PolyOne Corporation 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, 2007
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. þ
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer,
accelerated filer and smaller reporting
company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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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 29, 2007, determined using a per
share closing price on that date of $7.19, as quoted on the New
York Stock Exchange, was $623,115,000.
The number of shares of common
stock outstanding as of February 27, 2008 was 93,157,719.
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 with respect to the
2008 Annual Meeting of Shareholders.
POLYONE
CORPORATION
PART I
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 polymer formulations, color
and additive systems, thermoplastic resin distribution and
specialty polyvinyl chloride (PVC) vinyl resins, with equity
investments in manufacturers of caustic soda and chlorine, and
PVC compound products 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 4,800 people and have
56 manufacturing sites and 13 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 11,000 customers
on 6 continents. In 2007, we had sales of $2.6 billion, 37%
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 July 2007, we sold our 24% interest in Oxy Vinyls LP
(OxyVinyls) for $261 million in cash. During the second
quarter of 2007 an impairment of $14.8 million was recorded
on our investment in OxyVinyls due to an other than temporary
decline in value. This sale resulted in the reversal of an
associated deferred tax liability, which reduced tax expense by
$31.5 million for the year ended December 31, 2007.
Proceeds from the sale were used for the redemption of the
balance of our 10.625% senior notes as well as for the
reduction of borrowings under short-term facilities. The
redemption of the senior notes resulted in debt redemption
premium costs and the write-off of unamortized debt issuance
fees for 2007 of $15.6 million ($10.1 million after
tax).
Purchase of
businesses
In January 2008, we acquired 100% of the outstanding capital
stock of GLS Corporation (GLS), a global provider of
specialty thermoplastic elastomer compounds for consumer,
packaging and medical applications.
In December 2007, we acquired the vinyl compounding business and
assets of Ngai Hing PlastChem Company Ltd. (NHPC), a subsidiary
of Ngai Hing Hong Company Limited, a publicly-held company
listed on the Hong Kong Stock Exchange for $3.3 million,
net of cash received.
In July 2007, in a transaction related to the sale of our
interest in OxyVinyls, we purchased the remaining 10% minority
interest in Powder Blends, LP, for $11 million in cash.
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 interest in 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
2 POLYONE
CORPORATION
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, lead replacement for radiation shielding,
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. All Other is
comprised of the remaining operating segments and includes North
American Color and Additives, North American Engineered
Materials, Producer Services and Specialty Inks and Polymer
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 array of products and services for vinyl coating, molding and
extrusion processors. Our product offerings include: rigid,
flexible and dry blend vinyl compounds; industry-leading
dispersion, blending and specialty suspension grade vinyl
resins; and specialty coating materials based largely on vinyl.
These products are sold to a wide variety of manufacturers of
plastic parts and consumer-oriented products. We also offer a
wide range of services to the customer base utilizing these
products to meet the ever changing needs of our multi-market
customer base. These services include materials testing and
component analysis, custom compound development, colorant and
additive services, design assistance, structural analyses,
process simulations and extruder screw design.
Much of the revenue and income for the Vinyl Business is
generated in North America. However, production and sales in
Asia and Europe constitute a minor but growing portion of this
segment. In addition, PolyOne owns 50% of a joint venture
producing and marketing vinyl compounds in Latin America.
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 believe we are well-positioned to
meet the stringent quality, service and innovation requirements
of this diverse and highly competitive marketplace.
Our Vinyl Business segment had total sales of
$933.0 million, of which sales to external customers were
$833.0 million, with operating income of $50.8 million
in 2007 and total assets of $467.3 million as of
December 31, 2007.
International
Color and Engineered Materials:
Our International Color and Engineered Materials operating
segment combines the strong regional heritage of our color and
additive masterbatches and engineered materials operations to
create global capabilities with plants, sales and service
facilities located throughout Europe and Asia.
We operate 13 facilities in Europe (Belgium, Denmark, France,
Germany, Hungary, Poland, Spain, Sweden and Turkey) and 5
facilities in Asia (China, Singapore and Thailand).
Working in conjunction with our North American Color and
Additives and North American Engineered Materials operating
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 $610.9 million, with
operating
POLYONE
CORPORATION 3
income of $26.6 million in 2007 and total assets of
$424.4 million as of December 31, 2007.
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
$744.3 million, of which sales to external customers were
$739.6 million, with operating income of $22.1 million
in 2007 and total assets of $175.2 million as of
December 31, 2007.
Resin and
Intermediates:
We report the results of our Resin and Intermediates operating
segment on the equity method. This segment consists almost
entirely of our 50% equity interest in SunBelt and our former
24% equity interest in OxyVinyls, through its disposition date
of July 6, 2007. SunBelt, a producer of chlorine and
caustic soda, is a partnership with Olin Corporation. OxyVinyls,
a producer of PVC resins, vinyl chloride monomer (VCM), and
chlorine and caustic soda, was a partnership with Occidental
Chemical Corporation. In 2007, SunBelt had production capacity
of approximately 320 thousand tons of chlorine and 358 thousand
tons of caustic soda. Most of the chlorine manufactured by
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.
Our Resin and Intermediates segment had operating income of
$34.8 million in 2007, not including a $14.8 million
impairment charge related to the disposition of our 24% interest
in OxyVinyls, and had total assets of $15.6 million as of
December 31, 2007. We also received $35.0 million of
cash from dividends and distributions from our Resin and
Intermediates segment equity affiliates in 2007, in addition to
net proceeds of $261 million from the sale of our interest
in OxyVinyls.
All
Other:
All Other includes our North American Color and Additives, North
American Engineered Materials, Producer Services and Specialty
Inks and Polymer 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 and eco-friendly 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.
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 including
applications currently employing traditional materials such as
metal. 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, colorant and biomaterial 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 North American Engineered Materials
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 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 Specialty Inks and Polymer 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,
4 POLYONE
CORPORATION
latexes, specialty additives and colorants. Specialty Inks and
Polymer Systems serves diversified markets that include
recreational and athletic apparel, construction, filtration,
outdoor furniture and healthcare. 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.
All Other had total sales of $487.8 million, of which sales
to external customers were $459.2 million, with operating
income of $10.0 million in 2007 and total assets of
$296.5 million as of December 31, 2007.
Competition
The production of compounded plastics and the manufacture of
custom and proprietary formulated color and additives systems
for the plastics industry are 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 13 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 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 3% of our consolidated
revenues, and neither we nor any of our operating segments would
suffer a material adverse effect if we were 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,
POLYONE
CORPORATION 5
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 was
$21.6 million in 2007, $20.3 million in 2006 and
$19.5 million in 2005. In 2008, 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. We
also ship some of our manufactured products to customers by
railroad cars.
Employees
As of February 27, 2008, we employed approximately
4,800 people. Approximately 90 employees were
represented by labor unions under collective bargaining
agreements that expire on May 31, 2008 (4 employees),
July 31, 2010 (15 employees), October 31, 2010
(26 employees), November 30, 2010 (16 employees)
and January 31, 2011 (29 employees) and approximately
another 103 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.
Based on September 2007 court rulings (see Note N to the
Consolidated Financial Statements) in the case of Westlake
Vinyls, Inc. v. Goodrich Corporation, et al. and a
settlement agreement related to the former Goodrich Corporation
(now Westlake Vinyls, Inc.) Calvert City facility, we recorded a
charge during 2007 of $15.6 million for past remediation
costs payable to Goodrich Corporation. We also adjusted our
environmental reserve for future remediation costs, a portion of
which already related to the Calvert City site, resulting in an
additional charge of $28.8 million in 2007.
We incurred total environmental expense of $48.8 million in
2007, $2.5 million in 2006 and $0.2 million in 2005.
Our environmental expenses in 2007 were largely driven by the
charges stemming from the aforementioned Calvert City settlement
and subsequent reserve adjustment. Environmental expense is
presented net of insurance recoveries of $8.1 million in
2006 and $2.2 million in 2005. There were no insurance
recoveries in 2007. The insurance recoveries all relate to
inactive or formerly owned sites.
We expect environmental remediation expenditures will be
approximately $14 million in 2008 and $6 million to
$8 million per year thereafter.
We are strongly committed to safety as evidenced by the fact
that our injury incidence rate was 1.14 per 100 full-time
workers per year in 2007, an improvement from 1.33 in 2006. The
2006 average injury incidence rate for our NAICS Code (326
Plastics and Rubber Products Manufacturing) was 6.8.
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 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 became 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.
6 POLYONE
CORPORATION
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, 2007 Consolidated Balance Sheet
totaling $83.8 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, 2007. 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.
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. 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 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. This risk management
process is a component of our strategic planning process and as
such, is reviewed at regular intervals with our Board of
Directors and Audit Committee.
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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economic downturns in the significant end markets that we serve;
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product obsolescence, technological changes that unfavorably
alter the value / cost proposition of our products and
services;
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competition from existing and unforeseen polymer and non-polymer
based products;
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declines in general economic conditions or reductions in
industrial production growth rates, both domestically and
globally, which could impact our customers ability to pay
amounts owed to us;
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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 supplier work stoppages, supply
shortages, plant outages or regulatory changes that may limit or
prohibit overland transportation of certain hazardous materials
and exogenous factors, like severe weather.
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POLYONE
CORPORATION 7
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.
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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regulatory changes that affect 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 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.
The European business community has adopted REACH, a legislative
act to cover Registration, Evaluation, Authorization and
Restriction of Chemicals. The goal of this legislation, which
became 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 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 37% in 2007, 34% in 2006 and 33% in 2005 of our total
revenue during these periods. Long-lived assets of our foreign
operations represented 34% in 2007, 32% in 2006 and 31% in 2005
of our total long-lived assets.
8 POLYONE
CORPORATION
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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Any of these risks 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 engage in
acquisitions and joint ventures, and may encounter unexpected
difficulties identifying, pricing or integrating those
businesses.
Attainment of PolyOnes strategic plan objectives may
require, in part, strategic acquisitions or joint ventures
intended to complement or expand the Companys businesses
globally or add product technology that accelerates the
Companys specialization strategy, or both. Success will
depend on the Companys ability to identify, price and
complete these transactions or arrangements, and integrate the
businesses acquired in these transactions as well as develop
satisfactory working arrangements with the Companys
strategic partners in the joint ventures. Unexpected
difficulties in completing and integrating acquisitions with the
Companys existing operations, and in managing strategic
investments could occur. Furthermore, the Company may not
realize the degree, or timing, of benefits initially anticipated
which could adversely affect the Companys business and
results of operations.
Our results of
operations may be adversely affected by the results of
operations of Sunbelt.
SunBelt is our largest equity investment. The earnings of this
partnership may be significantly affected by changes in the
commodity cycle for hydrocarbon feedstocks and for chlor-alkali
products. If the profitability of SunBelt is adversely affected,
we may receive less cash distributions from the partnership or
we may be required to make cash contributions to the
partnership, either of which could adversely affect our
financial condition.
Natural gas,
electricity, fuel and raw material costs, and other external
factors beyond our control, as well as downturns in the home
repair and remodeling and new home sectors of the economy, can
cause wide fluctuations in our margins.
The cost of our natural gas, electricity, fuel and raw
materials, and other costs, may not correlate with changes in
the prices we receive for our products, either in the direction
of the price change or in absolute magnitude. Natural gas and
raw materials costs represent a substantial part of our
manufacturing costs, and energy costs, in particular electricity
and fuel, represent a component of the costs to manufacture
building products. Most of the raw materials we use are
commodities and the price of each can fluctuate widely for a
variety of reasons, including changes in availability because of
major capacity additions or significant facility operating
problems. Other external factors beyond our control can cause
volatility in raw materials prices, demand for our products,
product prices, sales volumes and margins. These factors include
general economic conditions, the level of business activity in
the industries that use our products, competitors actions,
international events and circumstances, and governmental
regulation in the United States and abroad. These factors can
also magnify the impact of economic cycles on our business.
While we attempt to pass through price increases in energy costs
and raw materials, we have been unsuccessful in doing so in some
circumstances in the past and there can be no reassurance that
we can do so in the future.
Additionally, our products used in building and construction
markets are impacted by changes in the North American home
repair and remodeling sectors, as well as the new construction
sector, which may be significantly affected by changes in
economic and other conditions such as gross domestic product
levels, employment levels, demographic trends and consumer
confidence. These factors can lower the demand for and pricing
of our building products, which could cause our net sales and
net income to decrease.
We face
competition from other polymer and chemical companies, which
could adversely affect our sales and financial
condition.
We actively compete with companies that produce the same or
similar products, and in some instances with companies that
produce different products that are designed for the same end
uses. We encounter competition in price, delivery, service,
performance, product innovation, product recognition and
quality, depending on the product involved.
POLYONE
CORPORATION 9
Because of the polymer and chemical industry consolidation, our
competitors may become larger, which could make them more
efficient, thereby reducing their cost of materials and
permitting them to be more price competitive. Increased size
could also permit them to operate in wider geographic areas and
enhance their ability to compete in other areas such as research
and development and customer service, which could also reduce
our profitability.
We expect that our competitors will continue to develop and
introduce new and enhanced products, which could cause a decline
in the market acceptance of our products. In addition, our
competitors could cause a reduction in the selling prices of
some of our products as a result of intensified price
competition. Competitive pressures can also result in the loss
of major customers. An inability to compete successfully could
have an adverse effect on our results of operations, financial
condition and cash flows.
We may also experience increased competition from companies that
offer products based on alternative technologies and processes
that may be more competitive or better in price or performance,
causing us to lose customers and result in a decline in our
sales volume and earnings.
Additionally, some of our customers may already be or may become
large enough to justify developing in-house production
capabilities. Any significant reduction in customer orders as a
result of a shift to in-house production could adversely affect
our sales and operating profits.
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 business
depends upon good relations with our employees.
We may experience difficulties in maintaining appropriate
relations with unions and employees in certain locations. About
4% of our employees at continuing operations are represented by,
or are in negotiations to be represented by, labor unions. In
addition, problems or changes affecting employees in certain
locations may affect relations with our employees at other
locations. The risk of labor disputes, work stoppages or other
disruptions in production could adversely affect us. If we
cannot successfully negotiate or renegotiate collective
bargaining agreements or if the negotiations take an excessive
amount of time, there may be a heightened risk of a prolonged
work stoppage. Any work stoppage could have a material adverse
effect in the productivity and profitability of a manufacturing
facility or in our operations as a whole.
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ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
We have no outstanding or unresolved comments from the staff of
the SEC.
10 POLYONE
CORPORATION
As of February 27, 2008, we operated facilities in the
United States and internationally. Our corporate office is
located in Avon Lake, Ohio. We own substantially all of our
facilities. During 2007, 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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Specialty Inks and
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Vinyl Business
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Engineered Materials
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Color and Additives
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Polymer Systems
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Commerce, California
Long Beach, California
Kennesaw, Georgia
Henry, Illinois
Terre Haute, Indiana
Louisville, Kentucky
Plaquemine, Louisiana
Sullivan, Missouri
Pedricktown, New Jersey
Avon Lake, Ohio
North Baltimore, Ohio
Pasadena, Texas
Sussex, Wisconsin
Niagara Falls, Ontario, Canada
Orangeville, Ontario, Canada
St. Remi de Napierville,
Quebec, Canada
Dongguan, China
Shenzhen, China
Cartagena, Colombia
(joint venture)
Bolton, England
Hyde, England
Widnes, England
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Assesse, Belgium Pudong (Shanghai), China Shenzhen, China Suzhou, China Glostrup, Denmark Cergy, France Tossiat, France Bendorf, Germany Gaggenau, Germany Melle, Germany Gyor, Hungary Kutno, Poland Jurong, Singapore Barbastro, Spain Pamplona, Spain Angered, Sweden Bangkok, Thailand Istanbul, Turkey
Producer Services Dyersburg,
Tennessee Clinton, Tennessee Seabrook, Texas
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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 GLS Corporation facilities: McHenry, Illinois Suzhou,
China
Resin and Intermediates SunBelt joint venture McIntosh, Alabama
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Commerce, California Kennesaw, Georgia St. Louis, Missouri Massillon, Ohio Sussex, Wisconsin Melbourne, Australia Shenzhen, China Widnes, England
PolyOne Distribution Livermore, California Rancho Cucamonga, California Denver, Colorado Lemont, Illinois Ayer, Massachusetts Chesterfield Township, Michigan Eagan, Minnesota
Hazelwood, Missouri Statesville, North Carolina Massillon, Ohio La Porte, Texas Fife, Washington Mississauga, Ontario, Canada
|
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.
|
SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2007.
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 27, 2008,
about each of our executive officers, including his position
with us as of that date and other positions held for at least
the past five years. Executive officers are elected by our Board
of Directors to serve one-year terms.
