10-K
United States
Securities and Exchange Commission
Washington, DC 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, 2008
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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(Do not check if a smaller
reporting company)
Indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the
registrants outstanding common stock held by
non-affiliates on June 30, 2008, determined using a per
share closing price on that date of $6.97, as quoted on the New
York Stock Exchange, was $638,671,332.
The number of shares of common
stock outstanding as of February 19, 2009 was 92,356,154.
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
2009 Annual Meeting of Shareholders.
POLYONE
CORPORATION
PART I
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:
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the effect on foreign operations of currency fluctuations,
tariffs and other political, economic and regulatory risks;
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changes in polymer consumption growth rates where PolyOne
conducts business;
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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;
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fluctuations in raw material prices, quality and supply and in
energy prices and supply;
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production outages or material costs associated with scheduled
or unscheduled maintenance programs;
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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;
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an inability to achieve or delays in achieving or achievement of
less than the anticipated financial benefit from initiatives
related to PolyOnes specialization strategy, operational
excellence initiatives, cost reductions and employee
productivity goals;
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an inability to raise or sustain prices for products or services;
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an inability to maintain appropriate relations with unions and
employees;
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the possibility that the degradation in the North American
building and construction market is more severe than anticipated;
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the timing of plant closings in connection with the recently
announced manufacturing realignments;
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separation and severance amounts that differ from original
estimates because of the timing of employee terminations;
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amounts for non-cash charges relating to property, plant and
equipment that differ from the original estimates because of the
ultimate fair market value of such property, plant and equipment;
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amounts required for capital expenditures at remaining locations
changing based on the level of expenditures required to shift
production capacity;
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our ability to realize anticipated savings and operational
benefits from our realigning of assets, including those related
to closure of certain production facilities;
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disruptions, uncertainty or volatility in the credit markets
that may limit our access to capital;
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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
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other factors described in this Annual Report on
Form 10-K
under Item 1A, Risk Factors.
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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.
Business
Overview
We are a premier 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) resins. We also have three equity
investments: one in a manufacturer of caustic soda and chlorine;
one in a manufacturer of PVC
2 POLYONE
CORPORATION
compound products; and one 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 4,400 people and have
46 manufacturing sites and 11 distribution facilities in North
America, Europe and Asia, and joint ventures in North America
and South America. We offer more than 35,000 polymer
solutions to over 10,000 customers across the globe. In 2008, we
had sales of $2.7 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, 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 and construction materials, wire and cable,
transportation, 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
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 (TPE) compounds for consumer,
packaging and medical applications.
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 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, transportation, 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 transportation 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, electrostatic
3 POLYONE
CORPORATION
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 six reportable segments: International Color
and Engineered Materials; Specialty Engineered Materials;
Specialty Color, Additives and Inks; Performance Products and
Solutions; PolyOne Distribution; and Resin and Intermediates.
For more information about our segments, see Note 17,
Segment Information, to the accompanying consolidated
financial statements.
International
Color and Engineered Materials:
The 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 12 facilities in Europe (Belgium, France, Germany,
Hungary, Poland, Spain, Sweden and Turkey) and six facilities in
Asia (China, Singapore and Thailand).
Working in conjunction with our Specialty Color, Additives and
Inks and Specialty 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 $587.4 million, with
operating income of $20.4 million, in 2008 and total assets
of $341.2 million as of December 31, 2008.
Specialty
Engineered
Materials:
The Specialty 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 those
that currently employ traditional materials such as metal.
Specialty Engineered Materials product portfolio, one of
the broadest in our industry, includes standard and custom
formulated high-performance polymer compounds that are
manufactured using a full range of thermoplastic compounds and
elastomers, which are then combined with advanced polymer
additive, reinforcement, filler, colorant and biomaterial
technologies.
With a depth of compounding expertise, we are able to 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.
This segment also includes the business of GLS, which we
acquired in January 2008. GLS, which is headquartered in
McHenry, Illinois, is a global developer of innovative TPE with
facilities in North America, Europe and China, and offers
the broadest range of soft-touch TPE materials in the industry.
Our Specialty Engineered Materials segment had total sales of
$252.3 million, of which sales to external customers were
$223.0 million, with operating income of
$12.9 million, in 2008 and total assets of
$215.8 million as of December 31, 2008.
Specialty
Color, Additives and Inks:
The Specialty Color, Additives and Inks operating segment is a
leading provider of specialized color and additive concentrates
as well as inks and latexes.
Color and additive products include 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,
transportation, 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.
This segment also provides custom-formulated liquid systems that
meet a variety of customer needs and chemistries, including
vinyl, natural rubber and latex, polyurethane and silicone.
Products include proprietary fabric screen-printing inks and
latexes for
4 POLYONE
CORPORATION
diversified markets that range from recreational and athletic
apparel, construction and filtration to outdoor furniture and
healthcare. In addition, we have a 50% interest in BayOne
Urethane Systems, L.L.C. (BayOne), a joint venture between
PolyOne and Bayer Corporation, which sells liquid polyurethane
systems into many of the same markets.
Our Specialty Color, Additives and Inks segment had total sales
of $228.6 million, of which sales to external customers
were $225.8 million, with operating income of
$13.5 million, in 2008 and total assets of
$139.7 million as of December 31, 2008.
Performance
Products and Solutions:
The Performance Products and Solutions 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 Performance Products and
Solutions is generated in North America. However, production and
sales in Asia and Europe constitute a minor but growing portion
of this segment. In addition, we own 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, transportation,
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.
This operating segment also includes Producer Services, which
offers custom compounding services to resin producers and
processors that design and develop their own compound and
masterbatch recipes. 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 Performance Products and Solutions segment had total sales
of $1,001.4 million, of which sales to external customers
were $910.9 million, with operating income of
$34.9 million, in 2008 and total assets of
$321.8 million as of December 31, 2008.
PolyOne
Distribution:
The 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
$796.7 million, of which sales to external customers were
$791.6 million, with operating income of
$28.1 million, in 2008 and total assets of
$149.8 million as of December 31, 2008.
Resin and
Intermediates:
This segment consists almost entirely of our 50% equity interest
in SunBelt and our former 24% equity interest in OxyVinyls LP
(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
2008, 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,
building and construction and consumer products industries. We
report the results of our SunBelt joint venture under the equity
method.
Our Resin and Intermediates segment had operating income of
$28.6 million in 2008 and had total assets of
$7.3 million as of December 31, 2008. We also received
$29.5 million of cash from dividends and distributions from
our Resin and Intermediates segment equity affiliates in 2008.
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
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CORPORATION
principal factors affecting competition. 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 we
believe 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. We also
periodically obtain raw materials from foreign suppliers. See
discussion of risks associated with raw material supply and
costs in Item 1A. Risk Factors.
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 exist for
20 years if all fees are paid, 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. Our customer
returns are immaterial.
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, 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
$26.5 million in 2008, $21.6 million in 2007 and
$20.3 million in 2006. In 2009, we expect our investment in
research and development to increase moderately as we deploy
greater resources to focus on 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 1, 2009, we employed approximately
4,400 people. Approximately 83 employees were
represented by labor unions under collective bargaining
agreements that expire on July 31, 2010
(15 employees), October 31, 2010 (20 employees),
November 30, 2010 (15 employees), January 31,
2011 (29 employees) and May 31, 2013 (four employees).
We believe that relations with our employees are good, and we do
not anticipate significant
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CORPORATION
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 matters and any actions that may be required to
address them. This effort can result in process or operational
modifications, the installation of pollution control devices or
cleaning up grounds or facilities. We believe that we are in
material compliance with all applicable requirements.
We are strongly committed to safety as evidenced by our injury
incidence rate of 1.09 per 100 full-time workers per year
in 2008, an improvement from 1.14 in 2007. The 2007 average
injury incidence rate for our NAICS Code (326 Plastics and
Rubber Products Manufacturing) was 6.4.
In our operations, we must comply with product-related
governmental law and regulations affecting the plastics industry
generally and also with content-specific law, regulations and
non-governmental standards. We believe that compliance with
current governmental laws and regulations and with
non-governmental content-specific standards will not have a
material adverse effect on our financial position, results of
operations or cash flows. 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,
including those under the Restrictions on the Use of Certain
Hazardous Substances (RoHS) and the Consumer Product Safety
Information Act of 2008, the implementation of additional
content-specific standards, 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.
During 2004, the U.S. Environmental Protection Agency (EPA)
conducted multimedia audits at two of our facilities, pursuant
to which certain fines and penalties have been asserted by the
EPA. See Item 3., Legal Proceedings, for
additional information.
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.
Based on September 2007 court rulings (see Note 13,
Commitments and Related-Party Information, to the
accompanying 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 owned by 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 expenses of $14.6 million
in 2008, $48.8 million in 2007 and $2.5 million in
2006. Our environmental expense in 2008 was driven by higher
utility cost estimates necessary to support remediation. 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 $1.5 million in
2008 and $8.1 million in 2006. There were no insurance
recoveries in 2007. The insurance recoveries all related to
inactive or formerly owned sites.
We also conduct investigations and remediation at certain of our
active and inactive facilities and have assumed responsibility
for the resulting environmental liabilities from operations at
sites we or our predecessors formerly owned or operated. 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
as of December 31, 2008 on our accompanying consolidated
balance sheet totaling $84.6 million to cover probable
future environmental expenditures related to previously
contaminated sites. This figure represents our best estimate of
probable costs for remediation, based upon the information and
technology currently available and our view of the most likely
remedy.
7 POLYONE
CORPORATION
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, 2008. 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.
We expect cash paid for environmental remediation expenditures
will be approximately $14 million in 2009.
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 17, Segment Information, to the
accompanying consolidated financial statements, which is
incorporated by reference into this Item 1.
Where You Can
Find Additional Information
Our principal executive offices are located at 33587 Walker
Road, Avon Lake, Ohio 44012, and our telephone number is
(440) 930-1000.
We are subject to the information reporting requirements of the
Exchange Act, and, in accordance with these requirements, we
file annual, quarterly and other reports, proxy statements and
other information with the SEC relating to our business,
financial results and other matters. The reports, proxy
statements and other information we file may be inspected and
copied at prescribed rates at the SECs Public Reference
Room and via the SECs website (see below for more
information).
You may inspect a copy of the reports, proxy statements and
other information we file with the SEC, without charge, at the
SECs Public Reference Room, 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549, and you may obtain
copies of the reports, proxy statements and other information we
file with the SEC, from those offices for a fee. You may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
Our filings are available to the public at the SECs
website at
http://www.sec.gov.
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
(www.polyone.com, select Investors and then SEC
Edgar filings) 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, financial position, results of operations or cash
flows. 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, financial position, results of operations
or cash flows could be negatively affected.
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 financial position, results of
operations or cash flows.
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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If any of these factors occur, the demand for and supply of our
products and services could suffer, which would adversely affect
our financial position, results of operations and cash flows.
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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8 POLYONE
CORPORATION
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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 financial position, results of
operations or cash flows.
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 certain 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.
We may also incur additional costs and liabilities as a result
of increasingly strict environmental, safety and health laws,
regulations and related enforcement policies, including those
that restrict the use of lead and phthalates under the
Restriction on the Use of Certain Hazardous Substances (RoHS)
and the Consumer Product Safety Information Act of 2008.
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 financial
position, results of operations or cash flows.
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 2008, 37% in 2007 and 34% in 2006 of our total
revenue during these periods. Long-lived assets of our foreign
operations represented 31% in 2008, 34% in 2007 and 32% in 2006
of our total long-lived assets.
International operations are subject to risks, which include,
but are 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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9 POLYONE
CORPORATION
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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 (FCPA);
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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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In addition, we could be adversely affected by violations of the
FCPA and similar worldwide anti-bribery laws. The FCPA and
similar anti-bribery laws in other jurisdictions generally
prohibit companies and their intermediaries from making improper
payments to
non-U.S. officials
for the purpose of obtaining or retaining business. Our policies
mandate compliance with these anti-bribery laws. We operate in
many parts of the world that have experienced governmental
corruption to some degree and, in certain circumstances, strict
compliance with anti-bribery laws may conflict with local
customs and practices. We cannot assure you that our internal
controls and procedures always will protect us from the reckless
or criminal acts committed by our employees or agents. If we are
found to be liable for FCPA violations (either due to our own
acts or our inadvertence or due to the acts or inadvertence of
others), we could suffer from criminal or civil penalties or
other sanctions, which could have a material adverse effect on
our business.
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
position, results of operations or cash flows. 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 our strategic plan objectives may require, in
part, strategic acquisitions or joint ventures intended to
complement or expand our businesses globally or add product
technology that accelerates our specialization strategy, or
both. Success will depend on our 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 our strategic partners in
the joint ventures. Unexpected difficulties in completing and
integrating acquisitions with our existing operations and in
managing strategic investments could occur. Furthermore, we may
not realize the degree, or timing, of benefits initially
anticipated, which could adversely affect our business,
financial position, results of operations or cash flows.
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 position, results of operations or cash flows.
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 reductions 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 housing, transportation and
building and construction markets are impacted by changes in
North American demand in these sectors, which may be
significantly affected by changes in economic and other
conditions such as gross domestic product levels, employment
levels, demographic trends, legislative actions and consumer
confidence. These factors can lower the demand for and pricing
of our products, which could cause our net sales and net income
to decrease.
