connection with this acquisition, we initiated the
purchase of certain assets at a manufacturing facility in
Dongguan, China with a deposit of $2.7 million. This
acquisition is expected to be completed during the first half of
2007, subject to customary closing conditions.
Restructuring
initiatives and facility closures
During the first quarter of 2006, we completed the closure of
our Manchester, England color additives manufacturing facility
to reduce costs and align capacity with market demand. Key
customers product demand requirements were transitioned to other
company facilities.
During the fourth quarter of 2006, we announced the relocation
of our Commerce, California latex business to our Massillon,
Ohio facility to better support the growth occurring in the
latex business east of the Mississippi River. This transition
will be completed in the first quarter of 2007 and resulted in
charges related to employee separation and plant phaseout of
approximately $0.5 million.
Sale of
assets
During 2006, we sold previously closed facilities as part of our
restructuring initiatives and cost reduction plans for a total
of $8.7 million.
Results of
Operations
Summary of
Consolidated Results:
Income from continuing operations in 2006 improved by
$63.7 million, or $0.69 per share, compared to 2005. Sales
increased by 7% from 2005, primarily due to increased volume in
our International Color and Engineered Materials, North American
Color and Additives, North American Engineered Materials and
Producer Services operating segments. Volume improvements in
Europe resulted from regaining market share that was lost in
2005 and from general improvement in key economies. Asian volume
was up due to new application developments and further
penetration into key markets. Domestic volume growth resulted
primarily from strong demand in packaging, custom injection
molding, appliance, construction, and wire and cable markets.
The sales increase was also driven by a shift in sales mix
towards high value specialized applications, combined with
higher selling prices that were required to offset higher raw
material and energy costs.
Improved earnings were primarily the result of margin expansion
as we increased selling prices in a high raw material and energy
cost escalation environment combined with strong earnings from
our equity affiliates. Also impacting the
year-over-year
comparison were a $22.9 million pre-tax asset impairment
charge in the third quarter of 2005 related to a previously
idled chlor-alkali facility at OxyVinyls and a
$15.8 million reversal of our deferred tax valuation
allowance in the fourth quarter of 2006.
14 POLYONE
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
$
|
925.8
|
|
|
$
|
926.7
|
|
|
$
|
831.4
|
|
International Color and Engineered
Materials
|
|
|
539.9
|
|
|
|
473.2
|
|
|
|
466.4
|
|
PolyOne Distribution
|
|
|
732.8
|
|
|
|
679.2
|
|
|
|
606.3
|
|
All Other
|
|
|
598.6
|
|
|
|
543.1
|
|
|
|
519.9
|
|
Corporate and eliminations
|
|
|
(174.7
|
)
|
|
|
(171.6
|
)
|
|
|
(156.3
|
)
|
|
Total sales
|
|
$
|
2,622.4
|
|
|
$
|
2,450.6
|
|
|
$
|
2,267.7
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
$
|
65.3
|
|
|
$
|
59.8
|
|
|
$
|
67.8
|
|
International Color and Engineered
Materials
|
|
|
22.3
|
|
|
|
16.2
|
|
|
|
34.1
|
|
PolyOne Distribution
|
|
|
19.2
|
|
|
|
19.5
|
|
|
|
17.8
|
|
Resin and Intermediates
|
|
|
102.5
|
|
|
|
90.9
|
|
|
|
53.7
|
|
All Other
|
|
|
(0.2
|
)
|
|
|
(4.5
|
)
|
|
|
(0.4
|
)
|
Corporate and eliminations
|
|
|
(18.9
|
)
|
|
|
(41.6
|
)
|
|
|
(44.6
|
)
|
|
Operating income
|
|
|
190.2
|
|
|
|
140.3
|
|
|
|
128.4
|
|
Interest expense
|
|
|
(66.5
|
)
|
|
|
(68.1
|
)
|
|
|
(72.1
|
)
|
Interest income
|
|
|
3.4
|
|
|
|
1.9
|
|
|
|
1.5
|
|
Premium on early extinguishment of
long-term debt
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
(3.3
|
)
|
Other expense, net
|
|
|
(2.8
|
)
|
|
|
(5.3
|
)
|
|
|
(13.2
|
)
|
|
Income before income taxes and
discontinued operations
|
|
|
119.9
|
|
|
|
68.8
|
|
|
|
41.3
|
|
Income tax benefit (expense)
|
|
|
6.0
|
|
|
|
(6.6
|
)
|
|
|
(13.7
|
)
|
|
Income before discontinued
operations
|
|
|
125.9
|
|
|
|
62.2
|
|
|
|
27.6
|
|
Loss from discontinued operations,
net of taxes
|
|
|
(2.7
|
)
|
|
|
(15.3
|
)
|
|
|
(4.1
|
)
|
|
Net income
|
|
$
|
123.2
|
|
|
$
|
46.9
|
|
|
$
|
23.5
|
|
|
|
Year-to-year
changes in sales and operating income are discussed in the
Segment Information section that follows. Segments
are also discussed in detail in Note R to the Consolidated
Financial Statements.
Selected
Operating Costs:
Selected operating costs, expressed as a percentage of sales,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Cost of sales
|
|
|
87.0
|
%
|
|
|
87.9
|
%
|
|
|
85.3
|
%
|
Selling and administrative costs
|
|
|
7.7
|
%
|
|
|
7.3
|
%
|
|
|
9.2
|
%
|
Cost of Sales These costs include raw
materials, plant conversion and distribution charges. As a
percentage of sales, these costs declined in 2006 compared to
2005 primarily from the full year effect of efforts to increase
our selling prices to pass on higher raw material, distribution
and utility costs, as well as the effect of our specialization
strategy to increase new higher value business. Cost of sales
increased in 2005 from 2004 levels primarily as a result of raw
material, transportation and energy cost increases that were not
fully offset by selling price increases and manufacturing cost
reduction initiatives.
Selling and Administrative These costs
generally include selling, technology and general and
administrative charges. Selling and administrative costs
increased in 2006 compared to 2005 from higher share-based
compensation and incentive costs and increased investment in
commercial resources and capabilities, partially offset by a
higher benefit in 2006 than 2005 from legal and other related
settlements. Selling and administrative costs declined in 2005
compared to 2004 from lower incentive costs combined with a
higher benefit in 2005 compared to 2004 from legal and other
related settlements.
Employee Separation and Plant Phaseout
These costs represent severance, employee outplacement,
lease termination, facility closing costs and the write-down of
the carrying value of plant and equipment resulting from the
consolidation of operations, restructuring initiatives and
executive separation agreements. For more information about our
employee separation and plant phaseout activities, see
Note E to the Consolidated Financial Statements.
Asset Impairments These charges are to
adjust the carrying values of intangible assets and other
investments to expected net future cash flows resulting from an
evaluation that we perform each year-end, or more often when
indicators of impairment exist. These non-cash charges will not
result in future cash expenditures.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Internet investments
|
|
$
|
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Community development investments
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
Customer contract lower
profit expectations
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
|
$
|
3.8
|
|
|
|
Environmental Remediation at Inactive
Sites These costs represent those charges
associated with environmental remediation costs for
manufacturing facilities that we either no longer own or that we
closed in prior years. We increased our reserves in 2006 based
on increased estimates for future remediation at one site that
we no longer own. We increased our reserves significantly in
2004 to reflect a reduction in expected recoveries from an
insurance company whose policies now only service remaining
liabilities for groundwater remediation costs at a site that we
no longer own and to recognize an increase over previous cost
estimates for a remedial action work plan at an inactive site.
Other
Components of Income and Expense:
Following are discussions of significant components of income
and expense that are presented below the line operating
income.
Interest Expense The decrease in
interest expense from year to year is largely the result of
lower average borrowing levels. Payment of maturing debt and
voluntary repurchases of debt are
POLYONE
CORPORATION 15
the main reasons for the continued decline in debt. Included in
interest expense in 2006 and 2004 were charges of
$0.8 million and $0.2 million, respectively, to write
off deferred debt issuance costs that resulted from the early
extinguishment of long-term debt.
In the second and fourth quarters of 2006, we repurchased
$15.0 million and $43.6 million, respectively, of our
10.625% senior notes. The following table presents the
quarterly average of short- and long-term debt for the past
three years and the related interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Short-term debt
|
|
$
|
5.6
|
|
|
$
|
4.5
|
|
|
$
|
2.1
|
|
Current portion of long-term debt
|
|
|
12.5
|
|
|
|
35.2
|
|
|
|
34.4
|
|
Long-term debt
|
|
|
610.8
|
|
|
|
639.5
|
|
|
|
716.8
|
|
|
Quarterly average
|
|
$
|
628.9
|
|
|
$
|
679.2
|
|
|
$
|
753.3
|
|
|
|
Interest expense
|
|
$
|
66.5
|
|
|
$
|
68.1
|
|
|
$
|
72.1
|
|
Premium on Early Extinguishment of Long-term
Debt Cash expense from the repurchase of
$58.6 million aggregate principal amount of our
10.625% senior notes in 2006 was $4.4 million. Cash
expense from the repurchase of $67.0 million aggregate
principal amount of our medium-term notes and bank debentures in
2004 was $3.3 million.
Other Expense, Net Finance costs
associated with our receivables sale facility, foreign currency
gains and losses, retained post-employment benefit costs from
previously discontinued operations and other miscellaneous items
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Currency exchange loss
|
|
$
|
(1.3
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(3.0
|
)
|
Foreign exchange contracts gain
(loss)
|
|
|
1.1
|
|
|
|
0.6
|
|
|
|
(1.1
|
)
|
Discount on sale of trade
receivables
|
|
|
(1.9
|
)
|
|
|
(5.5
|
)
|
|
|
(6.1
|
)
|
Retained post-employment benefit
costs related to previously discontinued operations
|
|
|
|
|
|
|
(1.3
|
)
|
|
|
(3.6
|
)
|
Other income (expense), net
|
|
|
(0.7
|
)
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
|
$
|
(2.8
|
)
|
|
$
|
(5.3
|
)
|
|
$
|
(13.2
|
)
|
|
|
The decline in the discount on sale of trade receivables in 2006
compared to 2005 was primarily from the lower average balance of
receivables that were sold during 2006.
Income Tax Expense The income tax
expense (benefit) for 2006, 2005 and 2004, including changes in
the deferred tax valuation allowance, is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Tax expense prior to valuation
allowance
|
|
$
|
54.1
|
|
|
$
|
27.9
|
|
|
$
|
8.6
|
|
Valuation allowance
|
|
|
(60.1
|
)
|
|
|
(21.3
|
)
|
|
|
5.1
|
|
|
Total tax (benefit) expense
|
|
$
|
(6.0
|
)
|
|
$
|
6.6
|
|
|
$
|
13.7
|
|
|
|
In calculating the tax expense or benefit prior to changes in
the valuation allowance, the effect of the repatriation of
foreign dividends was the principal cause of the difference
between the effective and statutory tax rate for 2006 and 2005.
For 2004, the difference between the effective and statutory tax
rate was principally the tax rates of foreign operations.
The deferred tax valuation allowance was recorded in accordance
with SFAS No. 109, Accounting for Income
Taxes, which requires a company to evaluate its deferred
tax assets for recoverability. This evaluation process is based
upon the companys ability to demonstrate future taxable
income that would result in utilization of those assets. As a
result of a review in the fourth quarter of 2003, we determined
that it was more likely than not that the majority of our
deferred tax assets were impaired and, accordingly, a valuation
allowance was recorded.
Subsequent to 2003, the valuation allowance was either increased
to offset the creation of additional deferred tax assets, as was
the case in 2004, or reduced for use of deferred tax assets in
2005 and 2006. In 2006, the valuation allowance was reduced by
$75.5 million as a result of the following factors:
a) $44.3 million for the utilization of net operating
loss carryforwards; b) $15.4 million associated with
changes in accumulated other comprehensive income related to the
pension and post-retirement health care liabilities; and
c) $15.8 million associated with our determination
that it is now more likely than not that the deferred tax assets
will be realized. The domestic deferred tax valuation allowance
was $0 at December 31, 2006.
The resulting tax expense for the years ended December 31,
2006, 2005 and 2004 includes foreign, state and alternative
minimum tax. Income taxes are discussed in detail in Note P
to the Consolidated Financial Statements.
Loss from Discontinued Operations, Net of Income
Taxes Discontinued operations are discussed
in detail in Note B to the Consolidated Financial
Statements. The loss from discontinued operations included a
pre-tax benefit of $0.2 million in 2005 and a pre-tax
charge of $7.5 million in 2004 for employee separation and
plant phaseout costs from restructuring initiatives and closing
certain manufacturing facilities of the Engineered Films and
Elastomers and Performance Additives businesses.
As required by generally accepted accounting principles in the
United States, the losses from discontinued operations, shown
below, do not include any depreciation or amortization expense.
16 POLYONE
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Elastomers and Performance Additives
|
|
$
|
|
|
|
$
|
|
|
|
$
|
220.1
|
|
Engineered Films
|
|
|
9.6
|
|
|
|
119.6
|
|
|
|
125.7
|
|
|
|
|
$
|
9.6
|
|
|
$
|
119.6
|
|
|
$
|
345.8
|
|
|
|
Pre-tax income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Elastomers and Performance Additives
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17.2
|
|
Engineered Films
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
17.8
|
|
Pre-tax charges to adjust net
assets of businesses held for sale to projected net sale
proceeds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Elastomers and Performance Additives
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
(17.0
|
)
|
Engineered Films
|
|
|
(3.1
|
)
|
|
|
(15.1
|
)
|
|
|
(4.3
|
)
|
|
|
|
|
(2.7
|
)
|
|
|
(15.3
|
)
|
|
|
(3.5
|
)
|
Income tax expense (net of
valuation allowance)
|
|
|
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
Loss from discontinued operations
|
|
$
|
(2.7
|
)
|
|
$
|
(15.3
|
)
|
|
$
|
(4.1
|
)
|
|
|
Segment
Information:
2006 compared
with 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
$
|
925.8
|
|
|
$
|
926.7
|
|
|
$
|
(0.9
|
)
|
|
|
0
|
%
|
International Color and Engineered
Materials
|
|
|
539.9
|
|
|
|
473.2
|
|
|
|
66.7
|
|
|
|
14
|
%
|
PolyOne Distribution
|
|
|
732.8
|
|
|
|
679.2
|
|
|
|
53.6
|
|
|
|
8
|
%
|
All Other
|
|
|
598.6
|
|
|
|
543.1
|
|
|
|
55.5
|
|
|
|
10
|
%
|
Corporate and eliminations
|
|
|
(174.7
|
)
|
|
|
(171.6
|
)
|
|
|
(3.1
|
)
|
|
|
2
|
%
|
|
|
|
$
|
2,622.4
|
|
|
$
|
2,450.6
|
|
|
$
|
171.8
|
|
|
|
7
|
%
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
$
|
65.3
|
|
|
$
|
59.8
|
|
|
$
|
5.5
|
|
|
|
|
|
International Color and Engineered
Materials
|
|
|
22.3
|
|
|
|
16.2
|
|
|
|
6.1
|
|
|
|
|
|
PolyOne Distribution
|
|
|
19.2
|
|
|
|
19.5
|
|
|
|
(0.3
|
)
|
|
|
|
|
Resin and Intermediates
|
|
|
102.5
|
|
|
|
90.9
|
|
|
|
11.6
|
|
|
|
|
|
All Other
|
|
|
(0.2
|
)
|
|
|
(4.5
|
)
|
|
|
4.3
|
|
|
|
|
|
Corporate and eliminations
|
|
|
(18.9
|
)
|
|
|
(41.6
|
)
|
|
|
22.7
|
|
|
|
|
|
|
|
|
$
|
190.2
|
|
|
$
|
140.3
|
|
|
$
|
49.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
|
Operating income (loss) as a
percentage of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
|
7.1
|
%
|
|
|
6.5
|
%
|
|
|
0.6%points
|
|
International Color and Engineered
Materials
|
|
|
4.1
|
%
|
|
|
3.4
|
%
|
|
|
0.7%points
|
|
PolyOne Distribution
|
|
|
2.6
|
%
|
|
|
2.9
|
%
|
|
|
(0.3)%points
|
|
All Other
|
|
|
0.0
|
%
|
|
|
(0.8
|
)%
|
|
|
0.8%points
|
|
Total
|
|
|
7.3
|
%
|
|
|
5.7
|
%
|
|
|
1.6%points
|
|
Effective with the first quarter of 2006, our operating and
reportable segments changed. The Producer Services operating
segment was formed at the start of 2006 from portions of the
North American Color and Additives and the North American
Engineered Materials operating segments. As a result, the North
American Color and Additives operating segment no longer meets,
nor is expected to meet, any of the quantitative thresholds that
would require separate disclosure as a reportable segment, and,
accordingly, it is included in the All Other segment. The new
Producer Services operating segment also does not meet, nor is
expected to meet, any of these quantitative thresholds, and, as
a result, it is also included in the All Other segment.
Effective with the fourth quarter of 2006, the former Specialty
Resins operating segment was subsumed into the former Vinyl
Compounds operating segment to create the new Vinyl Business
operating and reportable segment. Segment information for prior
periods has been reclassified to conform to the 2006
presentation.
Operating income is the primary financial measure that is
reported to the chief operating decision maker for purposes of
making decisions about allocating resources to the segment and
assessing its performance. Operating income at the segment level
does not include: corporate general and administrative costs
that are not allocated to segments; intersegment sales and
profit eliminations; charges related to specific strategic
initiatives, such as the consolidation of operations;
restructuring activities, including employee separation costs
resulting from personnel reduction programs, plant closure and
phaseout costs; executive separation agreements; share-based
compensation costs; asset impairments; environmental remediation
costs for facilities no longer owned or closed in prior years;
gains and losses on the divestiture of joint ventures and equity
investments; and certain other items that are not included in
the measure of segment profit or loss that is reported to and
reviewed by the chief operating decision maker. These costs are
included in Corporate and eliminations.
Vinyl Business sales were flat in 2006 compared to 2005 as
higher average selling prices offset 6% lower volume. Selling
prices at the beginning of 2006 reflected the increases that we
realized in the fourth quarter of 2005. Volume was down as a
result of slower building and construction market demand in the
second half of 2006 compared with the unusually high demand in
the second half of 2005 due to the rebuilding activities that
were created in the wake of Hurricanes Katrina and Rita. Also
negatively impacting 2006 volume was greater competition from
overseas suppliers who increased their market share, largely in
flooring applications,
POLYONE
CORPORATION 17
in the second half of 2005. Operating income increased
$5.5 million primarily from price-driven margin
improvements.
International Color and Engineered Materials sales increased 14%
due primarily to the strengthening of foreign economies and an
improvement in our customer portfolio. Sales in Europe increased
from recapturing market share , increased sales of higher margin
specialty products in the wire and cable and automotive markets,
continued growth in Eastern European countries and strong
results in the packaging market. Sales in Asia increased
primarily from growth in the higher-margin appliance and
electrical and electronics markets, the introduction of new
product lines and the development of the South Korean market. In
addition, favorable currency exchange rates contributed
approximately $4.8 million to the sales increase. Volume
also rose 14% in 2006. Operating income increased
$6.1 million, or 38% from 2005, primarily as a result of
higher volume, a shift in mix to higher-margin products and an
increase in selling prices. Differences in average currency
exchange rates did not materially impact earnings.