Stephen D. Newlin
Age: 55
Chairman, President and Chief Executive Officer, February 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 Boards of Directors of Black Hills Corporation and
The Valspar Corporation.
Bernard P. Baert
Age: 58
Senior Vice President and General Manager, Colors and Engineered
Materials, Europe and Asia, May 2006 to date. Vice President and
General Manager, Colors and Engineered Materials, Europe and
Asia, September 2000, upon formation of PolyOne, to April 2006.
General Manager, Color Europe, M.A. Hanna Company, 1997 to
August 2000.
POLYONE
CORPORATION 11
Michael E. Kahler
Age: 50
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.
Thomas J. Kedrowski
Age: 49
Senior Vice President, Operations, September 2007 to date. Vice
President of Strategy and Process Improvement, H.B. Fuller
Company (a global manufacturer and marketer of adhesives and
specialty chemical products) from November 2005 to April 2007.
Vice President of Global Operations, H.B. Fuller Company from
February 2002 to November 2005.
Michael L. Rademacher
Age: 57
Senior Vice President and General Manager, Distribution, May
2006 to date. Vice President and General Manager, PolyOne
Distribution, September 2000, upon formation of PolyOne, to
April 2006. 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: 53
Senior Vice President and General Manager, Vinyl Business, May
2006 to date. Vice President and General Manager, Vinyl
Business, January 2003 to April 2006. General Manager, Extrusion
Products, September 2000 to December 2002. General Manager,
Custom Profile Compounds, The Geon Company, April 1998 to August
2000.
Kenneth M. Smith
Age: 53
Senior Vice President and Chief Information and Human Resources
Officer, May 2006 to date. Chief Human Resources Officer,
January 2003 to date, and Vice President and Chief Information
Officer, September 2000, upon formation of PolyOne, to April
2006. 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: 54
Senior Vice President and Chief Financial Officer, May 2006 to
date. Vice President and Chief Financial Officer, September
2000, upon formation of PolyOne, to April 2006. 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 STOCKHOLDER 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, $.01 par value per share,
as reported by the New York Stock Exchange, where the shares are
traded under the symbol POL, for the periods
indicated.
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2007 Quarters
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2006 Quarters
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Fourth
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Third
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Second
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First
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Fourth
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Third
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Second
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First
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Common stock price:
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High
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$
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8.60
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$
|
9.29
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|
|
$
|
7.59
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|
|
$
|
7.76
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|
|
$
|
8.76
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|
|
$
|
9.18
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|
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$
|
9.89
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|
|
$
|
9.88
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Low
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|
$
|
5.93
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|
|
$
|
6.93
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|
|
$
|
6.14
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|
|
$
|
5.99
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|
|
$
|
6.71
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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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As of February 27, 2008, there were 2,662 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 agreements that
govern our receivables sale facility contain restrictions that
could limit our ability to pay future dividends.
ITEM 6. SELECTED
FINANCIAL DATA
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(In millions, except per share data)
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2007
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2006
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2005
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2004
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2003
|
|
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Sales
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|
$
|
2,642.7
|
|
|
$
|
2,622.4
|
|
|
$
|
2,450.6
|
|
|
$
|
2,267.7
|
|
|
$
|
2,048.1
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|
Operating income (loss)
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|
$
|
33.9
|
|
|
$
|
190.6
|
|
|
$
|
141.3
|
|
|
$
|
129.1
|
|
|
$
|
(43.4
|
)
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Income (loss) before discontinued operations and change in
method of accounting
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|
$
|
11.4
|
|
|
$
|
125.6
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|
|
$
|
63.2
|
|
|
$
|
28.3
|
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|
$
|
(134.8
|
)
|
Discontinued operations
|
|
|
|
|
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|
(2.7
|
)
|
|
|
(15.3
|
)
|
|
|
(4.1
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)
|
|
|
(144.7
|
)
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|
Net income (loss)
|
|
$
|
11.4
|
|
|
$
|
122.9
|
|
|
$
|
47.9
|
|
|
$
|
24.2
|
|
|
$
|
(279.5
|
)
|
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Basic and diluted earnings (loss) per common share:
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|
|
Before discontinued operations and change in method of accounting
|
|
$
|
0.12
|
|
|
$
|
1.36
|
|
|
$
|
0.69
|
|
|
$
|
0.31
|
|
|
$
|
(1.48
|
)
|
Discontinued operations
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
(0.17
|
)
|
|
|
(0.05
|
)
|
|
|
(1.59
|
)
|
|
Basic and diluted earnings (loss) per common share
|
|
$
|
0.12
|
|
|
$
|
1.33
|
|
|
$
|
0.52
|
|
|
$
|
0.26
|
|
|
$
|
(3.07
|
)
|
|
|
Dividends per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
Total assets
|
|
$
|
1,583.0
|
|
|
$
|
1,780.8
|
|
|
$
|
1,695.3
|
|
|
$
|
1,753.1
|
|
|
$
|
1,878.5
|
|
Long-term debt, net of current portion
|
|
$
|
308.0
|
|
|
$
|
567.7
|
|
|
$
|
638.7
|
|
|
$
|
640.5
|
|
|
$
|
757.1
|
|
The selected financial data in the above table has been restated
to reflect the adoption of FSP AUG AIR-1 during the first
quarter of 2007. For more information, see Note C to the
Consolidated Financial Statements.
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 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 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.
POLYONE
CORPORATION 13
Business
Overview
We are a leading global provider of specialized polymer
materials, services and solutions with operations in
thermoplastic compounds, specialty polymer formulations, color
and additive systems, thermoplastic resin distribution and
specialty vinyl resins, with equity investments in manufacturers
of caustic soda and chlorine, and PVC compound products and in a
formulator of polyurethane compounds. Headquartered in Avon
Lake, Ohio, with 2007 sales of $2.6 billion, we have
manufacturing sites and distribution facilities in North
America, Europe, Asia and Australia and joint ventures in North
America and South America. We currently employ approximately
4,800 people and sell more than 35,000 different specialty
and general purpose products to over 11,000 customers on 6
continents. 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 July 2007, we sold our 24% interest in Oxy Vinyls LP
(OxyVinyls) for $261 million in cash. During the second
quarter of 2007 an impairment of $14.8 million was recorded
on our investment in OxyVinyls due to an other than temporary
decline in value. This sale resulted in the reversal of an
associated deferred tax liability, which reduced tax expense by
$31.5 million for the year ended December 31, 2007.
Proceeds from the sale were used for the redemption of the
balance of our 10.625% senior notes as well as for the
reduction of borrowings under short-term facilities. The
redemption of the senior notes resulted in debt redemption
premium costs and the write-off of unamortized debt issuance
fees for 2007 of $15.6 million ($10.1 million after
tax).
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 January 2008, we acquired 100% of the outstanding capital
stock of GLS Corporation, a global provider of specialty
thermoplastic elastomer compounds for consumer, packaging and
medical applications.
In December 2007, we acquired the vinyl compounding business and
assets of Ngai Hing PlastChem Company Ltd. (NHPC), a subsidiary
of Ngai Hing Hong Company Limited for $3.3 million, net of
cash received.
In a transaction related to the sale of our interest in
OxyVinyls, in July 2007, we purchased the remaining 10% minority
interest in Powder Blends, LP for $11 million in cash.
Restructuring
initiatives and facility closures
During the third quarter of 2007, we announced the closure of
two manufacturing lines at our Avon Lake, Ohio facility. The
transition was completed in the fourth quarter of 2007 and
resulted in expenses related to employee separation and plant
phaseout charges of $0.9 million.
During 2007, we recognized and paid $0.4 million in
employee separation charges related to 33 employees
involved in the restructuring of our manufacturing facility in
St. Peters, Missouri, part of the North American Color and
Additives operating segment.
In 2007, we recognized charges of $0.6 million related to
three executive severance agreements.
The closure and exit from the Companys Commerce,
California facility was completed in the first quarter of 2007,
resulting in employee separation charges and plant phaseout
charges of $0.2 million.
Sale of
assets
As part of our restructuring initiatives and cost reduction
plans, during 2007, we sold previously closed facilities and
other assets for proceeds of $6.3 million and collected
$3.1 million in cash related to assets sold in 2006.
Environmental
remediation costs
In September 2007, we were informed of rulings by the United
States District Court for the Western District of Kentucky on
several pending motions in the case of Westlake Vinyls,
Inc. v. Goodrich Corporation, et al., which has been
pending since 2003. The Court held that we must pay the
remediation costs at the former Goodrich Corporation (now
Westlake Vinyls, Inc.) Calvert City facility, together with
certain defense costs of Goodrich Corporation. The rulings also
provided that we can seek indemnification for contamination
attributable to Westlake Vinyls. We recorded a charge of
$15.6 million and made payments, net of related receipts of
$18.8 million, in 2007 for past remediation activities
related to these Court rulings. We also adjusted our
environmental reserve for future remediation costs, a portion of
which already related to the Calvert City site, resulting in a
charge of $28.8 million in 2007. See Note N to the
Consolidated Financial Statements for additional information.
Results of
Operations
Summary of
Consolidated Results:
Aggregate sales increased 1% in 2007 compared to 2006. This
increase was primarily due to 9% sales growth in Asia, higher
prices driven by value adding selling activities of our
commercial team to offset higher raw material and energy costs,
and the impact of favorable exchange rates. Foreign exchange had
a 2% favorable effect on sales. Within All Other North American
Engineered Materials, Producer Services and the Specialty Inks
and Polymer Systems operating segments all registered sales
growth in 2007 versus 2006, which offset a 16% decline in sales
in the North
14 POLYONE
CORPORATION
American Color and Additives business due mainly to the pruning
of low margin business. These items netted positively against
the $92.1 million, or 9%, decline in sales in our Vinyl
Business segment, mainly resulting from the slowdown in the
residential construction market, and the 3% decrease in
year-over-year shipments.
Income before discontinued operations declined
$114.2 million in 2007, or $1.24 per share, compared to
2006.
Income from continuing operations before income taxes declined
$152.7 million in 2007 compared to 2006. A table showing
material items that comprise this decline is provided after the
following table which sets forth key financial information from
our statements of income for the years ended December 31,
2007, 2006 and 2005, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Sales
|
|
$
|
2,642.7
|
|
|
$
|
2,622.4
|
|
|
$
|
2,450.6
|
|
Operating income
|
|
|
33.9
|
|
|
|
190.6
|
|
|
|
141.3
|
|
Interest expense
|
|
|
(51.4
|
)
|
|
|
(66.5
|
)
|
|
|
(68.1
|
)
|
Interest income
|
|
|
4.5
|
|
|
|
3.4
|
|
|
|
1.9
|
|
Premium on early extinguishment of long-term debt
|
|
|
(12.8
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
Income (loss) before income taxes and discontinued operations
|
|
$
|
(32.4
|
)
|
|
$
|
120.3
|
|
|
$
|
69.8
|
|
Income tax benefit (expense)
|
|
|
43.8
|
|
|
|
5.3
|
|
|
|
(6.6
|
)
|
|
Income before discontinued operations
|
|
|
11.4
|
|
|
|
125.6
|
|
|
|
63.2
|
|
Loss from discontinued operations and loss on sale, net of
income taxes
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
(15.3
|
)
|
|
Net income
|
|
$
|
11.4
|
|
|
$
|
122.9
|
|
|
$
|
47.9
|
|
|
|
Basic and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before discontinued operations
|
|
$
|
0.12
|
|
|
$
|
1.36
|
|
|
$
|
0.69
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
(0.17
|
)
|
|
Net income
|
|
$
|
0.12
|
|
|
$
|
1.33
|
|
|
$
|
0.52
|
|
|
|
Income
(loss) before Income Taxes and Discontinued
Operations
The following table sets forth the components of the variance
for the years ended December 31, 2007 and 2006,
respectively, as compared to the same periods in the prior year:
|
|
|
|
|
|
|
|
|
|
|
Variances Favorable (Unfavorable)
|
|
(In millions)
|
|
2007 versus 2006
|
|
|
2006 versus 2005
|
|
|
|
|
Operating segment performance:
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
$
|
(17.7
|
)
|
|
$
|
5.6
|
|
International Color and Engineered Materials
|
|
|
5.3
|
|
|
|
5.8
|
|
PolyOne Distribution
|
|
|
2.9
|
|
|
|
(0.3
|
)
|
Resin and Intermediates
|
|
|
(68.1
|
)
|
|
|
11.0
|
|
All Other
|
|
|
12.3
|
|
|
|
4.6
|
|
|
Corporate and eliminations:
|
|
|
|
|
|
|
|
|
Write-down of certain assets of equity
affiliate(a)
|
|
|
(1.6
|
)
|
|
|
22.9
|
|
Impairment of intangibles and other
investments(b)
|
|
|
(2.3
|
)
|
|
|
0.2
|
|
Impairment of OxyVinyls equity
investment(c)
|
|
|
(14.8
|
)
|
|
|
|
|
Future environmental remediation
costs(d)
|
|
|
(30.7
|
)
|
|
|
(2.3
|
)
|
Settlement of environmental costs related to Calvert
City(e)
|
|
|
(15.6
|
)
|
|
|
|
|
Settlement of legal issues and related
reserves(f)
|
|
|
(23.9
|
)
|
|
|
14.5
|
|
Employee separation and plant phaseout
|
|
|
(2.2
|
)
|
|
|
5.5
|
|
All other and eliminations
|
|
|
0.7
|
|
|
|
(21.3
|
)
|
Cost related to sale of OxyVinyls equity investment
|
|
|
(0.4
|
)
|
|
|
|
|
Gain on sale of assets
|
|
|
(0.6
|
)
|
|
|
3.1
|
|
|
Total Corporate and eliminations
|
|
|
(91.4
|
)
|
|
|
22.6
|
|
|
Change in operating income
|
|
|
(156.7
|
)
|
|
|
49.3
|
|
Premium on early extinguishment of
debt(g)
|
|
|
(8.4
|
)
|
|
|
(4.4
|
)
|
Interest expense,
net(h)
|
|
|
16.2
|
|
|
|
3.1
|
|
Other expense
|
|
|
(3.8
|
)
|
|
|
2.5
|
|
|
Change in income (loss) from continuing operations before income
taxes
|
|
$
|
(152.7
|
)
|
|
$
|
50.5
|
|
|
|
|
|
(a)
|
Our share of an asset write-down
was recorded in the third quarter of 2007 against the carrying
value of certain inventory, accounts receivable and intangible
assets at our equity affiliate in Colombia. In 2005, we
recognized a charge of $22.9 million related to the
write-down of a previously idled OxyVinyls facility.
|
|
(b)
|
An impairment of the carrying value
of certain patents and technology agreements and investments of
$2.5 million was recorded during 2007.
|
|
|
(c)
|
Our 24% equity investment in
OxyVinyls was adjusted at June 30, 2007 as the carrying
value was higher than the fair value and the
|
POLYONE
CORPORATION 15
|
|
|
decrease was determined to be an
other than temporary decline in value.
|
|
|
(d)
|
Our accrual for costs related to
future remediation at inactive or formerly owned sites was
adjusted based on a U.S. District Courts ruling on several
motions in the case of Westlake Vinyls, Inc v. Goodrich
Corporation et al. and a settlement agreement entered into in
connection with the case, which require us to pay remediation
costs at the Calvert City facility.
|
|
(e)
|
We recorded a $15.6 million
expense for remediation costs and certain legal costs as a
result of the court ruling mentioned above in note (d).
|
|
|
(f)
|
The benefit of insurance, legal
settlements and adjustments to related reserves was a charge of
$0.6 million in 2007 as compared to a net benefit of
$23.3 million during 2006.
|
|
|
(g)
|
We repurchased all of our
10.625% senior notes through early extinguishment,
repurchasing $58.6 million and $241.4 million in 2006
and 2007, respectively, at a premium of $4.4 million and
$12.8 million, respectively.
|
|
(h)
|
The early extinguishment of our
10.625% senior notes resulted in lower interest during 2007
as compared to a year ago. Included in interest expense was
unamortized deferred note issuance cost of $0.8 million and
$2.8 million during 2006 and 2007, respectively.
|
See the following operating segment discussion for a further
explanation of our segments operating results for the
periods shown in the preceding table.
Selected
Operating Costs:
Selected operating costs, expressed as a percentage of sales,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Cost of sales
|
|
|
88.4
|
%
|
|
|
87.1
|
%
|
|
|
88.0
|
%
|
Selling and administrative costs
|
|
|
9.1
|
%
|
|
|
7.7
|
%
|
|
|
7.5
|
%
|
Cost of Sales These costs include raw
materials, plant conversion and distribution charges. As a
percentage of sales, these costs increased in 2007 compared to
2006 primarily due to higher raw material costs not yet fully
offset by price increases largely associated with the Vinyl
Business and as a result of environmental remediation costs at
inactive or formerly owned sites. For the year ended
December 31, 2007, environmental related remediation costs
were $48.8 million as compared to $2.5 million in 2006
(See Recent Developments section). The increased environmental
remediation costs more than offset the declines in cost of sales
on a percent basis being realized from the implementation of our
specialization strategy. 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.