10 POLYONE
CORPORATION
We face
competition from other polymer and chemical companies, which
could adversely affect our sales, results of operations or cash
flows.
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.
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 financial position, results of
operations or 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 financial
position, results of operations or cash flows.
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
2% of our employees 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.
Adverse credit
market conditions may significantly affect our access to
capital, cost of capital and ability to meet liquidity
needs.
Disruptions, uncertainty or volatility in the credit markets may
adversely impact our ability to access credit already arranged
and the availability and cost of credit to us in the future.
These market conditions may limit our ability to replace, in a
timely manner, maturing liabilities and access the capital
necessary to grow and maintain our business. Accordingly, we may
be forced to delay raising capital, issue shorter tenors than we
prefer or pay unattractive interest rates, which could increase
our interest expense, decrease our profitability and
significantly reduce our financial flexibility. There can be no
assurances that government responses to the disruptions in the
financial markets will stabilize the markets or increase
liquidity and the availability of credit. Longer term
disruptions in the capital and credit markets as a result of
uncertainty, changing or increased regulation, reduced
alternatives or failures of significant financial institutions
could adversely affect our access to liquidity needed for our
business. Any disruption could require us to take measures to
conserve cash until the markets stabilize or until alternative
credit arrangements or other funding for our business needs can
be arranged. Such measures could include deferring capital
expenditures and reducing or eliminating future share
repurchases or other discretionary uses of cash. Overall, our
results of operations, financial condition and cash flows could
be materially adversely affected by disruptions in the credit
markets.
The current
global financial crisis may have significant effects on our
customers and suppliers that would result in material adverse
effects on our business and operating results.
The current global financial crisis, which has included, among
other things, significant reductions in available capital and
liquidity from banks and other providers of credit, substantial
reductions and fluctuations in equity and currency values
worldwide, and concerns that the worldwide economy may enter
into a prolonged recessionary period, may materially adversely
affect our customers access to capital or willingness to
spend capital on our products or their ability to pay for
products that they will order or have already ordered from us.
In addition, the current global financial crisis may materially
adversely affect our suppliers access to capital and
liquidity with which to maintain their inventories, production
levels and product quality, which could cause them to raise
prices or lower production levels.
Also, availability under our receivable sales facility may be
adversely impacted by credit quality and performance of our
customer accounts receivable. The availability under the
receivable sales facility is based on the amount of receivables
that meet the eligibility criteria of the receivable sales
facility. As receivable losses increase or credit quality
deteriorates, the amount of eligible receivables declines and,
in turn, lowers the availability under the facility.
These potential effects of the current global financial crisis
are difficult to forecast and mitigate. As a consequence, our
operating results for a particular period are difficult to
predict, and, therefore,
11 POLYONE
CORPORATION
prior results are not necessarily indicative of results to be
expected in future periods. Any of the foregoing effects could
have a material adverse effect on our business, results of
operations and financial condition.
We have a
significant amount of goodwill, and any future goodwill
impairment charges could adversely impact our results of
operations.
We completed the annual impairment review required by Financial
Accounting Standards Board (FASB) Statement No. 142,
Goodwill and Other Intangible Assets, as of
October 1, 2008 and determined that there was no
impairment. However, on February 5, 2009, our management
determined that a non-cash goodwill impairment charge of
$170.0 million related to our Geon Compounds and Specialty
Coatings businesses within the Performance Products and
Solutions segment would be required in the fourth quarter of
2008. This charge is preliminary based on managements best
estimates. Management expects to revise this charge during the
first quarter 2009 after completing a formal step-two test. As
of December 31, 2008, after the impact of the
$170.0 million impairment charge, we had goodwill remaining
of $163.9 million.
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 us to perform another
valuation analysis, as required under FASB Statement
No. 142, for some or all of our reporting units prior to
the next required annual assessment. These types of events and
the resulting analysis could result in additional charges for
goodwill, which could adversely impact our results of operations.
Low investment
performance by our pension plan assets may require us to
increase our pension liability and expense, which may require us
to fund a portion of our pension obligations and divert funds
from other potential uses.
We provide defined benefit pension plans to eligible employees.
Our pension expense and our required contributions to our
pension plans are directly affected by the value of plan assets,
the projected rate of return on plan assets, the actual rate of
return on plan assets and the actuarial assumptions we use to
measure our defined benefit pension plan obligations, including
the rate at which future obligations are discounted to a present
value, or the discount rate. As of December 31, 2008, for
pension accounting purposes, we assumed an 8.5% rate of return
on pension assets.
Lower investment performance of our pension plan assets
resulting from a decline in the stock market could significantly
increase the deficit position of our plans. Should the assets
earn an average return less than 8.5% over time, it is likely
that future pension expenses would increase.
We establish the discount rate used to determine the present
value of the projected and accumulated benefit obligation at the
end of each year based upon the available market rates for high
quality, fixed income investments. An increase in the discount
rate would reduce the future pension expense and, conversely, a
lower discount rate would raise the future pension expense.
Based on current guidelines, assumptions and estimates,
including stock market prices and interest rates, we anticipate
that we will be required to make a cash contribution of
approximately $10.6 million to our pension plans in 2009.
We cannot predict whether changing market or economic
conditions, regulatory changes or other factors will further
increase our pension expense or funding obligations, diverting
funds we would otherwise apply to other uses.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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We have no outstanding or unresolved comments from the staff of
the SEC.
As of February 1, 2009, we operated facilities in the
United States and internationally. Our corporate office is
located in Avon Lake, Ohio. We employ approximately
4,400 people and have 46 manufacturing sites and 11
distribution facilities in North America, Europe, and Asia, and
joint ventures in North America and South America. We own
substantially all of our manufacturing sites and lease our
distribution facilities. We believe that the quality and
production capacity of our facilities is sufficient to maintain
our competitive position for the foreseeable future. The
following table identifies the principal facilities of our
segments:
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Performance Products and
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International Color and
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Specialty Color, Additives
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Solutions
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Engineered Materials
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and Inks
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PolyOne Distribution
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Long Beach, California
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Assesse, Belgium
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Glendale, Arizona
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Livermore, California
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Kennesaw, Georgia
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Pudong (Shanghai), China
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Kennesaw,
Georgia(1)
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Rancho Cucamonga, California
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Henry, Illinois
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Shenzhen, China
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Suwanee,
Georgia(3)
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Denver, Colorado
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Terre Haute, Indiana
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Suzhou, China
|
|
Elk Grove Village, Illinois
|
|
Ayer, Massachusetts
|
Louisville, Kentucky
|
|
Tianjin,
China(3)
|
|
St. Louis, Missouri
|
|
Chesterfield Township, Michigan
|
Sullivan, Missouri
|
|
Cergy, France
|
|
Massillon, Ohio
|
|
Eagan, Minnesota
|
Pedricktown, New Jersey
|
|
Tossiat, France
|
|
Norwalk, Ohio
|
|
Statesville, North Carolina
|
Avon Lake, Ohio
|
|
Bendorf, Germany
|
|
Lehigh, Pennsylvania
|
|
Massillon, Ohio
|
North Baltimore, Ohio
|
|
Gaggenau, Germany
|
|
Vonore, Tennessee
|
|
La Porte, Texas
|
Clinton, Tennessee
|
|
Melle, Germany
|
|
Shenzhen,
China(1)
|
|
Fife, Washington
|
Dyersburg, Tennessee
|
|
Gyor, Hungary
|
|
Widnes,
England(1)
|
|
Mississauga, Ontario, Canada
|
Pasadena, Texas
|
|
Kutno, Poland
|
|
Toluca, Mexico
|
|
(11 distribution facilities)
|
Seabrook, Texas
|
|
Jurong, Singapore
|
|
(8 manufacturing plants)
|
|
|
Niagara Falls, Ontario,
|
|
Barbastro, Spain
|
|
|
|
|
Canada(4)
|
|
Pamplona, Spain
|
|
Specialty
|
|
Resin and Intermediates
|
Orangeville, Ontario, Canada
|
|
Angered, Sweden
|
|
Engineered Materials
|
|
SunBelt joint venture
|
St. Remi de Napierville,
|
|
Bangkok, Thailand
|
|
McHenry, Illinois
|
|
McIntosh,
Alabama(2)
|
Quebec, Canada
|
|
Istanbul, Turkey
|
|
Avon Lake, Ohio
|
|
|
Dongguan, China
|
|
(17 manufacturing plants)
|
|
Dyersburg,
Tennessee(1)
|
|
|
Shenzhen,
China(1)
|
|
|
|
Seabrook,
Texas(1)
|
|
|
Geon Polimeros joint venture
|
|
|
|
Suzhou, China
|
|
|
Cartagena,
Columbia(2)
|
|
|
|
Gaggenau,
Germany(1)
|
|
|
Widnes, England
|
|
|
|
Jurong,
Singapore(1)
|
|
|
(18 manufacturing plants)
|
|
|
|
Barbastro, Spain
(1)
|
|
|
|
|
|
|
(3 manufacturing plants)
|
|
|
|
|
|
(1) |
|
Facility is not included in
manufacturing plants total as it is also included as part of
another segment.
|
|
(2) |
|
Facility is shared as part of a
joint venture, not included in manufacturing plants total.
|
|
(3) |
|
Facility is not included in
manufacturing plants total as it is a design center/lab.
|
|
(4) |
|
As part of the restructuring
actions announced in January 2009, the Niagara, Ontario facility
will be closed during 2009.
|
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
During 2004, the U.S. Environmental Protection Agency (EPA)
conducted multimedia inspections at our polyvinyl chloride
manufacturing facilities located in Henry, Illinois and
Pedricktown, New Jersey. In December 2007, the EPA met with the
Company for the first time since those inspections to discuss
possible violations of the Clean Air Act, the Clean Water Act
and the Resource Conservation and Recovery Act at each of the
Henry, Illinois and Pedricktown, New Jersey facilities.
Discussions between representatives for the Company and EPA
occurred in 2008, during which we provided additional
information as well as our position regarding the compliance
status of the facilities. In January 2009, we received a letter
from the EPA proposing a resolution of any violations identified
as a result of the 2004 inspection that would include our
payment of a penalty in the amount of $1.3 million. We plan
to continue discussions with the EPA seeking to resolve any
possible violations on a mutually agreed basis.
In addition to the matters regarding the environment described
above and 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
position, results of operations or cash flows.
|
|
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 2008.
EXECUTIVE
OFFICERS OF THE REGISTRANT
(Included pursuant to Instruction 3 to paragraph
(b) of Item 401 of
Regulation S-K)
Executive officers are elected by our Board of Directors to
serve one-year terms. The following table lists the name of each
person
13 POLYONE
CORPORATION
currently serving as an executive officer of our company, his
age as of February 23, 2009 and his current position with
our company:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
|
Stephen D. Newlin
|
|
|
56
|
|
|
Chairman, President and Chief Executive Officer
|
Robert M. Patterson
|
|
|
36
|
|
|
Senior Vice President and Chief Financial Officer
|
Bernard P. Baert
|
|
|
59
|
|
|
Senior Vice President and General Manager, Color and Engineered
Materials, Europe and Asia
|
Michael E. Kahler
|
|
|
51
|
|
|
Senior Vice President, Commercial Development
|
Thomas J. Kedrowski
|
|
|
50
|
|
|
Senior Vice President, Supply Chain and Operations
|
Michael L. Rademacher
|
|
|
58
|
|
|
Senior Vice President and General Manager, Distribution
|
Robert M. Rosenau
|
|
|
54
|
|
|
Senior Vice President and General Manager, Performance Products
and Solutions
|
Kenneth M. Smith
|
|
|
54
|
|
|
Senior Vice President, Chief Information and Human Resources
Officer
|
Stephen D. Newlin: 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.
Robert M. Patterson: Senior Vice President and Chief
Financial Officer, May 2008 to date. Vice President and
Treasurer of Novelis, Inc. (an aluminum rolled products
manufacturer) from 2007 to May 2008. Vice President, Controller
and Chief Accounting Officer of Novelis from 2006 to 2007.
Mr. Patterson served as Vice President and Segment Chief
Financial Officer, Thermal and Flow Technology Segments of SPX
Corporation (a multi-industry manufacturer and developer) from
2005 to 2006 and as Vice President and Chief Financial Officer,
Cooling Technologies and Services of SPX from 2004 to 2005.
Mr. Patterson served as Vice President and Chief Financial
Officer of Marley Cooling Tower Company, a cooling tower
manufacturer and subsidiary of SPX, from 2002 to 2004.
Bernard P. Baert: Senior Vice President and General
Manager, Color 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.
Michael E. Kahler: 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: Senior Vice President, Supply Chain
and 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: 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: Senior Vice President and General
Manager, Performance Products and Solutions, June 2008 to date,
Senior Vice President and General Manager, Vinyl Business, May
2006 to June 2008. Vice President and General Manager, Vinyl
Compounds, 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: Senior Vice President, 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.