PolyOne Distributions sales increased 8% led by an
increase in selling prices and, to a lesser extent, a 1%
increase in volume. The increase in selling prices was driven by
both passing through increases from our supplier base and from a
shift in mix towards higher-priced engineered products. The
change in volume was a result of gains from our National Account
programs that were mostly offset by a softening demand in the
building and construction and automotive markets in the second
half of 2006. Operating income decreased $0.3 million in
2006 due to increased investment in commercial resources.
Hurricanes Katrina and Rita caused a surge in demand in 2005
that temporarily increased selling prices and margins, both of
which have returned to normalized levels in 2006 as demand has
softened.
Resin and Intermediates operating income increased
$11.6 million, or 13%, over 2005. OxyVinyls equity
earnings increased $4.6 million primarily due to higher
industry average PVC resin and VCM price spreads over raw
material costs. SunBelts equity earnings increased
$6.6 million due to higher selling prices for chlorine and
caustic soda that were driven by strong demand.
The All Other segment includes the North American Color and
Additives, North American Engineered Materials, Producer
Services and Polymer Coating Systems operating segments. Sales
in aggregate were up 10% from a higher value sales mix and
higher shipment volumes.
North American Colors and Additives sales improved 2% due to
higher average selling prices and a 4% increase in volume. The
increase in sales was a result of higher selling prices to
recapture increases in raw material costs as well as the result
of improvements in manufacturing and new technologies. The
volume increases were in the packaging, custom injection molding
and profile extrusion markets.
North American Engineered Materials sales increased 19% from a
resurgence in the wire and cable market and continued
improvement in the general purpose product lines. In addition,
we expanded our market position as a leading compounder of
specialized formulations and materials. New technology platforms
have been introduced that complement our new plant established
to focus on specialized compounding. Increases in commercial
resources have and will continue to create better leverage for
our domestic and global capabilities to meet customer needs.
Producer Services sales increased 24% from continued strong
demand in the pipe market, penetration of new markets and new
business resulting from the acquisition of the remaining 50%
interest in DH Compounding Company in the fourth quarter of
2006. The acquisition of DH Compounding Company enabled us to
offer a broader range of blends and alloys materials that serve
the medical, food and consumer markets.
Polymer Coating Systems sales increased 5% in 2006 compared to
2005 from increased sales of higher-priced products such as inks
and specialty colorants, the introduction of new products,
higher selling prices, and continued growth in China. These
sales increases were partially offset by a decline in volume.
Volume decreased due to a combination of slower order patterns
at existing customers and the conclusion of several large
automotive programs at the end of 2005.
Operating income in 2006 for the All Other segment improved
$4.3 million compared to 2005.
Corporate and eliminations expense of $18.9 million in 2006
was $22.7 million lower than in 2005. The primary drivers
of this improvement include the elimination of charges in 2006
related to the impairment of a previously idled facility at
OxyVinyls that amounted to $22.9 million in 2005; an
increase of $14.5 million in 2006 for benefits received
from insurance and legal settlements and changes to the related
reserves; and a net charge of $0 in 2006 as compared to
$5.5 million in 2005 related to employee separation and
plant phaseout costs. These improvements were partially offset
by increases in share-based compensation and employee incentive
costs of $9.5 million; pension costs of $4.0 million;
administrative personnel costs of $3.0 million; and net
insurance costs of $2.7 million.
18 POLYONE
CORPORATION
2005 compared
with 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
%
Change
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
$
|
926.7
|
|
|
$
|
831.4
|
|
|
$
|
95.3
|
|
|
|
11
|
%
|
International Color and Engineered
Materials
|
|
|
473.2
|
|
|
|
466.4
|
|
|
|
6.8
|
|
|
|
1
|
%
|
PolyOne Distribution
|
|
|
679.2
|
|
|
|
606.3
|
|
|
|
72.9
|
|
|
|
12
|
%
|
All Other
|
|
|
543.1
|
|
|
|
519.9
|
|
|
|
23.2
|
|
|
|
4
|
%
|
Corporate and eliminations
|
|
|
(171.6
|
)
|
|
|
(156.3
|
)
|
|
|
(15.3
|
)
|
|
|
10
|
%
|
|
|
|
$
|
2,450.6
|
|
|
$
|
2,267.7
|
|
|
$
|
182.9
|
|
|
|
8
|
%
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
$
|
59.8
|
|
|
$
|
67.8
|
|
|
$
|
(8.0
|
)
|
|
|
|
|
International Color and Engineered
Materials
|
|
|
16.2
|
|
|
|
34.1
|
|
|
|
(17.9
|
)
|
|
|
|
|
PolyOne Distribution
|
|
|
19.5
|
|
|
|
17.8
|
|
|
|
1.7
|
|
|
|
|
|
Resin and Intermediates
|
|
|
90.9
|
|
|
|
53.7
|
|
|
|
37.2
|
|
|
|
|
|
All Other
|
|
|
(4.5
|
)
|
|
|
(0.4
|
)
|
|
|
(4.1
|
)
|
|
|
|
|
Corporate and eliminations
|
|
|
(41.6
|
)
|
|
|
(44.6
|
)
|
|
|
3.0
|
|
|
|
|
|
|
|
|
$
|
140.3
|
|
|
$
|
128.4
|
|
|
$
|
11.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
|
|
Operating income (loss) as a
percentage of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
|
6.5
|
%
|
|
|
8.2
|
%
|
|
|
(1.7)% points
|
|
International Color and Engineered
Materials
|
|
|
3.4
|
%
|
|
|
7.3
|
%
|
|
|
(3.9)% points
|
|
PolyOne Distribution
|
|
|
2.9
|
%
|
|
|
2.9
|
%
|
|
|
|
|
All Other
|
|
|
(0.8
|
)%
|
|
|
(0.1
|
)%
|
|
|
(0.7)% points
|
|
Total
|
|
|
5.7
|
%
|
|
|
5.7
|
%
|
|
|
|
|
Vinyl Business sales were up 11% driven by higher average
selling prices from efforts to recapture increases in the cost
of resin and non-resin raw materials. Volume was down 4% due to
softer demand in virtually all markets except custom extrusions
and fittings. The majority of our customers experienced softer
market conditions, which negatively affected their demand for
our products. This decline in volume was partially offset by new
business obtained in custom extrusion and wire and cable
applications. Operating income fell $8.0 million primarily
from the volume decline and higher raw material and energy costs.
International Color and Engineered Materials sales increased by
1% from higher average selling prices from efforts to recapture
raw material cost increases, combined with favorable Euro to
U.S. dollar currency exchange rates totaling approximately
$3 million. The sale of the Melos rubber granules business
negatively affected the
year-over-year
revenue comparison by 3 percentage points. Volume declined
11% in 2005 compared to 2004. The May 2004 sale of the Melos
rubber granules business accounted for 9 percentage points
of the 11%
year-over-year
volume decline. The balance of the volume decline was primarily
the result of weakness in demand for certain engineered
materials applications and a general weakness in European
plastics markets that was partially offset by higher volume in
Asia. In the second quarter of 2005, we began operations at our
new manufacturing facility in Shenzhen, China. This plant
manufactures engineered material compounds, color compounds and
plastisol inks. The sales and operating income associated with
plastisol inks are reported within the All Other segment.
Operating income declined by $17.9 million largely
reflecting increased competition experienced in the European
engineered materials markets. Energy-related operating costs
negatively affected earnings, and selling price increases did
not fully offset strong raw material cost increases. The sale of
Melos negatively impacted 2005 earnings compared with 2004 by
$1.1 million.
PolyOne Distributions sales were up 12% driven by selling
price increases and a shift in product mix toward higher-priced
products. Volume declined 2%, primarily in commodity resins,
which was consistent with the general softening across the North
American plastics industry during the second quarter. Operating
income improved by $1.7 million. The effect of lower
volumes and material cost increases were offset by higher
selling prices.
Resin and Intermediates operating income increased
$37.2 million primarily as a result of a $29.0 million
increase in SunBelts earnings contribution and a
$6.1 million increase from OxyVinyls. OxyVinyls benefited
from higher industry average PVC resin and VCM product spreads
that resulted from favorable supply and demand dynamics and
improved chlor-alkali profitability as compared to 2004. This
benefit was tempered in the third quarter of 2005 by the adverse
impact of the combination of hurricane-related production
interruptions and significant increases in ethylene and natural
gas costs. SunBelts earnings improvement was largely from
significantly higher combined selling prices for chlorine and
caustic soda that were driven by favorable supply and demand
dynamics.
The All Other segment includes the North American Color and
Additives, North American Engineered Materials, Producer
Services and Polymer Coating Systems operating segments. Sales
improved 4% despite a 4% decline in volume. The Producer
Services operating segment was formed at the start of 2006 from
portions of the North American Color and Additives and North
American Engineered Materials operating segments. As such, data
for Producer Services for 2004 is not available, preventing a
comparison of results between 2005 and 2004 for this operating
segment. Therefore, the following discussion combines these
three operating segments, North American Color and Additives,
North American Engineered Materials and Producer Services, for
purposes of comparing 2005 results with 2004. Polymer Coating
Systems, the other operating segment within the All Other
segment, was not affected.
Sales for the North American Color and Additives, North American
Engineered Materials and Producer Services operating
POLYONE
CORPORATION 19
segments were up by 6% in 2005 compared to 2004 despite a 4%
decline in volume. The decline in volume resulted from lower
demand in the packaging, pipe and fittings, film applications,
and general purpose and contract manufactured automotive
applications markets, partially offset by an increase in volume
in the construction market. Higher average selling prices that
resulted from efforts to recapture raw material cost increases,
combined with a shift in product mix towards higher value-added
products, drove the sales increase.
Polymer Coating Systems sales were up 2%, though volume was down
6% primarily due to a decline in automotive demand caused by
reduced production schedules and platform build-outs. Some
customers with their own compounding capability also decided to
bring the manufacture of a portion of their plastisol
requirements in-house, which reduced our volume. Higher average
selling prices drove the sales increase.
Operating income in 2006 for the All Other segment decreased by
$4.1 million primarily due to a lower volume and from
higher polyethylene and additives raw material costs that were
not fully recaptured in price increases due to competitive
pressures.
Corporate and eliminations expense of $41.6 million in 2005
was $3.0 million lower than in 2004. The primary drivers
for this improvement include a net decrease of
$12.7 million as a result of decreases in legal and
insurance reserves combined with legal settlements; a decrease
in net environmental costs of $7.8 million associated with
inactive or formerly owned sites; a decrease of
$5.3 million in share-based compensation and employee
incentive costs; a decrease in pension costs of
$3.4 million; and the elimination of the loss on sale of
assets of $5.9 million that occurred in 2004. These
improvements were not fully offset by the recognition of a
charge of $22.9 million related to the impairment of a
previously idled facility at OxyVinyls in 2005 and an increase
of $6.9 million in charges related to employee separation
and plant phaseout activities in 2005 compared to 2004.
Impact of
Inflation
Although inflation has slowed in recent years, we believe it
remains a factor in our economy and we continually seek ways to
lessen its impact. Toward that end, we deploy three primary
mitigating strategies: a) within the context of competitive
markets, we offset higher raw material and energy costs by
increasing the prices of our products to customers over time;
b) we are improving our ability to sell higher valued
specialized materials, services and solutions to our customers
where price is determined by value received by the customer
rather than by changes to cost inputs; and c) we are
implementing specific efficiency programs such as Lean Six
Sigma, energy conservation initiatives, and inventory and
distribution cost optimization programs, that are expected to
lower our delivered cost of product to customers, helping to
negate portions of the detrimental effect of inflation.
Additionally, we use the
last-in,
first-out (LIFO) method of accounting for 43% of our inventories
and the
first-in,
first-out (FIFO) or average cost method for the remainder. Under
the LIFO method, the cost of products sold that are reported in
the financial statements approximates current costs, providing a
better match of current period revenue and expenses. Charges to
operations for depreciation represent the allocation of
historical costs incurred over past years and are lower than if
they were based on the current cost of the productive capacity
that is being consumed.
Critical
Accounting Policies and Estimates
Significant accounting policies are described more fully in
Note C to the Consolidated Financial Statements. The
preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and
assumptions about future events that affect the amounts reported
in our financial statements and accompanying notes. We base our
estimates on historical experience and assumptions that we
believe are reasonable under the related facts and
circumstances. The application of these critical accounting
policies involves the exercise of judgment and use of
assumptions for future uncertainties. Accordingly, actual
results could differ significantly from these estimates. We
believe that the following discussion addresses our most
critical accounting policies, which are those that are the most
important to the portrayal of our financial condition and
results of operations and require our most difficult, subjective
and complex judgments.
Sales Discounts and Rebates Sales
discounts and rebates are offered to certain customers to
promote customer loyalty and to encourage greater product sales.
These programs provide customers with credits against their
purchases if they attain pre-established volumes or revenue
milestones for a specific period. We estimate the provision for
rebates based on the specific terms of each agreement at the
time of shipment and an estimate of the customers future
achievement of the respective volume or revenue milestones. The
actual amounts earned can differ from these estimates. In the
past, the actual amounts earned by our customers have not
differed materially from our estimates.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are determined based on
estimates of losses related to customer receivable balances. In
establishing the appropriate provisions for customer receivable
balances, we make assumptions about their future collectibility.
Our assumptions are based on an individual assessment of each
customers credit quality as well as subjective factors and
trends, including the aging of receivable balances. We regularly
analyze significant customer accounts and record a specific
reserve to reduce the related receivable to the amount we
reasonably believe is collectible when we become aware of a
customers inability to meet its financial obligations to
us, such as in the case of a bankruptcy filing or deterioration
in the customers operating results or financial position.
We also record reserves for all other customers based on a
variety of factors, including the length of time the receivables
are past due, the financial health of the customer, economic
conditions and our historical experience. If circumstances
related to specific customers change, our estimates of the
collectibility of receivables may be adjusted further. In the
past, the actual losses incurred have differed from our
estimates
20 POLYONE
CORPORATION
primarily as a result of unforeseen bankruptcy filings by our
customers.
Environmental Accrued Liability Based
upon estimates prepared by our environmental engineers and
consultants, we have $59.5 million accrued at
December 31, 2006 to cover probable future environmental
remediation expenditures. We do not believe that any of these
matters, either individually or in the aggregate, will have a
material adverse effect on our capital expenditures,
consolidated financial condition, results of operations or cash
flow beyond the amount accrued. This accrual represents our best
estimate of the remaining probable remediation costs based upon
information and technology currently available and our view of
the most likely remedy. Depending upon the results of future
testing, the ultimate remediation alternatives undertaken,
changes in regulations, new information, newly discovered
conditions and other factors, it is reasonably possible that we
could incur additional costs in excess of the amount accrued.
However, such additional costs, if any, cannot currently be
estimated. Our estimate of this liability may be revised as new
regulations or technologies are developed or additional
information is obtained. Changes during the past five years have
primarily resulted from an increase in the estimate of future
remediation costs at existing sites and payments made each year
for remediation costs that were already accrued.
For more information about our environmental liabilities, see
Note N to the Consolidated Financial Statements.
Asbestos-Related Claims We have been
named in various lawsuits involving multiple claimants and
defendants for alleged asbestos exposure in the past by, among
others, workers and contractors and their families at plants
owned by us or our predecessors, or on board ships owned or
operated by us or our predecessors. We have reserves totaling
$0.5 million as of December 31, 2006 for
asbestos-related claims that are probable and estimable. We
believe that the probability is remote that losses in excess of
the amounts we have accrued could be materially adverse to our
financial condition, results of operations or cash flows. This
belief is based on our ongoing assessment of the strengths and
weaknesses of the specific claims and our defenses and insurance
coverage available for these claims, as well as the probability
and expected magnitude of reasonably anticipated future
asbestos-related claims. Our assessment includes: whether the
pleadings allege exposure to asbestos, asbestos-containing
products or premises exposure; the severity of the
plaintiffs alleged injuries from exposure to asbestos or
asbestos-containing products and the length and certainty of
exposure on our premises, to the extent disclosed in the
pleadings or identified through discovery; whether the named
defendant related to us manufactured or sold asbestos-containing
products; the outcomes of cases recently resolved; and the
historical pattern of the number of claims. If the underlying
facts and circumstances change in the future, we will modify our
reserves, as appropriate. The amount of this accrual has not
materially changed over the past several years.
Restructuring-Related Accruals Since
PolyOne was formed in 2000, we have recorded accruals for
charges in connection with restructuring our businesses, as well
as integrating acquired businesses. These accruals include
estimates related to employee separation costs, the closure
and/or
consolidation of facilities, contractual obligations and the
value of assets such as property, plant and equipment, and
inventories. Actual amounts could differ from the original
estimates, and have differed in the past primarily from
differences between estimated and actual net proceeds received
upon the sale of property, plant and equipment.
Restructuring-related accruals are reviewed on a quarterly basis
and changes to these accruals are made when changes to plans
occur. Changes to restructuring plans for existing businesses
are recorded as employee separation and plant phaseout costs in
the period when the change occurs.
For more information about our restructuring activities, see
Note E to the Consolidated Financial Statements.
Goodwill Under SFAS No. 142,
Goodwill and Other Intangible Assets, we are
required to perform impairment tests of our goodwill and
intangible assets. These tests must be done at least once a
year, and more frequently if an event or circumstance indicates
that an impairment or a decline in value may have occurred. We
test for goodwill impairment on July 1 of each year. The
goodwill impairment test is a two-step process, which requires
us to make judgments about the assumptions that we use in the
calculation. The first step of the process consists of
estimating the fair value of each reporting unit based on a
number of factors, including projected future operating results
and business plans, economic projections, anticipated future
cash flows, comparable marketplace data from within a consistent
industry grouping, and the cost of capital. We compare these
estimated fair values with their carrying values, which includes
the allocated goodwill. If the estimated fair value is less than
the carrying value, a second step is performed to compute the
amount of the impairment by determining an implied fair
value of goodwill. The determination of a reporting
units implied fair value of goodwill requires
us to allocate the estimated fair value of the reporting unit to
the assets and liabilities of the reporting unit. Any
unallocated fair value represents the implied fair
value of goodwill, which is then compared to its
corresponding carrying value.
We cannot predict what future events might adversely affect the
reported value of our goodwill. These events include, but are
not limited to, strategic decisions made in response to economic
competitive conditions, the impact of the economic environment
on our customer base, or a material negative change in
relationships with significant customers.
For more information about our goodwill, see Note D to the
Consolidated Financial Statements.
Income Taxes Estimates of full year
taxable income are used in the tax rate calculations for the
legal entities and jurisdictions in which we operate throughout
the year and these estimates may change during the year to
reflect evolving facts and circumstances. During the year, we
use judgment to estimate our income
POLYONE
CORPORATION 21
for the year. Because judgment is involved, the tax rate may
increase or decrease significantly in any period.
To determine income or loss for financial statement purposes, we
make estimates and judgments. These estimates and judgments
occur in the calculation of certain tax liabilities and in
determining the recoverability of deferred tax assets that
result from temporary differences between the tax and financial
statement recognition of revenue and expense.
SFAS No. 109, Accounting for Income Taxes,
also requires us to reduce the deferred tax assets by a
valuation allowance if it is more likely than not that some
portion or all of the recorded deferred tax assets will not be
realized in future periods.