Selling and Administrative These costs
generally include selling, technology and general and
administrative charges. Selling and administrative costs
increased 19% or $39.2 million in 2007 as compared to 2006.
In 2006, selling and administrative costs had a
$23.3 million benefit from insurance, legal settlements and
adjustments to related reserves. The remainder of the change in
selling and administrative expense was due mainly to increased
investment in commercial resources and capabilities, partially
offset by lower incentive, pension and post-retirement benefit
costs. 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.
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 the main reasons for the
continued decline in debt. Included in interest expense in 2007
and 2006 were charges of $2.8 million and
$0.8 million, respectively, to write off deferred debt
issuance costs related to the early extinguishment of long-term
debt.
We repurchased $100.0 million of our 10.625% senior
notes in June 2007 and repurchased the remaining
$141.4 million of such senior notes in August 2007. 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)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Short-term debt
|
|
$
|
9.2
|
|
|
$
|
5.6
|
|
|
$
|
4.5
|
|
Current portion of long-term debt
|
|
|
20.5
|
|
|
|
12.5
|
|
|
|
35.2
|
|
Long-term debt
|
|
|
441.7
|
|
|
|
610.8
|
|
|
|
639.5
|
|
|
Quarterly average
|
|
$
|
471.4
|
|
|
$
|
628.9
|
|
|
$
|
679.2
|
|
|
Interest expense
|
|
$
|
51.4
|
|
|
$
|
66.5
|
|
|
$
|
68.1
|
|
|
|
Premium on Early Extinguishment of Long-term
Debt Cash expense from the repurchase of
$241.4 million of our 10.625% senior notes in 2007 was
$12.8 million. Cash expense from the repurchase of
$58.6 million of our 10.625% senior notes in 2006 was
$4.4 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)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Currency exchange loss
|
|
$
|
(5.0
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(0.1
|
)
|
Foreign exchange contracts gain
|
|
|
0.7
|
|
|
|
1.1
|
|
|
|
0.6
|
|
Discount on sale of trade receivables
|
|
|
(2.0
|
)
|
|
|
(1.9
|
)
|
|
|
(5.5
|
)
|
Retained post-employment benefit costs related to previously
discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(1.3
|
)
|
Other income (expense), net
|
|
|
(0.3
|
)
|
|
|
(0.7
|
)
|
|
|
1.0
|
|
|
Other expense, net
|
|
$
|
(6.6
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
(5.3
|
)
|
|
|
16 POLYONE
CORPORATION
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 Benefit (Expense) The
income tax benefit (expense) for 2007, 2006 and 2005, including
the impact of the sale of our interest in OxyVinyls and changes
in the deferred tax valuation allowance, is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Tax benefit (expense) prior to OxyVinyls sale and valuation
allowance
|
|
$
|
12.3
|
|
|
$
|
(54.2
|
)
|
|
$
|
(28.3
|
)
|
Impact of sale of interest in OxyVinyls
|
|
|
31.5
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
|
|
|
|
59.5
|
|
|
|
21.7
|
|
|
Total tax benefit (expense)
|
|
$
|
43.8
|
|
|
$
|
5.3
|
|
|
$
|
(6.6
|
)
|
|
|
In calculating the 2007 tax benefit prior to the impact of the
sale of OxyVinyls, the difference in rates of foreign
subsidiaries was the principal cause of the difference between
the effective and statutory tax rate. Prior to the 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.
During the third quarter of 2007, as part of the sale of our 24%
interest in OxyVinyls, we recognized a deferred tax benefit of
$31.5 million that was related to the temporary difference
between the tax basis and book basis of the investment.
In 2005, in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, Accounting
for Income Taxes, the valuation allowance was reduced
$21.7 million for the use of net operating loss
carryforwards. In 2006, the valuation allowance was reduced
$44.3 million for the use of net operating loss
carryforwards and $15.4 million associated with changes in
accumulated other comprehensive income related to the pension
and post-retirement health care liabilities. In addition, in
2006, as a result of the improved actual and projected earnings
and the actual and projected use of the deferred tax assets, it
was determined that it was more likely than not that the
deferred tax assets would be realized and we reversed the
remaining $15.1 million of the valuation allowance through
the income statement. Income taxes in 2007 were recorded without
regard to any domestic deferred tax valuation allowance.
Income taxes for the years ended December 31, 2007, 2006
and 2005 include foreign, state and federal 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 for employee
separation and plant phaseout costs from restructuring
initiatives and closing certain manufacturing facilities of the
Engineered Films business.
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.
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
Engineered Films
|
|
$
|
9.6
|
|
|
$
|
119.6
|
|
Pre-tax income from operations:
|
|
|
|
|
|
|
|
|
Engineered Films
|
|
$
|
0.4
|
|
|
$
|
0.5
|
|
Pre-tax charges to adjust net assets of businesses held for sale
to projected net sale proceeds:
|
|
|
|
|
|
|
|
|
Elastomers and Performance Additives
|
|
|
|
|
|
|
(0.7
|
)
|
Engineered Films
|
|
|
(3.1
|
)
|
|
|
(15.1
|
)
|
|
|
|
|
(2.7
|
)
|
|
|
(15.3
|
)
|
Income tax expense (net of valuation allowance)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(2.7
|
)
|
|
$
|
(15.3
|
)
|
|
|
Segment
Information:
Sales and
Operating Income (Loss) 2007 compared with
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
$
|
933.0
|
|
|
$
|
1,025.1
|
|
|
$
|
(92.1
|
)
|
|
|
(9.0
|
)%
|
International Color and Engineered Materials
|
|
|
610.9
|
|
|
|
526.7
|
|
|
|
84.2
|
|
|
|
16.0
|
%
|
PolyOne Distribution
|
|
|
744.3
|
|
|
|
732.8
|
|
|
|
11.5
|
|
|
|
1.6
|
%
|
All Other
|
|
|
487.8
|
|
|
|
491.5
|
|
|
|
(3.7
|
)
|
|
|
(0.8
|
)%
|
Corporate and eliminations
|
|
|
(133.3
|
)
|
|
|
(153.7
|
)
|
|
|
20.4
|
|
|
|
13.3
|
%
|
|
|
|
$
|
2,642.7
|
|
|
$
|
2,622.4
|
|
|
$
|
20.3
|
|
|
|
0.8
|
%
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
$
|
50.8
|
|
|
$
|
68.5
|
|
|
$
|
(17.7
|
)
|
|
|
|
|
International Color and Engineered Materials
|
|
|
26.6
|
|
|
|
21.3
|
|
|
|
5.3
|
|
|
|
|
|
PolyOne Distribution
|
|
|
22.1
|
|
|
|
19.2
|
|
|
|
2.9
|
|
|
|
|
|
Resin and
Intermediates
|
|
|
34.8
|
|
|
|
102.9
|
|
|
|
(68.1
|
)
|
|
|
|
|
All Other
|
|
|
10.0
|
|
|
|
(2.3
|
)
|
|
|
12.3
|
|
|
|
|
|
Corporate and eliminations
|
|
|
(110.4
|
)
|
|
|
(19.0
|
)
|
|
|
(91.4
|
)
|
|
|
|
|
|
|
|
$
|
33.9
|
|
|
$
|
190.6
|
|
|
$
|
(156.7
|
)
|
|
|
|
|
|
|
POLYONE
CORPORATION 17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
Operating income (loss) as a percentage of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
|
5.4
|
%
|
|
|
6.7
|
%
|
|
|
(1.3)% points
|
|
International Color and Engineered Materials
|
|
|
4.4
|
%
|
|
|
4.0
|
%
|
|
|
0.4% points
|
|
PolyOne Distribution
|
|
|
3.0
|
%
|
|
|
2.6
|
%
|
|
|
0.4% points
|
|
All Other
|
|
|
2.1
|
%
|
|
|
(0.5
|
)%
|
|
|
2.6% points
|
|
Total
|
|
|
1.3
|
%
|
|
|
7.3
|
%
|
|
|
(6.0)% points
|
|
A summary of Corporate and eliminations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Future environmental remediation
costs(a)
|
|
$
|
(33.2
|
)
|
|
$
|
(2.5
|
)
|
Impairment of OxyVinyls equity
investment(b)
|
|
|
(14.8
|
)
|
|
|
|
|
Settlement of environmental costs related to Calvert
City(c)
|
|
|
(15.6
|
)
|
|
|
|
|
Impairment of intangibles and other
investments(d)
|
|
|
(2.5
|
)
|
|
|
(0.2
|
)
|
Employee separation and plant
phaseout(e)
|
|
|
(2.2
|
)
|
|
|
|
|
Write-down of certain assets of equity
affiliate(f)
|
|
|
(1.6
|
)
|
|
|
|
|
Cost related to sale of OxyVinyls equity investment
|
|
|
(0.4
|
)
|
|
|
|
|
Settlement of legal issues and related
reserves(g)
|
|
|
(0.6
|
)
|
|
|
23.3
|
|
Gain on sale of
assets(h)
|
|
|
2.5
|
|
|
|
3.1
|
|
All other and
eliminations(i)
|
|
|
(42.0
|
)
|
|
|
(42.7
|
)
|
|
Total Corporate and eliminations
|
|
$
|
(110.4
|
)
|
|
$
|
(19.0
|
)
|
|
|
|
|
(a)
|
In 2007, our accrual for costs
related to future remediation at inactive or formerly owned
sites was adjusted based on a U.S. District Courts ruling
on several motions in the case of Westlake Vinyls, Inc. v.
Goodrich Corporation et al. and a settlement agreement entered
into in connection with the case, which require us to pay
remediation costs at the Calvert City, Kentucky facility.
|
|
(b)
|
Our 24% equity investment in
OxyVinyls was adjusted at June 30, 2007 as the carrying
value was higher than the fair value and the decrease was
determined to be an other than temporary decline in value.
|
|
(c)
|
In the third quarter of 2007, we
recorded $15.6 million for remediation costs and certain
legal costs related to the Calvert City facility.
|
|
(d)
|
An impairment of the carrying value
of certain patents and technology agreements and investments of
$2.5 million was recorded during 2007.
|
|
(e)
|
Severance, employee outplacement,
external outplacement consulting, lease termination, facility
closing costs and the write-down of the carrying value of plant
and equipment resulting from restructuring initiatives and
executive separation agreements.
|
|
|
(f)
|
Our share of an asset write-down
was recorded in the third quarter of 2007 against the carrying
value of certain inventory, accounts receivable and intangible
assets at our equity affiliate in Colombia.
|
|
|
(g)
|
The benefit of insurance, legal
settlements and adjustments to related reserves was a charge of
$0.6 million for 2007 as compared to a net benefit of
$23.3 million during the same period of 2006.
|
|
(h)
|
The gains on sale of assets in 2007
and 2006 relate to the sale of previously closed facilities and
other assets.
|
|
|
(i)
|
All other and eliminations is
comprised of intersegment eliminations and corporate general and
administrative costs that are not allocated to segments.
|
Effective with the first quarter of 2007, the results of
operations for PolyOnes business located in Singapore are
managed and reported under the Vinyl Business operating segment.
Historically, the results of this business were included in the
International Color and Engineered Materials operating segment.
Prior period results of operations for Singapore have been
reclassified to conform to the 2007 presentation.
Effective with the fourth quarter of 2007, the former Polymer
Coating Systems operating segment was split into two reporting
units. The 50% interest in BayOne Urethane Systems, L.L.C.,
along with the inks and specialty colorants businesses formed a
new operating segment, Specialty Inks and Polymer Systems, which
is included in All Other. The remaining plastisols and coated
fabrics businesses were subsumed into the Vinyl Business
reportable segment. Segment information for prior periods has
been reclassified to conform to the 2007 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
Vinyl Business sales were $933.0 million in 2007,
$92.1 million or 9% lower than 2006. The primary driver was
the slowdown in the residential building and construction
market, which affected demand for vinyl windows, pipe and
fittings products, PVC flooring and appliances. Also, negatively
affecting 2007 results was a growing presence of imported
products in the end markets that use or that compete directly
with our specialty resin product. Shipments in 2007 were down
11% versus 2006.
Operating income in 2007 decreased $17.7 million or 26%
compared to 2006. The primary drivers of this decline were weak
18 POLYONE
CORPORATION
residential construction demand and margin compression due to
the combination of downward pricing pressure in residential
building and construction end markets and higher raw material
and energy costs.
International
Color and Engineered Materials
International Color and Engineered Materials 2007 sales
increased $84.2 million, or 16%, to $610.9 million due
primarily to strong growth in our Color and Additives businesses
in Asia and Europe, favorable foreign exchange and modest growth
in specialty engineered materials product lines in Europe. Asian
sales across all product platforms grew 9% while Europe
demonstrated sales growth of 6%. Favorable foreign exchange
rates increased International Color and Engineered Materials
sales by $51.2 million, or 10%. In Asia, colorant and
additives sales grew 17%, particularly in specialty packaging
applications utilizing liquid color product technology. Our
Asian Engineered Materials business demonstrated sales growth of
3% in 2007 versus 2006 despite a second half 2007 slowdown in
the growth of the electrical / electronics market.
Operating income increased $5.3 million in 2007 as compared
to 2006. This 25% increase was driven by improved margins due to
greater penetration of specialty applications in the Asian and
European Color and Additive businesses, higher margins due to
product mix improvements, value selling and price management and
lower conversion costs. Foreign exchange had a favorable impact
on operating income of $2.0 million.
PolyOne
Distribution
Distribution sales increased $11.5 million, or 2%, as
compared to 2006 due to relatively flat shipment volume combined
with a 1.3% increase in average selling prices. Increased demand
in the healthcare and automotive end markets offset declines in
the appliance and building/construction sectors.
Operating income was $22.1 million, up 16% from 2006. This
increase was due to higher sales, expanded gross margins
resulting from a favorable sales mix and lower unit delivery
costs. Selling and general administrative costs were slightly
lower due to lower bad debt costs that offset higher investment
in commercial resources.
Resin &
Intermediates
2007 operating income declined 66%, or $68.1 million,
versus 2006 as the slowdown in commercial and residential
construction markets and downward margin pressure from rising
feedstock costs severely impacted the results of OxyVinyls. In
July 2007, we divested our 24% interest in OxyVinyls, which in
the second half of 2006 contributed $18.4 million to
segment earnings. SunBelt earnings were $6.3 million lower
in 2007 compared to 2006 due to a 3% decline in sales that
offset higher year-over-year ECU netbacks, which were up
slightly more than 1%.
All
Other
All Other includes the North American Color and Additives, North
American Engineered Materials, Producer Services and Specialty
Inks and Polymer Systems operating segments. Sales in aggregate
were down 1% from 2006 due mainly to a 16% decline in North
American Color and Additives sales resulting from the
pruning of unprofitable business and withdrawing from certain
general purpose oriented applications. North American Engineered
Materials sales grew 5% due to continued progress in capturing
specialized applications in the
electrical / electronics and medical end markets, as
well as solid growth in wire and cable applications, where sales
were up 7%. Producer Services sales were up 9% compared to 2006
primarily reflecting the full year impact of the DH Compounding
acquisition which added $21.5 million of sales. Specialty
Inks and Polymer Systems sales grew 10% primarily due to
the growth of our global inks business.
Aggregate operating income was $10.0 million in 2007
compared to a $2.3 million loss in 2006, an increase of
$12.3 million. North American Color and Additives operating
income increased $9.2 million due to a stronger product mix
driven by the benefits of improved commercial disciplines, the
pruning of unprofitable business and lower operating costs.
Producer Services and Specialty Inks and Polymer Systems
operating income also improved significantly in 2007 as compared
to 2006. Both businesses delivered 30% or better improvements in
operating income. In Producer Services, operating margins
improved due to value added selling activities to enhance the
profitability of the customer mix and the full year impact of
the DH Compounding acquisition. Specialty Inks and Polymer
Systems profitability was up more than 30% reflecting a
strong sales mix of Inks and Urethanes products.