14 POLYONE
CORPORATION
PART II
|
|
ITEM 5.
|
MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
|
The following table sets forth the range of the high and low
sale prices for our common stock, $0.01 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Quarters
|
|
|
2007 Quarters
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
|
Common stock price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
6.39
|
|
|
$
|
8.57
|
|
|
$
|
8.23
|
|
|
$
|
7.15
|
|
|
$
|
8.60
|
|
|
$
|
9.29
|
|
|
$
|
7.59
|
|
|
$
|
7.76
|
|
Low
|
|
$
|
2.33
|
|
|
$
|
6.26
|
|
|
$
|
6.30
|
|
|
$
|
5.11
|
|
|
$
|
5.93
|
|
|
$
|
6.93
|
|
|
$
|
6.14
|
|
|
$
|
5.99
|
|
As of February 19, 2009, there were 2,606 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
position, results of operations and cash flows. 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.
The table below sets forth information regarding repurchases of
our common shares during the fourth quarter of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Shares that May Yet
|
|
|
|
Total Number of
|
|
|
Average Price Paid
|
|
|
Part of Publicly
|
|
|
be Purchased Under
|
|
Period
|
|
Shares Purchased
|
|
|
Per Share
|
|
|
Announced Program
|
|
|
the
Program(1)
|
|
|
|
|
October 1 to October 31
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
9,000,000
|
|
November 1 to November 30
|
|
|
250,000
|
|
|
|
3.86
|
|
|
|
250,000
|
|
|
|
8,750,000
|
|
December 1 to December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,750,000
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
250,000
|
|
|
$
|
3.86
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On August 18, 2008, our Board
of Directors approved a stock repurchase program authorizing us,
depending upon market conditions and other factors, to
repurchase up to 10.0 million shares of our common stock,
in the open market or in privately negotiated transactions.
|
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
You should refer to Item 7., Managements
Discussion and Analysis of Financial Condition and Results of
Operations, in Part II of this Annual Report on
Form 10-K
and the notes to our accompanying consolidated financial
statements for additional information regarding the financial
data presented below, including matters that might cause this
data not to be indicative of our future financial condition,
results of operations or cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Sales
|
|
$
|
2,738.7
|
|
|
$
|
2,642.7
|
|
|
$
|
2,622.4
|
|
|
$
|
2,450.6
|
|
|
$
|
2,267.7
|
|
Operating (loss) income
|
|
$
|
(129.3
|
)
|
|
$
|
33.9
|
|
|
$
|
190.6
|
|
|
$
|
141.3
|
|
|
$
|
129.1
|
|
(Loss) income before discontinued operations
|
|
$
|
(272.9
|
)
|
|
$
|
11.4
|
|
|
$
|
125.6
|
|
|
$
|
63.2
|
|
|
$
|
28.3
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
(15.3
|
)
|
|
|
(4.1
|
)
|
|
Net income (loss)
|
|
$
|
(272.9
|
)
|
|
$
|
11.4
|
|
|
$
|
122.9
|
|
|
$
|
47.9
|
|
|
$
|
24.2
|
|
|
|
Basic and diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before discontinued operations
|
|
$
|
(2.94
|
)
|
|
$
|
0.12
|
|
|
$
|
1.36
|
|
|
$
|
0.69
|
|
|
$
|
0.31
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
(0.17
|
)
|
|
|
(0.05
|
)
|
|
Basic and diluted (loss) earnings per common share
|
|
$
|
(2.94
|
)
|
|
$
|
0.12
|
|
|
$
|
1.33
|
|
|
$
|
0.52
|
|
|
$
|
0.26
|
|
|
|
Dividends per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
Total assets
|
|
$
|
1,277.7
|
|
|
$
|
1,583.0
|
|
|
$
|
1,780.8
|
|
|
$
|
1,695.3
|
|
|
$
|
1,753.1
|
|
Long-term debt, net of current portion
|
|
$
|
408.3
|
|
|
$
|
308.0
|
|
|
$
|
567.7
|
|
|
$
|
638.7
|
|
|
$
|
640.5
|
|
15 POLYONE
CORPORATION
In February 2006, we sold 82% of our Engineered Films business.
This business was previously reported as discontinued operations
and is recognized as such in our historical results. The
retained ownership of 18% is reported on the cost method of
accounting and is recognized in our accompanying consolidated
financial statements as such.
In August 2004, we sold our Elastomers and Performance Additives
business. This business was previously reported as a
discontinued operation and is recognized as such in our
historical results.
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
Managements Discussion and Analysis of Financial Condition
and Results of Operations (MD&A) is designed to provide
information that is supplemental to, and should be read together
with, our consolidated financial statements and the accompanying
notes contained in this Annual Report on
Form 10-K.
Information in this Item 7 is intended to assist the reader
in obtaining an understanding of our consolidated financial
statements, the changes in certain key items in those financial
statements from year to year, the primary factors that accounted
for those changes, and any known trends or uncertainties that we
are aware of that may have a material effect on our future
performance, as well as how certain accounting principles affect
our consolidated financial statements. MD&A includes the
following sections:
|
|
|
|
|
Business Model and Key Concepts
|
|
|
|
Key Challenges
|
|
|
|
Strategy and Key Trends
|
|
|
|
Recent Developments
|
|
|
|
|
|
Highlights and Executive Summary
|
|
|
|
Outlook Update
|
|
|
|
Results of Operations an analysis of our
consolidated results of operations for the three years presented
in our consolidated financial statements
|
|
|
|
Liquidity and Capital Resources an analysis of the
effect of our operating, financing and investing activities on
our liquidity and capital resources
|
|
|
|
Off-Balance Sheet Arrangements a discussion of such
commitments and arrangements
|
|
|
|
Contractual Obligations a summary of our aggregate
contractual obligations
|
|
|
|
Critical Accounting Policies and Estimates a
discussion of accounting policies that require significant
judgments and estimates
|
|
|
|
New Accounting Pronouncements a summary and
discussion of our plans for the adoption of new accounting
standards relevant to us
|
The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs. Our actual
results could differ materially from those discussed in these
forward-looking statements. Factors that could cause or
contribute to these differences include, but are not limited to,
those discussed below and elsewhere in this Annual Report on
Form 10-K
particularly in Special Note Regarding Forward-Looking
Statements and Item 1A. Risk Factors.
Our
Business
We are a premier 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. We also have three equity investments: one in a
manufacturer of caustic soda and chlorine; one in a manufacturer
of PVC compound products; and one in a formulator of
polyurethane compounds. Headquartered in Avon Lake, Ohio, with
2008 sales of $2.7 billion, we have manufacturing sites and
distribution facilities in North America, Europe and Asia and
joint ventures in North America and South America. We currently
employ approximately 4,400 people and offer more than
35,000 polymer solutions to over 10,000 customers across the
globe. 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).
Business Model
and Key Concepts
The central focus of our business model is to provide
specialized material and service solutions to our customers by
leveraging our global footprint, product and technology breadth,
manufacturing expertise, fully integrated information technology
network, broad market reach and raw material procurement
strength. These resources enable us to capitalize on dynamic
changes in the end markets we serve, which include appliances,
building and construction materials, electrical and electronics,
healthcare, industrial, packaging, transportation, and wire and
cable markets.
Key
Challenges
Overall, our business faces a number of issues resulting from
the continued economic downturn, especially as it relates to
critically affected markets such as building and construction
and transportation. Improving profitability during periods of
raw material price volatility is another critical challenge.
Further, we need to capitalize on the opportunity to accelerate
development of products that meet a growing body of
environmental laws and regulations such as lead and phthalate
restrictions inherent in the Restrictions on the use of Certain
Hazardous Substances (RoHS) and the Consumer Product Safety
Information Act of 2008.
16 POLYONE
CORPORATION
Strategy and
Key Trends
To address these challenges and achieve our vision, we have
implemented a strategy with four core components:
specialization, globalization, operational excellence and
commercial excellence. Specialization differentiates us through
products, services, technology, and solutions that add value.
Globalization takes us into growth markets to service our
customers with consistency wherever their operations might be.
Operational excellence empowers us to respond to the voice of
the customer while focusing on continuous improvement.
Commercial excellence enables us to deliver value to customers
by supporting their growth and profitability.
In the short-term, we are increasing our focus on improving
working capital, preserving liquidity and increasing cash flow.
In addition to continuing to drive margin improvement, we have
established working capital improvement targets for all
businesses. In 2009, most of our capital expenditures will be
focused on maintenance spending plus implementing the two
restructuring initiatives previously announced and short payback
projects of about a year or less. These actions will ensure that
we continue to invest in capabilities that advance the pace of
our transformation but do not adversely impact our liquidity.
Our other areas of focus are cost reductions, capacity
reductions and ensuring we have right sized the business for
current projected demand. The two restructuring initiatives we
have announced underscore this focus. We are also deploying an
enterprise-wide Lean Six Sigma program directed at improving
profitability and cash flow by applying proven management
techniques and strategies to key areas of the business, such as
pricing, supply chain and operations management, productivity
and quality.
Long term trends that currently provide opportunities to
leverage our strategy include the drive toward sustainability in
polymers and their processing, the emergence of biodegradable
and bio-based polymers, consumer concern over the use of
bisphenol-A (BPA) in infant-care products and developing
legislation that bans lead and certain phthalates from toys and
child-care items.
Recent
Developments
Pension
plan changes
On January 15, 2009, the Chair of our Compensation and
Governance Committee, pursuant to authority delegated to him by
our Board of Directors, approved and adopted changes to the Geon
Pension Plan (Geon Plan), the Benefit Restoration Plan (BRP),
the voluntary retirement savings plan (RSP) and the Supplemental
Retirement Benefit Plan (SRP). Effective March 20, 2009,
the amendments to the Geon Plan and the BRP permanently freeze
future benefit accruals and provide that participants will not
receive credit under the Geon Plan or the BRP for any eligible
earnings paid on or after that date. All accrued benefits under
the Geon Plan and the BRP will remain intact, and service
credits for vesting and retirement eligibility will continue in
accordance with the terms of the Geon Plan and the BRP. The
amendments to the RSP and SRP provide that transition
contributions under the RSP and the SRP will be eliminated after
March 20, 2009. These actions are expected to reduce our
2009 annual benefit expense by $3.7 million and future
pension fund contribution requirements by $20 million.
Restructuring
initiatives and facility closures
In July 2008, we announced the restructuring of certain
manufacturing assets, primarily in North America. We are closing
certain production facilities, including seven in North America
and one in the United Kingdom, resulting in a net reduction of
approximately 150 positions. The production facilities
closings are part of our focus on both the operational
excellence and specialization component of our transformation
strategy. This realignment improves the competitiveness of our
operations and supply chain across many product lines and
businesses, consistent with current and anticipated customer
requirements. We expect to incur one-time pre-tax charges of
approximately $28 million related to these actions, of
which $20.0 million has been recorded during 2008. In
total, these one-time charges will include cash costs of
approximately $15 million related to severance and site
closure costs with the remaining $13 million of non-cash
costs related to asset write-downs and accelerated depreciation,
of which $10.0 million has been recorded during 2008. We
expect these actions will deliver pre-tax savings of
approximately $17 million on an annualized run-rate basis.
In January 2009, we announced that we will enact further cost
saving measures that include eliminating approximately 370 jobs
worldwide, implementing reduced work schedules for another 100
to 300 employees, closing our Niagara, Ontario facility and
idling certain other capacity. Additionally, we are planning
other actions that include freezing corporate officer salaries
throughout 2009. We expect to incur one-time pre-tax charges of
approximately $45 million related to these actions, of
which $18.3 million has been recorded during the fourth
quarter of 2008. In total, these one-time charges include cash
costs of approximately $35 million related to severance and
site closure costs with the remaining $10 million of
non-cash costs related to asset write-downs and accelerated
depreciation. We expect these actions will deliver pre-tax
savings of approximately $40 million on an annualized
run-rate basis.
See Note 4, Employee Separation and Plant Phaseout,
to the accompanying consolidated financial statements for more
detailed information related to these restructuring actions.
New Banking
Relationship
In November 2008, we began transitioning various treasury
management services from Citicorp USA to Bank of America.
Implementation of new services is expected to be completed in
March 2009. Services being transitioned to Bank of America
include a corporate credit card program, foreign exchange
hedging, operation of a European cash pool, and administration
of our international finance subsidiary.
17 POLYONE
CORPORATION
Share
repurchases
In August 2008, our Board of Directors approved a stock
repurchase program authorizing us, depending upon market
conditions and other factors, to repurchase up to
10.0 million shares of our common stock, in the open market
or in privately negotiated transactions.
During 2008, we repurchased 1.25 million shares of common
stock under this program at an average price of $7.12 per common
share for approximately $8.9 million. There are
8.75 million shares available for repurchase under the
program at December 31, 2008.
Formation
of PolyOne companies in Japan and India
In July 2008, we formed PolyOne Japan Kabushiki Kaisha (PolyOne
Japan Ltd.). The new company, which includes an office in Tokyo
staffed with a business development manager for Japan, is
focused on gaining specification with Japanese original
equipment manufacturers (OEMs) and importing products for use by
Japanese polymer processors. During the same month, we
established PolyOne Polymers India Pvt. Ltd. to import,
manufacture and sell PolyOne products in India and neighboring
markets from new production and lab facilities located in
Mumbai. This company provides us with strategic regional access
to many large OEMs and polymer processors.