In the process of determining our ability to recover our
deferred tax assets, we consider all of the available positive
and negative evidence, including our past operating results, the
existence of cumulative losses in recent years and our forecast
of future taxable income. To estimate future taxable income we
develop assumptions including the amount of future state,
federal and international pre-tax income, the reversal of
temporary differences and the implementation of feasible and
prudent tax planning strategies. These assumptions require
significant judgment to forecast future taxable income and are
consistent with the plans and estimates that we use to manage
our businesses.
As a result of our conclusions at December 31, 2006, we
recorded a $75.5 million reversal of our valuation
allowance. This amount is comprised of $44.3 million for
the current year utilization of net operating loss
carryforwards, $15.4 million associated with changes in
accumulated other comprehensive income related to pension and
post-retirement health care benefit liabilities and a
$15.8 million reversal of the valuation allowance
associated with our determination that it is more likely than
not that the deferred tax asset will be realized.
In addition, the calculation of tax liabilities deals with
uncertainties in applying complex tax regulations in a large
number of jurisdictions. We recognize potential liabilities for
anticipated tax audit issues based on our estimate of the extent
to which additional taxes may be due. To the extent we prevail
in matters for which accruals have been established, or are
required to pay amounts in excess of recorded reserves, the
effective tax rate in a given financial statement period may be
materially impacted.
For more information about our income taxes, see Note P to
the Consolidated Financial Statements.
Pensions and Post-retirement Benefits
Effective December 31, 2006, we adopted
SFAS No. 158 (SFAS No. 158),
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132(R). This statement requires
employers to recognize the overfunded or underfunded status of
defined benefit post-retirement plans in their balance sheets.
This is measured as the difference between the fair value of
plan assets and the benefit obligation of the plans (the
projected benefit obligation for pension plans and the
accumulated post-retirement benefit obligation for other
post-retirement plans). The change in the funded status of the
plans must be recognized in the year in which the change occurs
through accumulated other comprehensive income.
Prior to the adoption of SFAS No. 158, we accounted
for our defined benefit post-retirement plans under
SFAS No. 87, Employers Accounting for
Pensions, and SFAS No. 106, Employers
Accounting for Postretirement Benefits Other Than
Pensions. SFAS No. 87 required that a liability
(minimum pension liability) be recorded when the accumulated
benefit obligation (ABO) liability exceeded the fair value of
plan assets. Any adjustment to this liability was recorded as a
non-cash charge to accumulated other comprehensive income within
shareholders equity. SFAS No. 106 required that the
liability that was recorded should represent the actuarial
present value of all future benefits attributable to an
employees service rendered to date. Under both
SFAS No. 87 and No. 106, any change in the funded
status was not immediately recognized. Instead, they were
deferred and recognized ratably over future periods. Upon
adoption of SFAS No. 158, we recognized the amounts of
prior changes in the funded status of our post-retirement
benefit plans through accumulated other comprehensive income. As
a result, the net impact of accounting for
SFAS No. 158 was an increase of $6.4 million on a
pre-tax basis and a decrease of $0.4 million on an
after-tax basis to our accumulated other comprehensive loss. In
addition, we recorded an adjustment of $2.7 million to
increase accumulated other comprehensive loss to record our
proportionate share of OxyVinyls adoption of
SFAS No. 158.
The adoption of SFAS No. 158 had no impact on our
consolidated statements of operations for the year ended
December 31, 2006 or for any prior period. Also, the
adoption of SFAS No. 158 does not affect any financial
covenants contained in the agreements governing our debt and our
receivables sale facility and is not expected to affect
operating results in future periods.
We have several pension plans, of which only two continue to
accrue benefits for certain U.S. employees. These two plans
generally provide benefit payments using a formula that is based
upon employee compensation and length of service. Length of
service for determining benefit payments was frozen as of
December 31, 2002. All U.S. defined-benefit pension
plans are closed to new participants. Regarding our other
post-employment benefit plans, only certain employees hired
prior to December 31, 1999 are eligible to participate.
Included in our results of operations are significant pension
and post-retirement benefit costs that we measure using
actuarial valuations. Inherent in these valuations are key
assumptions, including assumptions about discount rates and
expected returns on plan assets. These assumptions are updated
at the beginning of each fiscal year. We consider current market
conditions, including changes in interest rates, when making
these assumptions. Changes in pension and post-retirement
benefit costs may occur in the future due to changes in these
assumptions.
To develop our discount rate, we consider the yields of
high-quality, fixed-income investments with maturities that
correspond to the timing of our benefit obligations. To develop
our expected return
22 POLYONE
CORPORATION
on plan assets, we consider our historical long-term asset
return experience, the expected investment portfolio mix of plan
assets and an estimate of long-term investment returns. To
develop our expected portfolio mix of plan assets, we consider
the duration of the plan liabilities and give more weight to
equity investments than to fixed-income securities. Holding all
other assumptions constant, a 0.5 percentage point increase
or decrease in the discount rate would have increased or
decreased our 2006 net pension and post-retirement expense
by approximately $2.0 million. Likewise, a
0.5 percentage point increase or decrease in the expected
return on plan assets would have increased or decreased our
2006 net pension cost by approximately $1.9 million.
Market conditions and interest rates significantly affect the
value of future assets and liabilities of our pension and
post-retirement plans. It is difficult to predict these factors
due to the volatility of market conditions. Holding all other
assumptions constant, a 0.5 percentage point increase or
decrease in the discount rate would have increased or decreased
accumulated other comprehensive income and the related pension
and post-retirement liability by approximately $35 million
as of December 31, 2006.
The rate of increase in medical costs that we assume for the
next five years was held constant with prior years to reflect
both our actual experience and projected expectations. The
health care cost trend rate assumption has a significant effect
on the amounts reported. Holding all other assumptions constant,
a 0.5 percentage increase or decrease in the health care
cost trend rate would have increased or decreased our
2006 net periodic benefit cost by $0.2 million and our
accumulated other comprehensive income and the related
post-retirement liability by approximately $2.8 million as
of December 31, 2006.
For more information about our pensions and post-retirement
benefits, see Note M to the Consolidated Financial
Statements.
Share-Based Compensation Prior to
January 1, 2006, as provided under SFAS No. 123,
we applied APB No. 25 and related interpretations to
account for our share-based compensation plans. Under APB
No. 25, compensation expense was recognized for stock
option grants if the exercise price of the grant was below the
fair value of the underlying stock at the measurement date. On
January 1, 2006, we adopted SFAS No. 123(R),
which requires us to recognize compensation expense based on the
fair value on the date of the grant. We are using the modified
prospective transition method, which does not require prior
period financial statements to be restated. The impact on
pre-tax earnings from adopting SFAS No. 123(R) for the
year ended December 31, 2006 was a charge of
$2.5 million.
The option-pricing model that we used to value the stock
appreciation rights granted during 2006 was a Monte Carlo
simulation method. Under this method, the fair value of awards
on the date of grant is an estimate and is affected by our stock
price, as well as assumptions regarding a number of highly
complex and subjective variables. Expected volatility was set at
the average of the six-year historical weekly volatility for our
common stock and the implied volatility rates for
exchange-traded options. The expected term of options that were
granted was set equal to halfway between the vesting and
expiration dates for each grant. Dividends were not included in
this calculation because we do not currently pay dividends. The
risk-free rate of return for periods within the contractual life
of the option is based on U.S. Treasury rates in effect at
the time of the grant. Forfeitures were estimated at 3% per
year based on our historical experience.
For more information on the adoption and impact of
SFAS No. 123(R), see Note C and Note Q to
the Consolidated Financial Statements.
Contingencies We are subject to
various investigations, claims, and legal and administrative
proceedings covering a wide range of matters that arise in the
ordinary course of business activities. Any liability that may
result from these proceedings that we judge to be probable and
estimable has been accrued. The actual amounts resulting from
these matters can differ from our estimates.
New Accounting Pronouncements In June
2006, the FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109, Accounting for Income Taxes, which is
effective for fiscal years beginning after December 15,
2006. FIN 48 clarifies the recognition threshold and
measurement attributes for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We are
currently evaluating the provisions of FIN 48; however, the
adoption is not expected to have a material impact on our
financial statements.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an Amendment of FASB
Statements No. 87, 88, 106 and 132(R).
SFAS No. 158 requires an employer that is a business
entity and sponsors one or more single employer benefit plans to
(1) recognize the funded status of the benefit in its
statement of financial position, (2) recognize as a
component of other comprehensive income, net of tax, the gains
or losses and prior service costs or credits that arise during
the period but are not recognized as components of net periodic
benefit cost, (3) measure defined benefit plan assets and
obligations as of the date of the employers fiscal year
end statement of financial position and (4) disclose
additional information in the notes to financial statements
about certain effects on net periodic benefit costs for the next
fiscal year that arise from delayed recognition of gains or
losses, prior service costs or credits, and transition assets or
obligations. SFAS No. 158 is effective for fiscal
years ending after December 15, 2006. We adopted SFAS
No. 158 on December 31, 2006, which resulted in an
increase of $6.4 million on a pre-tax basis and a decrease
of $0.4 million on an after-tax basis on our accumulated
other comprehensive loss. We also recorded an adjustment of
$2.7 million to increase accumulated other comprehensive
loss to record our proportionate share of OxyVinyls
adoption of SFAS No. 158. The adoption of
SFAS No. 158 will have no effect on our compliance
with
POLYONE
CORPORATION 23
the financial covenants contained in the agreements governing
our debt and our receivables sale facility, and is not expected
to affect our operating results in future periods. For further
discussion of the impact of the adoption of
SFAS No. 158, see Note M to the Consolidated
Financial Statements.
Cash
Flows
Detail about cash flows can be found in the Consolidated
Statement of Cash Flows. The following discussion focuses on the
material components of cash flows from operating, investing and
financing activities.
Operating Activities In 2006, our
operations provided $111.7 million of cash. The primary
sources of cash were: profitable business operations; a decline
in accounts receivable due to lower sales levels at the end of
2006 compared with the prior year; and cash distributions that
we received from our equity investments. Primary uses of cash
included: cash payments for interest and income taxes; an
increase in inventories due to the slower than expected sales
volume at the end of the year; and a decrease in accounts
payable at the end of the year. Cash used by discontinued
operations was $0.1 million.
In 2005, our operations provided $63.7 million of cash.
Primary sources of cash were: profitable business operations; a
decline in inventories from improved inventory turnover; an
increase in accounts payable due to higher purchasing levels to
support higher sales levels at the end of the year compared to
the prior year; cash distributions that we received from our
equity investments; and short-term borrowings under our
receivables sale facility. Primary uses of cash were: cash
payments for environmental remediation at inactive sites; cash
payments for interest and income taxes; an increase in accounts
receivable due to higher sales levels at the end of the year
compared to the prior year; and the payment of employee bonuses
that had been accrued at the end of 2004 that were greater than
those that were accrued at the end of 2005. Cash provided by
discontinued operations was $1.8 million.
In 2004, our operations used $20.6 million of cash. Primary
sources of cash were: profitable business operations; an
increase in accounts payable due to a higher purchasing levels
to support higher sales levels at the end of the year compared
to the prior year, combined with longer payment terms; and cash
distributions that we received from our equity investments.
Primary uses of cash were: cash payments for employee separation
and plant closure initiatives; cash payments for interest and
income taxes; an increase in accounts receivable due to higher
sales levels at the end of the year compared to the prior year;
the repayment of short-term borrowings under our receivables
sale facility; and a $65 million voluntary contribution to
a defined-benefit pension plan. Cash provided by discontinued
operations was $5.9 million.
Working
capital management
Our working capital management focus is on three metrics that we
believe are the most critical to maximizing cash provided by
operating activities. These three metrics measure the number of
days of sales in receivables (DSO), and the days of cost of
goods sold in inventories (DSI) and accounts payable (DSP).
These metrics allow us to better understand the total dollar
changes in the three dollar components of working capital by
isolating the effects of sales and production levels in the
business versus managements efforts to drive more
efficient use of company funds.
The following table presents our working capital metrics and the
impact of changes in efficiency and volume on accounts
receivable, inventories and accounts payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Accounts receivable DSO
|
|
|
50.7
|
|
|
|
51.4
|
|
|
|
52.8
|
|
Inventories DSI
|
|
|
44.0
|
|
|
|
43.7
|
|
|
|
45.9
|
|
Accounts payable DSP
|
|
|
(41.7
|
)
|
|
|
(40.2
|
)
|
|
|
(44.1
|
)
|
|
Average annual net days
|
|
|
53.0
|
|
|
|
54.9
|
|
|
|
54.6
|
|
|
|
Change in net days from prior year
end
|
|
|
1.9
|
|
|
|
(0.3
|
)
|
|
|
|
|
Compared to 2005, 2006 average annual net days improved
1.9 days as management initiatives around working capital
demonstrated continued improvement. Comparing 2005 versus 2004,
DSO and DSI performance improved 3.6 days collectively,
offset by a less favorable performance in DSP.
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
Cash provided (used) by
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
23.0
|
|
|
$
|
(23.6
|
)
|
Inventories
|
|
|
(39.6
|
)
|
|
|
9.3
|
|
Accounts payable
|
|
|
(17.2
|
)
|
|
|
13.0
|
|
|
|
|
$
|
(33.8
|
)
|
|
$
|
(1.3
|
)
|
|
|
Impact of change in net days
|
|
$
|
20.4
|
|
|
$
|
36.8
|
|
Impact of change in sales and
production levels
|
|
|
(54.2
|
)
|
|
|
(38.1
|
)
|
|
|
|
$
|
(33.8
|
)
|
|
$
|
(1.3
|
)
|
|
|
From December 31, 2005 to December 31, 2006,
$33.8 million of cash was consumed in working capital
investment driven by higher inventories and lower payables.
Year-end 2005 demand was significantly above typical seasonal
levels and caused a larger than expected reduction in
inventories reflecting heightened customer demand following the
severe storms in the U.S. Gulf Coast. Conversely, at the
end of 2006, demand softened resulting in a relatively higher
year-end inventory levels. The decline in accounts payable was
due to lower purchases during December of 2006.
Higher sales levels during 2005 used $38.1 million of cash
from operating activities to fund the increase in sales from
2004 to 2005. Effective working capital programs, however,
resulted in a minimal overall increase of 0.3 net days
outstanding over the same time period. This contributed
$36.8 million to cash provided by operating activities,
holding the increase in our total investment in receivables,
inventory and payables from the effect of higher sales levels to
a minimum.
Investing Activities In 2006, we used
$16.8 million for investing activities, primarily for
capital spending in support of
24 POLYONE
CORPORATION
manufacturing operations. This use of cash was partially offset
by the proceeds from the sale of our Engineered Films business.
Capital spending in 2006 as a percentage of depreciation was
75%. Cash used by discontinued operations was $0.2 million.
In 2005, we used $24.2 million for investing activities,
reflecting capital spending in support of manufacturing
operations, the purchase of the remaining 16% of Star Color, a
Thailand-based color and additives business, and the purchase of
certain assets of Novatec Plastics Corporation. Star Color is
included in our International Color and Engineered Materials
segment, and Novatecs assets are included in our Vinyl
Business segment. This capital spending was partially offset by
proceeds that we received from the sale of previously closed
facilities. Capital spending as a percentage of depreciation was
67% in 2005. Cash used by discontinued operations was
$1.7 million.
In 2004, we generated $106.8 million from investing
activities, largely from the sale of our Elastomers and
Performance Additives business and our European Melos rubber
granules business. Melos was formerly included in our
International Color and Engineered Materials segment. Elastomers
and Performance Additives was a separate segment that was
reclassified as a discontinued operation as of December 31,
2003. This cash generation was partially offset by capital
spending in support of manufacturing operations and the
acquisition of the North American distribution business of
ResinDirect LLC, which is included in our PolyOne Distribution
segment. Capital spending as a percentage of depreciation in
2004 was 51%. Cash used by discontinued operations was
$4.6 million.
Financing Activities Cash used by
financing activities in 2006, 2005 and 2004 was primarily for
the extinguishment of debt.
Discontinued Operations Cash flows
from discontinued operations are presented separately on a
single line in each section of the Consolidated Statements of
Cash Flows. The absence of future cash flows from discontinued
operations is not expected to materially affect future liquidity
and capital resources.
Balance
Sheets
The following discussion focuses on material changes in balance
sheet line items from December 31, 2005 to
December 31, 2006 that are not discussed in the preceding
Cash Flows section.
Other non-current assets The increase
of $4.5 million was primarily due to the recording of a
note receivable of $6.2 million resulting from the sale of
our Engineered Films business in February 2006.
Accrued expenses The increase of
$10.7 million was primarily due to an increase in accrued
employee benefit costs, including incentives and vacation
benefits, partially offset by a reduction in accrued payroll
taxes and accrued income taxes.
Post-retirement benefits other than
pensions The reduction of $24.3 million
was due to the adoption of SFAS No. 158 and an
increase in the discount rate to determine the liability for
other post-employment benefits (OPEBs), both of which resulted
in a decrease in the liability for OPEBs.
Other non-current liabilities including
pensions The reduction of $13.8 million
was primarily due to a decrease in the pension liability of
$10.3 million that resulted primarily from an increase in
the discount rate at December 31, 2006, partially offset by
an increase of $6.6 million in non-current environmental
reserves. The remaining decrease in other non-current
liabilities including pensions is comprised of other less
significant account changes such as employment costs, insurance
accruals and other reserves.
Capital Resources
and Liquidity
Liquidity is defined as an enterprises ability to generate
adequate amounts of cash to meet both current and future needs.
These needs include paying obligations as they mature,
maintaining production capacity and providing for planned
growth. Capital resources are sources of funds other than those
generated by operations. We are not aware of any trends,
demands, commitments, events, or uncertainties that are
reasonably likely to result in our liquidity increasing or
decreasing to the extent that it would have a material adverse
effect on our financial condition.
As of December 31, 2006, we had existing facilities to
access available capital resources (receivables sale facility,
uncommitted short-term credit lines and senior unsecured notes
and debentures) totaling $706.9 million. As of
December 31, 2006, we had used $595.4 million of these
facilities, and $111.5 million was available to be drawn
while remaining in compliance with all facilities. In addition,
at December 31, 2006, we could incur additional secured
debt in an amount up to $31.6 million while remaining in
compliance with the debt coverage limit contained in the
Guarantee and Agreement, discussed in the section titled
Revolving Credit Facility below. As of
December 31, 2006, we also had a $66.2 million cash
and cash equivalents balance that exceeded our typical operating
cash requirements of $35 million to $40 million,
adding to our available liquidity.