POLYONE
CORPORATION 19
Sales and
Operating Income (Loss) 2006 compared with
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
$
|
1,025.1
|
|
|
$
|
1,022.1
|
|
|
$
|
3.0
|
|
|
|
0.3
|
%
|
International Color and Engineered Materials
|
|
|
526.7
|
|
|
|
465.4
|
|
|
|
61.3
|
|
|
|
13.2
|
%
|
PolyOne Distribution
|
|
|
732.8
|
|
|
|
679.2
|
|
|
|
53.6
|
|
|
|
7.9
|
%
|
All Other
|
|
|
491.5
|
|
|
|
435.0
|
|
|
|
56.5
|
|
|
|
13.0
|
%
|
Corporate and eliminations
|
|
|
(153.7
|
)
|
|
|
(151.1
|
)
|
|
|
(2.6
|
)
|
|
|
(1.7
|
)%
|
|
|
|
$
|
2,622.4
|
|
|
$
|
2,450.6
|
|
|
$
|
171.8
|
|
|
|
7.0
|
%
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
$
|
68.5
|
|
|
$
|
62.9
|
|
|
$
|
5.6
|
|
|
|
|
|
International Color and Engineered Materials
|
|
|
21.3
|
|
|
|
15.5
|
|
|
|
5.8
|
|
|
|
|
|
PolyOne Distribution
|
|
|
19.2
|
|
|
|
19.5
|
|
|
|
(0.3
|
)
|
|
|
|
|
Resin and Intermediates
|
|
|
102.9
|
|
|
|
91.9
|
|
|
|
11.0
|
|
|
|
|
|
All Other
|
|
|
(2.3
|
)
|
|
|
(6.9
|
)
|
|
|
4.6
|
|
|
|
|
|
Corporate and eliminations
|
|
|
(19.0
|
)
|
|
|
(41.6
|
)
|
|
|
22.6
|
|
|
|
|
|
|
|
|
$
|
190.6
|
|
|
$
|
141.3
|
|
|
$
|
49.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
|
Operating income (loss) as a percentage of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Vinyl Business
|
|
|
6.7
|
%
|
|
|
6.2
|
%
|
|
|
0.5% points
|
|
International Color and Engineered Materials
|
|
|
4.0
|
%
|
|
|
3.3
|
%
|
|
|
0.7% points
|
|
PolyOne Distribution
|
|
|
2.6
|
%
|
|
|
2.9
|
%
|
|
|
(0.3)% points
|
|
All Other
|
|
|
(0.5
|
)%
|
|
|
(1.6
|
)%
|
|
|
1.1% points
|
|
Total
|
|
|
7.3
|
%
|
|
|
5.8
|
%
|
|
|
1.5% points
|
|
A summary of Corporate and eliminations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In millions)
|
|
2006
|
|
|
2005
|
|
|
|
|
Future environmental remediation
costs(a)
|
|
$
|
(2.5
|
)
|
|
$
|
(0.2
|
)
|
Impairment of intangibles and other
investments(b)
|
|
|
(0.2
|
)
|
|
|
(0.4
|
)
|
Gain on sale of
assets(c)
|
|
|
3.1
|
|
|
|
|
|
Settlement of legal issues and related
reserves(d)
|
|
|
23.3
|
|
|
|
8.8
|
|
Employee separation and plant
phaseout(e)
|
|
|
|
|
|
|
(5.5
|
)
|
Write-down of certain assets of equity
affiliate(f)
|
|
|
|
|
|
|
(22.9
|
)
|
All other and
eliminations(g)
|
|
|
(42.7
|
)
|
|
|
(21.4
|
)
|
|
Total Corporate and eliminations
|
|
$
|
(19.0
|
)
|
|
$
|
(41.6
|
)
|
|
|
|
|
|
(a) |
|
These charges represent
environmental remediation costs for facilities either no longer
owned or closed in prior years including, remediation costs and
certain legal costs
|
|
(b) |
|
Impairments of community
development and internet investments were recorded during 2006
and 2005.
|
|
(c) |
|
The gain on sale of assets in 2006
relates to the sale of previously closed facilities.
|
|
(d) |
|
The benefit of insurance, legal
settlements and adjustments to related reserves were benefits of
$23.3 million and $8.8 million during 2006 and 2005,
respectively.
|
|
(e) |
|
Employee separation charges of
$2.5 million were recorded in 2005 related to the terms of
a separation agreement between PolyOne and Thomas A. Waltermire.
Plant phaseout charges in 2005 included a $2.5 million loss
on the sale of facilities and equipment of previously idled
operations.
|
|
(f) |
|
In 2005, we recognized a charge of
$22.9 million related to the write-down of a previously
idled OxyVinyls facility.
|
|
(g) |
|
All other and eliminations is
comprised of intersegment eliminations and corporate general and
administrative costs that are not allocated to segments.
|
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, in the second half of 2005.
Operating income increased $5.6 million, or 9%, to
$68.5 million in 2006 as compared to 2005. Strong demand
coupled with intensified value selling activities and pricing
actions to recover rising energy and feedstock costs all
contributed to expanding margins.
20 POLYONE
CORPORATION
International
Color and Engineered Materials
Sales reached $526.7 million in 2006 which represented a
13% increase over 2005. Sales in Asia grew 24% due to strong
demand for our products in the appliance and electrical and
electronics end markets, and 14% sales growth of our colorants
and additives, particularly into specialty packaging
applications. European sales were up 9% due to overall
improvements in the economic environment in the Euro Zone,
recapture of market share, penetration of higher margin
specialty markets, and favorable foreign exchange impact which
contributed approximately $4.8 million to the overall sales
increase.
Operating income increased $5.8 million, or 37% from 2005,
primarily as a result of a shift in mix to higher-margin
products, strong sales growth, and increased margins due to
value added selling activities. Differences in average currency
exchange rates did not materially impact earnings.
Distribution
Sales were $732.8 million in 2006, an increase of 8% versus
2005 led by an increase in selling prices and a 1% increase in
shipment volume. The increase in selling prices was driven by
both passing through increases from our supplier base and from a
slight shift in mix towards higher-priced engineered products.
The small change in volume was a result of gains from our
National Account programs more than offsetting 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
Resin and Intermediates operating income increased
$11.0 million, or 12%, over 2005. OxyVinyls equity
earnings increased $4.0 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.
All
Other
All Other includes the North American Color and Additives, North
American Engineered Materials, Producer Services and Specialty
Inks and Polymer Systems operating segments. Sales in aggregate
were $491.5 million in 2006, up 13% from 2005. All of the
operating segments except for North American Color and Additives
achieved sales growth in excess of 15%. In 2006, demand
generated from the rebuilding activities in the aftermath of the
hurricanes that impacted the US Gulf Coast drove strong
improvements in year-over-year sales for our wire &
cable and general purpose pipe products. In addition, we started
to see positive results in our North American Engineered
Materials business from our investments in commercial resources
and the launch of new technology platforms, both of which
contributed to a 19% increase in sales versus 2005. Specialty
Inks and Polymer Systemss sales increased 15% 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 global growth. The
remaining 50% interest in DH Compounding was acquired in fourth
quarter 2006 and had a modest impact on sales growth.
Operating income in 2006 for All Other was ($2.3) million,
but this result was a $4.6 million improvement compared to
2005. North American Color and Additives and North American
Engineered Materials demonstrated 20% and 33% improvements,
respectively, in operating income due to improved demand,
aggressive margin improvement actions related to value-added
pricing and cost structure improvements.
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 38% 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
POLYONE
CORPORATION 21
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 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 $83.8 million accrued at
December 31, 2007 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
$0.2 million as of December 31, 2007 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. 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
22 POLYONE
CORPORATION
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 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.
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, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an
amendment of Financial Accounting Standards Board (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. The overfunded or underfunded status 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 income for the year ended
December 31, 2006 or for any prior period. Also, the
adoption of SFAS No. 158 did 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
subsidized post-employment
POLYONE
CORPORATION 23
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 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 2007 net pension
and post-retirement expense by approximately $1.9 million.
Likewise, a 0.5 percentage point increase or decrease in
the expected return on plan assets would have increased or
decreased our 2007 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
$27.0 million as of December 31, 2007.
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 point increase or decrease in the health
care cost trend rate would have increased or decreased our
2007 net periodic benefit cost by $0.2 million and our
accumulated other comprehensive income and the related
post-retirement liability by approximately $3.0 million as
of December 31, 2007.
For more information about our pensions and post-retirement
benefits, see Note M to the Consolidated Financial
Statements.
FASB Interpretation
No. 48 We adopted the provisions
of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an Interpretation of
FASB Statement No. 109, Accounting for Income Taxes
(FIN 48), on January 1, 2007.
The net income tax assets recognized under FIN 48 did not
differ from the net assets recognized before adoption, and,
therefore, we did not record a cumulative effect adjustment
related to the adoption of FIN 48. We are no longer subject
to U.S. income tax examinations for periods preceding 2004,
and with limited exceptions, for periods preceding 2002 for
foreign, state and local tax examinations.
As of December 31, 2007, we have a $6.0 million
liability for uncertain tax positions. This amount relates to
items under examination by foreign tax authorities related to
the valuation of assets. We do not agree with the proposed
adjustments and have appealed the assessments. We do not
anticipate that the disputes will be resolved in the next twelve
months.
During the third quarter of 2007, a foreign jurisdiction
initiated an audit related to transfer pricing and we accrued
$1.0 million for the payment of income tax and interest.
The issue was resolved during the fourth quarter of 2007 and we
paid $0.3 million for income taxes and $0.5 million
for interest.
We recognize interest and penalties related to unrecognized
income tax benefits in the provision for income taxes. As of
December 31, 2007, we have accrued $2.5 million of
interest and penalties.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
Unrecognized
|
|
|
Tax Benefits
|
(In millions)
|
|
2007
|
|
|
Balance at January 1, 2007
|
|
$
|
6.0
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
Additions for tax positions of prior years
|
|
|
0.5
|
|
Reductions for tax positions of prior years
|
|
|
(0.2
|
)
|
Settlements
|
|
|
(0.3
|
)
|
|
Balance at December 31, 2007
|
|
$
|
6.0
|
|
|
|
FASB Staff Position AUG AIR-1 In
September 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. OxyVinyls, a former equity affiliate sold on July 6,
2007, adopted FSP AUG AIR-1 in the first quarter of 2007, on a
retrospective basis, and used the deferral method of accounting
for planned major maintenance for 2007.
The effect on OxyVinyls consolidated balance sheet at
January 1, 2007 from adopting FSP AUG AIR-1 was 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. Our proportionate
share of OxyVinyls operations was 24%.
The adoption of FSP AUG AIR-1 represents a change in accounting
principle and, under the guidance of this principle, must be
applied retrospectively. Under these retrospective provisions,
we
24 POLYONE
CORPORATION
have restated our historical financial statements to reflect the
change in accounting for planned major maintenance activities of
our former equity affiliate, OxyVinyls. For further discussion
and illustration of the changes made to our financial
statements, refer to Note C of the Consolidated Financial
Statements.
Share-Based Compensation Prior to
January 1, 2006, as provided under SFAS No. 123,
we applied Accounting Principles Board (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 2007 and 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
SFAS No. 157 In September
2006, the FASB issued SFAS No. 157, Fair Value
Measurement, which defines fair value, establishes the
framework for measuring fair value under U.S. generally
accepted accounting principles and expands disclosures about
fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. In December
2007, The FASB issued a proposed FASB Staff Position (FSP
FAS 157-b)
that would delay the effective date of SFAS No. 157
for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on a recurring basis to fiscal years
beginning after November 15, 2008. We adopted the
non-deferred portion of SFAS No. 157 on
January 1, 2008 and it did not have a material impact on
our financial statements. We are evaluating the effect that
adoption of the deferred portion of SFAS No. 157 will
have on our financial statements in 2009, specifically in the
areas of measuring fair value in business combinations and
goodwill impairment tests.
SFAS No. 159 In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, which allows entities to voluntarily choose,
at specified election dates, to measure many financial assets
and liabilities at fair value. The election is made on an
instrument-by-instrument
basis and is irrevocable. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. We do
not believe that the adoption of SFAS No. 159 will
have a significant effect on our financial statements.
SFAS No. 141
(revised) In December 2007, the FASB
issued SFAS No. 141 (revised 2007), Business
Combinations, which establishes principles over the method
entities use to recognize and measure assets acquired and
liabilities assumed in a business combination and enhances
disclosures on business combinations. SFAS No. 141(R)
is effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. We are
evaluating the effect that adoption will have on our 2009
financial statements.
Cash
Flows
The following discussion focuses on the material components of
cash flows from operating, investing and financing activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Cash flow summary
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
67.2
|
|
|
$
|
111.7
|
|
|
$
|
63.7
|
|
Cash provided (used) by investing activities
|
|
|
215.3
|
|
|
|
(16.8
|
)
|
|
|
(24.2
|
)
|
Cash used in financing activities
|
|
|
(275.9
|
)
|
|
|
(63.4
|
)
|
|
|
(43.7
|
)
|
|
|
|
|
6.6
|
|
|
|
31.5
|
|
|
|
(4.2
|
)
|
Effect of exchange rates on cash
|
|
|
6.6
|
|
|
|
1.9
|
|
|
|
(1.6
|
)
|
|
Increase (decrease) in cash and equivalents
|
|
$
|
13.2
|
|
|
$
|
33.4
|
|
|
$
|
(5.8
|
)
|
|
|
POLYONE
CORPORATION 25
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11.4
|
|
|
$
|
122.9
|
|
|
$
|
47.9
|
|
Depreciation and amortization
|
|
|
57.4
|
|
|
|
57.1
|
|
|
|
50.7
|
|
Loss on disposition of discontinued businesses and related plant
phaseout charge
|
|
|
|
|
|
|
3.1
|
|
|
|
15.6
|
|
Charges for environmental remediation, net of net payments
|
|
|
23.3
|
|
|
|
4.3
|
|
|
|
(9.6
|
)
|
Deferred income tax provision (benefit)
|
|
|
(57.1
|
)
|
|
|
(12.9
|
)
|
|
|
2.0
|
|
Premium on early extinguishment of long-term debt
|
|
|
12.8
|
|
|
|
4.4
|
|
|
|
|
|
Stock compensation expense
|
|
|
4.3
|
|
|
|
4.5
|
|
|
|
(0.6
|
)
|
Asset impairment charges
|
|
|
2.5
|
|
|
|
0.2
|
|
|
|
0.4
|
|
Companies carried at equity and minority interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of investment in equity affiliates
|
|
|
14.8
|
|
|
|
|
|
|
|
|
|
Income from equity affiliates and minority interest
|
|
|
(42.5
|
)
|
|
|
(112.0
|
)
|
|
|
(79.9
|
)
|
Distributions and distributions received
|
|
|
37.6
|
|
|
|
97.7
|
|
|
|
67.4
|
|
Pension and postretirement contributions
|
|
|
(26.9
|
)
|
|
|
(13.9
|
)
|
|
|
(17.8
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) from working capital
|
|
|
35.6
|
|
|
|
(33.8
|
)
|
|
|
(1.3
|
)
|
Increase (decrease) in sale of accounts receivable
|
|
|
|
|
|
|
(7.9
|
)
|
|
|
7.9
|
|
Accrued expenses and other
|
|
|
(6.0
|
)
|
|
|
(1.9
|
)
|
|
|
(20.8
|
)
|
Net cash used by discontinued operations
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
1.8
|
|
|
Net cash provided by operating activities
|
|
$
|
67.2
|
|
|
$
|
111.7
|
|
|
$
|
63.7
|
|
|
|
Operating Activities Cash
provided by operations decreased by $44.5 million compared
to 2006 due to lower operating earnings, lower earnings and
distributions from equity affiliates, an increase in
environmental remediation payments, and a $57.1 million
benefit in deferred income taxes principally related to the
OxyVinyls sale. Additionally, the impact of the change in
working capital was a $69.4 million improvement comparing
2007 versus 2006. A more comprehensive discussion of working
capital is provided below.
In 2006, net cash provided by operations increased by
$48.0 million compared to 2005 primarily due to a
significant increase in operating earnings, higher cash
distributions from equity affiliates and lower accrued expenses.
The change in operating earnings is discussed in
Note R Segments and at the beginning of this
section MD&A. Equity affiliate cash distributions
increased $30.3 million as our joint ventures in the
chloro-vinyl chain saw their businesses elevate to peak earnings.
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 understand total dollar changes in the
three principal 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 a comparison of our year-end
working capital metrics and the impact of changes in efficiency
and volume on accounts receivable, inventories and accounts
payable:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In days)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Accounts receivable DSO
|
|
|
54.5
|
|
|
|
53.1
|
|
|
|
49.8
|
|
Inventories DSI
|
|
|
39.5
|
|
|
|
42.2
|
|
|
|
37.6
|
|
Accounts payable DSP
|
|
|
(46.6
|
)
|
|
|
(44.3
|
)
|
|
|
(41.3
|
)
|
|
Year-end net days
|
|
|
47.4
|
|
|
|
51.0
|
|
|
|
46.1
|
|
|
|
Change in net days from prior year end
|
|
|
3.6
|
|
|
|
(4.9
|
)
|
|
|
3.7
|
|
The 2007 year-end working capital metrics netted to a
3.6 day improvement compared to 2006 as managements
actions to reduce inventories due to a slower demand outlook and
initiate vendor terms management programs offset a DSO increase
of 1.4 days as customers slowed payments in light of
current trends in the economy and credit market turmoil. The
2006 year-end working capital metrics netted to an
unfavorable increase of 4.9 days compared to 2005 due to
slower collections and higher inventories as compared to
year-end 2005 when weather issues in the U.S. Gulf Coast
created an unusually favorable impact on collections and
inventories levels due to material shortages.