Purchase of
GLS business
In January 2008, we acquired 100% of the outstanding capital
stock of GLS, the leading North American provider of TPE
compounds for consumer, packaging and medical applications for a
cash purchase price of $148.9 million including acquisition
costs and net of cash received. The acquisition complements our
global Engineered Materials business portfolio and accelerates
our shift to specialization by combining GLSs specialty
TPE technology, compounding expertise and brands with our
extensive global infrastructure and commercial presence.
Development
agreements signed
Several agreements with technology partners were signed in 2008.
We established a market development agreement with Eastman
Chemical Company designating PolyOne as the exclusive compounder
of filled systems with Eastmans new-generation
TritanTM
copolyester in North America. We can now combine Eastman
TritanTM
copolyester with performance-enhancing additives to develop
fully compounded systems that offer a BPA-free alternative to
polycarbonate. We began a formal collaboration agreement with
Archer Daniels Midland to help develop bio-based plasticizers
for use in polymer formulations, which builds on our earlier
license agreement with Battelle concerning bio-plasticizer
technology. Our TPE business completed an agreement with The Dow
Chemical Company to compound thermoplastic elastomer materials
based on Dows Infuse OBC Olefin Block Copolymers.
Sustainability
strategy defined
During 2008, we issued our Sustainability Promise and No
Surprises
PledgeSM
to assure customers that we are dedicated to solutions that are
environmentally responsible. To further support this
sustainability commitment, we defined a set of standards from
which we established a family of products and services branded
PolyOne Sustainable Solutions. These brands meet
criteria for renewability, recyclability, reusability,
eco-conscious composition and resource efficiency. In September
2008, we received the Frost & Sullivan Green
Excellence of the Year Award for our work in sustainability.
Highlights and
Executive Summary
2008 proved to be a volatile year for our company. The year
began with a sense that the U.S. housing market would reach
a bottom in late 2008 or early 2009 with the United States
entering a mild recession, and Europe and Asia experiencing only
a moderate economic slowdown. During the first half of the year,
raw material and energy costs rapidly escalated and in
mid-summer oil approached a high of nearly $150 per barrel. In
July 2008, we announced a manufacturing realignment to reduce
capacity and headcount, primarily in North America. Around the
same time, we saw the first signs of weakness in Europe. In
September, credit markets came to a stand still as the
U.S. government searched for a solution to the banking
crisis. The financial markets reacted unfavorably to all of this
news and sent equity markets to lows not seen since 2003. With
this global economic backdrop, our customers immediately reduced
demand. In the fourth quarter of 2008, our year-over-year sales
declined $89.5 million, or 14.2%. Volume declined 24%.
Lower raw material costs offered some relief but were not enough
to offset the significant declines in demand. Fourth quarter
2008 operating income was a loss of $174.7 million which
included a $170 million goodwill impairment charge and a
portion of the pre-tax costs of a second restructuring
initiative announced in January 2009, of which
$18.3 million was recorded in the fourth quarter. In the
fourth quarter of 2008, we increased valuation allowances
against our deferred tax assets by $166.7 million. The
non-cash charge to income tax expense consists of
$104.5 million related to U.S. federal and state and
local deferred tax assets and $1.4 million related to
foreign deferred tax assets. $60.8 million related to
pension and post-retirement health care liabilities was recorded
as a reduction of accumulated other comprehensive income.
Despite the challenging economic conditions, 2008 was a year of
continuing progress in the transformation of PolyOne.
Significant declines in demand required us to take aggressive
actions that we had not planned at the outset of 2008, however,
the benefits of such actions will be significant in terms of
their positive impact on our future profitability and attainment
of our transformation goals.
Selected financial data, a discussion of the aforementioned
impact of these events on PolyOne, and a comparative review of
performance in 2008 and 2007 versus prior years are provided
below. An outlook update is provided thereafter.
18 POLYONE
CORPORATION
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Sales
|
|
$
|
2,738.7
|
|
|
$
|
2,642.7
|
|
|
$
|
2,622.4
|
|
Operating income
|
|
$
|
(129.3
|
)
|
|
$
|
33.9
|
|
|
$
|
190.6
|
|
Net income (loss)
|
|
$
|
(272.9
|
)
|
|
$
|
11.4
|
|
|
$
|
122.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44.3
|
|
|
$
|
79.4
|
|
|
$
|
66.2
|
|
Accounts Receivable Availability
|
|
|
121.4
|
|
|
|
151.2
|
|
|
|
111.5
|
|
|
Liquidity
|
|
$
|
165.7
|
|
|
$
|
230.6
|
|
|
$
|
177.7
|
|
|
|
Debt, short- and long-term
|
|
$
|
434.3
|
|
|
$
|
336.7
|
|
|
$
|
595.4
|
|
2008 vs.
2007
Aggregate sales increased $96.0 million, or 3.6%, in 2008
as compared to 2007. The acquisition of GLS, favorable impact
from foreign exchange and higher prices driven by an improved
sales mix and the result of offsetting rising raw material and
energy costs helped counterbalance the adverse impact of lower
volume driven by a significant slowing in global economic
activity in the late third quarter and the fourth quarter of
2008. This turndown in economic activity and the underlying
financial credit crisis that precipitated it had a significant
negative impact on our businesses, particularly the Performance
Products and Solutions segment. The International Color and
Engineered Materials business, while benefiting from favorable
foreign exchange rates, saw demand contract in the third quarter
and then more dramatically in the fourth quarter of 2008 as the
economies in Europe and Asia slowed and declining exports from
Asia offset any sales increase during the prior quarters in 2008.
Operating income declined by $163.2 million driven by a
$170 million goodwill impairment charge taken in the fourth
quarter of 2008, $39.7 million of restructuring charges,
and year-over-year declines in Performance Products and
Solutions and International Color and Engineered Materials
segment operating income. The acquisition of GLS, margin and mix
improvements and the impact from foreign exchange were favorable
items that partially offset the overall decrease.
The $284.3 million decline in net income was due to the
items described previously and the recording of a
$105.9 million tax valuation allowance. See Note 15,
Income Taxes, in the accompanying consolidated financial
statements for a more detailed discussion.
Liquidity declined $64.9 million due to a lower available
pool of receivables to borrow against and a year-over-year
decline in cash and cash equivalents driven by a higher
investment in working capital, pension funding, and lower
dividends from our equity affiliates. The increase in total debt
resulted from the financing activities necessary to support the
acquisition of GLS.
2007 vs.
2006
Aggregate sales increased $20.3 million, or 0.8%, in 2007
compared to 2006. This increase was primarily due to sales
growth in Asia, higher prices necessary to offset increased raw
material and energy costs, and the impact of favorable exchange
rates. Offsetting these favorable items was an 8.3% and 6.8%
decline in sales in our Specialty Color, Additives and Inks, and
Performance Products and Solutions segments, respectively. These
declines were due mainly to the pruning of unprofitable business
and the slowdown in the North American building and construction
market. Operating income declined 82.2% as a result of the
impact of the slowdown in the North American building and
construction and margin compression in our Performance Products
and Solutions and Resin and Intermediates segments. In 2007, we
also recorded environmental remediation and impairment charges
and legal settlements of $68.3 million as compared to a
benefit of $20.6 million of similar items in 2006. The
$52.9 million increase in liquidity was driven by a larger
eligible pool of receivables for securitization and an increase
in cash and cash equivalents due to a year-over-year improvement
in working capital of $70.5 million, a favorable foreign
exchange impact of $6.6 million on cash, and the sales of
assets. The year-over-year decline in debt was primarily due to
the repurchase of $241.4 million aggregate principal amount
of our 10.625% senior notes due 2010 at a premium of
$12.8 million. This repurchase transaction was financed by
the sale of our 24% ownership interest in OxyVinyls in the third
quarter of 2007.
Outlook
Update
It appears that 2009 will be a challenging year as we project
sales will fall below 2008 levels. We expect continued economic
weakness in the near term and accordingly we have taken actions
to reduce capacity and costs. In July of 2008 we announced our
manufacturing realignment and the related closure of eight
facilities. As the economy has deteriorated further and the
downturn extended internationally, we determined that another
phase of cost reductions would be necessary to ensure that
PolyOne remains competitive. In January 2009 we announced those
additional actions that included eliminating 370 jobs worldwide;
implementing reduced work schedules for another 100 to
300 employees based on demand; closing our Niagara, Ontario
facility and idling certain other capacity. Additionally and
among other actions, we have announced that we have frozen
corporate officer salaries throughout 2009 and deferred other
salary adjustments. Combined, the Company expects all of the
aforementioned actions will deliver pre-tax savings of
approximately $57 million on an annualized run-rate basis.
While we are not altering our four-pillar strategy, our pace of
investment in the business has slowed. In 2009, our focus will
be on improving free cash flow and reducing working capital
investment to preserve liquidity. Our capital expenditures will
be focused on maintenance spending plus implementing the two
restructuring initiatives previously described.
We have a very limited amount of immediate or near term debt
payment obligations and our only immediate long-term debt
payment requirements are the medium term notes of which
$20 million is due in both 2009 and 2010. We expect pension
plan expense to increase approximately $27 million over
2008 due to a 30% decline
19 POLYONE
CORPORATION
in pension asset values during 2008. The required level of
funding in 2009 will be approximately $11 million for
pension obligations.
In addition to changes in broader economic conditions, raw
material and energy costs are expected to remain volatile and
could impact the magnitude and direction of our preliminary
viewpoint.
Results of
Operations
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 2, Discontinued
Operations, in the accompanying consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VariancesFavorable (Unfavorable)
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 versus 2007
|
|
|
2007 versus 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
(Dollars in millions, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
|
Change
|
|
|
Change
|
|
|
|
|
Sales
|
|
$
|
2,738.7
|
|
|
$
|
2,642.7
|
|
|
$
|
2,622.4
|
|
|
$
|
96.0
|
|
|
|
3.6
|
%
|
|
$
|
20.3
|
|
|
|
0.8
|
%
|
Cost of sales
|
|
|
2,442.1
|
|
|
|
2,381.7
|
|
|
|
2,321.9
|
|
|
|
(60.4
|
)
|
|
|
(2.5
|
)%
|
|
|
(59.8
|
)
|
|
|
(2.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
296.6
|
|
|
|
261.0
|
|
|
|
300.5
|
|
|
|
35.6
|
|
|
|
13.6
|
%
|
|
|
(39.5
|
)
|
|
|
(13.1
|
)%
|
Selling and administrative
|
|
|
287.1
|
|
|
|
254.8
|
|
|
|
221.9
|
|
|
|
(32.3
|
)
|
|
|
(12.7
|
)%
|
|
|
(32.9
|
)
|
|
|
(14.8
|
)%
|
Impairment of goodwill
|
|
|
170.0
|
|
|
|
|
|
|
|
|
|
|
|
(170.0
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
Income from equity affiliates and minority interest
|
|
|
31.2
|
|
|
|
27.7
|
|
|
|
112.0
|
|
|
|
3.5
|
|
|
|
12.6
|
%
|
|
|
(84.3
|
)
|
|
|
(75.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(129.3
|
)
|
|
|
33.9
|
|
|
|
190.6
|
|
|
|
(163.2
|
)
|
|
|
(481.4
|
)%
|
|
|
(156.7
|
)
|
|
|
(82.2
|
)%
|
Interest expense, net
|
|
|
(37.2
|
)
|
|
|
(46.9
|
)
|
|
|
(63.1
|
)
|
|
|
9.7
|
|
|
|
20.7
|
%
|
|
|
16.2
|
|
|
|
25.7
|
%
|
Premium on early extinguishment of long-term debt
|
|
|
|
|
|
|
(12.8
|
)
|
|
|
(4.4
|
)
|
|
|
12.8
|
|
|
|
100.0
|
%
|
|
|
(8.4
|
)
|
|
|
(190.9
|
)%
|
Other expense, net
|
|
|
(4.6
|
)
|
|
|
(6.6
|
)
|
|
|
(2.8
|
)
|
|
|
2.0
|
|
|
|
30.3
|
%
|
|
|
(3.8
|
)
|
|
|
(135.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and discontinued operations
|
|
|
(171.1
|
)
|
|
|
(32.4
|
)
|
|
|
120.3
|
|
|
|
(138.7
|
)
|
|
|
(428.1
|
)%
|
|
|
(152.7
|
)
|
|
|
(126.9
|
)%
|
Income tax (expense) benefit
|
|
|
(101.8
|
)
|
|
|
43.8
|
|
|
|
5.3
|
|
|
|
(145.6
|
)
|
|
|
(332.4
|
)%
|
|
|
38.5
|
|
|
|
726.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before discontinued operations
|
|
|
(272.9
|
)
|
|
|
11.4
|
|
|
|
125.6
|
|
|
|
(284.3
|
)
|
|
|
NM
|
|
|
|
(114.2
|
)
|
|
|
(90.9
|
)%
|
Loss from discontinued operations and loss on sale, net of
income taxes
|
|
|
|
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
2.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(272.9
|
)
|
|
$
|
11.4
|
|
|
$
|
122.9
|
|
|
$
|
(284.3
|
)
|
|
|
NM
|
|
|
$
|
(111.5
|
)
|
|
|
(90.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before discontinued operations
|
|
$
|
(2.94
|
)
|
|
$
|
0.12
|
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per common share
|
|
$
|
(2.94
|
)
|
|
$
|
0.12
|
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Aggregate sales increased $96.0 million, or 3.6%, in 2008
as compared to 2007. The components of this increase include
6.3% from acquisitions and other, 1.7% due to the favorable
impact of foreign exchange, a 9.7% favorable impact from price
and mix, which offset an unfavorable impact of 14.1% due to the
decline in volume. The impact of the decline in volume was
evident across all of our operating segments but of greatest
magnitude in our businesses tied to the North American building
and construction and transportation end markets.