The following table summarizes our available and outstanding
facilities at December 31, 2006:
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
Outstanding
|
|
|
Available
|
|
|
|
|
Long-term debt, including current
maturities
|
|
$
|
590.2
|
|
|
$
|
|
|
Receivables sale facility
|
|
|
|
|
|
|
111.5
|
|
Short-term debt
|
|
|
5.2
|
|
|
|
|
|
|
|
|
$
|
595.4
|
|
|
$
|
111.5
|
|
|
|
Long-Term Debt At December 31,
2006, long-term debt totaled $590.2 million, with
maturities ranging from 2007 to 2015. Current maturities of
long-term debt at December 31, 2006 were
$22.5 million. During 2006, we repurchased
$58.6 million aggregate principal amount of our
10.625% senior notes due 2010 at a premium of
$4.4 million. This premium is shown as a separate line item
in the Consolidated Statements of Operations. Unamortized
deferred note issuance costs of $0.8 million were expensed
due to this repurchase and are included in interest
POLYONE
CORPORATION 25
expense in the Consolidated Statements of Operations. We also
made a payment of $0.7 million of aggregate principal
amount of our medium-term notes which matured during 2006. As
part of our purchase of DH Compounding Company during the fourth
quarter 2006, we issued a promissory note in the principal
amount of $8.7 million, payable in 36 equal installments at
a rate of 6% per annum. During 2006, we made principal
payments totaling $0.7 million on this promissory note. For
more information about our debt, see Note G to the
Consolidated Financial Statements.
Revolving Credit Facility We decided
not to renew our revolving credit facility, and, accordingly, it
expired on June 6, 2006. To replace some of the features of
this expired facility, we entered into a definitive Guarantee
and Agreement with Citicorp USA, Inc. on June 6, 2006.
Under this Guarantee and Agreement, we guarantee the treasury
management and banking services provided to us and our
subsidiaries, such as subsidiary borrowings, interest rate
swaps, foreign currency forwards, letters of credit, credit card
programs and bank overdrafts. This guarantee is secured by our
inventories located in the United States.
Receivables Sale Facility Our
receivables sale facility will expire in July 2010. Our
receivables sale facility allows us to sell accounts receivable
and obtain proceeds of up to $175.0 million. The maximum
proceeds that we may receive is limited to 85% of the eligible
domestic accounts receivable sold. This facility also makes up
to $40.0 million available for issuing standby letters of
credit, of which $10.9 million was used at
December 31, 2006.
The receivables sale facility requires us to maintain a minimum
Fixed Charge Coverage Ratio (defined as Adjusted EBITDA less
capital expenditures, divided by interest expense and scheduled
debt repayments for the next four quarters) of at least 1 to 1
when availability under the facility is $40 million or
less. As of December 31, 2006, the Fixed Charge Coverage
Ratio was 2.3 to 1 and availability under the facility was
$111.5 million.
Of the capital resource facilities available to us as of
December 31, 2006, the portion of the receivables sale
facility that was actually sold provided security for the
transfer of ownership of these receivables. Each indenture
governing our senior unsecured notes and debentures and our
guarantee of the SunBelt notes allows a specific level of
secured debt, above which security must be provided on each
indenture and our guarantee of the SunBelt notes. The
receivables sale facility and our guarantee of the SunBelt notes
are not considered debt under the covenants associated with our
senior unsecured notes and debentures. As of December 31,
2006, we had not sold any accounts receivable and had guaranteed
$67.0 million of our SunBelt equity affiliates debt.
The following table summarizes our obligations under long-term
debt, operating leases, standby letters of credit, interest
obligations, pension and post-retirement obligations, guarantees
and purchase obligations as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by
Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
(In
millions)
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
590.2
|
|
|
$
|
22.5
|
|
|
$
|
42.4
|
|
|
$
|
276.2
|
|
|
$
|
249.1
|
|
Operating leases
|
|
|
65.0
|
|
|
|
15.2
|
|
|
|
21.2
|
|
|
|
13.4
|
|
|
|
15.2
|
|
Standby letters of credit
|
|
|
10.9
|
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
obligations(1)
|
|
|
235.8
|
|
|
|
53.7
|
|
|
|
103.2
|
|
|
|
56.5
|
|
|
|
22.4
|
|
Pension and post-retirement
obligations(2)
|
|
|
198.1
|
|
|
|
25.1
|
|
|
|
55.6
|
|
|
|
49.4
|
|
|
|
68.0
|
|
Guarantees
|
|
|
67.0
|
|
|
|
6.1
|
|
|
|
12.2
|
|
|
|
12.2
|
|
|
|
36.5
|
|
Purchase obligations
|
|
|
1.9
|
|
|
|
1.4
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
|
|
|
Total
|
|
$
|
1,168.9
|
|
|
$
|
134.9
|
|
|
$
|
235.0
|
|
|
$
|
407.8
|
|
|
$
|
391.2
|
|
|
|
|
|
(1)
|
Interest obligations are stated at
the rate of interest that is defined by the debt instrument and
take into effect any impact of rate swap agreements, assuming
that the debt is paid at maturity.
|
|
(2)
|
Pension and post-retirement
obligations relate to our U.S. and international pension and
other post-retirement plans. Based upon our interpretation of
the new pension regulations, there will be minimum funding
requirements in 2007 of approximately $11.1 million for our
U.S. qualified defined benefit pension plans. Obligations
are based on the plans current funded status and actuarial
assumptions, and include funding requirements projected to be
made to our qualified pension plans, projected benefit payments
to participants in our other post-employment benefit plans, and
projected benefit payments to participants in our non-qualified
pension plans through 2016.
|
We expect that profitable operations in 2007 will enable us to
maintain existing levels of available capital resources and meet
our cash requirements. Expected sources of cash in 2007 include
net income, additional borrowings under existing loan
agreements, cash distributions from equity affiliates and
proceeds from the sale of previously closed facilities and
redundant assets. Expected uses of cash in 2007 include interest
expense and discounts on the sale of accounts receivable, cash
taxes, a contribution to a defined benefit pension plan, capital
expenditures, early extinguishment of a portion of long-term
debt and the retirement of medium-term notes maturing in 2007.
Capital expenditures are currently estimated to be between $45
and $50 million in 2007, primarily to support strategic
growth initiatives and manufacturing operations. Cash
expenditures for environmental remediation in future years are
expected to be generally consistent with 2006 levels.
Based on current projections, we believe that we should be able
to continue to manage and control working capital, discretionary
spending and capital expenditures and that cash provided by
operating activities, along with available borrowing capacity
under our receivables sale facility, should allow us to maintain
adequate levels of available capital resources to fund our
operations and meet debt service and minimum pension funding
requirements for both the short- and long-term.
26 POLYONE
CORPORATION
Related-Party
Transactions
We purchase a substantial portion of our PVC resin and all of
our VCM raw materials under supply agreements with OxyVinyls, a
24% equity-owned company. These agreements have an initial term
of 15 years, commencing May 1, 1999, and we have the
right to renew these agreements for two five-year periods. We
have also entered into various service agreements with
OxyVinyls. Net amounts owed to OxyVinyls, primarily for raw
material purchases, totaled $17.3 million at
December 31, 2006 and $28.0 million at
December 31, 2005. Our total purchases of raw materials
from OxyVinyls were $369 million during 2006 and
$368 million during 2005.
Off-Balance Sheet
Arrangements
Receivables sale facility We sell our
accounts receivable to PolyOne Funding Corporation (PFC), a
wholly-owned, bankruptcy-remote subsidiary. At December 31,
2006, accounts receivable totaling $161.6 million were sold
to PFC and, as a result, they are reflected as a reduction of
accounts receivable in our Consolidated Balance Sheets. PFC in
turn sells an undivided interest in these accounts receivable to
certain investors and realizes proceeds of up to
$175 million. The maximum proceeds that PFC may receive
under the facility is limited to 85% of the eligible accounts
receivable sold to PFC. At December 31, 2006, PFC had not
sold any of its undivided interests in accounts receivable. We
retained an interest in the $161.6 million of trade
receivables sold by us to PFC. As a result, this retained
interest is included in accounts receivable on our Consolidated
Balance Sheet at December 31, 2006. We believe that
available funding under our receivables sale facility provides
us increased flexibility to manage working capital requirements
and is an important source of liquidity. For more information
about our receivables sale facility, see Note I to the
Consolidated Financial Statements.
Guarantee of indebtedness of others As
discussed in Note N to the Consolidated Financial
Statements, we guarantee $67.0 million of unconsolidated
equity affiliate debt of Sunbelt in connection with the
construction of a chlor-alkali facility in McIntosh, Alabama.
This debt guarantee matures in 2017.
Letters of credit We maintain
approximately $10.9 million letters of credit under the
receivables sale facility. These letters of credit are issued by
the bank in favor of third parties and are mainly related to
insurance claims and interest rate swap agreements.
We have no other off-balance sheet arrangements as defined in
Item 303(a)(4)(ii) of
Regulation S-K.
Outlook
We anticipate that the North American market and operating
environment experienced during the last half of 2006 will
continue into early 2007, as the industrial slowdown we
experienced is projected to continue through the first half.
Sales demand was sluggish at the end 2006, reflecting softening
in the building and construction, automotive and consumer
durables (e.g., appliance) markets. Pockets of strengthening
demand have been seen, but it is premature to view them as
sustainable and predictive of a broader rebound. Overall
industrial production is projected to moderate approximately
1.5 percentage points to 2.5% compared to 2006. Automobile
production is also projected to soften compared to 2006. The
leading construction index, on the other hand, started to show
signs of improvement in the fourth quarter of 2006. While it is
too early to suggest a strong uptrend, it is encouraging for a
rebound in late spring 2007. Moreover, the leading home price
index is also rising. If this advance continues, it would point
to the bottom in home prices as early as late spring. This would
also likely bolster consumer confidence and spending. Sustained
lower energy prices to the consumer, at least compared to the
two previous years, should also strengthen confidence with the
attendant beneficial impacts on the overall economy. With this
backdrop, we do not anticipate a material change to long term
North American plastic consumption growth trends of 2.5% to 4%
in 2007.
After having strengthened markedly in 2006, Eurozone economic
growth, in terms of gross domestic product (GDP) and industrial
production, is projected to moderate in 2007. This trend is
expected to be generally mirrored in our principal market
economies of Germany, France, United Kingdom and Benelux. Spain,
on the other hand, is expected to experience continued strong
economic growth in 2007 of approximately 3.5% after 3.9% growth
in 2006. The primary economies in Eastern Europe are projected
to experience GDP growth between 2 and 3 times that of Western
Europe. Plastics consumption growth in Western Europe is
projected to remain in the 1.5% to 2.5% range, whereas Eastern
Europe plastic consumption is expected to remain in the high
single digits. Additionally, per capita plastics consumption is
approximately 55 kilograms in Eastern Europe, only 60% of the 95
kilogram consumption experienced in Western Europe.
GDP growth for key Asian economies in 2007 is projected to
moderate compared to 2006. GDP growth in China is projected to
be 9% to 10%. Industrial production is projected to be
approximately 50% higher than GDP growth rates. Plastics growth
for ASEAN is projected at 5% to 6%, and plastics growth in China
is projected at 14% in the aggregate, with regional differences
accounting for growth rates that range between 12% and 20%. Our
target is to grow sales 15% to 20% annually, well in excess of
market growth rates, through organic programs and entry into new
markets and geographies.
Even though margin pressures experienced across most business
segments at the end of 2006 are not expected to abate in the
near term, we project improved gross margins in 2007 due to more
effective pricing, an improved sales mix through specialization
and accelerated rates of higher value new business closes. Gross
margins will also benefit from sourcing leverage and operating
efficiencies resulting from Lean-Six Sigma implementation. It is
also noteworthy that fourth quarter 2006 pricing actions should
provide a degree of margin momentum entering 2007, despite
market pressures being exerted on our businesses.
POLYONE
CORPORATION 27
Chlorovinyl and derivative hydrocarbon costs are projected to
decline from cycle peaks realized in 2006. This trend began in
the third quarter of 2006 and is expected to continue through
2007. Natural gas, on the other hand, is projected to average
moderately higher in 2007 compared to 2006. Aggregate chlorine
and caustic prices are projected to fall, adversely impacting
earnings in Resin and Intermediates. Based on these
expectations, the overall net 2007 chlorovinyl chain margin
drivers are expected to negatively impact operating income in
2007.
Listed below are some of the priorities that we have identified
for 2007:
|
|
|
|
|
Transform our culture towards specialization to drive additional
sales of new high margin business by having a customer first
focus.
|
|
|
|
Improve gross margins through value pricing, upgrading sales
mix, developing differentiated new product technologies and
closing more new high value business across each operating
business.
|
|
|
|
Implement initiatives that drive our key strategies:
|
|
|
|
|
|
Specialization Shift basis of competition to
differentiation from a cost and commodity orientation;
|
|
|
|
Globalization Leverage our global competitive
advantages;
|
|
|
|
Operational Excellence Drive cultural change
to address and answer the Voice of Customer
relentlessly; and
|
|
|
|
Commercial Excellence Improve effectiveness
of sales, marketing and innovation resources to strengthen our
value proposition to sell valued solutions, not products.
|
|
|
|
|
|
Restore profitability and reposition North American Engineered
Materials further into being a high value custom specialty
business.
|
|
|
|
Deliver meaningful progress toward re-establishing North
American Color and Additives profitability.
|
|
|
|
Further strengthen our financial profile.
|
CAUTIONARY
NOTE ON FORWARD-LOOKING STATEMENTS
In this Annual Report on
Form 10-K,
statements that are not reported financial results or other
historical information are forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements give
current expectations or forecasts of future events and are not
guarantees of future performance. They are based on
managements expectations that involve a number of business
risks and uncertainties, any of which could cause actual results
to differ materially from those expressed in or implied by the
forward-looking statements. You can identify these statements by
the fact that they do not relate strictly to historic or current
facts. They use words such as anticipate,
estimate, expect, project,
intend, plan, believe and
other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In
particular, these include statements relating to future actions;
prospective changes in raw material costs, product pricing or
product demand; future performance or results of current and
anticipated market conditions and market strategies; sales
efforts; expenses; the outcome of contingencies such as legal
proceedings; and financial results. Factors that could cause
actual results to differ materially include, but are not limited
to:
|
|
|
|
|
the effect on foreign operations of currency fluctuations,
tariffs, nationalization, exchange controls, limitations on
foreign investment in local businesses and other political,
economic and regulatory risks;
|
|
|
|
changes in polymer consumption growth rates within the U.S.,
Europe or Asia or other geographic regions where PolyOne
conducts business;
|
|
|
|
changes in global industry capacity or in the rate at which
anticipated changes in industry capacity come online in the PVC,
chlor-alkali, VCM or other industries in which PolyOne
participates;
|
|
|
|
fluctuations in raw material prices, quality and supply and in
energy prices and supply, in particular fluctuations outside the
normal range of industry cycles;
|
|
|
|
production outages or material costs associated with scheduled
or unscheduled maintenance programs;
|
|
|
|
costs, difficulties or delays related to the operation of joint
venture entities;
|
|
|
|
lack of
day-to-day
operating control, including procurement of raw materials, of
equity affiliates or joint ventures;
|
|
|
|
partial control over investment decisions and dividend
distribution policy of the OxyVinyls partnership and other
minority equity holdings of PolyOne;
|
|
|
|
an inability to launch new products
and/or
services within PolyOnes various businesses;
|
|
|
|
the possibility of further goodwill impairment;
|
|
|
|
an inability to maintain any required licenses or permits;
|
|
|
|
an inability to comply with any environmental laws and
regulations;
|
|
|
|
the cost of compliance with environmental laws and regulations,
including any increased cost of complying with new or revised
laws and regulations;
|
|
|
|
unanticipated developments that could occur with respect to
contingencies such as litigation and environmental matters,
including any developments that would require any increase in
our costs
and/or
reserves for such contingencies;
|
|
|
|
the cost of complying, or the inability to comply, with the
REACH legislation in Europe that may make it more difficult
|
28 POLYONE
CORPORATION
|
|
|
|
|
to use recycled wastes and imported chemical raw materials;
|
|
|
|
|
|
an inability to achieve or delays in achieving or achievement of
less than the anticipated financial benefit from initiatives
related to cost reductions and employee productivity goals;
|
|
|
|
a delay or inability to achieve targeted debt level reductions;
|
|
|
|
an inability to access the receivables sale facility as a result
of breaching covenants due to not achieving anticipated earnings
performance or for any other reason;
|
|
|
|
any poor performance of our pension plan assets and any
obligation on our part to fund PolyOnes pension plan;
|
|
|
|
any delay
and/or
inability to bring the North American Color and Additives and
the Engineered Materials segments to profitability;
|
|
|
|
an inability to raise or sustain prices for products or services;
|
|
|
|
an inability to maintain appropriate relations with unions and
employees in certain locations in order to avoid business
disruptions;
|
|
|
|
other factors affecting our business beyond our control,
including, without limitation, changes in the general economy,
changes in interest rates and changes in the rate of inflation;
|
|
|
|
any change in agreements with product suppliers to PolyOne
Distribution that prohibit PolyOne from distributing products;
|
|
|
|
the timing and amounts of any repurchases of outstanding senior
notes or medium-term notes, including the amount of any premiums
paid;
|
|
|
|
the timing of completion of acquisitions, including the
acquisition of Ngai Hing PlastChem Company;
|
|
|
|
the future financial performance of acquired businesses,
including that of Ngai Hing PlastChem Company and DH Compounding
Company; and
|
|
|
|
other factors described in this Annual Report on
Form 10-K
under Item 1A, Risk Factors.
|
We cannot guarantee that any forward-looking statement will be
realized, although we believe we have been prudent in our plans
and assumptions. Achievement of future results is subject to
risks, uncertainties and inaccurate assumptions. Should known or
unknown risks or uncertainties materialize, or should underlying
assumptions prove inaccurate, actual results could vary
materially from those anticipated, estimated or projected.
Investors should bear this in mind as they consider
forward-looking statements. We undertake no obligation to
publicly update forward-looking statements, whether as a result
of new information, future events or otherwise, except as
otherwise required by law. You are advised, however, to consult
any further disclosures we make on related subjects in our
reports on
Forms 10-Q,
8-K and
10-K
furnished to the SEC. You should understand that it is not
possible to predict or identify all risk factors. Consequently,
you should not consider any such list to be a complete set of
all potential risks or uncertainties.
POLYONE
CORPORATION 29
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
We are exposed to certain market risks as part of our ongoing
business operations, including risks from changes in interest
rates on debt obligations and foreign currency exchange rates,
that could impact our financial condition, results of operations
and cash flows. We manage our exposure to these and other market
risks through regular operating and financing activities,
including the use of derivative financial instruments. We intend
to use these derivative financial instruments as risk management
tools and not for speculative investment purposes.
Interest rate exposure We periodically
enter into interest rate swap agreements that modify our
exposure to interest rate risk by converting some of our
fixed-rate obligations to floating rates. We have six agreements
with a net fair value liability of $5.1 million and
$5.8 million at December 31, 2006 and 2005,
respectively. The weighted-average interest rate for these six
agreements was 9.3% at December 31, 2006 and 8.2% at
December 31, 2005. These exchange agreements are perfectly
effective as defined by SFAS No. 133, Accounting for
Derivative Financial Instruments and Hedging Activities.
There were no material changes in the market risk that we faced
during 2006. For more information about our interest rate
exposure, see Note C to the Consolidated Financial
Statements.
Foreign currency exposure We enter
into intercompany lending transactions that are denominated in
various foreign currencies and are subject to financial exposure
from foreign exchange rate movement from the date a loan is
recorded to the date it is settled or revalued. To mitigate this
risk, we enter into foreign exchange contracts. Gains and losses
on these contracts generally offset gains or losses on the
assets and liabilities being hedged, and are recorded as other
income or expense in the Consolidated Statements of Operations.