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Cash provided (used) by:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
(8.9
|
)
|
|
$
|
23.0
|
|
Inventories
|
|
|
26.7
|
|
|
|
(39.6
|
)
|
Accounts payable
|
|
|
17.8
|
|
|
|
(17.2
|
)
|
|
|
|
$
|
35.6
|
|
|
$
|
(33.8
|
)
|
|
|
Impact of change in net days
|
|
$
|
18.7
|
|
|
$
|
(21.0
|
)
|
Impact of change in sales and production levels
|
|
|
16.9
|
|
|
|
(12.8
|
)
|
|
|
|
$
|
35.6
|
|
|
$
|
(33.8
|
)
|
|
|
From December 31, 2006 to December 31, 2007,
$35.6 million of cash was provided by a reduction in
working capital investment due to lower year-end inventories,
reflecting management actions, and higher outstanding payables.
In addition, inventories were favorably impacted by a
$9.9 million increase in our 2007 LIFO reserve versus 2006,
which is due to the inflation in the cost of raw materials in
2007, and the impact of foreign exchange. The impact
26 POLYONE
CORPORATION
of LIFO and foreign exchange are shown in the impact of change
in sales and production levels line item in the above table.
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 relatively higher
year-end inventory levels. The decline in accounts payable was
due to lower purchases during December 2006. The year-over-year
change in LIFO was $14 million unfavorable.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(43.4
|
)
|
|
$
|
(41.1
|
)
|
|
$
|
(32.1
|
)
|
Business acquisitions and related deposits, net of cash acquired
|
|
|
(11.2
|
)
|
|
|
(1.5
|
)
|
|
|
(2.7
|
)
|
Proceeds from sale of assets
|
|
|
9.4
|
|
|
|
8.7
|
|
|
|
12.3
|
|
Proceeds from sale of investment in equity affiliate
|
|
|
260.5
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of discontinued business, net
|
|
|
|
|
|
|
17.3
|
|
|
|
|
|
Net cash used by discontinued operations
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(1.7
|
)
|
|
Net cash provided (used) by investing activities
|
|
$
|
215.3
|
|
|
$
|
(16.8
|
)
|
|
$
|
(24.2
|
)
|
|
|
Investing Activities In 2007, we
generated $215.3 million from investing activities,
primarily from the proceeds that we received from the sale of
our 24% interest in OxyVinyls. In a transaction related to the
sale of our interest in OxyVinyls, we purchased the remaining
10% minority interest in Powder Blends, LP. Capital spending as
a percentage of depreciation and amortization was 76%.
In 2006, we used $16.8 million for investing activities,
primarily for capital spending in support of 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 and
amortization was 72%.
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 and
amortization was 63% in 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in short-term debt
|
|
$
|
(0.2
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
4.8
|
|
Repayment of long-term debt
|
|
|
(264.1
|
)
|
|
|
(60.0
|
)
|
|
|
(49.0
|
)
|
Premium paid on early extinguishment of long-term debt
|
|
|
(12.8
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1.2
|
|
|
|
3.1
|
|
|
|
0.5
|
|
|
Net cash used by financing activities
|
|
$
|
(275.9
|
)
|
|
$
|
(63.4
|
)
|
|
$
|
(43.7
|
)
|
|
|
Financing Activities Cash used by
financing activities in 2007, 2006 and 2005 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, 2006 to
December 31, 2007 that are not discussed in the preceding
Cash Flows section.
Pension benefits The
$42.5 million decrease in pension benefits was a result of
a higher discount rate at December 31, 2007 and strong
asset performance.
Other non-current liabilities The
increase of $12.1 million was primarily due to an increase
of $15.8 million in non-current environmental reserves. The
remaining decrease in other non-current liabilities 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 decreasing to the
extent that it would have a material adverse effect on our
financial condition.
As of December 31, 2007, we had existing facilities to
access available capital resources (receivables sale facility,
uncommitted short-term credit lines and senior unsecured notes
and debentures) totaling $487.9 million. As of
December 31, 2007, we had used $336.7 million of these
facilities, and $151.2 million was available to be drawn
while remaining in compliance with all covenants associated with
these facilities. As of December 31, 2007, we also had a
$79.4 million cash and cash equivalents balance that
POLYONE
CORPORATION 27
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, 2007:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Outstanding
|
|
|
Available
|
|
|
|
|
Long-term debt, including current maturities
|
|
$
|
330.6
|
|
|
$
|
|
|
Receivables sale facility
|
|
|
|
|
|
|
151.2
|
|
Short-term debt
|
|
|
6.1
|
|
|
|
|
|
|
|
|
$
|
336.7
|
|
|
$
|
151.2
|
|
|
|
Long-Term Debt At
December 31, 2007, long-term debt totaled
$330.6 million, with maturities ranging from 2008 to 2015.
Current maturities of long-term debt at December 31, 2007
were $22.6 million. During 2007, we repurchased
$241.4 million aggregate principal amount of our
10.625% senior notes due 2010 at a premium of
$12.8 million. This premium is shown as a separate line
item in the Consolidated Statements of Income. Unamortized
deferred note issuance costs of $2.8 million were expensed
due to this repurchase and are included in interest expense in
the Consolidated Statements of Income. We also made a payment of
$20.0 million of aggregate principal amount of our
medium-term notes that matured during 2007. As part of our
purchase of DH Compounding 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 2007, we made principal payments totaling
$2.8 million on this promissory note. For more information
about our debt, see Note G to the Consolidated Financial
Statements.
Guarantee and Agreement 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.
Credit Facility On
January 3, 2008, we entered into a credit agreement with
Citicorp USA, Inc., as administrative agent and as issuing bank,
and The Bank of New York, as paying agent. The credit agreement
provides for an unsecured revolving and letter of credit
facility with total commitments of up to $40 million. The
credit agreement expires on March 20, 2011.
Borrowings under the revolving credit facility are based on the
applicable LIBOR rate plus a fixed fee. On January 9, we
borrowed $40 million under the agreement and entered into a
floating to fixed interest rate swap to January 9, 2009
resulting in an effective interest rate of 8.4%. The credit
agreement contains covenants that, among other things, restrict
our ability to incur liens, and various other customary
provisions, including affirmative and negative covenants, and
representations and warranties.
Receivables Sale Facility The
receivables sale facility was amended in June 2007 to extend the
maturity to June 2012 and to among other things, modify certain
financial covenants and reduce the cost of utilizing the
facility. In July 2007, the receivable sale facility was amended
to include up to $25.0 million of Canadian receivables,
which increased the facility size to $200.0 million. The
maximum proceeds that we may receive are limited to 85% of the
eligible domestic and Canadian accounts receivable sold. This
facility also makes up to $40.0 million available for
issuing standby letters of credit as a sub-limit within the
$200.0 million facility, of which $11.4 million was
used at December 31, 2007.
The 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 $40.0 million or less.
As of December 31, 2007, the fixed charge coverage ratio
was 1.4 to 1 and we had not sold any accounts receivable,
resulting in availability under the facility of
$151.2 million.
During January 2008, we sold $59.2 million of our undivided
interest in accounts receivable.
Of the capital resource facilities available to us as of
December 31, 2007, 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,
2007, we had not sold any accounts receivable and had guaranteed
$60.9 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, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
330.6
|
|
|
$
|
22.6
|
|
|
$
|
40.3
|
|
|
$
|
217.7
|
|
|
$
|
50.0
|
|
Operating leases
|
|
|
64.9
|
|
|
|
17.4
|
|
|
|
26.1
|
|
|
|
11.1
|
|
|
|
10.3
|
|
Standby letters of credit
|
|
|
11.4
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
obligations(1)
|
|
|
120.6
|
|
|
|
26.6
|
|
|
|
48.4
|
|
|
|
34.3
|
|
|
|
11.3
|
|
Pension and post-retirement
obligations(2)
|
|
|
205.8
|
|
|
|
33.2
|
|
|
|
55.3
|
|
|
|
49.6
|
|
|
|
67.7
|
|
Guarantees
|
|
|
60.9
|
|
|
|
6.1
|
|
|
|
12.2
|
|
|
|
12.2
|
|
|
|
30.4
|
|
Purchase obligations
|
|
|
7.9
|
|
|
|
3.6
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
802.1
|
|
|
$
|
120.9
|
|
|
$
|
186.6
|
|
|
$
|
324.9
|
|
|
$
|
169.7
|
|
|
|
28 POLYONE
CORPORATION
|
|
(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 2008 of approximately $18.2 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 2017.
|
We expect that profitable operations in 2008 will enable us to
maintain existing levels of available capital resources and meet
our cash requirements. Expected sources of cash in 2008 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 2008 include interest
expense and discounts on the sale of accounts receivable, cash
taxes, a contribution to a defined benefit pension plan, debt
retirements upon maturity, environmental remediation at inactive
and formerly owned sites and capital expenditures. Capital
expenditures are currently estimated to be between $50 and
$60 million in 2008, primarily to support strategic growth
initiatives and manufacturing operations.
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.
Related-Party
Transactions
We purchase a substantial portion of our PVC resin and all of
our VCM raw materials under supply agreements with OxyVinyls. We
formerly held a 24% equity ownership in OxyVinyls. This
ownership was sold on July 6, 2007 after which we no longer
report related party transactions with OxyVinyls. Net amounts
owed to OxyVinyls, primarily for raw material purchases, totaled
$17.3 million at December 31, 2006. Our total
purchases of raw materials from OxyVinyls were $152 million
during the six months ended June 30, 2007 and
$369 million during the year ended December 31, 2006.
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,
2007, accounts receivable totaling $175.8 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
$200 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, 2007, PFC had not
sold any of its undivided interests in accounts receivable. We
retained an interest in the $175.8 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, 2007. 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 $60.9 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 $11.4 million of 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
Our 2008 outlook for global GDP calls for overall growth in
2008, but down about 0.5% points from the 2007 level. In North
America, our outlook for 2008 GDP and industrial production
growth is for a steeper year-to-year decline compared to our
global outlook. Our outlooks for GDP and industrial production
in North America assume continued weakness and volatility in
financial markets as well as restrained demand growth from
reduced consumer and business confidence. The export outlook
remains vibrant, based on the co-factors of a weak dollar and
the strong growth in developing nations. Current
U.S. leading indicators for manufacturing and employment
growth do not point toward a recession, but do anticipate
weakening conditions through early 2008.
PolyOnes primary North American markets are expected to
remain in decline. The housing sector is expected to weaken
further with our 2008 projection for housing starts down to
approximately 1 million units, or approximately 25% less
than 2007 levels, and the lowest level since 1991. Automobile
and light truck sales are also projected to decline moderately
from 2007 levels to below 16 million units and to the
lowest level since 1997.
Eurozone economic activity is also expected to slow in 2008,
with our outlook for 2008 GDP growth down from 2007 levels.
Slower growth in the U.K., Germany and Spain are the leading
factors that will affect us, with France projecting only a
slight decline from 2007 levels largely as a result of consumer
spending. Partially counterbalancing the slowing in Western
Europe, Eastern Europe
POLYONE
CORPORATION 29
GDP growth, although decelerating, is projected to reach
approximately 5%.
Industrial production growth in China is expected to remain
strong with growth of approximately 1.5 times GDP growth, even
though GDP is anticipated to decline moderately to a level
slightly below 10% from a rate of over 11% in 2007. Indias
economy is expected to continue robust expansion although GDP is
expected to decline slightly year-to-year. GDP growth in our
other key Asian markets is projected between 5% and 7%.
Oil and natural gas prices are not expected to decrease
substantially during 2008, with prices continuing to be
sensitive to shocks and perceived or real supply volatility.
Moreover, high energy and hydrocarbon feedstock costs underpin
anticipated year-over-year increases in most chloro-vinyl raw
materials. Ethylene and PVC resin pricing are expected to
increase compared to 2007. Additionally, during 2008,
significant PVC resin capacity is expected to become operational
as North American producers bring announced expansion on line.
In summary, the economy is expected to affect PolyOne in several
significant ways during 2008. Softness in North American
construction, particularly residential, and automotive will
affect products and services sold into those markets for most if
not all of 2008. Continued strong growth is expected for our
operations in Asia, especially China and India, and also for
emerging markets for our materials and services. Relatively
strong growth in our operations in Eastern Europe should
continue. Western European markets will experience lower growth
rates due to the strong euro and high energy costs. Globally,
growth markets such as electronics and medical and new
eco-friendly solutions through metal replacement or new
biopolymer materials will be targeted and pursued aggressively.
We anticipate 2008 total Company sales growth in the range of
10% to 12%, including sales from our recent GLS and NHPC
acquisitions, despite the likelihood of incremental degradation
in the North American residential construction market. While
near term economic conditions should remain challenging, we
expect full-year earnings growth in 2008. Growth in our
non-vinyl businesses, operating improvements and lower interest
expense underpin current expectations. Beyond the broader
economic conditions, raw material and energy costs remain a
fluid dynamic that clearly could impact the magnitude and
direction of our preliminary viewpoint.
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
and/or
sales. In particular, these include statements relating to
future actions; prospective changes in raw material costs,
product pricing or product demand; future performance; 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 countries where PolyOne conducts
business;
|
|
|
|
changes in global industry capacity or in the rate at which
anticipated changes in industry capacity come online in the
polyvinyl chloride (PVC), chlor-alkali, vinyl chloride monomer
(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;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
any change in any agreements with product suppliers to PolyOne
Distribution that prohibits PolyOne from continuing to
distribute a suppliers products to customers;
|
|
|
|
the successful integration of acquired businesses, including
GLS Corporation;
|
30 POLYONE
CORPORATION
|
|
|
|
|
the possibility that the degradation in the North American
residential construction market is more severe than anticipated;
|
|
|
|
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;
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 31
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES 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. At
December 31, 2007, we maintained interest rate swap
agreements on five of our fixed-rate obligations in the
aggregate amount of $80.0 million with a net fair value
liability of $1.7 million. At December 31, 2006, we
maintained interest rate swap agreements on six of our
fixed-rate obligations in the aggregate amount of
$100.0 million with a net fair value liability of
$5.1 million. The weighted-average interest rate for these
agreements was 8.8% at December 31, 2007 and 9.3% at
December 31, 2006. During January 2008, four of these
interest rate swap agreements in the aggregate amount of
$70.0 million were unwound. There were no material changes
in the market risk that we faced during 2007. 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 Income. 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
|
|
|
|
|
|
32
|
|
|
|
|
33
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
34
|
|
|
|
|
35
|
|
|
|
|
36
|
|
|
|
|
37
|
|
|
|
|
38-63
|
|
Financial Statement Schedules:
|
|
|
|
|
|
|
|
64
|
|
|
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, 2007.
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, 2007 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, 2007 and has prepared Managements Annual
Report On Internal Control Over Financial Reporting contained on
page 64 of this Annual Report. This report concludes that
internal control over financial reporting is effective and that
no material weaknesses were identified.
|
|
|
|
|
/s/ W.
David Wilson
|
|
|
|
Stephen D. Newlin
|
|
W. David Wilson
|
Chairman, President and
|
|
Senior Vice President
|
Chief Executive Officer
|
|
and Chief Financial Officer
|
February 27, 2008
32 POLYONE
CORPORATION
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of
Directors and Shareholders PolyOne Corporation
We have audited PolyOne Corporations internal control over
financial reporting as of December 31, 2007, 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 included in the accompanying
Managements Annual Report on Internal Control over
Financial Reporting which is included in Item 9A. Our
responsibility is to express an opinion on 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, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, 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, PolyOne Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, 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, 2007, and 2006, and the
related consolidated statements of income, shareholders
equity, and cash flows for each of the three years in the period
ended December 31, 2007 of PolyOne Corporation and our
report dated February 27, 2008 expressed an unqualified
opinion thereon.
Cleveland, Ohio
February 27, 2008
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of
Directors and Shareholders PolyOne Corporation
We have audited the accompanying consolidated balance sheets of
PolyOne Corporation and subsidiaries as of December 31,
2007 and 2006, and the related consolidated statements of
income, shareholders equity, and cash flows for each of
the three years in the period ended December 31, 2007. 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 had 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 and 2005 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, 2007 and 2006, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2007, 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(R) effective December 31, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
PolyOne Corporations internal control over financial
reporting as of December 31, 2007, 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 27, 2008 expressed
an unqualified opinion thereon.