Aggregate sales increased $20.3 million, or 0.8%, in 2007
compared to 2006. The components of this increase include a 2.3%
favorable impact from foreign exchange and a 1.4% favorable
impact from price and mix. These components offset a 2.8%
unfavorable impact from the decline in volume. The most
significant impact of the decline in volume was evident in the
Performance Product and Solutions segment, which was due mainly
to the slowdown in demand in the North American building and
construction market, and the pruning of unprofitable business in
the Specialty Color, Additives and Inks operating segment.
Cost of
Sales
These costs include raw materials, plant conversion,
distribution, environmental remediation and plant related
restructuring charges. As a percentage of sales, these costs
declined to 89.2% of sales in 2008 as compared to 90.1% in 2007.
GLS contributed 0.5 percentage points of the improvement
reflecting the margin impact of its specialty sales mix. Charges
related to environmental remediation and plant related
restructurings were $44.9 million in 2008 as compared to
$50.1 million in 2007. These decreased charges contributed
0.2 percentage points of the decline. The remaining
0.2 percentage points of the decline in cost of sales as a
percent of sales is due to the realization of pricing
initiatives and sales mix improvements partially offset by
higher raw material costs.
As a percentage of sales, these costs increased to 90.1% of
sales in 2007 as compared to 88.5% in 2006. This increase was
primarily due to higher remediation and plant related
restructuring costs of $50.2 million recorded in 2007
versus $2.9 million of similar costs recorded in 2006.
Higher raw material costs not yet fully offset by price
increases largely associated with Performance Products and
Solutions were more than counterbalanced by the
20 POLYONE
CORPORATION
improvements in margins from the implementation of our
specialization strategy. strategy.
Selling and
Administrative
Selling and administrative year-over-year variances for
2008, 2007 and 2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
VariancesFavorable (Unfavorable)
|
|
(In millions)
|
|
2008 v. 2007
|
|
|
2007 v. 2006
|
|
|
|
|
Selling and administrative
|
|
|
|
|
|
|
|
|
Employee separation and executive severance
|
|
$
|
(9.6
|
)
|
|
$
|
(1.0
|
)
|
Settlement of legal issues and related reserves
|
|
|
(0.3
|
)
|
|
|
(24.4
|
)
|
Impairment of intangibles and other investments
|
|
|
2.5
|
|
|
|
(2.5
|
)
|
GLS selling and administrative costs
|
|
|
(17.5
|
)
|
|
|
|
|
Other corporate costs
|
|
|
(2.6
|
)
|
|
|
0.3
|
|
Impact of foreign exchange
|
|
|
(4.8
|
)
|
|
|
(5.3
|
)
|
|
Total
|
|
$
|
(32.3
|
)
|
|
$
|
(32.9
|
)
|
|
|
These costs include selling, technology, administrative
functions and corporate and general expenses. Selling and
administrative costs increased $32.3 million, or 12.7%, in
2008 as compared to 2007. During 2007, selling and
administrative costs increased $32.9 million, or 14.8%, as
compared to 2006. In 2006, we recorded $23.3 million of
benefits from insurance, legal settlements and related reserves.
Impairment of
Goodwill
During the fourth quarter of 2008, indicators of potential
impairment caused us to conduct an interim impairment test.
Those indicators included the following: a significant decrease
in market capitalization; a decline in recent operating results;
and a decline in our business outlook primarily due to the
macroeconomic environment. In accordance with FASB Statement
No. 142, we completed step one of the impairment analysis
and concluded that, as of December 31, 2008, the fair value
of two of our reporting units was below their respective
carrying values, including goodwill. The two reporting units
that showed potential impairment were Geon Compounds and
Specialty Coatings (reporting units within Performance Products
and Solutions). As such, step two of the impairment test was
initiated in accordance with FASB Statement No. 142. Due to
its time consuming nature, the step-two analysis has not been
completed as of the date of this filing. In accordance with
paragraph 22 of Statement No. 142, we have recorded an
estimate in the amount of $170.0 million as a non-cash
goodwill impairment charge as of December 31, 2008.
Management expects to revise the charge during the first quarter
of 2009 after completing a formal step-two test.
Income from
Equity Affiliates and Minority Interest
Income from equity affiliates and minority interest for
2008, 2007 and 2006 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
SunBelt
|
|
$
|
32.5
|
|
|
$
|
41.0
|
|
|
$
|
47.3
|
|
OxyVinyls
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
59.7
|
|
Other equity affiliates
|
|
|
3.3
|
|
|
|
3.9
|
|
|
|
5.8
|
|
Impairment of OxyVinyls investment
|
|
|
|
|
|
|
(14.8
|
)
|
|
|
|
|
Charges related to sale of OxyVinyls investment
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
Write-down of certain assets of and investment in Geon Polimeros
Andinos
|
|
|
(4.7
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
Minority interest
|
|
|
0.1
|
|
|
|
(0.2
|
)
|
|
|
(0.8
|
)
|
|
|
|
$
|
31.2
|
|
|
$
|
27.7
|
|
|
$
|
112.0
|
|
|
|
During 2008, income from equity affiliates and minority interest
increased $3.5 million, or 12.6%, versus 2007. The increase
was due to $11.7 million lower impairment charges recorded
in 2008 as compared to 2007 partially offset by lower SunBelt
earnings. The $8.5 million lower SunBelt earnings were
mainly due to lower demand for chlorine in the downstream PVC
resin markets as a result of the significant deterioration of
the North American building and construction and basic
infrastructure markets.
During 2007, income from equity affiliates and minority interest
decreased $84.3 million, or 75.3%, as compared to 2006
mainly due to the slowdown in demand in the North American
building and construction and basic infrastructure materials end
markets, and margin compression due to the inability to pass
higher raw materials costs through pricing. Impairment charges
were recorded for the other than temporary decline of our 24%
interest in our equity investment in OxyVinyls of which we
subsequently divested our 24% interest in July 2007.
Interest
Expense, Net
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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Short-term debt
|
|
$
|
53.8
|
|
|
$
|
9.2
|
|
|
$
|
5.6
|
|
Current portion of long-term debt
|
|
|
16.2
|
|
|
|
20.5
|
|
|
|
12.5
|
|
Long-term debt
|
|
|
360.4
|
|
|
|
441.7
|
|
|
|
610.8
|
|
|
Quarterly average
|
|
$
|
430.4
|
|
|
$
|
471.4
|
|
|
$
|
628.9
|
|
|
|
Interest expense
|
|
$
|
40.6
|
|
|
$
|
51.4
|
|
|
$
|
66.5
|
|
The decrease in interest expense from year to year is largely
the result of 8.7% 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.
21 POLYONE
CORPORATION
In April 2008, we issued an additional $80.0 million in
aggregate principal amount of our 8.875% senior notes due
2012. 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.
Included in Interest expense, net for the years ended
December 31, 2008, 2007 and 2006 is interest income of
$3.4 million, $4.5 million and $3.4 million.
Premium on
Early Extinguishment of Long-term Debt
Cash expense from the premium on our repurchase of
$241.4 million of our 10.625% senior notes in 2007 was
$12.8 million. Cash expense from the premium on our
repurchase of $58.6 million of our 10.625% senior
notes in 2006 was $4.4 million.
Other Expense,
Net
Financing 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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Currency exchange gain (loss)
|
|
$
|
1.2
|
|
|
$
|
(5.0
|
)
|
|
$
|
(1.3
|
)
|
Foreign exchange contracts (loss) gain
|
|
|
(1.3
|
)
|
|
|
0.7
|
|
|
|
1.1
|
|
Discount on sale of trade receivables
|
|
|
(3.6
|
)
|
|
|
(2.0
|
)
|
|
|
(1.9
|
)
|
Impairment of available for sale security
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
(0.7
|
)
|
|
Other expense, net
|
|
$
|
(4.6
|
)
|
|
$
|
(6.6
|
)
|
|
$
|
(2.8
|
)
|
|
|
Income Tax
(Expense) Benefit
In the fourth quarter of 2008, we recorded a valuation allowance
of $166.7 million to increase valuation allowances against
deferred tax assets. The charge to income tax expense consists
of $104.5 million related to U.S. federal and state
and local deferred tax assets and $1.4 million related to
foreign deferred tax assets. $60.8 million, related to
pension and post-retirement health care liabilities, is recorded
as a component of accumulated other comprehensive income.
We created a new valuation allowance of $104.5 million that
is related to U.S. federal and state and local deferred tax
assets. This valuation allowance was recorded based on our
U.S. pre-tax losses over 2007 and 2008 as well as our
current estimates for near term U.S. results. Taking this
charge will have no impact on our ability to utilize these
U.S. net operating losses to offset future
U.S. taxable profits. We review all valuation allowances
related to deferred tax assets and will reverse these charges,
partially or totally, when appropriate under FAS 109.
We have U.S. net operating loss carryforwards of
$97.9 million which expire at various dates from 2024
through 2028. Certain foreign subsidiaries had tax loss
carryforwards aggregating $28.8 million which will expire
at various dates from 2010 through 2018.
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 2006, in accordance with FASB Statement No. 109,
Accounting for Income Taxes, the valuation allowance that
was established during 2002 through 2004 was reduced
$74.9 million. This amount is comprised of
$44.3 million for the utilization of the net operating loss
carryforward, $15.4 million associated with changes in AOCI
related to pension and post-retirement health care liabilities,
and the remaining $15.2 million of the valuation allowance
on the basis that it is more likely than not that the deferred
tax asset will be realized.
Income taxes for the years ended December 31, 2008, 2007
and 2006 include foreign, state and federal alternative minimum
tax. Income taxes are discussed in detail in Note 15,
Income Taxes, in the accompanying consolidated financial
statements.
Loss from
Discontinued Operations, Net of Income Taxes
Discontinued operations are discussed in detail in Note 2
in the accompanying consolidated financial statements.
Segment
Information
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 and goodwill 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.
22 POLYONE
CORPORATION
During the second quarter of 2008, we announced that Producer
Services, formerly included in All Other, was combined with Geon
Performance Polymers to form the Performance Products and
Solutions operating segment. In addition, North American Color
and Additives and Specialty Inks and Polymer Systems, both
formerly included in All Other, were combined to form a new
operating segment named Specialty Color, Additives and Inks.
On March 20, 2008, we announced the formation of the
Specialty Engineered Materials segment. This segment includes
PolyOnes TPE compounds product line in Europe and Asia
(historically included in International Color and Engineered
Materials), North American Engineered Materials (historically
included in All Other) and GLS. On April 15, 2008, the
Vinyl Business segment was re-branded to be called Geon
Performance Polymers.
As a result of these changes to PolyOnes segment
structure, prior period segment information was reclassified to
conform to the 2008 presentation. These changes had no material
impact on segment results.
Sales and
Operating Income (Loss) 2008 compared with
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Color and Engineered Materials
|
|
$
|
587.4
|
|
|
$
|
588.6
|
|
|
$
|
(1.2
|
)
|
|
|
(0.2)%
|
|
Specialty Engineered Materials
|
|
|
252.3
|
|
|
|
124.3
|
|
|
|
128.0
|
|
|
|
103.0%
|
|
Specialty Color, Additives and Inks
|
|
|
228.6
|
|
|
|
232.0
|
|
|
|
(3.4
|
)
|
|
|
(1.5)%
|
|
Performance Products and Solutions
|
|
|
1,001.4
|
|
|
|
1,086.8
|
|
|
|
(85.4
|
)
|
|
|
(7.9)%
|
|
PolyOne Distribution
|
|
|
796.7
|
|
|
|
744.3
|
|
|
|
52.4
|
|
|
|
7.0%
|
|
Corporate and eliminations
|
|
|
(127.7
|
)
|
|
|
(133.3
|
)
|
|
|
5.6
|
|
|
|
4.2%
|
|
|
|
|
|
|
|
|
$
|
2,738.7
|
|
|
$
|
2,642.7
|
|
|
$
|
96.0
|
|
|
|
3.6%
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Color and Engineered Materials
|
|
$
|
20.4
|
|
|
$
|
25.1
|
|
|
$
|
(4.7
|
)
|
|
|
(18.7)%
|
|
Specialty Engineered Materials
|
|
|
12.9
|
|
|
|
(2.2
|
)
|
|
|
15.1
|
|
|
|
686.4%
|
|
Specialty Color, Additives and Inks
|
|
|
13.5
|
|
|
|
7.0
|
|
|
|
6.5
|
|
|
|
92.9%
|
|
Performance Products and Solutions
|
|
|
34.9
|
|
|
|
57.5
|
|
|
|
(22.6
|
)
|
|
|
(39.3)%
|
|
PolyOne Distribution
|
|
|
28.1
|
|
|
|
22.1
|
|
|
|
6.0
|
|
|
|
27.1%
|
|
Resin and Intermediates
|
|
|
28.6
|
|
|
|
34.8
|
|
|
|
(6.2
|
)
|
|
|
(17.8)%
|
|
Corporate and eliminations
|
|
|
(267.7
|
)
|
|
|
(110.4
|
)
|
|
|
(157.3
|
)
|
|
|
(142.5)%
|
|
|
|
|
|
|
|
|
$
|
(129.3
|
)
|
|
$
|
33.9
|
|
|
$
|
(163.2
|
)
|
|
|
(481.4)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
Operating income (loss) as a percentage of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
International Color and Engineered Materials
|
|
|
3.5
|
%
|
|
|
4.3
|
%
|
|
|
(0.8)% points
|
|
Specialty Engineered Materials
|
|
|
5.1
|
%
|
|
|
(1.8
|
)%
|
|
|
6.9% points
|
|
Specialty Color, Additives and Inks
|
|
|
5.9
|
%
|
|
|
3.0
|
%
|
|
|
2.9% points
|
|
Performance Products and Solutions
|
|
|
3.5
|
%
|
|
|
5.3
|
%
|
|
|
(1.8)% points
|
|
PolyOne Distribution
|
|
|
3.5
|
%
|
|
|
3.0
|
%
|
|
|
0.5% points
|
|
Total
|
|
|
(4.7
|
)%
|
|
|
1.3
|
%
|
|
|
(6.0)% points
|
|
International
Color and Engineered Materials
Sales declined $1.2 million, or 0.2%, in 2008 as weakening
demand in the second half of 2008 in both Europe and Asia offset
higher pricing and a $42.6 million favorable impact from
foreign exchange. Volume declined 11.1%. Operating income
declined $4.7 million, or 18.7%, in 2008 despite the
favorable impact of foreign exchange of $2.2 million.