We do not hold or issue financial instruments for trading
purposes. For more information about our foreign currency
exposure, see Note T to the Consolidated Financial
Statements.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Index to
Financial Statements and Financial Statement Schedule
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
30
|
|
|
|
|
31
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
32
|
|
|
|
|
33
|
|
|
|
|
34
|
|
|
|
|
35
|
|
|
|
|
36-61
|
|
Financial Statement Schedules:
|
|
|
|
|
|
|
|
62
|
|
|
MANAGEMENTS
REPORT
The management of PolyOne Corporation is responsible for
preparing the consolidated financial statements and disclosures
included in this Annual Report on
Form 10-K.
The financial statements and disclosures included in this Annual
Report fairly present in all material respects the financial
position, results of operations, shareholders equity and
cash flows of PolyOne Corporation as of and for the year ended
December 31, 2006.
Management is responsible for establishing and maintaining
disclosure controls and procedures designed to ensure that the
information required to be disclosed by the company is captured
and reported in a timely manner. Management has evaluated the
design and operation of the companys disclosure controls
and procedures at December 31, 2006, and found them to be
effective.
Management is also responsible for establishing and maintaining
a system of internal control over financial reporting that is
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Internal control over
financial reporting includes policies and procedures that
provide reasonable assurance that: PolyOne Corporations
accounting records accurately and fairly reflect the
transactions and dispositions of the assets of the company;
unauthorized or improper acquisition, use or disposal of company
assets will be prevented or timely detected; the companys
transactions are properly recorded and reported to permit the
preparation of the companys financial statements in
conformity with generally accepted accounting principles; and
the companys receipts and expenditures are made only in
accordance with authorizations of management and the board of
directors of the company.
Management has assessed the effectiveness of PolyOnes
internal control over financial reporting as of
December 31, 2006, and has prepared Managements
Annual Report On Internal Control Over Financial Reporting
contained on page 62 of this Annual Report. This report
concludes that internal control over financial reporting is
effective and that no material weaknesses were identified.
Ernst & Young LLP, who audited the consolidated
financial statements of PolyOne Corporation as of and for the
year ended December 31, 2006, also audited
managements assessment of internal control over financial
reporting and issued an attestation report on that assessment.
|
|
|
|
|
/s/ W.
David Wilson
|
|
|
|
Stephen D. Newlin
|
|
W. David Wilson
|
President and
|
|
Senior Vice President
|
Chief Executive Officer
|
|
and Chief Financial Officer
|
February 26, 2007
30 POLYONE
CORPORATION
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and
Shareholders PolyOne Corporation
We have audited managements assessment, included in
Item 9A,Controls and Procedures
Managements Annual Report on Internal Control over
Financial Reporting, that PolyOne Corporation maintained
effective internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). PolyOne Corporations management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control over financial
reporting, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that: (1) pertain to the
maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that PolyOne
Corporation maintained effective internal control over financial
reporting as of December 31, 2006 is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, PolyOne Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of PolyOne Corporation and
subsidiaries as of December 31, 2006, and 2005, and the
related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2006 of PolyOne
Corporation and our report dated February 26, 2007
expressed an unqualified opinion thereon.
Cleveland, Ohio
February 26, 2007
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders PolyOne Corporation
We have audited the consolidated balance sheets of PolyOne
Corporation and subsidiaries as of December 31, 2006 and
2005, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2006. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a)(2). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits. The
financial statements of Oxy Vinyls, LP (a limited partnership in
which the Company has a 24% interest) have been audited by other
auditors whose report has been furnished to us, and our opinion
on the consolidated financial statements, insofar as it relates
to 2006, 2005 and 2004 amounts included for Oxy Vinyls, LP, is
based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the
report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other
auditors, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of PolyOne Corporation and subsidiaries at
December 31, 2006 and 2005, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note C to the consolidated financial
statements, the Company adopted SFAS No. 123(R),
Share-Based Payment applying the modified
prospective transition method effective January 1, 2006. As
discussed in Note C to the consolidated financial
statements, the Company adopted the provisions of
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and
132®
effective December 31, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 26, 2007
expressed an unqualified opinion thereon.
Cleveland, Ohio
February 26, 2007
POLYONE
CORPORATION 31
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
(In millions,
except per share data)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Sales
|
|
$
|
2,622.4
|
|
|
$
|
2,450.6
|
|
|
$
|
2,267.7
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,282.7
|
|
|
|
2,153.5
|
|
|
|
1,934.2
|
|
Selling and administrative
|
|
|
201.3
|
|
|
|
178.2
|
|
|
|
207.8
|
|
Depreciation and amortization
|
|
|
57.1
|
|
|
|
50.7
|
|
|
|
50.9
|
|
Employee separation and plant
phaseout
|
|
|
|
|
|
|
5.5
|
|
|
|
(1.4
|
)
|
Asset impairments
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
3.8
|
|
Environmental remediation at
inactive sites
|
|
|
2.5
|
|
|
|
0.9
|
|
|
|
8.7
|
|
Income from equity affiliates and
minority interest
|
|
|
(111.6
|
)
|
|
|
(78.9
|
)
|
|
|
(64.7
|
)
|
|
Operating income
|
|
|
190.2
|
|
|
|
140.3
|
|
|
|
128.4
|
|
Interest expense
|
|
|
(66.5
|
)
|
|
|
(68.1
|
)
|
|
|
(72.1
|
)
|
Interest income
|
|
|
3.4
|
|
|
|
1.9
|
|
|
|
1.5
|
|
Premium on early extinguishment of
long-term debt
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
(3.3
|
)
|
Other expense, net
|
|
|
(2.8
|
)
|
|
|
(5.3
|
)
|
|
|
(13.2
|
)
|
|
Income before income taxes and
discontinued operations
|
|
|
119.9
|
|
|
|
68.8
|
|
|
|
41.3
|
|
Income tax benefit (expense)
|
|
|
6.0
|
|
|
|
(6.6
|
)
|
|
|
(13.7
|
)
|
|
Income before discontinued
operations
|
|
|
125.9
|
|
|
|
62.2
|
|
|
|
27.6
|
|
Loss from discontinued operations
and loss on sale, net of income taxes
|
|
|
(2.7
|
)
|
|
|
(15.3
|
)
|
|
|
(4.1
|
)
|
|
Net income
|
|
$
|
123.2
|
|
|
$
|
46.9
|
|
|
$
|
23.5
|
|
|
|
Basic and diluted earnings (loss)
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before discontinued operations
|
|
$
|
1.36
|
|
|
$
|
0.68
|
|
|
$
|
0.30
|
|
Discontinued operations
|
|
|
(0.03
|
)
|
|
|
(0.17
|
)
|
|
|
(0.04
|
)
|
|
Basic and diluted earnings per
common share
|
|
$
|
1.33
|
|
|
$
|
0.51
|
|
|
$
|
0.26
|
|
|
|
Weighted average shares used to
compute earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
92.4
|
|
|
|
91.9
|
|
|
|
91.6
|
|
Diluted
|
|
|
92.8
|
|
|
|
92.0
|
|
|
|
91.8
|
|
See Notes to Consolidated Financial
Statements.
32 POLYONE
CORPORATION
Consolidated Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In millions,
except per share data)
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
66.2
|
|
|
$
|
32.8
|
|
Accounts receivable (less allowance
of $5.9 in 2006 and $6.4 in 2005)
|
|
|
316.4
|
|
|
|
320.5
|
|
Inventories
|
|
|
240.8
|
|
|
|
191.8
|
|
Deferred income tax assets
|
|
|
18.1
|
|
|
|
20.1
|
|
Other current assets
|
|
|
27.8
|
|
|
|
27.4
|
|
Discontinued operations
|
|
|
|
|
|
|
20.9
|
|
|
Total current assets
|
|
|
669.3
|
|
|
|
613.5
|
|
Property, net
|
|
|
442.4
|
|
|
|
436.0
|
|
Investment in equity affiliates
|
|
|
276.1
|
|
|
|
273.9
|
|
Goodwill
|
|
|
287.0
|
|
|
|
287.0
|
|
Other intangible assets, net
|
|
|
9.4
|
|
|
|
10.6
|
|
Deferred income tax assets
|
|
|
25.0
|
|
|
|
0.1
|
|
Other non-current assets
|
|
|
64.4
|
|
|
|
59.9
|
|
Discontinued operations
|
|
|
|
|
|
|
6.7
|
|
|
Total assets
|
|
$
|
1,773.6
|
|
|
$
|
1,687.7
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
5.2
|
|
|
$
|
7.1
|
|
Accounts payable, including amounts
payable to related party (see Note N)
|
|
|
221.0
|
|
|
|
232.6
|
|
Accrued expenses
|
|
|
93.1
|
|
|
|
82.4
|
|
Current portion of long-term debt
|
|
|
22.5
|
|
|
|
0.7
|
|
Discontinued operations
|
|
|
|
|
|
|
11.2
|
|
|
Total current
liabilities
|
|
|
341.8
|
|
|
|
334.0
|
|
Long-term debt
|
|
|
567.7
|
|
|
|
638.7
|
|
Post-retirement benefits other than
pensions
|
|
|
83.6
|
|
|
|
107.9
|
|
Other non-current liabilities
including pensions
|
|
|
200.5
|
|
|
|
214.3
|
|
Minority interest in consolidated
subsidiaries
|
|
|
5.5
|
|
|
|
5.4
|
|
|
Total liabilities
|
|
|
1,199.1
|
|
|
|
1,300.3
|
|
Commitments and Contingencies
(see Note N)
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
Preferred stock, 40.0 shares
authorized, no shares issued
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par,
400.0 shares authorized, 122.2 shares issued in 2006
and 2005
|
|
|
1.2
|
|
|
|
1.2
|
|
Additional paid-in capital
|
|
|
1,065.7
|
|
|
|
1,066.4
|
|
Retained deficit
|
|
|
(67.1
|
)
|
|
|
(190.3
|
)
|
Common stock held in treasury,
29.4 shares in 2006 and 30.3 shares in 2005
|
|
|
(326.2
|
)
|
|
|
(337.1
|
)
|
Accumulated other comprehensive loss
|
|
|
(99.1
|
)
|
|
|
(152.8
|
)
|
|
Total shareholders
equity
|
|
|
574.5
|
|
|
|
387.4
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
1,773.6
|
|
|
$
|
1,687.7
|
|
|
|
See Notes to Consolidated Financial
Statements.
POLYONE
CORPORATION 33
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
123.2
|
|
|
$
|
46.9
|
|
|
$
|
23.5
|
|
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee separation and plant
phaseout charge (benefit)
|
|
|
|
|
|
|
5.5
|
|
|
|
(1.4
|
)
|
Cash payments for employee
separation and plant phaseout
|
|
|
(1.8
|
)
|
|
|
(3.6
|
)
|
|
|
(23.3
|
)
|
Asset impairment charges
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
3.8
|
|
Premium on extinguishment of
long-term debt
|
|
|
4.4
|
|
|
|
|
|
|
|
3.3
|
|
Charges for environmental
remediation at inactive sites
|
|
|
2.5
|
|
|
|
0.9
|
|
|
|
8.7
|
|
Cash receipts (payments) for
environmental remediation at inactive sites, net of insurance
benefits
|
|
|
1.8
|
|
|
|
(8.7
|
)
|
|
|
(1.6
|
)
|
Depreciation and amortization
|
|
|
57.1
|
|
|
|
50.7
|
|
|
|
50.9
|
|
Loss on disposition of discontinued
businesses and related plant phaseout charge
|
|
|
3.1
|
|
|
|
15.6
|
|
|
|
28.8
|
|
Companies carried at equity and
minority interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity affiliates
|
|
|
(111.6
|
)
|
|
|
(78.9
|
)
|
|
|
(64.7
|
)
|
Dividends and distributions received
|
|
|
97.7
|
|
|
|
67.4
|
|
|
|
51.5
|
|
Provision (benefit) for deferred
income taxes
|
|
|
(13.6
|
)
|
|
|
2.0
|
|
|
|
0.7
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
23.0
|
|
|
|
(23.6
|
)
|
|
|
(21.7
|
)
|
Inventories
|
|
|
(39.6
|
)
|
|
|
9.3
|
|
|
|
1.5
|
|
Accounts payable
|
|
|
(17.2
|
)
|
|
|
13.0
|
|
|
|
22.2
|
|
Increase (decrease) in sale of
accounts receivable
|
|
|
(7.9
|
)
|
|
|
7.9
|
|
|
|
(70.7
|
)
|
Accrued expenses and other
|
|
|
(9.5
|
)
|
|
|
(42.9
|
)
|
|
|
(38.0
|
)
|
Net cash provided (used) by
discontinued operations
|
|
|
(0.1
|
)
|
|
|
1.8
|
|
|
|
5.9
|
|
|
Net cash provided (used) by
operating activities
|
|
|
111.7
|
|
|
|
63.7
|
|
|
|
(20.6
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(41.1
|
)
|
|
|
(32.1
|
)
|
|
|
(23.9
|
)
|
Return of capital by equity
affiliates, net
|
|
|
|
|
|
|
|
|
|
|
8.3
|
|
Business acquisitions, net of cash
acquired
|
|
|
1.2
|
|
|
|
(2.7
|
)
|
|
|
(6.7
|
)
|
Deposit on pending business
acquisition
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued
business, net
|
|
|
17.3
|
|
|
|
|
|
|
|
101.5
|
|
Proceeds from sale of assets
|
|
|
8.7
|
|
|
|
12.3
|
|
|
|
32.2
|
|
Net cash used by discontinued
operations
|
|
|
(0.2
|
)
|
|
|
(1.7
|
)
|
|
|
(4.6
|
)
|
|
Net cash provided (used) by
investing activities
|
|
|
(16.8
|
)
|
|
|
(24.2
|
)
|
|
|
106.8
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in short-term debt
|
|
|
(2.1
|
)
|
|
|
4.8
|
|
|
|
1.2
|
|
Repayment of long-term debt
|
|
|
(60.0
|
)
|
|
|
(49.0
|
)
|
|
|
(92.9
|
)
|
Premium on early extinguishment of
long-term debt
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
(3.3
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
Termination of interest rate swap
agreements
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
Proceeds from the exercise of stock
options
|
|
|
3.1
|
|
|
|
0.5
|
|
|
|
0.3
|
|
|
Net cash used by financing
activities
|
|
|
(63.4
|
)
|
|
|
(43.7
|
)
|
|
|
(95.4
|
)
|
Effect of exchange rate changes
on cash
|
|
|
1.9
|
|
|
|
(1.6
|
)
|
|
|
(0.9
|
)
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
33.4
|
|
|
|
(5.8
|
)
|
|
|
(10.1
|
)
|
Cash and cash equivalents at
beginning of year
|
|
|
32.8
|
|
|
|
38.6
|
|
|
|
48.7
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
66.2
|
|
|
$
|
32.8
|
|
|
$
|
38.6
|
|
|
|
See Notes to Consolidated Financial
Statements.
34 POLYONE
CORPORATION
Consolidated
Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
Common
|
|
|
Share
|
|
|
Other
|
|
(In millions,
except per share
|
|
Common
|
|
|
Shares Held
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Stock Held
|
|
|
Ownership
|
|
|
Comprehensive
|
|
data; shares in
thousands)
|
|
Shares
|
|
|
in
Treasury
|
|
|
Total
|
|
|
Stock
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
in
Treasury
|
|
|
Trust
|
|
|
Income
(Loss)
|
|
|
|
|
Balance January 1, 2004
|
|
|
122,192
|
|
|
|
30,425
|
|
|
$
|
338.5
|
|
|
$
|
1.2
|
|
|
$
|
1,068.7
|
|
|
$
|
(260.7
|
)
|
|
$
|
(339.8
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(129.6
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
23.5
|
|
|
|
|
|
|
|
|
|
|
|
23.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.9
|
|
Adjustment of minimum pension
liability, net of tax benefit of $0.4
|
|
|
|
|
|
|
|
|
|
|
(19.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation and
benefits and exercise of options
|
|
|
|
|
|
|
55
|
|
|
|
2.1
|
|
|
|
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
0.8
|
|
|
|
1.3
|
|
|
|
1.5
|
|
|
Balance December 31, 2004
|
|
|
122,192
|
|
|
|
30,480
|
|
|
$
|
352.1
|
|
|
$
|
1.2
|
|
|
$
|
1,067.2
|
|
|
$
|
(237.2
|
)
|
|
$
|
(339.0
|
)
|
|
$
|
|
|
|
$
|
(140.1
|
)
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
46.9
|
|
|
|
|
|
|
|
|
|
|
|
46.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(9.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9.3
|
)
|
Adjustment of minimum pension
liability, net of tax benefit of $1.0
|
|
|
|
|
|
|
|
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
35.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation and
benefits and exercise of options
|
|
|
|
|
|
|
(225
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
(1.0
|
)
|
|
Balance December 31, 2005
|
|
|
122,192
|
|
|
|
30,255
|
|
|
$
|
387.4
|
|
|
$
|
1.2
|
|
|
$
|
1,066.4
|
|
|
$
|
(190.3
|
)
|
|
$
|
(337.1
|
)
|
|
$
|
|
|
|
$
|
(152.8
|
)
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
123.2
|
|
|
|
|
|
|
|
|
|
|
|
123.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
12.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.1
|
|
Adjustment of minimum pension
Liability, net of tax expense of $0.3
|
|
|
|
|
|
|
|
|
|
|
44.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
179.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially apply
SFAS No. 158, net of tax benefit of $6.8
|
|
|
|
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.3
|
)
|
Stock-based compensation and
benefits and exercise of options
|
|
|
|
|
|
|
(871
|
)
|
|
|
9.5
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
10.9
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
Balance December 31, 2006
|
|
|
122,192
|
|
|
|
29,384
|
|
|
$
|
574.5
|
|
|
$
|
1.2
|
|
|
$
|
1,065.7
|
|
|
$
|
(67.1
|
)
|
|
$
|
(326.2
|
)
|
|
$
|
|
|
|
$
|
(99.1
|
)
|
|
|
See Notes to Consolidated Financial
Statements.
POLYONE
CORPORATION 35
Notes to
Consolidated Financial Statements
Note A.
DESCRIPTION OF BUSINESS
PolyOne Corporation (PolyOne or Company) is an international
polymer services company with operations in thermoplastic
compounds, specialty polyvinyl chloride (PVC) resins, specialty
polymer formulations, color and additive systems, and
thermoplastic resin distribution. PolyOne also has equity
investments in manufacturers of PVC resin and its intermediates
and in a formulator of polyurethane compounds.
PolyOnes operations are located primarily in the United
States, Europe, Canada, Asia and Mexico. PolyOne operations are
reflected in four reportable segments: Vinyl Business,
International Color and Engineered Materials, PolyOne
Distribution and Resin and Intermediates. PolyOne also has an
All Other segment that includes North American Color and
Additives, North American Engineered Materials, Producer
Services and Polymer Coating Systems. See Note R for more
information.
In February 2006, PolyOne sold 82% of its Engineered Films
business for $26.7 million. This business is presented in
discontinued operations in these financial statements. PolyOne
maintains an 18% ownership interest in this business, which is
reflected in the 2006 financial statements on the cost basis of
accounting.