Cleveland, Ohio
February 27, 2008
POLYONE
CORPORATION 33
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In millions, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Sales
|
|
$
|
2,642.7
|
|
|
$
|
2,622.4
|
|
|
$
|
2,450.6
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,337.3
|
|
|
|
2,284.1
|
|
|
|
2,155.7
|
|
Selling and administrative
|
|
|
241.8
|
|
|
|
202.6
|
|
|
|
182.8
|
|
Depreciation and amortization
|
|
|
57.4
|
|
|
|
57.1
|
|
|
|
50.7
|
|
Income from equity affiliates and minority interest
|
|
|
27.7
|
|
|
|
112.0
|
|
|
|
79.9
|
|
|
Operating income
|
|
|
33.9
|
|
|
|
190.6
|
|
|
|
141.3
|
|
Interest expense
|
|
|
(51.4
|
)
|
|
|
(66.5
|
)
|
|
|
(68.1
|
)
|
Interest income
|
|
|
4.5
|
|
|
|
3.4
|
|
|
|
1.9
|
|
Premium on early extinguishment of long-term debt
|
|
|
(12.8
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
Other expense, net
|
|
|
(6.6
|
)
|
|
|
(2.8
|
)
|
|
|
(5.3
|
)
|
|
Income (loss) before income taxes and discontinued operations
|
|
|
(32.4
|
)
|
|
|
120.3
|
|
|
|
69.8
|
|
Income tax benefit (expense)
|
|
|
43.8
|
|
|
|
5.3
|
|
|
|
(6.6
|
)
|
|
Income before discontinued operations
|
|
|
11.4
|
|
|
|
125.6
|
|
|
|
63.2
|
|
Loss from discontinued operations and loss on sale, net of
income taxes
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
(15.3
|
)
|
|
Net income
|
|
$
|
11.4
|
|
|
$
|
122.9
|
|
|
$
|
47.9
|
|
|
|
Basic and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before discontinued operations
|
|
$
|
0.12
|
|
|
$
|
1.36
|
|
|
$
|
0.69
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
(0.17
|
)
|
|
Basic and diluted earnings per common share
|
|
$
|
0.12
|
|
|
$
|
1.33
|
|
|
$
|
0.52
|
|
|
|
Weighted average shares used to compute earnings per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
92.8
|
|
|
|
92.4
|
|
|
|
91.9
|
|
Diluted
|
|
|
93.1
|
|
|
|
92.8
|
|
|
|
92.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
See Notes to Consolidated Financial
Statements.
34 POLYONE
CORPORATION
Consolidated Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In millions, except per share data)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79.4
|
|
|
$
|
66.2
|
|
Accounts receivable (less allowance of $4.8 in 2007 and $5.9 in
2006)
|
|
|
340.8
|
|
|
|
316.4
|
|
Inventories
|
|
|
223.4
|
|
|
|
240.8
|
|
Deferred income tax assets
|
|
|
20.4
|
|
|
|
18.1
|
|
Other current assets
|
|
|
19.8
|
|
|
|
27.8
|
|
|
Total current assets
|
|
|
683.8
|
|
|
|
669.3
|
|
Property, net
|
|
|
449.7
|
|
|
|
442.4
|
|
Investment in equity affiliates
|
|
|
19.9
|
|
|
|
287.2
|
|
Goodwill
|
|
|
288.8
|
|
|
|
287.0
|
|
Other intangible assets, net
|
|
|
6.7
|
|
|
|
9.4
|
|
Deferred income tax assets
|
|
|
69.9
|
|
|
|
21.1
|
|
Other non-current assets
|
|
|
64.2
|
|
|
|
64.4
|
|
|
Total assets
|
|
$
|
1,583.0
|
|
|
$
|
1,780.8
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
6.1
|
|
|
$
|
5.2
|
|
Accounts payable, including amounts payable to related party
(see Note N)
|
|
|
250.5
|
|
|
|
221.0
|
|
Accrued expenses
|
|
|
94.4
|
|
|
|
93.1
|
|
Current portion of long-term debt
|
|
|
22.6
|
|
|
|
22.5
|
|
|
Total current liabilities
|
|
|
373.6
|
|
|
|
341.8
|
|
Long-term debt
|
|
|
308.0
|
|
|
|
567.7
|
|
Post-retirement benefits other than pensions
|
|
|
81.6
|
|
|
|
83.6
|
|
Pension benefits
|
|
|
82.6
|
|
|
|
125.1
|
|
Other non-current liabilities
|
|
|
87.5
|
|
|
|
75.4
|
|
Minority interest in consolidated subsidiaries
|
|
|
0.3
|
|
|
|
5.5
|
|
|
Total liabilities
|
|
|
933.6
|
|
|
|
1,199.1
|
|
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 2007 and 2006
|
|
|
1.2
|
|
|
|
1.2
|
|
Additional paid-in capital
|
|
|
1,065.0
|
|
|
|
1,065.7
|
|
Retained deficit
|
|
|
(48.5
|
)
|
|
|
(59.9
|
)
|
Common stock held in treasury, 29.1 shares in 2007 and
29.4 shares in 2006
|
|
|
(319.7
|
)
|
|
|
(326.2
|
)
|
Accumulated other comprehensive loss
|
|
|
(48.6
|
)
|
|
|
(99.1
|
)
|
|
Total shareholders equity
|
|
|
649.4
|
|
|
|
581.7
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,583.0
|
|
|
$
|
1,780.8
|
|
|
|
See Notes to Consolidated Financial
Statements.
POLYONE
CORPORATION 35
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11.4
|
|
|
$
|
122.9
|
|
|
$
|
47.9
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
57.4
|
|
|
|
57.1
|
|
|
|
50.7
|
|
Loss on disposition of discontinued businesses and related plant
phaseout charge
|
|
|
|
|
|
|
3.1
|
|
|
|
15.6
|
|
Charges for environmental remediation
|
|
|
48.8
|
|
|
|
2.5
|
|
|
|
0.2
|
|
Cash receipts (payments) for environmental remediation, net of
insurance recoveries
|
|
|
(25.5
|
)
|
|
|
1.8
|
|
|
|
(9.8
|
)
|
Deferred income tax provision (benefit)
|
|
|
(57.1
|
)
|
|
|
(12.9
|
)
|
|
|
2.0
|
|
Premium on early extinguishment of long-term debt
|
|
|
12.8
|
|
|
|
4.4
|
|
|
|
|
|
Stock compensation expense (benefit)
|
|
|
4.3
|
|
|
|
4.5
|
|
|
|
(0.6
|
)
|
Asset impairment charges
|
|
|
2.5
|
|
|
|
0.2
|
|
|
|
0.4
|
|
Companies carried at equity and minority interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of investment in equity affiliate
|
|
|
14.8
|
|
|
|
|
|
|
|
|
|
Income from equity affiliates
|
|
|
(42.5
|
)
|
|
|
(112.0
|
)
|
|
|
(79.9
|
)
|
Dividends and distributions received
|
|
|
37.6
|
|
|
|
97.7
|
|
|
|
67.4
|
|
Contributions to pensions and other postretirement plans
|
|
|
(26.9
|
)
|
|
|
(13.9
|
)
|
|
|
(17.8
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(8.9
|
)
|
|
|
23.0
|
|
|
|
(23.6
|
)
|
Inventories
|
|
|
26.7
|
|
|
|
(39.6
|
)
|
|
|
9.3
|
|
Accounts payable
|
|
|
17.8
|
|
|
|
(17.2
|
)
|
|
|
13.0
|
|
Increase (decrease) in sale of accounts receivable
|
|
|
|
|
|
|
(7.9
|
)
|
|
|
7.9
|
|
Accrued expenses and other
|
|
|
(6.0
|
)
|
|
|
(1.9
|
)
|
|
|
(20.8
|
)
|
Net cash provided (used) by discontinued operations
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
1.8
|
|
|
Net cash provided by operating activities
|
|
|
67.2
|
|
|
|
111.7
|
|
|
|
63.7
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(43.4
|
)
|
|
|
(41.1
|
)
|
|
|
(32.1
|
)
|
Business acquisitions and related deposits, net of cash acquired
|
|
|
(11.2
|
)
|
|
|
(1.5
|
)
|
|
|
(2.7
|
)
|
Proceeds from sale of discontinued business, net
|
|
|
|
|
|
|
17.3
|
|
|
|
|
|
Proceeds from sale of assets
|
|
|
9.4
|
|
|
|
8.7
|
|
|
|
12.3
|
|
Proceeds from sale of investment in equity affiliate
|
|
|
260.5
|
|
|
|
|
|
|
|
|
|
Net cash used by discontinued operations
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
(1.7
|
)
|
|
Net cash provided (used) by investing activities
|
|
|
215.3
|
|
|
|
(16.8
|
)
|
|
|
(24.2
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in short-term debt
|
|
|
(0.2
|
)
|
|
|
(2.1
|
)
|
|
|
4.8
|
|
Repayment of long-term debt
|
|
|
(264.1
|
)
|
|
|
(60.0
|
)
|
|
|
(49.0
|
)
|
Premium on early extinguishment of long-term debt
|
|
|
(12.8
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
1.2
|
|
|
|
3.1
|
|
|
|
0.5
|
|
|
Net cash used by financing activities
|
|
|
(275.9
|
)
|
|
|
(63.4
|
)
|
|
|
(43.7
|
)
|
Effect of exchange rate changes on cash
|
|
|
6.6
|
|
|
|
1.9
|
|
|
|
(1.6
|
)
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
13.2
|
|
|
|
33.4
|
|
|
|
(5.8
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
66.2
|
|
|
|
32.8
|
|
|
|
38.6
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
79.4
|
|
|
$
|
66.2
|
|
|
$
|
32.8
|
|
|
|
See Notes to Consolidated Financial
Statements.
36 POLYONE
CORPORATION
Consolidated
Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
Common
|
|
|
Other
|
|
(In millions, except per share data;
|
|
Common
|
|
|
Shares Held
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Stock Held
|
|
|
Comprehensive
|
|
shares in thousands)
|
|
Shares
|
|
|
in Treasury
|
|
|
Total
|
|
|
Stock
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
in Treasury
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
Balance January 1, 2005
|
|
|
122,192
|
|
|
|
30,480
|
|
|
$
|
352.1
|
|
|
$
|
1.2
|
|
|
$
|
1,067.2
|
|
|
$
|
(237.2
|
)
|
|
$
|
(339.0
|
)
|
|
$
|
(140.1
|
)
|
Cumulative effect of adoption of FSP AUG AIR-1 as of
January 1, 2005
|
|
|
|
|
|
|
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
47.9
|
|
|
|
|
|
|
|
|
|
|
|
47.9
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
36.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
394.9
|
|
|
$
|
1.2
|
|
|
$
|
1,066.4
|
|
|
$
|
(182.8
|
)
|
|
$
|
(337.1
|
)
|
|
$
|
(152.8
|
)
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
122.9
|
|
|
|
|
|
|
|
|
|
|
|
122.9
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
179.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
581.7
|
|
|
$
|
1.2
|
|
|
$
|
1,065.7
|
|
|
$
|
(59.9
|
)
|
|
$
|
(326.2
|
)
|
|
$
|
(99.1
|
)
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
28.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.3
|
|
Adjustments related to SFAS No. 158:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit recognized during year, net of tax of $1.9
|
|
|
|
|
|
|
|
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.0
|
)
|
Net actuarial gain occurring during year, net of tax benefit of
$12.2
|
|
|
|
|
|
|
|
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
61.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation and benefits and exercise of options
|
|
|
|
|
|
|
(325
|
)
|
|
|
5.8
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
|
122,192
|
|
|
|
29,059
|
|
|
$
|
649.4
|
|
|
$
|
1.2
|
|
|
$
|
1,065.0
|
|
|
$
|
(48.5
|
)
|
|
$
|
(319.7
|
)
|
|
$
|
(48.6
|
)
|
|
|
|
|
|
|
See Notes to Consolidated Financial
Statements.
POLYONE
CORPORATION 37
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 polymer formulations, color and additive
systems, thermoplastic resin distribution and specialty
polyvinyl chloride (PVC) resins. PolyOne also has equity
investments in manufacturers of caustic soda and chlorine, and
PVC compound products 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. All Other is comprised
of the remaining operating segments and includes North American
Color and Additives, North American Engineered Materials,
Producer Services and Specialty Inks and Polymer 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 2007 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.
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 Income
beginning October 1, 2006. DH Compounding is included in
the Producer Services operating segment.
In July 2007, PolyOne sold its 24% interest in Oxy Vinyls LP
(OxyVinyls) for $261 million in cash. In a related
transaction, PolyOne purchased the remaining 10% minority
interest in Powder Blends, LP for $11 million in cash.
In December 2007, PolyOne completed the acquisition of the vinyl
compounding business and assets of Ngai Hing PlastChem Company
Ltd. (NHPC), a subsidiary of Ngai Hing Hong Company Limited, a
publicly-held company listed on the Hong Kong stock exchange,
for $3.3 million, net of cash received.
In January 2008, PolyOne acquired 100% of the outstanding
capital stock of GLS Corporation, a global provider of
specialty thermoplastic elastomer compounds for consumer,
packaging and medical applications. See Note U
Subsequent Event for more information.
Unless otherwise noted, disclosures contained in these financial
statements 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 and additive
masterbatch and PolyOne Distribution businesses to improve
profitability and strengthen its balance sheet because
management believed 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 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 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.
In February 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 Financial
Accounting Standards Board (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 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.
38 POLYONE
CORPORATION
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
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
Engineered Films
|
|
$
|
9.6
|
|
|
$
|
119.6
|
|
Pre-tax income from operations:
|
|
|
|
|
|
|
|
|
Engineered Films
|
|
$
|
0.4
|
|
|
$
|
0.5
|
|
Pre-tax loss on disposition of businesses:
|
|
|
|
|
|
|
|
|
Elastomers and Performance Additives
|
|
|
|
|
|
|
(0.7
|
)
|
Engineered Films
|
|
|
(3.1
|
)
|
|
|
(15.1
|
)
|
|
|
|
|
(2.7
|
)
|
|
|
(15.3
|
)
|
Income tax expense, net of valuation allowance
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(2.7
|
)
|
|
$
|
(15.3
|
)
|
|
|
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 PolyOnes 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 38% and 45% of
PolyOnes inventories at December 31, 2007 and 2006
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 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. Depreciation and amortization expense are excluded
from cost of goods sold and presented separately in the
Consolidated Statements of Income. Repair and maintenance costs
are expensed as incurred.
Impairment of Long-Lived Assets As required
by SFAS No. 144, Accounting for the Impairment
or Disposal of 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
POLYONE
CORPORATION 39
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 13 years.
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 Income. 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 year or less.
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 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. 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, 2007 and 2006, there
were no deferred losses related to equity investees.
PolyOne 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 $21.6 million in 2007,
$20.3 million in 2006 and $19.5 million in 2005, 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.
Comprehensive Income Accumulated other
comprehensive loss at December 31, 2007 and 2006 are as
follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
20.3
|
|
|
$
|
(8.0
|
)
|
Employee post-retirement benefit plans
|
|
|
(68.9
|
)
|
|
|
(91.1
|
)
|
|
|
|
$
|
(48.6
|
)
|
|
$
|
(99.1
|
)
|
|
|
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.
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.
40 POLYONE
CORPORATION
Share-Based Compensation As of
December 31, 2007, 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 Accounting
Principles Board (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
Income. 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, 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 years ended December 31, 2007 and 2006,
respectively, was $4.3 million and $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 reduces net
operating cash flows and increases 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 year ended
December 31, 2005. 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
|
|
|
|
December 31,
|
|
(In millions, except per share data)
|
|
2005
|
|
|
|
|
Net income, as reported
|
|
$
|
47.9
|
|
Add: Total share-based employee compensation (benefit) included
in reported net income, net of tax
|
|
|
(0.6
|
)
|
Deduct: Total share-based employee compensation expense
determined under the fair value-based method for all awards, net
of tax
|
|
|
(4.1
|
)
|
|
Pro forma net income
|
|
$
|
43.2
|
|
|
|
Net earnings per share:
|
|
|
|
|
Basic and diluted as reported
|
|
$
|
0.52
|
|
Basic and diluted pro forma
|
|
$
|
0.47
|
|
SFAS No. 158 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.
New Accounting
Pronouncements
FASB Interpretation No. 48
PolyOne adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement
No. 109, Accounting for Income Taxes
(FIN 48) on January 1, 2007.
The net income tax assets recognized under FIN 48 did not
differ from the net assets recognized before adoption, and,
therefore, the Company did not record a cumulative effect
adjustment related to the adoption of FIN 48.
POLYONE
CORPORATION 41
PolyOne is no longer subject to U.S. income tax
examinations for periods preceding 2004, and with limited
exceptions, for periods preceding 2002 for foreign, state and
local tax examinations.