Continued progress in improving the sales mix through the
penetration of specialty applications in the packaging,
electrical and electronics, specialty wire and cable and
transportation end markets did not offset the adverse impact of
the substantial weakening of demand in the fourth quarter of
2008.
Specialty
Engineered Materials
Sales increased $128.0 million, or 103.0%, in 2008 compared
to 2007 primarily due to the acquisition of GLS. GLS continued
to demonstrate its ability to grow its specialty mix of
applications in the health care, consumer products and medical
end markets. Partially offsetting the favorable benefit to sales
from the acquisition of GLS was lower demand for wire and cable
and general purpose products that go into the North American
building and construction and transportation end markets.
Operating income increased $15.1 million in 2008 driven
primarily by the GLS acquisition and the elimination of
unprofitable accounts.
Specialty
Color, Additives and Inks
Sales declined $3.4 million, or 1.5%, in 2008 as volume
declined 10.7%. Partially mitigating the impact of lower volume
was a higher value sales mix driven by a greater focus on
capturing specialty type applications and higher pricing to
offset increased raw material costs. Operating income improved
$6.5 million in 2008 driven by the combined effect of a
more profitable sales mix, cost reduction initiatives in
operations, and a focused effort on culling unprofitable
business.
Performance
Products and Solutions
Sales declined $85.4 million, or 7.9%, in 2008 due
primarily to significantly lower demand in the North American
building and construction and transportation markets. Volume
declined
23 POLYONE
CORPORATION
19.9%. Favorable items impacting sales were higher prices due to
rising raw material costs and an improved sales mix. Operating
income declined $22.6 million, or 39.3%, in 2008 as
compared to 2007 due to lower demand and because selling price
increases did not offset higher raw material costs. Falling raw
material costs and reduced inventory resulted in a favorable
LIFO reserve adjustment of $3.2 million for the year.
PolyOne
Distribution
PolyOne Distribution sales increased $52.4 million, or
7.0%, in 2008 despite lower volumes. The combined impact of
price increases to offset increasing raw material costs,
continued growth in higher value end markets, such as healthcare
and consumer products, and the success of a national accounts
program offset the impact of declining volume. Operating income
increased $6.0 million, or 27.1%, in 2008 driven by a more
profitable sales mix, margin benefits realized as a result of
increased market prices, cost containment programs to mitigate
rising transportation and distribution costs, and the cumulative
impact of various margin improvement programs.
Resin and
Intermediates
Operating income declined $6.2 million, or 17.8%, in 2008
driven by a 20.8% volume decline driven partially by force
majeure claims from SunBelts sole chlorine customer,
OxyVinyls. In December, OxyVinyls declared force majeure due to
a plant shutdown. In the third quarter of 2008, OxyVinyls
declared force majeure due to the combined effect of Hurricanes
Gustav and Ike.
Corporate and
Eliminations
Operating loss from Corporate and eliminations was
$157.3 million higher in 2008 due mainly to a
$170 million impairment of goodwill, higher year-over-year
restructuring charges offset partially by lower environmental
remediation charges. In 2008, we recorded environmental
remediation, restructuring and impairment charges of
$229.0 million as compared to $69.9 million of similar
charges recorded in 2007. The following table breaks down
Corporate and eliminations into its various components:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
Impairment of
goodwill(a)
|
|
$
|
(170.0
|
)
|
|
$
|
|
|
Future environmental remediation
costs(b)
|
|
|
(14.6
|
)
|
|
|
(33.2
|
)
|
Impairment of OxyVinyls equity
investment(c)
|
|
|
|
|
|
|
(14.8
|
)
|
Settlement of environmental costs related to Calvert
City(d)
|
|
|
|
|
|
|
(15.6
|
)
|
Impairment of intangibles and other
investments(e)
|
|
|
|
|
|
|
(2.5
|
)
|
Employee separation and plant
phaseout(f)
|
|
|
(39.7
|
)
|
|
|
(2.2
|
)
|
Write-down of certain assets of and investment in equity
affiliate(g)
|
|
|
(4.7
|
)
|
|
|
(1.6
|
)
|
Cost related to sale of OxyVinyls equity investment
|
|
|
|
|
|
|
(0.4
|
)
|
Settlement of legal issues and related
reserves(h)
|
|
|
(1.2
|
)
|
|
|
(0.6
|
)
|
Gain on sale of
assets(i)
|
|
|
|
|
|
|
2.5
|
|
Share-based compensation
|
|
|
(3.0
|
)
|
|
|
(4.3
|
)
|
All other and
eliminations(j)
|
|
|
(34.5
|
)
|
|
|
(37.7
|
)
|
|
Total Corporate and eliminations
|
|
$
|
(267.7
|
)
|
|
$
|
(110.4
|
)
|
|
|
|
|
|
(a) |
|
In the fourth quarter of 2008, we
recognized a non-cash goodwill impairment charge of
$170.0 million related to our Geon Compounds and Specialty
Coatings reporting units within the Performance Products and
Solutions segment. See Note 3, Goodwill and Other
Intangibles, to the accompanying consolidated financial
statements for further information.
|
|
(b) |
|
In the third quarter of 2007, our
accrual for costs related to future remediation at inactive or
formerly owned sites was adjusted based on a U.S. District
Courts rulings 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 requires us to pay remediation costs related to the
Calvert City facility.
|
|
(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 decrease was
determined to be an other than temporary decline in value.
|
|
(d) |
|
In the third quarter of 2007, we
accrued $15.6 million to reimburse Goodrich Corporation for
remediation costs paid on our behalf and certain legal costs
related to the Calvert City facility.
|
|
(e) |
|
An impairment of the carrying value
of certain patents and technology agreements and investments of
$2.5 million was recorded during 2007.
|
|
(f) |
|
During the third quarter of 2008,
we announced the restructuring of certain manufacturing assets,
primarily in North America. During January 2009, we announced
the initiation of further cost saving measures that include
eliminating approximately 370 jobs, implementing reduced work
schedules, closing a facility and idling certain other capacity.
See Note 4, Employee Separation and Plant Phaseout, to
the accompanying consolidated financial statements for further
information.
|
|
(g) |
|
In the third quarter of 2008 and
2007, we recorded $2.6 million and $1.6 million,
respectively, related to our proportionate share of the
write-down of certain assets by Geon Polimeros Andinos, our
|
24 POLYONE
CORPORATION
|
|
|
|
|
equity affiliate in Columbia. Also,
in the third quarter of 2008, we recorded a $2.1 million
charge related to our proportionate share of an impairment of
our investment in the equity affiliate.
|
|
(h) |
|
In 2008, we recognized
$1.0 million for the estimated cost of settlement of a
civil penalty settlement demand related to EPA claim at PolyOne
facilities.
|
|
(i) |
|
The gains on sale of assets in 2007
relates to the sale of previously closed facilities and other
assets.
|
|
(j) |
|
All other and eliminations is
comprised of intersegment eliminations and corporate general and
administrative costs that are not allocated to segments.
|
Sales and
Operating Income (Loss) 2007 compared with
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
% Change
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Color and Engineered Materials
|
|
$
|
588.6
|
|
|
$
|
510.7
|
|
|
$
|
77.9
|
|
|
|
15.3
|
%
|
Specialty Engineered Materials
|
|
|
124.3
|
|
|
|
113.3
|
|
|
|
11.0
|
|
|
|
9.7
|
%
|
Specialty Color, Additives and Inks
|
|
|
232.0
|
|
|
|
253.1
|
|
|
|
(21.1
|
)
|
|
|
(8.3
|
)%
|
Performance Products and Solutions
|
|
|
1,086.8
|
|
|
|
1,166.2
|
|
|
|
(79.4
|
)
|
|
|
(6.8
|
)%
|
PolyOne Distribution
|
|
|
744.3
|
|
|
|
732.8
|
|
|
|
11.5
|
|
|
|
1.6
|
%
|
Corporate and eliminations
|
|
|
(133.3
|
)
|
|
|
(153.7
|
)
|
|
|
20.4
|
|
|
|
13.3
|
%
|
|
|
|
|
|
|
|
$
|
2,642.7
|
|
|
$
|
2,622.4
|
|
|
$
|
20.3
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Color and Engineered Materials
|
|
$
|
25.1
|
|
|
$
|
20.6
|
|
|
$
|
4.5
|
|
|
|
21.8
|
%
|
Specialty Engineered Materials
|
|
|
(2.2
|
)
|
|
|
(2.4
|
)
|
|
|
0.2
|
|
|
|
8.3
|
%
|
Specialty Color, Additives and Inks
|
|
|
7.0
|
|
|
|
(4.1
|
)
|
|
|
11.1
|
|
|
|
270.7
|
%
|
Performance Products and Solutions
|
|
|
57.5
|
|
|
|
73.4
|
|
|
|
(15.9
|
)
|
|
|
(21.7
|
)%
|
PolyOne Distribution
|
|
|
22.1
|
|
|
|
19.2
|
|
|
|
2.9
|
|
|
|
15.1
|
%
|
Resin and Intermediates
|
|
|
34.8
|
|
|
|
102.9
|
|
|
|
(68.1
|
)
|
|
|
(66.2
|
)%
|
Corporate and eliminations
|
|
|
(110.4
|
)
|
|
|
(19.0
|
)
|
|
|
(91.4
|
)
|
|
|
(481.1
|
)%
|
|
|
|
|
|
|
|
$
|
33.9
|
|
|
$
|
190.6
|
|
|
$
|
(156.7
|
)
|
|
|
(82.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
Operating income (loss) as a percentage of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
International Color and Engineered Materials
|
|
|
4.3
|
%
|
|
|
4.0
|
%
|
|
|
0.3% points
|
|
Specialty Engineered Materials
|
|
|
(1.8
|
)%
|
|
|
(2.1
|
)%
|
|
|
0.3% points
|
|
Specialty Color, Additives and Inks
|
|
|
3.0
|
%
|
|
|
(1.6
|
)%
|
|
|
4.6% points
|
|
Performance Products and Solutions
|
|
|
5.3
|
%
|
|
|
6.3
|
%
|
|
|
(1.0)% points
|
|
PolyOne Distribution
|
|
|
3.0
|
%
|
|
|
2.6
|
%
|
|
|
0.4% points
|
|
Total
|
|
|
1.3
|
%
|
|
|
7.3
|
%
|
|
|
(6.0)% points
|
|
International
Color and Engineered Materials
International Color and Engineered Materials 2007 sales
increased $77.9 million, or 15.3%, to $588.6 million
due primarily to favorable foreign exchange rates, which
increased sales by $49.9 million, or 9.8%, coupled with
growth in the Color product lines in Asia and Europe and
engineered materials in Europe.
Operating income increased $4.5 million in 2007 as compared
to 2006. This 21.8% 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 $1.9 million.
Specialty
Engineered Materials
Specialty Engineered Materials sales grew 9.7% due to continued
progress in capturing specialized applications in the
electrical / electronics and medical end markets, as
well as growth in wire and cable application markets.
Thermoplastic elastomer sales grew 39.4% due to strengthening
demand at existing customers and the capture of a new large
customer.
Operating income improved $0.2 million, or 8.3%, over 2006.
This increase was due mainly to the improvement in earnings of
our thermoplastic elastomer product lines driven by higher sales
and improved margins resulting from the recapture of raw
material costs.
Specialty
Color, Additives and Inks
Specialty Color, Additives and Inks includes the North American
Color and Additives and Specialty Inks and Polymer Systems
reporting units. Sales were down 8.3% from 2006 due mainly to
the pruning of unprofitable business and withdrawing from
certain general purpose oriented applications. Lower sales
resulting from these pruning efforts were offset partially by
growth in the inks product lines.