In October 2006, PolyOne purchased the remaining 50% of its
equity investment in DH Compounding Company from a wholly-owned
subsidiary of The Dow Chemical Company for $10.2 million.
The equity investment was previously reflected in the
Consolidated Balance Sheets on the line Investment in
equity affiliates. DH Compounding Company is consolidated
in the Consolidated Balance Sheet as of December 31, 2006,
and the results of operations are included in the Consolidated
Statement of Operations beginning October 1, 2006. DH
Compounding is included in the Producer Services operating
segment.
Unless otherwise noted, disclosures contained in this Annual
Report relate to continuing operations.
Note B.
DISCONTINUED OPERATIONS
In October 2003, PolyOne announced that its future focus would
be on its global Plastics Compounding, Color & Additive
Masterbatch and PolyOne Distribution businesses to improve
profitability and strengthen its balance sheet because
management believes these businesses have the strongest market
synergies and potential for long-term success. Consequently, the
Elastomers and Performance Additives, Engineered Films and
Specialty Resins businesses were targeted for divestment. In
December 2003, PolyOnes board of directors authorized
management to complete and execute plans to sell these
businesses. As a result, these businesses qualified for
accounting treatment as discontinued operations as of
December 31, 2003 under Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
In August 2004, PolyOne sold the Elastomers and Performance
Additives business to an entity formed by an investor group led
by Lion Chemical Capital, LLC and ACI Capital Co., Inc. for
gross proceeds of $120 million before associated fees and
costs. A cash payment of $106 million was made on the
closing date and the remaining $14 million was in the form
of a six-year note from the buyer. Consequently, PolyOne
recognized a $17.0 million non-cash pre-tax charge to
adjust the net asset carrying value of the Elastomers and
Performance Additives business on the date of sale to the net
proceeds received. In the fourth quarter of 2004, PolyOne also
recorded a $4.3 million charge to reduce the net carrying
value of the net assets held for sale of the Engineered Films
business to reflect managements best estimate of the
projected net sale proceeds. These charges are included in
Loss from discontinued operations and loss on sale, net of
income taxes in the Consolidated Statement of Operations
for the year ended December 31, 2004.
In December 2005, PolyOne announced that the Specialty Resins
divestment process was unlikely to result in a sale of the
business at acceptable terms. As a result, its financial results
were reclassified from discontinued operations to continuing
operations. No adjustments to the carrying value were required
when it was reclassified to continuing operations. During the
fourth quarter of 2006, Specialty Resins was subsumed into the
Vinyl Business operating segment and is no longer a separate
operating segment.
During 2005, PolyOne recorded additional charges of
$15.1 million to further reduce the net assets held for
sale of the Engineered Films business to reflect its net
realizable value based upon current estimates.
On February 15, 2006, PolyOne sold 82% of the Engineered
Films business to an investor group consisting of members of the
operating segments management team and Matrix Films, LLC
for gross proceeds of $26.7 million before associated fees
and costs. A cash payment of $20.5 million was received on
the closing date and the remaining $6.2 million was in the
form of a five-year note from the buyer. PolyOne retained an 18%
ownership interest in the company. Under EITF
03-13,
Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report
Discontinued Operations, when a business is sold with a
retained interest, the cost method of accounting is appropriate
if the disposal group qualifies as a component of an entity, the
selling entity has no significant influence or continuing
involvement in the new entity, and the operations and cash flows
of the business being sold will be eliminated from the ongoing
operations of the company selling it. The Engineered Films
business qualified as a component of an entity and PolyOne will
have no significant influence or continuing involvement in the
new entity. Activities that would be considered continuing cash
flows (consisting of warehousing services and short-term
transitional services) amount to less than one percent of the
new entitys corresponding costs, and for that reason are
not considered significant. The operations and cash flows of the
business being sold will be eliminated from the ongoing
operations of PolyOne. PolyOne also considered the provisions of
FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, and
36 POLYONE
CORPORATION
determined that the new entity is not a variable interest entity
subject to consolidation. As a result, the retained minority
interest investment in the Engineered Films business is reported
on the cost method of accounting. The carrying amount of the
major classes of assets and liabilities of Engineered Films at
December 31, 2005 is reflected in Discontinued
operations in the Consolidated Balance Sheets.
During 2006, PolyOne recognized charges of $3.1 million to
adjust the carrying value of the net assets of the Engineered
Films Business to the net proceeds received, to recognize costs
that were not able to be recognized until the business was sold
due to the contingent nature of the costs, and for costs related
to the pension benefits of the business.
The following table summarizes the results of discontinued
operations. As required by generally accepted accounting
principles in the United States, the results of discontinued
operations, as presented below, do not include any depreciation
or amortization expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Elastomers and Performance Additives
|
|
$
|
|
|
|
$
|
|
|
|
$
|
220.1
|
|
Engineered Films
|
|
|
9.6
|
|
|
|
119.6
|
|
|
|
125.7
|
|
|
|
|
$
|
9.6
|
|
|
$
|
119.6
|
|
|
$
|
345.8
|
|
Pre-tax income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Elastomers and Performance Additives
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17.2
|
|
Engineered Films
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
17.8
|
|
Pre-tax loss on disposition of
businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Elastomers and Performance Additives
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
(17.0
|
)
|
Engineered Films
|
|
|
(3.1
|
)
|
|
|
(15.1
|
)
|
|
|
(4.3
|
)
|
|
|
|
|
(2.7
|
)
|
|
|
(15.3
|
)
|
|
|
(3.5
|
)
|
Income tax expense, net of
valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(0.6
|
)
|
Loss from discontinued operations
|
|
$
|
(2.7
|
)
|
|
$
|
(15.3
|
)
|
|
$
|
(4.1
|
)
|
|
|
Note C.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation The
Consolidated Financial Statements include the accounts of
PolyOne and its subsidiaries. All majority-owned affiliates over
which PolyOne has control are consolidated. Investments in
affiliates and joint ventures in which PolyOnes ownership
is 50% or less, or in which PolyOne does not have control but
has the ability to exercise significant influence over operating
and financial policies, are accounted for under the equity
method. Intercompany transactions are eliminated. Transactions
with related parties, including joint ventures, are in the
ordinary course of business.
Cash and Cash Equivalents PolyOne considers
all highly liquid investments purchased with a maturity of less
than three months to be cash equivalents. Cash equivalents are
stated at cost, which approximates fair value.
Allowance for Doubtful Accounts PolyOne
evaluates the collectibility of trade receivables based on a
combination of factors. PolyOne regularly analyzes significant
customer accounts and, when PolyOne becomes aware of a specific
customers inability to meet its financial obligations to
PolyOne, such as in the case of a bankruptcy filing or
deterioration in the customers operating results or
financial position, PolyOne records a specific reserve for bad
debt to reduce the related receivable to the amount PolyOne
reasonably believes is collectible. PolyOne also records bad
debt reserves for all other customers based on a variety of
factors including the length of time the receivables are past
due, the financial health of the customer, economic conditions
and historical experience. If circumstances related to specific
customers change, PolyOnes estimates of the recoverability
of receivables could be adjusted further.
Concentrations of Credit Risk Financial
instruments that subject PolyOne to potential credit risk are
trade accounts receivable, foreign exchange contracts and
interest rate swap agreements. Concentration of credit risk for
trade accounts receivable is limited due to the large number of
customers constituting its customer base and their distribution
among many industries and geographic locations. PolyOne is
exposed to credit risk with respect to forward foreign exchange
contracts and interest rate swap agreements in the event of
non-performance by the counter-parties to these financial
instruments. Management believes that the risk of incurring
material losses related to this credit risk is remote. PolyOne
does not require collateral to support the financial position of
its credit risks.
Sale of Accounts Receivable PolyOne follows
the provisions of SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities. As a result, trade accounts receivable
that are sold are removed from the balance sheet at the time of
sale.
Inventories Inventories are stated at the
lower of cost or market. Approximately 43% and 39% of
PolyOnes inventories at December 31, 2006 and 2005
are valued using the
last-in,
first-out (LIFO) cost method. Inventories not valued by the LIFO
method are valued using the
first-in,
first-out (FIFO) or average cost method.
Property and Depreciation Property, plant and
equipment is recorded at cost, net of depreciation and
amortization that is computed principally using the
straight-line method over the estimated useful life of the
assets, which ranges from three to 15 years for machinery
and equipment and up to 40 years for buildings. Computer
software is amortized over periods not exceeding ten years.
Property, plant and equipment is generally depreciated on
accelerated methods for income tax purposes. Repair and
maintenance costs are expensed as incurred.
Depreciation expense was $55.0 million in 2006,
$48.0 million in 2005 and $47.3 million in 2004.
Impairment of Long-Lived Assets As required
by SFAS No. 144, Accounting for the Impairment
or Disposal of
POLYONE
CORPORATION 37
Long-Lived Assets, PolyOne reviews long-lived assets for
impairment when circumstances indicate that the carrying value
of an asset may not be recoverable. For assets that are to be
held and used, an impairment charge is recognized when the
estimated undiscounted future cash flows associated with the
asset or group of assets are less than their carrying value. If
an impairment exists, an adjustment is made to write the asset
down to its fair value, and a loss is recorded for the
difference between the carrying value and the fair value. Fair
values are determined based on quoted market values, discounted
cash flows, internal appraisals or external appraisals, as
applicable. Assets to be disposed of are carried at the lower of
their carrying value or estimated net realizable value.
Goodwill and Other Intangible Assets Goodwill
is the excess of the purchase price paid over the fair value of
the net assets of the acquired business. Goodwill is subject to
annual impairment testing and the Company has selected
July 1 as the annual impairment testing date. Other
intangible assets, which consist primarily of non-contractual
customer relationships, sales contracts, patents and technology,
are amortized over their estimated useful lives. The remaining
lives range from three to 20 years.
Total amortization expense of other intangibles was
$2.1 million in 2006, $2.7 million in 2005 and
$3.6 million in 2004.
Derivative Financial Instruments
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, requires that all
derivative financial instruments, such as foreign exchange
contracts and interest rate swap agreements, be recognized in
the financial statements and measured at fair value, regardless
of the purpose or intent in holding them. Changes in the fair
value of derivative financial instruments are recognized in the
period when the change occurs in either net income or
shareholders equity (as a component of accumulated other
comprehensive income or loss), depending on whether the
derivative is being used to hedge changes in fair value or cash
flows. PolyOnes interest rate swaps qualify as fair value
hedges in accordance with SFAS No. 133.
PolyOne is exposed to foreign currency changes and interest rate
fluctuations in the normal course of business. PolyOne has
established policies and procedures that manage these exposures
through the use of financial instruments. By policy, PolyOne
does not enter into these instruments for trading purposes or
speculation.
PolyOne enters into foreign currency exchange forward contracts
with major financial institutions to reduce the effect of
fluctuating exchange rates, primarily on foreign currency
inter-company lending transactions. These contracts are not
treated as hedges and, as a result, are marked to market, with
the resulting gains and losses recognized as other income or
expense in the Consolidated Statements of Operations. Realized
gains and losses on these contracts offset the foreign exchange
gains and losses on the underlying transactions. PolyOnes
forward contracts have original maturities of one month.
From time to time, PolyOne also enters into interest rate swap
agreements that modify the exposure to interest risk by
converting fixed-rate debt to a floating rate. The interest rate
swap and instrument being hedged are marked to market in the
balance sheet. The net effect on PolyOnes operating
results is that interest expense on the portion of fixed-rate
debt being hedged is recorded based on the variable rate that is
stated within the swap agreement. No other cash payments are
made unless the contract is terminated prior to its maturity. In
this case, the amount paid or received at settlement is
established by agreement at the time of termination and usually
represents the net present value, at current rates of interest,
of the remaining obligations to exchange payments under the
terms of the contract. Any gains or losses incurred upon the
early termination of interest rate swap contracts are deferred
within the hedged item and recognized over the remaining life of
the contract. See Note T for more information.
Revenue Recognition Revenue is recognized
when title and the risks and rewards of ownership of the product
is transferred to the customer, usually at the Companys
shipping point or when the service is performed.
Shipping and Handling Costs Shipping and
handling costs are included in cost of sales.
Equity Affiliates PolyOne recognizes its
proportionate share of the income of equity affiliates. Losses
of equity affiliates are recognized to the extent of
PolyOnes investment, advances, financial guarantees and
other commitments to provide financial support to the investee.
Any losses in excess of this amount are deferred and reduce the
amount of future earnings of the equity investee recognized by
PolyOne. At December 31, 2006 and 2005, there were no
deferred losses related to equity investees.
PolyOne accounts for its investments in equity affiliates under
Accounting Principles Board (APB) Opinion No. 18, The
Equity Method of Accounting for Investments in Common
Stock, and recognizes impairment losses in the value of
investments that management judges to be other than temporary.
See Note F for more information.
Environmental Costs PolyOne expenses costs
that are associated with managing hazardous substances and
pollution in ongoing operations on a current basis. Costs
associated with the remediation of environmental contamination
are accrued when it becomes probable that a liability has been
incurred and PolyOnes proportionate share of the amount
can be reasonably estimated.
Research and Development Expense Research and
development costs, which were $20.3 million in 2006,
$19.5 million in 2005 and $16.7 million in 2004, are
charged to expense as incurred.
Income Taxes Deferred tax liabilities and
assets are determined based upon the differences between the
financial reporting and tax basis of assets and liabilities, and
are measured using the tax rate and laws currently in effect.
38 POLYONE
CORPORATION
Comprehensive Income Accumulated other
comprehensive loss at December 31, 2006 and 2005 are as
follows:
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
Foreign currency translation
adjustments
|
|
$
|
(8.0
|
)
|
|
$
|
(20.1
|
)
|
Minimum pension liability
adjustments
|
|
|
(88.8
|
)
|
|
|
(133.4
|
)
|
Impact of adopting
SFAS No. 158
|
|
|
(2.3
|
)
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
0.7
|
|
|
|
|
$
|
(99.1
|
)
|
|
$
|
(152.8
|
)
|
|
|
Foreign Currency Translation Revenues and
expenses are translated at average currency exchange rates
during the related period. Assets and liabilities of foreign
subsidiaries and equity investees are translated using the
exchange rate at the end of the period. PolyOnes share of
the resulting translation adjustment is recorded as accumulated
other comprehensive income or loss in shareholders equity.
The cumulative unrecognized translation adjustment balance was
$8.0 million at December 31, 2006, $20.1 million
at December 31, 2005 and $10.8 million at
December 31, 2004. Gains and losses resulting from foreign
currency transactions, including intercompany transactions that
are not considered permanent investments, are included in net
income.
Marketable Securities Marketable securities
are classified as available for sale and are presented at
current market value. Net unrealized gains and losses on
marketable securities available for sale are reflected in
accumulated other comprehensive income or loss in
shareholders equity.
Share-Based Compensation As of
December 31, 2006, PolyOne had one active share-based
employee compensation plan, which is described more fully in
Note Q. Prior to January 1, 2006, PolyOne accounted
for share-based compensation under the provisions of APB Opinion
No. 25, Accounting for Stock Issued to
Employees (APB No. 25). Under APB No. 25,
compensation cost for stock options was measured as the excess,
if any, of the quoted market price of PolyOne common stock at
the date of the grant over the amount an option holder must pay
to acquire the common stock. Compensation cost for stock
appreciation rights (SARs) was recognized upon vesting as the
amount by which the quoted market value of the shares of PolyOne
common stock covered by the grant exceeded the SARs specified
value.
On January 1, 2006, PolyOne adopted
SFAS No. 123(revised 2004), Share-Based
Payment, using the modified prospective transition method.
SFAS No. 123(R) requires the Company to estimate the
fair value of share-based awards on the date of grant using an
option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the
requisite service periods in the Consolidated Statements of
Operations. Under the modified prospective transition method,
compensation cost recognized during the year ended
December 31, 2006 includes (a) compensation cost for
all share-based payments granted prior to, but not yet vested as
of, January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123(R), plus (b) compensation cost for
all share-based payments granted on or subsequent to
January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of
SFAS No. 123(R). In accordance with the modified
prospective transition method, the Consolidated Financial
Statements for prior periods have not been restated to reflect,
nor do they include, the impact of SFAS No. 123(R).
Total share-based compensation cost for the year ended
December 31, 2006 was $4.5 million pre-tax.
The adoption of SFAS No. 123(R) on January 1,
2006 resulted in compensation cost for the year ended
December 31, 2006 of $2.5 million on a pre-tax basis,
or $0.03 per diluted share, more than what it would have
been under APB No. 25.
SFAS No. 123(R) requires that the benefits of tax
deductions in excess of compensation cost recognized be reported
as a financing cash flow, rather than as an operating cash flow
as was previously required. This requirement will reduce net
operating cash flows and increase net financing cash flows.
The following table illustrates the effect on net income and
earnings per share as if PolyOne had applied the fair value
recognition provisions of SFAS No. 123 to share-based
employee compensation using the fair value estimate computed by
the Black-Scholes-Merton option-pricing model for the years
ended December 31, 2005 and 2004. The Black-Scholes-Merton
option-pricing model was developed to estimate the fair value of
traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models use highly
subjective assumptions, including expected share price
volatility.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In millions,
except per share data)
|
|
2005
|
|
|
2004
|
|
|
|
|
Net income, as reported
|
|
$
|
46.9
|
|
|
$
|
23.5
|
|
Add: Total share-based employee
compensation (benefit) included in reported net income, net of
tax
|
|
|
(0.6
|
)
|
|
|
2.7
|
|
Deduct: Total share-based employee
compensation expense determined under the fair value-based
method for all awards, net of tax
|
|
|
(4.1
|
)
|
|
|
(4.3
|
)
|
|
Pro forma net income
|
|
$
|
42.2
|
|
|
$
|
21.9
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
Basic and diluted as
reported
|
|
$
|
0.51
|
|
|
$
|
0.26
|
|
Basic and diluted pro
forma
|
|
$
|
0.46
|
|
|
$
|
0.24
|
|
New Accounting Pronouncements In November
2004, the FASB issued SFAS No. 151, Inventory
Costs. SFAS No. 151 amends Accounting Research
Bulletin (ARB) No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted
material. SFAS No. 151 requires that these items be
recognized as current-period charges and requires that the
allocation of fixed production overhead to the costs of
conversion be based on the normal capacity of the associated
production facilities. PolyOne adopted SFAS No. 151
effective January 1, 2006. The adoption of
SFAS No. 151 did not have a material impact on the
Companys financial position or results of operations.
POLYONE
CORPORATION 39
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections.
SFAS No. 154 applies to all voluntary changes in
accounting principle and to changes required by an accounting
pronouncement that do not include explicit transition
provisions. SFAS No. 154 requires that changes in
accounting principle be applied retroactively, instead of
including the cumulative effect in the income statement. The
correction of an error will continue to require financial
statement restatement. A change in accounting estimate will
continue to be accounted for in the period of change and in
subsequent periods, if necessary. PolyOne adopted
SFAS No. 154 as of January 1, 2006. The adoption
of SFAS No. 154 did not have a material impact on the
Companys financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109, Accounting for Income Taxes, which is
effective for fiscal years beginning after December 15,
2006. FIN 48 clarifies the recognition threshold and
measurement attributes for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The
Company is currently evaluating the provisions of FIN 48;
however, the adoption is not expected to have a material impact
on its financial statements.