As of December 31, 2007, PolyOne has a $6.0 million
liability for uncertain tax positions. This amount relates to
items under examination by foreign tax authorities related to
the valuation of assets. PolyOne does not agree with the
proposed adjustments and has appealed the assessments. PolyOne
does not anticipate that the disputes will be resolved in the
next twelve months.
During the third quarter of 2007, a foreign jurisdiction
initiated an audit related to transfer pricing and the Company
accrued $1.0 million for the payment of income tax and
interest. The issue was resolved during the fourth quarter of
2007 and the Company paid $0.3 million for income taxes and
$0.5 million for interest.
PolyOne recognizes interest and penalties related to
unrecognized income tax benefits in the provision for income
taxes. As of December 31, 2007, PolyOne has accrued
$2.5 million of interest and penalties.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
Unrecognized Tax
|
|
|
|
Benefits
|
|
(In millions)
|
|
2007
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
6.0
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
Additions for tax positions of prior years
|
|
|
0.5
|
|
Reductions for tax positions of prior years
|
|
|
(0.2
|
)
|
Settlements
|
|
|
(0.3
|
)
|
|
Balance at December 31, 2007
|
|
$
|
6.0
|
|
|
|
FASB Staff Position AUG AIR-1 In
September 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. OxyVinyls adopted FSP AUG
AIR-1 in the
first quarter of 2007, on a retrospective basis, and is now
using the deferral method of accounting for planned major
maintenance. The effect on OxyVinyls consolidated balance
sheet at January 1, 2007 from adopting FSP AUG
AIR-1 was 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 its former equity investment in
OxyVinyls operations was 24%.
The adoption of FSP AUG
AIR-1
represents a change in accounting principle and, under the
guidance of this principle, must be applied retrospectively.
Under these retrospective provisions, PolyOne has restated its
historical financial statements to reflect the change in
accounting for planned major maintenance activities of its
former equity affiliate. The following tables illustrate the
retrospective changes in PolyOnes respective financial
statements:
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
Year Ended December 31, 2005
|
|
(In millions, except per share data)
|
|
As Originally Filed
|
|
|
Adjustment
|
|
|
Restated
|
|
|
As Originally Filed
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
|
Income from equity affiliates and minority interest
|
|
$
|
111.6
|
|
|
$
|
0.4
|
|
|
$
|
112.0
|
|
|
$
|
78.9
|
|
|
$
|
1.0
|
|
|
$
|
79.9
|
|
Income tax benefit (expense)
|
|
|
6.0
|
|
|
|
(0.7
|
)
|
|
|
5.3
|
|
|
|
(6.6
|
)
|
|
|
|
|
|
|
(6.6
|
)
|
Income before discontinued operations
|
|
|
125.9
|
|
|
|
(0.3
|
)
|
|
|
125.6
|
|
|
|
62.2
|
|
|
|
1.0
|
|
|
|
63.2
|
|
Net income
|
|
|
123.2
|
|
|
|
(0.3
|
)
|
|
|
122.9
|
|
|
|
46.9
|
|
|
|
1.0
|
|
|
|
47.9
|
|
Basic and diluted earnings per common share
Before discontinued operations
|
|
$
|
1.36
|
|
|
$
|
|
|
|
$
|
1.36
|
|
|
$
|
0.68
|
|
|
$
|
0.01
|
|
|
$
|
0.69
|
|
Basic and diluted earnings per share
|
|
|
1.33
|
|
|
|
|
|
|
|
1.33
|
|
|
|
0.51
|
|
|
|
0.01
|
|
|
|
0.52
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
(In millions)
|
|
As Originally Filed
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
|
Investment in equity affiliates
|
|
$
|
276.1
|
|
|
$
|
11.1
|
|
|
$
|
287.2
|
|
Deferred income tax assets
|
|
|
25.0
|
|
|
|
(3.9
|
)
|
|
|
21.1
|
|
Total assets
|
|
|
1,773.6
|
|
|
|
7.2
|
|
|
|
1,780.8
|
|
Retained deficit
|
|
|
(67.1
|
)
|
|
|
7.2
|
|
|
|
(59.9
|
)
|
Shareholders equity
|
|
|
574.5
|
|
|
|
7.2
|
|
|
|
581.7
|
|
42 POLYONE
CORPORATION
The cumulative effect of the adoption of FSP AUG
AIR-1 as of
January 1, 2005 is a reduction to retained deficit and an
increase to shareholders equity of $6.5 million.
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
Year Ended December 31, 2005
|
|
(In millions)
|
|
As Originally Filed
|
|
|
Adjustment
|
|
|
Restated
|
|
|
As Originally Filed
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
|
Net income
|
|
$
|
123.2
|
|
|
$
|
(0.3
|
)
|
|
$
|
122.9
|
|
|
$
|
46.9
|
|
|
$
|
1.0
|
|
|
$
|
47.9
|
|
Income from equity affiliates and minority interest
|
|
|
(111.6
|
)
|
|
|
(0.4
|
)
|
|
|
(112.0
|
)
|
|
|
(78.9
|
)
|
|
|
(1.0
|
)
|
|
|
(79.9
|
)
|
Provision (benefit) for deferred income taxes
|
|
|
(13.6
|
)
|
|
|
0.7
|
|
|
|
(12.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Financial Accounting Standards
No. 157 In September 2006, the FASB
issued SFAS No. 157, Fair Value
Measurement, which defines fair value, establishes the
framework for measuring fair value under U.S. generally
accepted accounting principles and expands disclosures about
fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. In December
2007, the FASB issued a proposed FASB Staff Position (FSP
FAS 157-b)
that would delay the effective date of SFAS No. 157
for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on a recurring basis to fiscal years
beginning after November 15, 2008. The Company adopted the
non-deferred portion of SFAS No. 157 on
January 1, 2008 and it did not have a material impact on
the Companys financial statements. The Company is
evaluating the effect that adoption of the deferred portion of
SFAS No. 157 will have on our financial statements in
2009, specifically in the areas of measuring fair value in
business combinations and goodwill impairment tests.
SFAS No. 159 In February
2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities, which allows entities to voluntarily choose,
at specified election dates, to measure many financial assets
and liabilities at fair value. The election is made on an
instrument-by-instrument
basis and is irrevocable. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007.
SFAS No. 159 will have no impact on the Companys
financial statements.
SFAS No. 141 (revised 2007)
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, which
establishes principles over the method entities use to recognize
and measure assets acquired and liabilities assumed in a
business combination and enhances disclosures on business
combinations. SFAS No. 141(R) is effective for
business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The Company is
evaluating the effect that adoption will have on its 2009
financial statements.
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 2006 and
2005 have been reclassified to conform to the 2007 presentation.
During 2007, PolyOne changed its reportable segments. As a
result, PolyOnes segment disclosures for 2006 and 2005
have been restated to conform with the changes made in 2007.
Note D.
GOODWILL AND INTANGIBLE ASSETS
There were no changes in the carrying amount of goodwill, other
than for new acquisitions, during the years ended
December 31, 2007 and 2006.
As of December 31, 2007, PolyOne had $288.8 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.
Goodwill as of December 31, 2007 and 2006, by operating
segment, was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In millions)
|
|
2006
|
|
|
2007
|
|
|
|
|
Vinyl Business
|
|
$
|
181.4
|
|
|
$
|
179.6
|
|
International Color and Engineered Materials
|
|
|
72.0
|
|
|
|
72.0
|
|
Specialty Inks and Polymer Systems
|
|
|
33.8
|
|
|
|
33.8
|
|
PolyOne Distribution
|
|
|
1.6
|
|
|
|
1.6
|
|
|
Total
|
|
$
|
288.8
|
|
|
$
|
287.0
|
|
|
|
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
POLYONE
CORPORATION 43
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-year 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, 2007, PolyOne had three reporting units, consistent
with PolyOnes operating segments, that had a significant
amount of goodwill: Vinyl Compounds, 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, 2007. 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
52%, 8% and 24%, respectively, as of July 1, 2007.
As a result of the reorganization of the Companys segments
discussed further in Notes A and R, on October 1,
2007, PolyOne had four reporting units that had a significant
amount of goodwill: Vinyl Compounds, Specialty Coatings,
International Color and Engineered Materials and Specialty Inks
and Polymer Systems. PolyOne performed an interim assessment of
goodwill on the two new reporting units Specialty
Coatings and Specialty Inks and Polymer Systems. The average
fair values of the market approach and income approach exceeded
the carrying value of Specialty Coatings and Specialty Inks and
Polymer Systems by 17% and 31%, respectively, as of
October 1, 2007.
Even though PolyOne determined that there was no additional
goodwill impairment as of the July 1, 2007 annual
assessment nor as of the October 1, 2007 interim
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, 2008.
Information regarding other intangible assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
Acquisition
|
|
|
Accumulated
|
|
|
Currency
|
|
|
|
|
(In millions)
|
|
Cost
|
|
|
Amortization
|
|
|
Translation
|
|
|
Net
|
|
|
|
|
Non-contractual customer relationships
|
|
$
|
8.6
|
|
|
$
|
(6.7
|
)
|
|
$
|
|
|
|
$
|
1.9
|
|
Sales contract
|
|
|
11.4
|
|
|
|
(10.0
|
)
|
|
|
|
|
|
|
1.4
|
|
Patents, technology and other
|
|
|
4.7
|
|
|
|
(2.7
|
)
|
|
|
1.4
|
|
|
|
3.4
|
|
|
Total
|
|
$
|
24.7
|
|
|
$
|
(19.4
|
)
|
|
$
|
1.4
|
|
|
$
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
There were no indefinite-lived intangible assets as of
December 31, 2007 and 2006.
Amortization of other intangible assets was $2.1 million
for the year ended December 31, 2007, $2.1 million for
the year ended December 31, 2006 and $2.7 million for
the year ended
44 POLYONE
CORPORATION
December 31, 2005. Amortization expense for each of the
next five years is expected to be approximately
$1.5 million per year.
The carrying values of intangible assets and other investments
are adjusted to fair value based on estimated net future cash
flows as a result of an evaluation done each year end, or more
often when indicators of impairment exist. During 2007, an
impairment charge of $2.5 million was recorded against the
carrying value of certain patents and technology agreements and
is included in Selling and administrative in the
Consolidated Statements of Income. No impairment charges were
recorded in 2006 or 2005.
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. These costs are
recorded in the Consolidated Statements of Income on the lines
Cost of sales and Selling and
administrative. 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. These costs are recorded in the
Consolidated Statements of Income on the lines Cost of
sales and Selling and administrative. 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 discontinued operations are
included in the Consolidated Statements of Income 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, 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.
2005 Activity Employee separation and plant
phaseout costs for 2005 were $5.5 million of which
$3.6 million and $1.9 million was included in Costs of
sales and Selling and administrative in the Consolidated
Statements of Income, respectively.
Operating income includes a $2.5 million charge to be paid
pursuant to the terms of an October 6, 2005 separation
agreement (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.
2006 Activity Cost of sales 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.
Cost of sales 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, $0.9 million of which was included in
Cost of sales and $0.2 million in Selling and
administrative, from the sale of facilities that were previously
identified as part of the Companys plant phaseout
activities.
During 2006, the Company paid $1.2 million under the 2005
Separation Agreement.
2007 Activity Employee separation and plant
phaseout costs for 2007 were $2.2 million of which $1.4
million and $0.8 million was included in Costs of sales and
Selling and administrative in the Consolidated Statements of
Income, respectively.
During 2007, the Company recognized and paid $0.4 million
in employee separation charges related to 33 employees
involved in
POLYONE
CORPORATION 45
the restructuring of its manufacturing facility in St. Peters,
Missouri, part of the North American Color and Additives
operating segment.
The closure and exit from the Companys Commerce,
California facility was completed in the first quarter of 2007,
during which the Company paid $0.1 million in employee
separation charges and $0.1 million in plant phase-out
costs.
During 2007, charges related to three executive severance
agreements in the amount of $0.6 million were recognized.
During 2007, the Company paid $0.9 million for executive
severance. Accrued executive severance costs at
December 31, 2007 are $1.0 million and are expected to
be paid over the next 12 months.
In September 2007, PolyOne announced the closure of two
manufacturing lines at its Avon Lake, Ohio facility. Non-cash
charges of $0.5 million were recorded to adjust the
carrying value of certain assets to their net realizable value.
In addition, during the third quarter of 2007, severance costs
of $0.4 million for seven employees at the Avon Lake and
other facilities were recorded of which $0.1 million were
paid in 2007 and the remaining $0.3 million of costs are
expected to be paid over the next 12 months.
In addition, during 2007, $0.3 million of other non-cash
charges were incurred as the Company adjusted previous carrying
values of assets held for sale.
Note F.
FINANCIAL INFORMATION OF EQUITY AFFILIATES
On July 6, 2007, PolyOne sold its 24% interest in
OxyVinyls, a manufacturer and marketer of PVC resins, for cash
proceeds of $261 million.
The following table presents OxyVinyls summarized
financial results for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
OxyVinyls:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,107.4
|
|
|
$
|
2,476.0
|
|
|
$
|
2,502.0
|
|
Operating income
|
|
$
|
11.6
|
|
|
$
|
274.8
|
|
|
$
|
200.3
|
|
Partnership income (loss) as reported by OxyVinyls
|
|
$
|
(2.0
|
)
|
|
$
|
246.2
|
|
|
$
|
134.0
|
|
PolyOnes ownership of OxyVinyls
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
24
|
%
|
|
PolyOnes proportionate share of OxyVinyls earnings
(loss)
|
|
|
(0.5
|
)
|
|
|
59.1
|
|
|
|
32.2
|
|
Amortization of the difference between PolyOnes investment
and its underlying share of OxyVinyls equity
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
Earnings (loss) of equity affiliate recorded by PolyOne
|
|
$
|
(0.2
|
)
|
|
$
|
59.7
|
|
|
$
|
32.8
|
|
|
|
|
|
|
|
|
Summarized balance sheet as of December 31:
|
|
|
|
(In millions)
|
|
2006
|
|
|
|
|
Current assets
|
|
$
|
382.4
|
|
Non-current assets
|
|
|
1,293.1
|
|
|
Total assets
|
|
|
1,675.5
|
|
|
Current liabilities
|
|
|
238.8
|
|
Non-current liabilities
|
|
|
294.5
|
|
|
Total liabilities
|
|
|
533.3
|
|
|
Partnership capital
|
|
$
|
1,142.2
|
|
|
|
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.
The Company recorded an impairment of $14.8 million on its
OxyVinyls investment during the second quarter of 2007 due to an
other than temporary decline in value. It is included in the
Income from equity affiliates and minority interest caption in
the Consolidated Statement of Income. The impairment is not
reflected in the equity affiliate earnings above because it is
excluded as a measure of segment operating income or loss that
is reported to and reviewed by the chief operating decision
maker (See Note R Segment Information).
SunBelt Chlor-Alkali Partnership (SunBelt) is the most
significant of PolyOnes equity investments and is reported
within the Resin and Intermediates segment. PolyOne owns 50% of
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)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
SunBelt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
180.6
|
|
|
$
|
186.7
|
|
|
$
|
167.0
|
|
Operating income
|
|
$
|
91.3
|
|
|
$
|
104.3
|
|
|
$
|
92.2
|
|
Partnership income as reported by SunBelt
|
|
$
|
82.0
|
|
|
$
|
94.6
|
|
|
$
|
81.3
|
|
PolyOnes ownership of SunBelt
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
|
Earnings of equity affiliate recorded by PolyOne
|
|
$
|
41.0
|
|
|
$
|
47.3
|
|
|
$
|
40.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Summarized balance sheet as of December 31:
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Current assets
|
|
$
|
27.8
|
|
|
$
|
25.1
|
|
Non-current assets
|
|
|
109.6
|
|
|
|
113.7
|
|
|
Total assets
|
|
|
137.4
|
|
|
|
138.8
|
|
|
Current liabilities
|
|
|
21.0
|
|
|
|
22.1
|
|
Non-current liabilities
|
|
|
109.7
|
|
|
|
121.9
|
|
|
Total liabilities
|
|
|
130.7
|
|
|
|
144.0
|
|
|
Partnership interest (deficit)
|
|
$
|
6.7
|
|
|
$
|
(5.2
|
)
|
|
|
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
46 POLYONE
CORPORATION
$33.9 million in 2007 through its disposition date of
July 6, 2007 and $72.2 million for the year ended
December 31, 2006.
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 affiliate and was reflected in All Other together
with BayOne Urethane Systems, L.L.C equity affiliate (owned 50%
and included in the Specialty Inks and Polymer 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. An asset write-down of
$1.6 million was recorded in the third quarter of 2007
against the carrying value of certain inventory, accounts
receivable and intangible assets of our Geon/Polimeros equity
affiliate in Colombia. The impairment is not reflected in the
following equity affiliate earnings because it is excluded as a
measure of segment operating income or loss that is reported to
and reviewed by the chief operating decision maker (See
Note R Segment Information).