Operating income was $7.0 million in 2007 compared to a
$4.1 million loss in 2006, an increase of
$11.1 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. The
remaining increase was due to sales and mix improvements within
the inks product lines.
Performance
Products and Solutions
Performance Products and Solutions sales were
$1,086.8 million in 2007, $79.4 million or 6.8% lower
than 2006, primarily due to the slowdown in the 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. The decline in volume
drove sales down 6.2%.
25 POLYONE
CORPORATION
Operating income in 2007 decreased $15.9 million, or 21.7%,
compared to 2006, primarily due to weak building and
construction demand and margin compression due to the
combination of downward pricing pressure in building and
construction end markets and higher raw material and energy
costs.
PolyOne
Distribution
PolyOne Distribution sales increased $11.5 million, or
1.6%, compared to 2006 due to an improved mix of sales on
relatively flat volume. Increased sales into the healthcare and
transportation end markets offset declines in the appliance and
building and construction sectors.
Operating income was $22.1 million, up 15.1% 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 and
Intermediates
2007 operating income declined 66.2%, or
$68.1 million, versus 2006 as the slowdown in building and
construction markets and downward margin pressure from rising
feedstock costs negatively 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 3.3% decline in sales that
offset higher year-over-year ECU netbacks, which were up 1.0%.
Corporate and
Eliminations
Operating loss from Corporate and eliminations was
$91.4 million higher in 2007 versus 2006 mainly due to
higher environmental remediation charges and impairment charges
and lower benefits from legal settlements. In 2007, we recorded
environmental remediation and impairment charges and legal
settlements of $68.3 million as compared to a benefit of
$20.6 million of similar items recorded in 2006. A summary
of Corporate and eliminations 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
|
|
Share-based compensation
|
|
|
(4.3
|
)
|
|
|
(4.5
|
)
|
All other and
eliminations(i)
|
|
|
(37.7
|
)
|
|
|
(38.2
|
)
|
|
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.
|
26 POLYONE
CORPORATION
Liquidity and
Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44.3
|
|
|
$
|
79.4
|
|
|
$
|
66.2
|
|
Accounts Receivable Availability
|
|
|
121.4
|
|
|
|
151.2
|
|
|
|
111.5
|
|
|
Liquidity
|
|
$
|
165.7
|
|
|
$
|
230.6
|
|
|
$
|
177.7
|
|
|
|
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.
Liquidity decreased $64.9 million in 2008 versus 2007 due
to investment in the business, specifically the acquisition of
GLS, which was partially offset by cash provided by operating
and financing activities. Accounts Receivable Availability
declined from 2007 to 2008 by $29.8 million based on
$15.3 million of lower eligible receivables, and as of
December 31, 2008, $14.2 million of our undivided
interests in accounts receivable were sold as compared to
$0.0 million at December 31, 2007.
In 2007, liquidity increased $52.9 million driven by a
larger eligible pool of receivables as the facility was expanded
to include Canadian receivables and an increase in cash and cash
equivalents due to a year-over-year improvement in working
capital of $70.5 million, a favorable impact of foreign
exchange on cash of $6.6 million, and the sales of assets.
Cash
Flows
The following discussion focuses on the material components of
cash flows from operating, investing and financing activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Cash flow summary
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
72.5
|
|
|
$
|
67.2
|
|
|
$
|
111.7
|
|
Cash (used) provided by investing activities
|
|
|
(193.5
|
)
|
|
|
215.3
|
|
|
|
(16.8
|
)
|
Cash provided (used) in financing activities
|
|
|
88.0
|
|
|
|
(275.9
|
)
|
|
|
(63.4
|
)
|
|
|
|
|
(33.0
|
)
|
|
|
6.6
|
|
|
|
31.5
|
|
Effect of exchange rates on cash
|
|
|
(2.1
|
)
|
|
|
6.6
|
|
|
|
1.9
|
|
|
(Decrease) increase in cash and equivalents
|
|
$
|
(35.1
|
)
|
|
$
|
13.2
|
|
|
$
|
33.4
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(272.9
|
)
|
|
$
|
11.4
|
|
|
$
|
122.9
|
|
Depreciation and amortization
|
|
|
68.0
|
|
|
|
57.4
|
|
|
|
57.1
|
|
Loss on disposition of discontinued businesses and related plant
phaseout charge
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Deferred income tax provision (benefit)
|
|
|
89.4
|
|
|
|
(57.1
|
)
|
|
|
(12.9
|
)
|
Premium on early extinguishment of long-term debt
|
|
|
|
|
|
|
12.8
|
|
|
|
4.4
|
|
Provision for doubtful accounts
|
|
|
6.0
|
|
|
|
1.9
|
|
|
|
3.0
|
|
Stock compensation expense
|
|
|
3.0
|
|
|
|
4.3
|
|
|
|
4.5
|
|
Impairment of goodwill
|
|
|
170.0
|
|
|
|
|
|
|
|
|
|
Asset write-downs and impairment charges, net of (gain) on sale
of closed facilities
|
|
|
3.6
|
|
|
|
3.3
|
|
|
|
(0.9
|
)
|
Companies carried at equity and minority interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity affiliates and minority interest
|
|
|
(31.2
|
)
|
|
|
(27.7
|
)
|
|
|
(112.0
|
)
|
Distributions and distributions received
|
|
|
32.9
|
|
|
|
37.6
|
|
|
|
97.7
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) from working capital
|
|
|
(0.3
|
)
|
|
|
33.7
|
|
|
|
(36.8
|
)
|
Increase (decrease) in sale of accounts receivable
|
|
|
14.2
|
|
|
|
|
|
|
|
(7.9
|
)
|
(Decrease) increase in accrued expenses and other
|
|
|
(10.2
|
)
|
|
|
(10.4
|
)
|
|
|
(10.4
|
)
|
Net cash used by discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
Net cash provided by operating activities
|
|
$
|
72.5
|
|
|
$
|
67.2
|
|
|
$
|
111.7
|
|
|
|
In 2008, cash provided by operating activities increased
$5.3 million as compared to 2007 due to higher earnings
before giving effect to non-cash restructuring and tax valuation
allowance charges, lower debt extinguishment premiums, lower
cash payments for environmental remediation, and an increase in
the sale of accounts receivable, all of which offset the
unfavorable impacts related to working capital changes,
year-over-year, and higher pension funding.
Cash provided by operations decreased in 2007 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 $70.5 million
improvement comparing 2007 versus 2006. A more comprehensive
discussion of working capital is provided below.
27 POLYONE
CORPORATION
Our working capital management focus is on three metrics that we
believe are the most critical to maximizing cash provided by
operating activities. These metrics measure the number of days
of sales in receivables (DSO), the days of cost of goods sold in
inventories (DSI) and the days of cost of goods sold in accounts
payable (DSP).
The following table presents a comparison of our average working
capital metrics for 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In days)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Accounts receivable DSO
|
|
|
52.8
|
|
|
|
51.6
|
|
|
|
50.8
|
|
Inventories DSI
|
|
|
50.6
|
|
|
|
45.2
|
|
|
|
44.3
|
|
Accounts payable DSP
|
|
|
(53.3
|
)
|
|
|
(55.5
|
)
|
|
|
(51.5
|
)
|
|
Average net days
|
|
|
50.1
|
|
|
|
41.3
|
|
|
|
43.6
|
|
|
|
Change in net days from prior year average
|
|
|
(8.8
|
)
|
|
|
2.3
|
|
|
|
(4.9
|
)
|
Average working capital as a percentage of sales
|
|
|
15.4
|
%
|
|
|
14.4
|
%
|
|
|
14.4
|
%
|
In 2008, average net days increased 8.8 days primarily due
to a higher investment in inventories particularly in the fourth
quarter of 2008 when the rapid decline in the level of business
activity outpaced inventory reduction programs. Overall, working
capital as a percentage of sales increased one percentage point
based on dynamics described above.
The 2007 average working capital metrics netted to a
2.3 day improvement compared to 2006 driven by
managements actions to improve DSP by initiating vendor
terms management programs which offset higher inventories due to
a slower demand outlook and a DSO increase of 0.8 days as
customers slowed payments in light of a softening outlook for
the economy. 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 inventory levels due to material shortages.
The net impact on cash flow from the change in working capital
metrics described above is presented below:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
Cash provided (used) by:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
60.8
|
|
|
$
|
(10.8
|
)
|
Inventories
|
|
|
33.6
|
|
|
|
26.7
|
|
Accounts payable
|
|
|
(94.7
|
)
|
|
|
17.8
|
|
|
|
|
$
|
(0.3
|
)
|
|
$
|
33.7
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(42.5
|
)
|
|
$
|
(43.4
|
)
|
|
$
|
(41.1
|
)
|
Investment in affiliated company
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
Business acquisitions and related deposits, net of cash acquired
|
|
|
(150.2
|
)
|
|
|
(11.2
|
)
|
|
|
(1.5
|
)
|
Proceeds from sale of assets
|
|
|
0.3
|
|
|
|
9.4
|
|
|
|
8.7
|
|
Proceeds from sale of investment in equity affiliate
|
|
|
|
|
|
|
260.5
|
|
|
|
|
|
Proceeds from sale of discontinued business
|
|
|
|
|
|
|
|
|
|
|
17.3
|
|
Net cash used by discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
Net cash (used) provided by investing activities
|
|
$
|
(193.5
|
)
|
|
$
|
215.3
|
|
|
$
|
(16.8
|
)
|
|
|
In 2008, net cash used by investing activities was driven by the
acquisition of GLS. Capital spending as a percentage of
depreciation and amortization was 63%. Included in the
$42.5 million of capital expenditures were strategic
investments to upgrade our Enterprise Resource Planning system,
expand our global footprint in China and India through
investment in manufacturing and customer specific projects,
product line investments to support our specialization strategy,
and the enablement of the manufacturing restructuring initiative
we announced in July 2008. Spending on strategic projects
constituted approximately 48% of total spending. The remainder
of spending was related to productivity improvement, on-going
maintenance of the asset base and critical environmental, health
and safety (EH&S) projects.
In 2007, we generated $215.3 million from investing
activities, primarily from the proceeds of 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%. Included in
the $43.4 million of capital expenditures were strategic
investments to expand our footprint in Eastern Europe through
the building of our Poland facility, and increase our
capabilities to compete in more specialized end-markets related
to additives and liquid color applications. Spending on
strategic projects constituted approximately 42% of total
spending. The remainder of spending was related to productivity
improvement, on-going maintenance of the asset base and critical
EH&S projects.
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%. Included in the $41.1 million of
capital expenditures were strategic investments to upgrade our
capabilities to compete in more specialized end-markets, such as
the construction of our Avon Lake Engineered Materials
manufacturing plant in Ohio and the investment in specialty
28 POLYONE
CORPORATION
product manufacturing assets in Europe and the expansion of
capacity in China. Spending on strategic projects constituted
approximately 48% of total spending. The remainder of spending
was related to productivity improvement, on-going maintenance of
the asset base and critical EH&S projects.
Capital expenditures are currently estimated to be between
$40 million and $50 million in 2009, primarily to
support and maintain manufacturing operations and restructuring
actions.
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in short-term debt
|
|
$
|
43.3
|
|
|
$
|
(0.2
|
)
|
|
$
|
(2.1
|
)
|
Issuance of long-term debt, net of debt issuance costs
|
|
|
77.8
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(25.3
|
)
|
|
|
(264.1
|
)
|
|
|
(60.0
|
)
|
Purchase of common stock for treasury
|
|
|
(8.9
|
)
|
|
|
|
|
|
|
|
|
Premium paid on early extinguishment of long-term debt
|
|
|
|
|
|
|
(12.8
|
)
|
|
|
(4.4
|
)
|
Proceeds from exercise of stock options
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
3.1
|
|
|
Net cash provided (used) by financing activities
|
|
$
|
88.0
|
|
|
$
|
(275.9
|
)
|
|
$
|
(63.4
|
)
|
|
|
Cash provided by financing activities in 2008 was primarily used
for the acquisition of GLS and the funding necessary to
extinguish maturing debt. On January 9, 2008, we borrowed
$40.0 million under the new revolving credit facility. In
April 2008, we sold an additional $80.0 million in
aggregate principal amount of 8.875% senior notes due 2012.
Cash used by financing activities in 2007 and 2006 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 accompanying
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, 2007 to
December 31, 2008 that are not discussed in the preceding
Cash Flows section.
Pension benefits Our liability for
pension benefits increased $142.4 million during 2008, due
mainly to a decline in the values of pension assets as a result
of volatility in the equity markets during 2008.
Accounts payable Accounts payable as
of December 31, 2008 decreased $90.5 million as
compared to December 31, 2007. This decrease is primarily
due to reduced purchases near
year-end.
Liquidity and
Capital Resources
As of December 31, 2008, we had existing facilities to
access available capital resources (receivables sale facility,
and senior unsecured notes and debentures) totaling
$569.9 million. As of December 31, 2008, we had used
$448.5 million of these facilities, and $121.4 million
was available to be drawn. As of December 31, 2008, we also
had a $44.3 million cash and cash equivalents balance
adding to our available liquidity.