In September of 2006, the FASB issued FASB Staff Position (FSP)
AUG AIR-1, Accounting for Planned Major Maintenance
Activities (FSP AUG AIR-1). FSP AUG AIR-1 prohibits the
use of the
accrue-in-advance
method of accounting for planned major maintenance activities in
annual and interim financial reporting periods and is effective
for the first fiscal year beginning after December 15,
2006. PolyOnes equity affiliate, OxyVinyls, will adopt FSP
AUG AIR-1 in the first quarter of 2007, on a retrospective
basis, and will use the deferral method of accounting for
planned major maintenance. The effect on OxyVinyls
financial statements upon adoption will be an increase of
$38.3 million in other assets, a decrease of
$12.3 million in accrued liabilities, an increase of
$4.2 million in minority interest and an increase of
$46.4 million in partners capital. PolyOnes
proportionate share of OxyVinyls operations is 24%.
On December 31, 2006, the Company adopted
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans an Amendment of FASB Statements No. 87,
88, 106 and 132(R). SFAS No. 158 requires an
employer that is a business entity and sponsors one or more
single employer benefit plans to (1) recognize the funded
status of the benefit in its statement of financial position,
(2) recognize as a component of other comprehensive income,
net of tax, the gains or losses and prior service costs or
credits that arise during the period but are not recognized as
components of net periodic benefit cost, (3) measure
defined benefit plan assets and obligations as of the date of
the employers fiscal year end statement of financial
position and (4) disclose additional information in the
notes to financial statements about certain effects on net
periodic benefit costs for the next fiscal year that arise from
delayed recognition of gains or losses, prior service costs or
credits, and transition assets or obligations. The adoption of
SFAS No. 158 resulted in an increase of
$6.4 million on a pre-tax basis and a $0.4 million
decrease on an after-tax basis on the Companys accumulated
other comprehensive loss. PolyOne also recorded an adjustment of
$2.7 million to increase accumulated other comprehensive
loss to record its proportionate share of OxyVinyls
adoption of SFAS No. 158. The adoption of
SFAS No. 158 had no effect on the Companys
compliance with the financial covenants contained in the
agreements governing its debt and its receivables sales
facility, and is not expected to affect the Companys
operating results in future periods. For further discussion, see
Note M.
Use of Estimates The preparation of
consolidated financial statements in conformity with generally
accepted accounting principles requires management to make
extensive use of estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of
revenues and expenses during these periods. Significant
estimates in these Consolidated Financial Statements include
sales discounts and rebates, restructuring charges, allowances
for doubtful accounts, estimates of future cash flows associated
with assets, asset impairments, useful lives for depreciation
and amortization, loss contingencies, net realizable value of
inventories, environmental and asbestos-related liabilities,
income taxes and tax valuation reserves, goodwill and the
determination of discount and other rate assumptions used to
determine pension and post-retirement employee benefit expenses.
Actual results could differ from these estimates.
Reclassification Certain amounts for 2005 and
2004 have been reclassified to conform to the 2006 presentation.
During 2006, PolyOne changed its reportable segments. As a
result, PolyOnes segment disclosures for 2005 and 2004
have been restated to conform with the changes made in 2006.
Note D.
GOODWILL AND INTANGIBLE ASSETS
There were no changes in the carrying amount of goodwill during
the year ended December 31, 2006. Changes in the carrying
amount of goodwill by operating segment during the year ended
December 31, 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
Color
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl
|
|
|
and Engineered
|
|
|
Polymer
Coating
|
|
|
PolyOne
|
|
|
|
|
(In
millions)
|
|
Business
|
|
|
Materials
|
|
|
Systems
|
|
|
Distribution
|
|
|
Total
|
|
|
|
|
January 1, 2005
|
|
$
|
156.7
|
|
|
$
|
73.3
|
|
|
$
|
61.1
|
|
|
$
|
1.6
|
|
|
$
|
292.7
|
|
Business acquisition
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
1.0
|
|
Reduction of acquired tax accrual
|
|
|
(4.4
|
)
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
(6.7
|
)
|
|
December 31, 2005
|
|
$
|
152.3
|
|
|
$
|
72.0
|
|
|
$
|
61.1
|
|
|
$
|
1.6
|
|
|
$
|
287.0
|
|
|
|
40 POLYONE
CORPORATION
PolyOne acquired the remaining 16% of Star Color, a
Thailand-based color and additives business, in the first
quarter of 2005, resulting in goodwill of $1.0 million.
The reduction of the acquired tax accrual represents an
adjustment to goodwill from resolving certain income tax
uncertainties that existed prior to the business combination of
Geon and Hanna.
As of December 31, 2006, PolyOne had $287.0 million of
goodwill that resulted from acquiring businesses.
SFAS No. 142 requires that goodwill and intangible
assets with indefinite lives be tested for impairment at least
once a year. Carrying values are compared with fair values, and
when the carrying value exceeds the fair value, the carrying
value of the impaired asset is reduced to its fair value.
PolyOne has elected July 1 as its annual assessment date.
PolyOne uses a combination of two valuation methods, a market
approach and an income approach, to estimate the fair value of
its reporting units. Absent an indication of fair value from a
potential buyer or similar specific transactions, the Company
believes that the use of these two methods provides reasonable
estimates of a reporting units fair value. Fair value
computed by these two methods is arrived at using a number of
factors, including projected future operating results and
business plans, economic projections, anticipated future cash
flows, comparable marketplace data within a consistent industry
grouping, and the cost of capital. There are inherent
uncertainties, however, related to these factors and to
managements judgment in applying them to this analysis.
Nonetheless, management believes that the combination of these
two methods provides a reasonable approach to estimate the fair
value of PolyOnes reporting units. Assumptions for sales,
earnings and cash flows for each reporting unit were consistent
between these two methods.
The market approach estimates fair value by applying sales,
earnings and cash flow multiples (derived from comparable
publicly-traded companies with similar investment
characteristics of the reporting unit) to the reporting
units operating performance adjusted for non-recurring
items. Management believes that this approach is appropriate
because it provides a fair value estimate using multiples from
entities with operations and economic characteristics comparable
to PolyOnes reporting units. The key estimates and
assumptions that are used to determine fair value under this
approach include trailing twelve- and thirty-six month results
and a control premium applied to the market multiples to adjust
the enterprise value upward for a 100% ownership interest, where
applicable.
The income approach is based on projected future debt-free cash
flow that is discounted to present value using factors that
consider the timing and risk of the future cash flows.
Management believes that this approach is appropriate because it
provides a fair value estimate based upon the reporting
units expected long-term operating and cash flow
performance. This approach also mitigates most of the impact of
cyclical downturns that occur in the reporting units
industry. The income approach is based on a reporting
units five- to ten-year projection of operating results
and cash flows that is discounted using a weighted-average cost
of capital. The projection is based upon managements best
estimates of projected economic and market conditions over the
related period including growth rates, estimates of future
expected changes in operating margins and cash expenditures.
Other significant estimates and assumptions include terminal
value growth rates, terminal value margin rates, future capital
expenditures and changes in future working capital requirements
based on management projections.
SFAS No. 142 requires that this assessment be
performed at the reporting unit level. At
July 1, 2006, PolyOne had three reporting units, consistent
with PolyOnes operating segments, that had a significant
amount of goodwill: Vinyl Business, International Color and
Engineered Materials, and Polymer Coating Systems. Under the
provisions of SFAS No. 142, these three reporting
units were tested for impairment as of July 1, 2006. The
average fair values of the market approach and income approach
exceeded the carrying value of Vinyl Business, International
Color and Engineered Materials, and Polymer Coating Systems by
81%, 28% and 19%, respectively, as of July 1, 2006.
Even though PolyOne determined that there was no additional
goodwill impairment as of the July 1, 2006 annual
assessment, the future occurrence of a potential indicator of
impairment, such as a significant adverse change in legal
factors or business climate, an adverse action or assessment by
a regulator, unanticipated competition, a material negative
change in relationships with significant customers, strategic
decisions made in response to economic or competitive
conditions, loss of key personnel or a more-likely-than-not
expectation that a reporting unit or a significant portion of a
reporting unit will be sold or disposed of, would require an
interim assessment for some or all of the reporting units prior
to the next required annual assessment on July 1, 2007.
Information regarding other intangible assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2006
|
|
|
|
|
|
Acquisition
|
|
|
Accumulated
|
|
|
Currency
|
|
|
|
|
(In
millions)
|
|
Cost
|
|
|
Amortization
|
|
|
Translation
|
|
|
Net
|
|
|
|
|
Non-contractual customer
relationships
|
|
$
|
8.6
|
|
|
$
|
(6.1
|
)
|
|
$
|
|
|
|
$
|
2.5
|
|
Sales contract
|
|
|
9.6
|
|
|
|
(9.1
|
)
|
|
|
|
|
|
|
0.5
|
|
Patents, technology and other
|
|
|
8.0
|
|
|
|
(2.9
|
)
|
|
|
1.3
|
|
|
|
6.4
|
|
|
Total
|
|
$
|
26.2
|
|
|
$
|
(18.1
|
)
|
|
$
|
1.3
|
|
|
$
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2005
|
|
|
|
|
|
Acquisition
|
|
|
Accumulated
|
|
|
Currency
|
|
|
|
|
(In
millions)
|
|
Cost
|
|
|
Amortization
|
|
|
Translation
|
|
|
Net
|
|
|
|
|
Non-contractual customer
relationships
|
|
$
|
8.6
|
|
|
$
|
(5.6
|
)
|
|
$
|
|
|
|
$
|
3.0
|
|
Sales contract
|
|
|
9.6
|
|
|
|
(8.4
|
)
|
|
|
|
|
|
|
1.2
|
|
Patents, technology and other
|
|
|
7.3
|
|
|
|
(2.0
|
)
|
|
|
1.1
|
|
|
|
6.4
|
|
|
Total
|
|
$
|
25.5
|
|
|
$
|
(16.0
|
)
|
|
$
|
1.1
|
|
|
$
|
10.6
|
|
|
|
POLYONE
CORPORATION 41
There were no indefinite-lived intangible assets as of
December 31, 2006 and 2005.
Amortization of other intangible assets was $2.1 million
for the year ended December 31, 2006 and $2.7 million
for the year ended December 31, 2005. Amortization expense
for each of the next five years is expected to be approximately
$2 million per year.
The carrying values of intangible assets and other investments
are adjusted to estimated net future cash flows as a result of
an evaluation done each year end, or more often when indicators
of impairment exist. No impairment charges were recorded in
2006, 2005 or 2004.
Note E.
EMPLOYEE SEPARATION AND PLANT PHASEOUT
Since the formation of PolyOne in 2000, management has
undertaken several restructuring initiatives to improve
profitability and, as a result, PolyOne has incurred employee
separation and plant phaseout costs.
Employee separation costs include salary continuation benefits,
medical coverage and outplacement assistance and are based on a
formula that takes into account each individual employees
base compensation and length of service. PolyOne maintains a
severance plan that provides specific benefits to all employees
(except those who are employed under collective bargaining
agreements) who lose their jobs due to reduction in workforce or
job elimination initiatives, or from closing manufacturing
facilities. Collective bargaining employees are covered under
the terms of each specific agreement. The amount is determined
separately for each employee and is recognized at the date the
employee is notified if the expected termination date will be
within 60 days of notification or is accrued on a
straight-line basis over the period from the notification date
to the expected termination date if the termination date is more
than 60 days after the notification date.
Plant phaseout costs include the impairment of property, plant
and equipment at manufacturing facilities, and the resulting
write-down of the carrying value of these assets to fair value,
which represents managements best estimate of the net
proceeds to be received for the assets to be sold or scrapped,
less any costs to sell. Plant phaseout costs also include cash
facility closing costs and lease termination costs. Assets
transferred to other PolyOne facilities are transferred at net
book value.
Plant phaseout costs associated with continuing operations are
reflected on the Consolidated Statements of Operations on the
line Employee separation and plant phaseout. Plant
phaseout costs associated with discontinued operations are
included in the Consolidated Statements of Operations on the
line Loss from discontinued operations and loss on sale,
net of income taxes. Plant phaseout costs for continuing
operations relate to the Vinyl Business, Polymer Coating
Systems, North American Color and Additives, and North American
Engineered Materials operating segments, and for discontinued
operations relate to the Engineered Films and the Elastomers and
Performance Additives businesses. Employee separation and plant
phaseout costs associated with continuing operations are
reflected on the line Corporate and eliminations in
Note R, Segment Information.
2006 Activity Employee separation and plant
phaseout costs for 2006 includes a $0.5 million charge
related to the November 2006 announcement to move the latex
product manufacturing business located at the Companys
Commerce, California facility to its Massillon, Ohio location to
better serve customers. The six employees affected by this
relocation were terminated by February 28, 2007.
Operating income also includes an additional $0.6 million
charge to complete the separation of the 22 remaining employees
from the November 2005 announcement to close the Manchester,
England color additives facility.
Fully offsetting these charges was a net gain of
$1.1 million from the sale of facilities that were
previously identified as part of the Companys plant
phaseout activities.
2005 Activity Employee separation and plant
phaseout costs for 2005 were $5.5 million. Operating income
includes a $2.5 million charge to be paid pursuant to the
terms of an October 6, 2005 separation agreement between
PolyOne and Thomas A. Waltermire as the President, Chief
Executive Officer and a Director. The amounts accrued at
December 31, 2005 are expected to be paid out through 2008.
The $2.5 million loss on the sale of facilities and
equipment of previously idled operations reflects the amount in
excess of the estimate at December 31, 2004 when the
carrying value of these assets was reduced to estimated future
net proceeds.
Operating income was also reduced by $0.5 million from the
November 2005 announcement to close the Companys
Manchester, England plastic color additives facility by the end
of the first quarter of 2006. Of the 44 employees affected by
the facility closing, 22 were terminated by December 31,
2005. An additional charge of $0.6 million for employee
separation was recognized in 2006 as the plant phaseout was
completed.
Loss from discontinued operations reflects a $0.2 million
benefit relative to employee separation costs as a result of
adjusting estimates when the activities were completed.
2004 Activity Operating income includes a
$1.4 million benefit from adjusting the estimated remaining
liabilities associated with restructuring initiatives announced
in prior years. Loss from discontinued operations included a
$7.5 million pre-tax charge from closing an Engineered
Films manufacturing facility and two Elastomers and
Performance Additives manufacturing facilities in the
first quarter of 2004. All of the employees who were affected by
the restructuring initiatives announced in 2004 and prior years
were terminated as of December 31, 2004.
The following table summarizes the provisions, payments and
remaining reserves associated with each of these initiatives
from December 31, 2003 through December 31, 2006:
42 POLYONE
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Separation
|
|
|
Plant Phaseout
Costs
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Cash
|
|
|
Asset Write-
|
|
|
|
|
(In millions,
except employee numbers)
|
|
Employees
|
|
|
Costs
|
|
|
Closure
|
|
|
Downs
|
|
|
Total
|
|
|
|
|
January 2003 reduction of staff
personnel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
|
|
|
$
|
1.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.5
|
|
Continuing operations benefit
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
Utilized 2004
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.0
|
)
|
|
Balance at December 31, 2004,
2005 and 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Separation
|
|
|
Plant Phaseout
Costs
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Cash
|
|
|
Asset Write-
|
|
|
|
|
(In millions,
except employee numbers)
|
|
Employees
|
|
|
Costs
|
|
|
Closure
|
|
|
Downs
|
|
|
Total
|
|
|
|
|
North American manufacturing
restructuring announced in 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
|
|
|
$
|
0.9
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
1.0
|
|
Continuing operations benefit
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
(1.3
|
)
|
Utilized 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
Balance at December 31, 2004,
2005 and 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Separation
|
|
|
Plant Phaseout
Costs
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Cash
|
|
|
Asset Write-
|
|
|
|
|
(In millions,
except employee numbers)
|
|
Employees
|
|
|
Costs
|
|
|
Closure
|
|
|
Downs
|
|
|
Total
|
|
|
|
|
Closure and exit of Engineered
Films manufacturing plants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
117
|
|
|
$
|
2.6
|
|
|
$
|
2.3
|
|
|
$
|
|
|
|
$
|
4.9
|
|
Discontinued operations charge
|
|
|
|
|
|
|
3.6
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
3.5
|
|
Utilized 2004
|
|
|
(117
|
)
|
|
|
(5.2
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
(6.6
|
)
|
|
Balance at December 31, 2004
|
|
|
|
|
|
$
|
1.0
|
|
|
$
|
0.8
|
|
|
$
|
|
|
|
$
|
1.8
|
|
Discontinued operations benefit
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
Utilized 2005
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
(1.6
|
)
|
|
Balance at December 31, 2005
and 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Separation
|
|
|
Plant Phaseout
Costs
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Cash
|
|
|
Asset Write-
|
|
|
|
|
(In millions,
except employee numbers)
|
|
Employees
|
|
|
Costs
|
|
|
Closure
|
|
|
Downs
|
|
|
Total
|
|
|
|
|
Wynne, Arkansas and Deforest,
Wisconsin production facility closures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
137
|
|
|
$
|
1.6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.6
|
|
Discontinued operations charge
|
|
|
|
|
|
|
1.0
|
|
|
|
2.5
|
|
|
|
|
|
|
|
3.5
|
|
Utilized 2004
|
|
|
(137
|
)
|
|
|
(2.6
|
)
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
(5.1
|
)
|
|
Balance at December 31, 2004,
2005 and 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Separation
|
|
|
Plant Phaseout
Costs
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Cash
|
|
|
Asset Write-
|
|
|
|
|
(In millions,
except employee numbers)
|
|
Employees
|
|
|
Costs
|
|
|
Closure
|
|
|
Downs
|
|
|
Total
|
|
|
|
|
June 2003 closure of
Ft. Worth, Texas color additives plant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Continuing operations charge
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
Utilized 2004
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
Balance at December 31, 2004,
2005 and 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
POLYONE
CORPORATION 43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Separation
|
|
|
Plant Phaseout
Costs
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Cash
|
|
|
Asset Write-
|
|
|
|
|
(In millions,
except employee numbers)
|
|
Employees
|
|
|
Costs
|
|
|
Closure
|
|
|
Downs
|
|
|
Total
|
|
|
|
|
Mexico & North America
administrative staff reductions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
151
|
|
|
$
|
9.0
|
|
|
$
|
2.2
|
|
|
$
|
|
|
|
$
|
11.2
|
|
Continuing operations benefit
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
Discontinued operations charge
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
Utilized 2004
|
|
|
(151
|
)
|
|
|
(8.5
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
(10.0
|
)
|
|
|
Balance at December 31, 2004
|
|
|
|
|
|
$
|
0.8
|
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
1.5
|
|
Continuing operations charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
|
|
2.5
|
|
Utilized 2005
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
(0.7
|
)
|
|
|
(2.5
|
)
|
|
|
(4.0
|
)
|
|
Balance at December 31, 2005
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
Continuing operations benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
(1.1
|
)
|
Utilized 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
|
|
1.1
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Separation
|
|
|
Plant Phaseout
Costs
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Cash
|
|
|
Asset Write-
|
|
|
|
|
(In millions,
except employee numbers)
|
|
Employees
|
|
|
Costs
|
|
|
Closure
|
|
|
Downs
|
|
|
Total
|
|
|
|
|
Executive severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Continuing operations charge
|
|
|
1
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
Utilized 2005
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
$
|
2.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.5
|
|
Utilized 2006
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.2
|
)
|
|
Balance at December 31, 2006
|
|
|
|
|
|
$
|
1.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Separation
|
|
|
Plant Phaseout
Costs
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Cash
|
|
|
Asset Write-
|
|
|
|
|
(In millions,
except employee numbers)
|
|
Employees
|
|
|
Costs
|
|
|
Closure
|
|
|
Downs
|
|
|
Total
|
|
|
|
|
Closure and exit of Manchester,
England Color Additives facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Continuing operations charge
|
|
|
44
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
Utilized 2005
|
|
|
(22
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
Balance at December 31, 2005
|
|
|
22
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Continuing operations charge
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
0.6
|
|
Utilized 2006
|
|
|
(22
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
Balance at December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Separation
|
|
|
Plant Phaseout
Costs
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Cash
|
|
|
Asset Write-
|
|
|
|
|
(In millions,
except employee numbers)
|
|
Employees
|
|
|
Costs
|
|
|
Closure
|
|
|
Downs
|
|
|
Total
|
|
|
|
|
Closure and exit of Commerce
Polymer Coating Systems facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Continuing operations charge
|
|
|
6
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.5
|
|
Utilized 2006
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
Balance at December 31, 2006
|
|
|
5
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
0.2
|
|
|
|
44 POLYONE
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Separation
|
|
|
Plant Phaseout
Costs
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Cash
|
|
|
Asset Write-
|
|
|
|
|
(In millions,
except employee numbers)
|
|
Employees
|
|
|
Costs
|
|
|
Closure
|
|
|
Downs
|
|
|
Total
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
405
|
|
|
$
|
15.6
|
|
|
$
|
4.6
|
|
|
$
|
|
|
|
$
|
20.2
|
|
Continuing operations
|
|
|
|
|
|
|
(1.0
|
)
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
(1.4
|
)
|
Discontinued operations
|
|
|
|
|
|
|
5.1
|
|
|
|
2.4
|
|
|
|
|
|
|
|
7.5
|
|
Utilized 2004
|
|
|
(405
|
)
|
|
|
(17.9
|
)
|
|
|
(5.4
|
)
|
|
|
0.3
|
|
|
|
(23.0
|
)
|
|
Balance at December 31, 2004
|
|
|
|
|
|
$
|
1.8
|
|
|
$
|
1.5
|
|
|
$
|
|
|
|
$
|
3.3
|
|
Continuing operations
|
|
|
45
|
|
|
|
3.0
|
|
|
|
|
|
|
|
2.5
|
|
|
|
5.5
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
Utilized 2005
|
|
|
(23
|
)
|
|
|
(2.1
|
)
|
|
|
(1.5
|
)
|
|
|
(2.5
|
)
|
|
|
(6.1
|
)
|
|
Balance at December 31, 2005
|
|
|
22
|
|
|
$
|
2.5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.5
|
|
Continuing operations
|
|
|
6
|
|
|
|
0.7
|
|
|
|
0.1
|
|
|
|
(0.8
|
)
|
|
|
|
|
Utilized 2006
|
|
|
(23
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
0.8
|
|
|
|
(1.0
|
)
|
|
Balance at December 31, 2006
|
|
|
5
|
|
|
$
|
1.4
|
|
|
$
|
0.1
|
|
|
$
|
|
|
|
$
|
1.5
|
|
|
|
Note F.