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Net sales
|
|
$
|
116.8
|
|
|
$
|
122.9
|
|
Operating income
|
|
$
|
8.1
|
|
|
$
|
12.0
|
|
Net income
|
|
$
|
6.5
|
|
|
$
|
10.7
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Summarized balance sheet as of December 31:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
37.0
|
|
|
$
|
30.7
|
|
Non-current assets
|
|
|
14.6
|
|
|
|
14.0
|
|
|
Total assets
|
|
$
|
51.6
|
|
|
$
|
44.7
|
|
|
|
Current liabilities
|
|
$
|
32.2
|
|
|
$
|
28.7
|
|
Non-current liabilities
|
|
|
3.1
|
|
|
|
2.7
|
|
|
Total liabilities
|
|
$
|
35.3
|
|
|
$
|
31.4
|
|
|
|
Note G.
FINANCING ARRANGEMENTS
Long-term debt at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
10.625% senior notes due 2010
|
|
$
|
|
|
|
$
|
241.4
|
|
8.875% senior notes due 2012
|
|
|
199.2
|
|
|
|
199.1
|
|
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 6.76% and 6.83% at
December 31, 2007 and 2006, respectively due
between 2008 and 2011
|
|
|
76.1
|
|
|
|
91.7
|
|
6.0% promissory note due in equal monthly installments through
2009
|
|
|
5.3
|
|
|
|
8.0
|
|
|
Total long-term debt
|
|
$
|
330.6
|
|
|
$
|
590.2
|
|
Less current portion
|
|
|
22.6
|
|
|
|
22.5
|
|
|
Total long-term debt, net of current portion
|
|
$
|
308.0
|
|
|
$
|
567.7
|
|
|
|
Aggregate maturities of long-term debt for the next five years
are: 2008 $22.6 million; 2009
$21.5 million; 2010 $18.8 million;
2011 $18.5 million; 2012
$199.2 million; and thereafter
$50.0 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 2007 and 2006, PolyOne repurchased $241.4 million
and $58.6 million aggregate principal amounts of its
10.625% senior notes at premiums of $12.8 million and
$4.4 million, respectively. The premium is shown as a
separate line item in the Consolidated Statements of Income.
Unamortized deferred note issuance costs of $2.8 million
and $0.8 million were expensed due to this repurchase and
are included in interest expense in the Consolidated Statements
of Income in 2007 and 2006, respectively. Also, during 2007 and
2006, $20.0 million and $0.7 million of aggregate
principal amount of PolyOnes medium-term notes became due
and were paid, respectively.
As of December 31, 2007, 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. See Note N.
Guarantee Agreement 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.
POLYONE
CORPORATION 47
The weighted-average interest rate on short-term borrowings was
6.0% at December 31, 2007 and 4.9% at December 31,
2006. Total interest paid on long-term and short-term borrowings
was $45.7 million in 2007, $62.2 million in 2006 and
$63.5 million in 2005.
PolyOne is exposed to market risk from changes in interest rates
on debt obligations. PolyOne periodically enters into interest
rate swap agreements that modify its exposure to interest rate
risk by converting fixed-rate obligations to floating rates. At
December 31, 2007, PolyOne maintained interest rate swap
agreements on five of its fixed-rate obligations in the
aggregate amount of $80.0 million with a net fair value
liability of $1.7 million. At December 31, 2006,
PolyOne maintained interest rate swap agreements on six of its
fixed-rate obligations in the aggregate amount of
$100.0 million with a net fair value liability of
$5.1 million. The weighted-average interest rate for these
agreements was 8.8% at December 31, 2007 and 9.3% at
December 31, 2006. During January 2008, four of these
interest rate swap agreements in the aggregate amount of
$70.0 million were unwound.
The following table shows the interest rate impact of the swap
agreements during 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Effective
|
|
|
Effective
|
|
|
|
Interest Rate
|
|
|
Interest Rate
|
|
|
|
during 2007
|
|
|
during 2006
|
|
|
|
|
$80.0 million of medium-term notes with a weighted-average
interest rate of 6.76%
|
|
|
9.5
|
%
|
|
|
|
|
$100.0 million of medium-term notes with a weighted-average
interest rate of 6.83%
|
|
|
|
|
|
|
8.8
|
%
|
Note H.
LEASING ARRANGEMENTS
PolyOne leases certain manufacturing facilities, warehouse
space, machinery and equipment, automobiles and railcars under
operating leases. Rent expense was $20.9 million in 2007,
$20.5 million in 2006 and $19.3 million in 2005.
Future minimum lease payments under non-cancelable operating
leases with initial lease terms longer than one year at
December 31, 2007 were as follows: 2008
$17.4 million; 2009 $14.3 million;
2010 $11.8 million; 2011
$6.4 million; 2012 $4.7 million; and
thereafter $10.3 million.
Note I. SALE
OF ACCOUNTS RECEIVABLE
Accounts receivable at December 31 consist of the following:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Trade accounts receivable
|
|
$
|
169.8
|
|
|
$
|
160.7
|
|
Retained interest in securitized accounts receivable
|
|
|
175.8
|
|
|
|
161.6
|
|
Allowance for doubtful accounts
|
|
|
(4.8
|
)
|
|
|
(5.9
|
)
|
|
|
|
$
|
340.8
|
|
|
$
|
316.4
|
|
|
|
Under the terms of its receivables sale facility, PolyOne may
sell up to $200.0 million of its accounts receivable to
PolyOne Funding Corporation (PFC), a wholly owned,
bankruptcy-remote subsidiary. PFC, in turn, may sell an
undivided interest in these accounts receivable to certain
investors. As of December 31, 2007, $151.2 million was
available. The receivables sale facility was amended in June
2007 to extend the maturity of the facility to June 2012 and to,
among other things, modify certain financial covenants and
reduce the cost of utilizing the facility. In July 2007, the
Company entered into a Canadian receivables purchase agreement
which increased the facility by $25.0 million to
$200.0 million.
At December 31, 2007 and 2006, accounts receivable totaling
$175.8 million and $161.6 million, respectively, were
sold by PolyOne to PFC. 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,
2007 and December 31, 2006 PFC had not sold any of its
undivided interests in accounts receivable.
PolyOne retained an interest in the difference between the
amount of trade receivables sold by PolyOne to PFC and the
undivided interest sold by PFC as of December 31, 2007 and
2006. As a result, the interest retained by PolyOne is
$175.8 million and $161.6 million and is included in
accounts receivable on the Consolidated Balance Sheets at
December 31, 2007 and 2006, respectively.
The receivables sale facility also makes up to
$40.0 million available for the issuance of standby letters
of credit as a sub-limit within the $200.0 million limit
under the facility, of which $11.4 million was used at
December 31, 2007. Continued availability of the
receivables sale facility depends upon compliance with a fixed
charge coverage ratio covenant related primarily to operating
performance that is set forth in the related agreements. As of
December 31, 2007, 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
Income.
48 POLYONE
CORPORATION
Note J.
INVENTORIES
Components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
At FIFO or average cost, which approximates current cost:
|
|
|
|
|
|
|
|
|
Finished products and in process
|
|
$
|
169.5
|
|
|
$
|
165.4
|
|
Raw materials and supplies
|
|
|
100.1
|
|
|
|
111.7
|
|
|
|
|
|
269.6
|
|
|
|
277.1
|
|
Reserve to reduce certain inventories to LIFO cost basis
|
|
|
(46.2
|
)
|
|
|
(36.3
|
)
|
|
|
|
$
|
223.4
|
|
|
$
|
240.8
|
|
|
|
Note K.
PROPERTY
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Land and land improvements
|
|
$
|
40.3
|
|
|
$
|
39.8
|
|
Buildings
|
|
|
271.8
|
|
|
|
263.2
|
|
Machinery and equipment
|
|
|
903.6
|
|
|
|
854.9
|
|
|
|
|
|
1,215.7
|
|
|
|
1,157.9
|
|
Less accumulated depreciation and amortization
|
|
|
(766.0
|
)
|
|
|
(715.5
|
)
|
|
|
|
$
|
449.7
|
|
|
$
|
442.4
|
|
|
|
Depreciation expense was $55.3 million in 2007,
$55.0 million in 2006 and $48.0 million in 2005.
Note L.
OTHER BALANCE SHEET LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses
|
|
|
Non-current Liabilities
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Employment costs
|
|
$
|
46.4
|
|
|
$
|
49.5
|
|
|
$
|
13.1
|
|
|
$
|
12.7
|
|
Environmental
|
|
|
13.5
|
|
|
|
5.0
|
|
|
|
70.3
|
|
|
|
54.5
|
|
Taxes
|
|
|
2.8
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
Post-retirement benefits
|
|
|
9.9
|
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
3.6
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
4.7
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
Employee separation and plant phaseout
|
|
|
1.3
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
Insurance accruals
|
|
|
0.3
|
|
|
|
0.1
|
|
|
|
2.1
|
|
|
|
1.7
|
|
Other
|
|
|
11.9
|
|
|
|
8.7
|
|
|
|
2.0
|
|
|
|
6.5
|
|
|
|
|
$
|
94.4
|
|
|
$
|
93.1
|
|
|
$
|
87.5
|
|
|
$
|
75.4
|
|
|
|
Note M.
EMPLOYEE BENEFIT PLANS
PolyOne has 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 were closed to new participants as of December 31,
1999.
PolyOne also sponsors several unfunded defined-benefit
post-retirement plans that provide subsidized health care and
life insurance benefits to certain retirees and a closed group
of eligible employees. As of April 1, 2006, all
post-retirement health care plans are contributory. Retiree
contributions are adjusted periodically, and these plans contain
other cost-sharing features such as a maximum cap on the
Companys cost, deductibles and cost sharing. Life
insurance plans are generally non-contributory. Only certain
employees hired prior to December 31, 1999 are eligible to
participate in the Companys subsidized post-retirement
health care and life insurance plans.
PolyOne uses December 31 as the measurement date for all of its
plans. Effective December 31, 2007, PolyOne adopted the
RP-2000 projected by scale AA to 2008 mortality table to better
estimate the future liabilities under its defined-benefit
pension plans.
As discussed in Note C, the Company adopted the provisions
of SFAS No. 158 as of December 31, 2006 and,
accordingly, recognized an increase of $6.4 million on a
pre-tax basis and a decrease of $0.4 million on an
after-tax basis to its accumulated other comprehensive loss for
the unfunded status of its pension and post-retirement health
care benefit plans. In addition, PolyOne 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 Company also recognized
the prior service cost and net actuarial gains and losses of
these plans in accumulated other comprehensive income. Future
changes to the funded status of these plans will be recognized
through accumulated other comprehensive income (AOCI) in the
year the change occurs.
POLYONE
CORPORATION 49
The following table illustrates the impact of the adoption of
SFAS No. 158 on a pre-tax basis at December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Health Care
|
|
(In millions)
|
|
Benefits
|
|
|
Benefits
|
|
|
|
|
Before application of SFAS No. 158:
|
|
|
|
|
|
|
|
|
Assets
|
Prepaid cost
|
|
$
|
61.6
|
|
|
$
|
|
|
Intangible assets
|
|
|
0.1
|
|
|
|
|
|
Deferred income taxes
|
|
|
35.2
|
|
|
|
32.3
|
|
|
Liabilities and shareholders equity
|
Liability for pension benefits
|
|
|
167.5
|
|
|
|
109.6
|
|
AOCI
|
|
|
(124.4
|
)
|
|
|
|
|
Total shareholders equity
|
|
|
(124.4
|
)
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Assets
|
Prepaid cost
|
|
$
|
(60.9
|
)
|
|
$
|
|
|
Intangible assets
|
|
|
(0.1
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
0.6
|
|
|
|
6.2
|
|
|
Liabilities and shareholders equity
|
Liability for pension benefits
|
|
|
(37.9
|
)
|
|
|
(16.7
|
)
|
AOCI
|
|
|
(23.1
|
)
|
|
|
16.7
|
|
Change in AOCI related to adoption of SFAS No. 158 of
equity affiliate
|
|
|
|
|
|
|
(2.7
|
)
|
Total shareholders equity
|
|
|
(23.1
|
)
|
|
|
14.0
|
|
After application of SFAS No. 158:
|
|
|
|
|
|
|
|
|
Assets
|
Prepaid cost
|
|
$
|
0.7
|
|
|
$
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
35.8
|
|
|
|
38.5
|
|
|
Liabilities and shareholders equity
|
Liability for pension benefits
|
|
|
129.6
|
|
|
|
92.9
|
|
AOCI
|
|
|
(147.5
|
)
|
|
|
16.7
|
|
Change in AOCI related to adoption of SFAS No. 158 of
equity affiliate
|
|
|
|
|
|
|
(2.7
|
)
|
Total shareholders equity
|
|
|
(147.5
|
)
|
|
|
14.0
|
|
50 POLYONE
CORPORATION
The following tables present the change in benefit obligation,
change in plan assets and components of funded status for
defined-benefit pension and post-retirement health care benefit
plans. Actuarial assumptions that were used are also included.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Health Care Benefits
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation beginning of year
|
|
$
|
514.9
|
|
|
$
|
536.6
|
|
|
$
|
92.9
|
|
|
$
|
102.6
|
|
Service cost
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Interest cost
|
|
|
30.1
|
|
|
|
29.4
|
|
|
|
5.2
|
|
|
|
5.1
|
|
Participant contributions
|
|
|
|
|
|
|
|
|
|
|
5.6
|
|
|
|
6.3
|
|
Benefits paid
|
|
|
(36.8
|
)
|
|
|
(36.5
|
)
|
|
|
(12.1
|
)
|
|
|
(14.9
|
)
|
Plan amendments/settlements
|
|
|
0.1
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
Change in discount rate and other
|
|
|
(22.3
|
)
|
|
|
(16.8
|
)
|
|
|
(0.5
|
)
|
|
|
(6.6
|
)
|
|
Projected benefit obligation end of year
|
|
$
|
487.1
|
|
|
$
|
514.9
|
|
|
$
|
91.5
|
|
|
$
|
92.9
|
|
Projected salary increases
|
|
|
18.0
|
|
|
|
23.0
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
469.1
|
|
|
$
|
491.9
|
|
|
$
|
91.5
|
|
|
$
|
92.9
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets beginning of year
|
|
$
|
386.0
|
|
|
$
|
370.0
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
30.9
|
|
|
|
46.2
|
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
20.4
|
|
|
|
5.3
|
|
|
|
6.5
|
|
|
|
8.6
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
5.6
|
|
|
|
6.3
|
|
Benefits paid
|
|
|
(36.8
|
)
|
|
|
(36.5
|
)
|
|
|
(12.1
|
)
|
|
|
(14.9
|
)
|
Other
|
|
|
0.8
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
Plan assets end of year
|
|
$
|
401.3
|
|
|
$
|
386.0
|
|
|
$
|
|
|
|
$
|
|
|
|
|
Under-funded status at end of year
|
|
$
|
(85.8
|
)
|
|
$
|
(128.9
|
)
|
|
$
|
(91.5
|
)
|
|
$
|
(92.9
|
)
|
|
|
Plan assets of $401.3 million and $386.0 million at
December 31, 2007 and 2006, respectively, relate to
PolyOnes funded pension plans that have an accumulated
benefit obligation (ABO) of $428.7 million and
$443.3 million at December 31, 2007 and 2006,
respectively. As of December 31, 2007 and 2006, PolyOne is
90% and 83% funded, respectively, in regards to these plans and
their respective projected benefit obligation.
Amounts included in the Consolidated Balance Sheets are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Health Care Benefits
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Other non-current assets
|
|
$
|
1.5
|
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
|
|
Current liabilities
|
|
$
|
4.7
|
|
|
$
|
4.5
|
|
|
$
|
9.9
|
|
|
$
|
9.3
|
|
Long-term liabilities
|
|
$
|
82.6
|
|
|
$
|
125.1
|
|
|
$
|
81.6
|
|
|
$
|
83.6
|
|
Amounts recognized in AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Health Care Benefits
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Net loss
|
|
$
|
115.3
|
|
|
$
|
148.1
|
|
|
$
|
22.2
|
|
|
$
|
25.1
|
|
Prior service credit
|
|
|
(0.5
|
)
|
|
|
(0.6
|
)
|
|
|
(36.0
|
)
|
|
|
(41.8
|
)
|
Equity affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.7
|
|
|
|
|
$
|
114.8
|
|
|
$
|
147.5
|
|
|
$
|
(13.8
|
)
|
|
$
|
(14.0
|
)
|
|
|
POLYONE
CORPORATION 51
Change in AOCI under SFAS No. 158:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Health Care Benefits
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|