FINANCIAL INFORMATION OF EQUITY AFFILIATES
PolyOnes Resin and Intermediates segment consists
primarily of investments in equity affiliates.
PolyOne owns 24% of Oxy Vinyls, LP (OxyVinyls), a manufacturer
and marketer of PVC resins. The remaining 76% of OxyVinyls is
owned by subsidiaries of Occidental Petroleum Corporation.
OxyVinyls is the second largest producer of PVC resins in North
America.
Summarized financial information for OxyVinyls follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
OxyVinyls:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,476.0
|
|
|
$
|
2,502.0
|
|
|
$
|
2,272.5
|
|
Operating income
|
|
$
|
272.8
|
|
|
$
|
195.8
|
|
|
$
|
267.1
|
|
Partnership income as reported by
OxyVinyls
|
|
$
|
244.6
|
|
|
$
|
129.9
|
|
|
$
|
199.8
|
|
PolyOnes ownership of
OxyVinyls
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
24
|
%
|
|
PolyOnes proportionate share
of OxyVinyls earnings
|
|
|
58.7
|
|
|
|
31.2
|
|
|
|
48.0
|
|
Amortization of the difference
between PolyOnes investment and its underlying share of
OxyVinyls equity
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
Earnings of equity affiliate
recorded by PolyOne
|
|
$
|
59.3
|
|
|
$
|
31.8
|
|
|
$
|
48.6
|
|
|
|
Current assets
|
|
$
|
382.4
|
|
|
$
|
467.3
|
|
|
|
|
|
Non-current assets
|
|
|
1,254.9
|
|
|
|
1,234.8
|
|
|
|
|
|
|
Total assets
|
|
|
1,637.3
|
|
|
|
1,702.1
|
|
|
|
|
|
|
Current liabilities
|
|
|
251.2
|
|
|
|
276.0
|
|
|
|
|
|
Non-current liabilities
|
|
|
290.3
|
|
|
|
376.0
|
|
|
|
|
|
|
Total liabilities
|
|
|
541.5
|
|
|
|
652.0
|
|
|
|
|
|
|
Partnership capital
|
|
$
|
1,095.8
|
|
|
$
|
1,050.1
|
|
|
|
|
|
|
|
OxyVinyls income during 2005 includes a charge for the
impairment of a previously idled chlor-alkali facility, of which
PolyOnes share was $22.9 million.
PolyOne also owns 50% of SunBelt Chlor-Alkali Partnership
(SunBelt). The remaining 50% of SunBelt is owned by Olin SunBelt
Inc., a wholly owned subsidiary of the Olin Corporation.
Summarized financial information for SunBelt follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
SunBelt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
186.7
|
|
|
$
|
167.0
|
|
|
$
|
105.8
|
|
Operating income
|
|
$
|
104.3
|
|
|
$
|
92.2
|
|
|
$
|
35.6
|
|
Partnership income as reported by
SunBelt
|
|
$
|
94.6
|
|
|
$
|
81.3
|
|
|
$
|
23.5
|
|
PolyOnes ownership of SunBelt
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
|
Earnings of equity affiliate
recorded by PolyOne
|
|
$
|
47.3
|
|
|
$
|
40.7
|
|
|
$
|
11.7
|
|
|
|
Current assets
|
|
$
|
25.1
|
|
|
$
|
28.4
|
|
|
|
|
|
Non-current assets
|
|
|
113.7
|
|
|
|
120.5
|
|
|
|
|
|
|
Total assets
|
|
|
138.8
|
|
|
|
148.9
|
|
|
|
|
|
|
Current liabilities
|
|
|
22.1
|
|
|
|
19.4
|
|
|
|
|
|
Non-current liabilities
|
|
|
121.9
|
|
|
|
134.1
|
|
|
|
|
|
|
Total liabilities
|
|
|
144.0
|
|
|
|
153.5
|
|
|
|
|
|
|
Partnership deficit
|
|
$
|
(5.2
|
)
|
|
$
|
(4.6
|
)
|
|
|
|
|
|
|
OxyVinyls purchases chlorine from SunBelt under an agreement
that expires in 2094. The agreement requires OxyVinyls to
purchase all of the chlorine that is produced by SunBelt up to a
maximum of 250,000 tons per year at market price, less a
discount. OxyVinyls chlorine purchases from SunBelt were
$72.2 million in 2006 and $76.6 million in 2005.
On October 1, 2006, PolyOne purchased the remaining 50%
interest in DH Compounding Company from a subsidiary of The Dow
Chemical Company. DH Compounding Company is now fully
consolidated in the financial statements of PolyOne. Prior to
the acquisition of DH Compounding Company, it was accounted for
as an equity
POLYONE
CORPORATION 45
affiliate and was reflected in the All Other segment (owned 50%
and included in the Producer Services operating segment) along
with BayOne Urethane Systems, L.L.C equity affiliate (owned 50%
and included in the Polymer Coating Systems operating segment).
The Vinyl Business operating segment includes the Geon/Polimeros
Andinos equity affiliate (owned 50%).
Combined summarized financial information for these equity
affiliates follows. The amounts shown represent the entire
operations of these businesses. DH Compounding is included in
the following table up to the time of its consolidation into
PolyOne on October 1, 2006.
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
Net sales
|
|
$
|
122.9
|
|
|
$
|
127.0
|
|
Operating income
|
|
$
|
12.0
|
|
|
$
|
14.4
|
|
Net income
|
|
$
|
10.7
|
|
|
$
|
12.0
|
|
Current assets
|
|
$
|
30.7
|
|
|
$
|
34.9
|
|
Non-current assets
|
|
|
14.0
|
|
|
|
31.1
|
|
|
Total assets
|
|
$
|
44.7
|
|
|
$
|
66.0
|
|
|
|
Current liabilities
|
|
$
|
28.7
|
|
|
$
|
29.7
|
|
Non-current liabilities
|
|
|
2.7
|
|
|
|
2.8
|
|
|
Total liabilities
|
|
$
|
31.4
|
|
|
$
|
32.5
|
|
|
|
Note G.
FINANCING ARRANGEMENTS
Long-term debt at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
10.625% senior notes due 2010
|
|
$
|
241.4
|
|
|
$
|
300.0
|
|
8.875% senior notes due 2012
|
|
|
199.1
|
|
|
|
198.9
|
|
7.500% debentures due 2015
|
|
|
50.0
|
|
|
|
50.0
|
|
Medium-term notes
interest rates from 6.52% to 7.16% with a weighted average rate
of 6.83% at December 31, 2006 and 2005,
respectively due between 2007 and 2011
|
|
|
91.7
|
|
|
|
90.5
|
|
6.0% promissory note due in equal
monthly installments through 2009
|
|
|
8.0
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
590.2
|
|
|
$
|
639.4
|
|
Less current portion
|
|
|
22.5
|
|
|
|
0.7
|
|
|
Total long-term debt, net of
current portion
|
|
$
|
567.7
|
|
|
$
|
638.7
|
|
|
|
Aggregate maturities of long-term debt for the next five years
are: 2007 $22.5 million; 2008
$21.9 million; 2009 $20.5 million;
2010 $259.0 million; 2011
$17.2 million; and thereafter
$249.1 million.
During 2006, PolyOne issued a promissory note in the principal
amount of $8.7 million, payable in 36 equal installments at
a rate of 6% per annum. This promissory note resulted from
the purchase of the remaining 50% interest in DH Compounding
Company. For further discussion of this purchase, see
Note A.
During 2006, PolyOne repurchased $58.6 million aggregate
principal amount of its 10.625% senior notes at a premium
of $4.4 million. The premium is shown as a separate line
item in the Consolidated Statements of Operations. Unamortized
deferred note issuance costs of $0.8 million were expensed
due to this repurchase and are included in interest expense in
the Consolidated Statements of Operations. Also during 2006,
$0.7 million of aggregate principal amount of
PolyOnes medium-term notes became due and were paid.
As of December 31, 2006, PolyOnes secured borrowings
were not at levels that would trigger the security provisions of
the indentures governing its senior notes and debentures and its
guarantee of the SunBelt notes.
Revolving Credit Facility PolyOne decided not
to renew its revolving credit facility, and, accordingly, it
expired on June 6, 2006. To replace some of the features of
this expired facility, PolyOne entered into a definitive
Guarantee and Agreement with Citicorp USA, Inc. on June 6,
2006. Under this Guarantee and Agreement, PolyOne guarantees the
treasury management and banking services provided to it and its
subsidiaries, such as subsidiary borrowings, interest rate
swaps, foreign currency forwards, letters of credit, credit card
programs and bank overdrafts. This guarantee is secured by
PolyOnes inventories located in the United States. As of
December 31, 2005, PolyOne had no amounts outstanding under
the revolving credit facility, although the facility served as a
back-up
facility for $6.0 million of outstanding letters of credit
and for $5.0 million of loan guarantees related to
PolyOnes Shenzhen subsidiary. The amount available for
borrowing under the revolving credit facility at
December 31, 2005 was $13.8 million.
The weighted-average interest rate on short-term borrowings was
4.9% at December 31, 2006 and 4.3% at December 31,
2005. Total interest paid on long-term and short-term borrowings
was $62.2 million in 2006, $63.5 million in 2005 and
$69.2 million in 2004.
PolyOne is exposed to market risk from changes in interest rates
on debt obligations and from changes in foreign currency
exchange rates. PolyOne periodically enters into interest rate
swap agreements that modify its exposure to interest rate risk
by converting fixed-rate obligations to floating rates. PolyOne
has six agreements with a net fair value liability of
$5.1 million and $5.8 million at December 31,
2006 and 2005, respectively. The weighted-average interest rate
for these six agreements was 9.3% at December 31, 2006 and
8.2% at December 31, 2005. These exchange agreements are
perfectly effective as defined by
SFAS No. 133, Accounting for Derivative
Financial Instruments and Hedging Activities. There have
been no material changes in the market risk faced by PolyOne
from December 31, 2005 to December 31, 2006.
46 POLYONE
CORPORATION
The following table shows the interest rate impact of the swap
agreements at December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Effective
|
|
|
Effective
|
|
|
|
Interest Rate
at
|
|
|
Interest Rate
at
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
$100.0 million of medium-term
notes with a weighted-average interest rate of 6.83%
|
|
|
8.8
|
%
|
|
|
|
|
$100.7 million of medium-term
notes with a weighted-average interest rate of 6.83%
|
|
|
|
|
|
|
6.9
|
%
|
Note H.
LEASING ARRANGEMENTS
PolyOne leases certain manufacturing facilities, warehouse
space, machinery and equipment, automobiles and railcars under
operating leases. Rent expense was $20.5 million in 2006,
$19.3 million in 2005 and $18.3 million in 2004.
Future minimum lease payments under non-cancelable operating
leases with initial lease terms longer than one year at
December 31, 2006 were as follows: 2007
$15.2 million; 2008 $12.0 million;
2009 $9.2 million; 2010
$7.0 million; 2011 $6.4 million; and
thereafter $15.2 million.
Note I. SALE
OF ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consist of the following:
|
|
|
|
|
|
|
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
Trade accounts receivable
|
|
$
|
160.7
|
|
|
$
|
139.6
|
|
Retained interest in securitized
accounts receivable
|
|
|
161.6
|
|
|
|
187.3
|
|
Allowance for doubtful accounts
|
|
|
(5.9
|
)
|
|
|
(6.4
|
)
|
|
|
|
$
|
316.4
|
|
|
$
|
320.5
|
|
|
|
Under the terms of its receivables sale facility, PolyOne sells
its accounts receivable to PolyOne Funding Corporation (PFC), a
wholly owned, bankruptcy-remote subsidiary. At December 31,
2006 and 2005, accounts receivable totaling $161.6 million
and $187.3 million, respectively, were sold by PolyOne to
PFC. PFC, in turn, may sell an undivided interest in these
accounts receivable to certain investors and realize proceeds of
up to $175 million. The maximum proceeds that PFC may
receive under the facility is limited to 85% of the eligible
accounts receivable that are sold to PFC. At December 31,
2006, PFC had not sold any of its undivided interests in
accounts receivable. At December 31, 2005, PFC had sold
$7.9 million of its undivided interests in accounts
receivable. PolyOne retained an interest in the
$161.6 million and $187.3 million of trade receivables
at December 31, 2006 and 2005, respectively, that were sold
by PolyOne to PFC. As a result, these retained interests are
included in accounts receivable on the Consolidated Balance
Sheets at December 31, 2006 and 2005.
The receivables sale facility also makes up to $40 million
available for the issuance of standby letters of credit as a
sub-limit
within the $175 million limit under the facility, of which
$10.9 million was used at December 31, 2006. Continued
availability of the securitization program depends upon
compliance with covenants that are contained in the related
agreements. As of December 31, 2006, PolyOne was in
compliance with these covenants.
PolyOne receives the remaining proceeds from collection of the
receivables after a deduction for the aggregate yield payable on
the undivided interests in the receivables sold by PFC, a
servicers fee, an unused commitment fee (between 0.25% and
0.50%, depending upon the amount of the unused portion of the
facility), fees for any outstanding letters of credit, and an
administration and monitoring fee ($150,000 per annum).
PolyOne also services the underlying accounts receivable and
receives a service fee of 1% per annum on the average daily
amount of the outstanding interests in its receivables. The net
discount and other costs of the receivables sale facility are
included in other expense, net in the Consolidated Statements of
Operations.
Note J.
INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
At FIFO or average cost, which
approximates current cost:
|
|
|
|
|
|
|
|
|
Finished products and in process
|
|
$
|
165.4
|
|
|
$
|
155.0
|
|
Raw materials and supplies
|
|
|
111.7
|
|
|
|
86.8
|
|
|
|
|
|
277.1
|
|
|
|
241.8
|
|
Reserve to reduce certain
inventories to LIFO cost basis
|
|
|
(36.3
|
)
|
|
|
(50.0
|
)
|
|
|
|
$
|
240.8
|
|
|
$
|
191.8
|
|
|
|
Note K.
PROPERTY
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
Land and land improvements
|
|
$
|
39.8
|
|
|
$
|
40.6
|
|
Buildings
|
|
|
263.2
|
|
|
|
253.4
|
|
Machinery and equipment
|
|
|
854.9
|
|
|
|
827.5
|
|
|
|
|
|
1,157.9
|
|
|
|
1,121.5
|
|
Less accumulated depreciation and
amortization
|
|
|
(715.5
|
)
|
|
|
(685.5
|
)
|
|
|
|
$
|
442.4
|
|
|
$
|
436.0
|
|
|
|
The increase in property of $6.4 million was a result of
capital expenditures of $41.1 million, the acquisition of
the fixed assets of DH Compounding Company in the amount of
$15.4 million, and an increase of $9.7 million from
foreign currency translation. Offsetting these increases was
depreciation expense of $55.0 million and disposals of
$4.8 million.
POLYONE
CORPORATION 47
Note L.
OTHER BALANCE SHEET LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses
|
|
|
Non-current Liabilities
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In
millions)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Employment costs
|
|
$
|
49.5
|
|
|
$
|
39.4
|
|
|
$
|
11.0
|
|
|
$
|
12.8
|
|
Environmental
|
|
|
5.0
|
|
|
|
7.3
|
|
|
|
54.5
|
|
|
|
47.9
|
|
Taxes
|
|
|
7.6
|
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
Post-retirement benefits
|
|
|
9.3
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
6.9
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
4.5
|
|
|
|
4.8
|
|
|
|
125.1
|
|
|
|
135.4
|
|
Employee separation and plant
phaseout
|
|
|
1.5
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
Insurance accruals
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
1.7
|
|
|
|
1.8
|
|
Other
|
|
|
8.7
|
|
|
|
3.5
|
|
|
|
8.2
|
|
|
|
16.4
|
|
|
|
|
$
|
93.1
|
|
|
$
|
82.4
|
|
|
$
|
200.5
|
|
|
$
|
214.3
|
|
|
|