The following table summarizes our available and outstanding
facilities at December 31, 2008:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Outstanding
|
|
|
Available
|
|
|
|
|
Long-term debt, including current maturities
|
|
$
|
428.1
|
|
|
$
|
|
|
Receivables sale facility
|
|
|
14.2
|
|
|
|
121.4
|
|
Short-term debt
|
|
|
6.2
|
|
|
|
|
|
|
|
|
$
|
448.5
|
|
|
$
|
121.4
|
|
|
|
Long-Term Debt At December 31,
2008, long-term debt totaled $428.1 million, with
maturities ranging from 2009 to 2015. Current maturities of
long-term debt at December 31, 2008 were
$19.8 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 accompanying consolidated statements of operations.
Unamortized deferred note issuance costs of $2.8 million
were expensed due to this repurchase and are included in
interest expense in the accompanying consolidated statements of
operations. We also made payments of $20.0 million in 2008
and 2007 of aggregate principal amount of our medium-term notes
that matured during 2008 and 2007. As part of our purchase of DH
Compounding Company during the fourth quarter of 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. During 2008, we paid
the remaining $5.3 million of aggregate principal on this
note. For more information about our debt, see Note 6,
Financing Arrangements, to the accompanying consolidated
financial statements.
Guarantee and Agreement We entered
into a definitive Guarantee and Agreement with Citicorp USA,
Inc., KeyBank National Association and National City Bank on
June 6, 2006. Under this Guarantee and Agreement, we
guarantee some treasury management and banking services provided
to us and our subsidiaries, such as foreign currency forwards,
letters of credit 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
29 POLYONE
CORPORATION
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 facility fee of 4.77%. On
January 9, 2008, 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%. On December 30, 2008, we terminated this
interest rate swap. At December 31, 2008, we had
outstanding borrowings under the revolving credit facility of
$40.0 million that is included in Long-term debt on
the accompanying consolidated balance sheets. 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 the lesser
of $200.0 million or 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
$11.0 million was used at December 31, 2008.
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
average excess availability under the facility is
$40.0 million or less.
Notes Receivable As of
December 31, 2008, included in Other non-current assets
is $20.5 million outstanding on a seller note
receivable due from Excel Polymers LLC who purchased our
elastomers and performance additives business in February 2006.
This note accrues interest at 10% and is due in full with
accrued interest at maturity in July 2010. Also included in
Other non-current assets as of December 31, 2008 is
$7.5 million outstanding on a seller note receivable due to
us from OSullivan Films who purchased our engineered films
business in August 2004. This note accrues interest at 7% and is
due in full with accrued interest at maturity in December 2010.
Concentrations of Credit
Risk Financial instruments, including
foreign exchange contracts and interest rate swap agreements,
along with trade accounts receivable and notes receivable,
subject us to potential credit risk. Concentration of credit
risk for trade accounts receivable is limited due to the large
number of customers constituting our customer base and their
distribution among many industries and geographic locations. We
are exposed to credit risk with respect to notes receivable but
we believe collection of the outstanding amounts is probable. We
are 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. We believe that the risk of incurring
material losses related to this credit risk is remote. We do not
require collateral to support the financial position of our
credit risks.
Of the capital resource facilities available to us as of
December 31, 2008, 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,
2008, we had sold $14.2 million of accounts receivable and
had guaranteed $54.8 million of our SunBelt equity
affiliates debt.
We expect that operations in 2009 will enable us to maintain
existing levels of available capital resources and meet our cash
requirements. Expected sources of cash in 2009 include cash from
operations, additional borrowings under existing loan agreements
that are not fully drawn, cash distributions from equity
affiliates and proceeds from the sale of previously closed
facilities and redundant assets. Expected uses of cash in 2009
include interest expense and discounts on the sale of accounts
receivable, cash taxes, a contribution to a defined benefit
pension plan, debt retirements, environmental remediation at
inactive and formerly owned sites and capital expenditures.
Capital expenditures are currently estimated to be between
$40 million and $50 million in 2009, primarily to
support and maintain manufacturing operations and restructuring
actions. We may from time to time seek to retire or purchase our
outstanding debt through cash purchases
and/or
exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases
or exchanges, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions
and other factors. The amounts involved may be material.
Disruptions, uncertainty or volatility in the credit markets may
adversely impact the availability of credit already arranged and
the availability and cost of credit in the future. These market
conditions may limit our ability to replace, in a timely manner,
maturing liabilities and access the capital necessary to grow
and maintain our business. Accordingly, we may be forced to
delay raising capital, issue shorter tenors than we prefer or
pay unattractive interest rates, which could increase our
interest expense, decrease our profitability and significantly
reduce our financial flexibility. There can be no assurances
that government responses to the disruptions in the financial
markets will stabilize the markets or increase liquidity and the
availability of credit.
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
30 POLYONE
CORPORATION
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.
Off-Balance Sheet
Arrangements
Receivables sale facility We sell a
portion of our domestic accounts receivable to PolyOne Funding
Corporation (PFC) and a portion of our Canadian accounts
receivable to PolyOne Funding Canada Corporation (PFCC), both
wholly-owned, bankruptcy-remote subsidiaries. At
December 31, 2008, accounts receivable totaling
$141.4 million were sold to PFC and PFCC and, as a result,
they are reflected as a reduction of accounts receivable in the
accompanying consolidated balance sheets. PFC and PFCC, in turn,
sell an undivided interest in these accounts receivable to
certain investors and realize proceeds of up to
$200 million. The maximum proceeds that PFC and PFCC may
receive under the facility is limited to the lesser of
$200.0 million or 85% of the eligible domestic and Canadian
accounts receivable sold. At December 31, 2008, PFC and
PFCC had sold $14.2 million of their undivided interests in
accounts receivable. We retained an interest in the
$127.2 million difference between the amount of trade
receivables sold by us to PFC and PFCC and the undivided
interests sold by PFC and PFCC. As a result, this retained
interest is included in accounts receivable on our accompanying
consolidated balance sheet at December 31, 2008. 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 8, Accounts Receivable, to the accompanying
consolidated financial statements.
Guarantee of indebtedness of others As
discussed in Note 13, Commitments and Related-Party
Information, to the accompanying consolidated financial
statements, we guarantee $54.8 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 The receivables
sales facility makes up to $40.0 million available for the
issuance of standby letters of credit of which
$11.0 million was used at December 31, 2008. 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.
Contractual
Obligations
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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
428.1
|
|
|
$
|
19.8
|
|
|
$
|
79.1
|
|
|
$
|
279.2
|
|
|
$
|
50.0
|
|
Operating leases
|
|
|
68.9
|
|
|
|
19.5
|
|
|
|
26.6
|
|
|
|
12.5
|
|
|
|
10.3
|
|
Standby letters of credit
|
|
|
11.0
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on long-term debt
obligations(1)
|
|
|
120.4
|
|
|
|
33.1
|
|
|
|
59.9
|
|
|
|
19.9
|
|
|
|
7.5
|
|
Pension and post-retirement
obligations(2)
|
|
|
350.3
|
|
|
|
20.7
|
|
|
|
129.9
|
|
|
|
117.7
|
|
|
|
82.0
|
|
Guarantees
|
|
|
54.8
|
|
|
|
6.1
|
|
|
|
12.2
|
|
|
|
12.2
|
|
|
|
24.3
|
|
Purchase obligations
|
|
|
26.2
|
|
|
|
24.4
|
|
|
|
1.5
|
|
|
|
0.3
|
|
|
|
|
|
|
Total
|
|
$
|
1,059.7
|
|
|
$
|
134.6
|
|
|
$
|
309.2
|
|
|
$
|
441.8
|
|
|
$
|
174.1
|
|
|
|
|
|
(1)
|
Interest obligations are stated at
the rate of interest that is defined by the debt instrument,
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 2009 of approximately $5.5 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 2019.
|
Critical
Accounting Policies and Estimates
Significant accounting policies are described more fully in
Note 1, Summary of Significant Accounting Policies,
to the accompanying consolidated financial statements. The
preparation of financial statements in conformity with
U.S. generally accepted accounting principles
(U.S. GAAP) requires us to make estimates and assumptions
about future events that affect the amounts reported in our
financial statements and accompanying notes. We base our
estimates on historical experience and assumptions that we
believe are reasonable under the related facts and
circumstances. The application of these critical accounting
policies involves the exercise of judgment and use of
assumptions for future uncertainties. Accordingly, actual
results could differ significantly from these estimates. We
believe that the following discussion addresses our most
critical accounting policies, which are those that are the most
important to the portrayal of our financial condition and
results of operations and require our most difficult, subjective
and complex judgments. We have reviewed these critical
accounting policies and related disclosures with the Audit
Committee of our Board of Directors.
|
|
|
|
|
|
|
|
|
Effect if Actual Results
|
Description
|
|
Judgments and Uncertainties
|
|
Differ from Assumptions
|
|
Pension and Other Postretirement Plans
|
|
|
|
|
We account for our defined benefit
pension plans and other postretirement plans in accordance with
FASB Statement No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans -- an
Amendment of FASB Statements No. 87, 88, 106 and
132 (R).
|
|
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.
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.
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.
The rate of increase in health care
costs that we assume for the next five years was held constant
with prior years to reflect both our actual experience and
projected expectations.
|
|
As of December 31, 2008, an
increase/decrease in the discount rate of 0.5%, holding all
other assumptions constant, would have increased or decreased
accumulated other comprehensive income and the related pension
and post-retirement liability by approximately $27.5 million.
The weighted-average expected return on
assets was 8.50% for 2008, 2007 and 2006. The expected return on
assets is a long-term assumption whose accuracy can only be
measured over a long period based on past experience. A
variation in the expected return on assets by 0.5% as of
December 31, 2008 would result in a variation of approximately
$1.4 million in the net periodic benefit cost.
Holding all other assumptions constant,
a 0.5% increase or decrease in the health care cost trend rate
would have increased or decreased our 2008 net periodic
benefit cost by $0.2 million and our accumulated other
comprehensive income and the related post-retirement liability
by approximately $2.3 million as of December 31, 2008.
|
32 POLYONE
CORPORATION
|
|
|
|
|
|
|
|
|
Effect if Actual Results
|
Description
|
|
Judgments and Uncertainties
|
|
Differ from Assumptions
|
|
Goodwill and Intangible Assets
|
|
|
|
|
Goodwill represents the excess of the
purchase price over the fair value of the net assets of acquired
companies. We follow the guidance in FASB Statement No. 142,
Goodwill and Intangible Assets, and test goodwill for
impairment at least annually, absent some triggering event that
would accelerate an impairment assessment. On an ongoing basis,
absent any impairment indicators, we perform our goodwill
impairment testing as of the first day of October of each year.
The carrying value of goodwill at December 31, 2008 was $163.9
million.
|
|
We determine the fair value of our
reporting units using the income approach, which requires us to
make assumptions and estimates regarding projected economic and
market conditions, growth rates, operating margins and cash
expenditures.
|
|
We performed our annual testing for
goodwill impairment as of the first day of July 2008 and we
recorded a non-cash impairment charge of $2.6 million related to
our share of a write-down of goodwill of an equity affiliate.
See Note 3, Goodwill and Intangible Assets, to the
accompanying consolidated financial statements for further
discussion. As a result of our change in timing of the annual
impairment testing to be as of the first day of October
prospectively, we reperformed the goodwill impairment test as of
October 1 and determined that no additional goodwill impairment
existed.
|
|
|
|
|
During the fourth quarter of 2008,
indicators of potential impairment caused us to conduct an
interim impairment test. Those indicators included the
following: a significant decrease in market capitalization; a
decline in recent operating results; and a decline in our
business outlook primarily due to the macroeconomic environment.
In accordance with FASB Statement No. 142, we completed step one
of the impairment analysis and concluded that, as of December
31, 2008, the fair value of two of our reporting units was below
their respective carrying values, including goodwill. The two
reporting units that showed potential impairment were Geon
Compounds and Specialty Coatings (reporting units within
Performance Products and Solutions). As such, step two of the
impairment test was initiated in accordance with FASB Statement
No. 142. Due to its time consuming nature, the step-two analysis
has not been completed as of the date of this filing. In
accordance with paragraph 22 of Statement No. 142, we have
recorded an estimate in the amount of $170.0 million as a
non-cash goodwill impairment charge as of December 31, 2008. We
expect to complete the step-two analysis during the first
quarter of 2009.
|
|
|
|
|
If actual results are not consistent
with our assumptions and estimates, we may be exposed to
additional goodwill impairment charges.
|
At December 31, 2008, we have $33.2
million of indefinite-lived intangibles consisting of a trade
name acquired as part of the January 2008 acquisition of GLS.
|
|
We have estimated the fair value of the
tradename using a relief from royalty payments
approach. This approach involves two steps (1) estimating
reasonable royalty rate for the tradename and (2) applying this
royalty rate to a net sales stream and discounting the resulting
cash flows to determine fair value. Fair value is then compared
with the carrying value of the tradename.
|
|
If actual results are not consistent
with our assumptions and estimates, we may be exposed to
intangible impairment charges
|
33 POLYONE
CORPORATION
|
|
|
|
|
|
|
|
|
Effect if Actual Results
|
Description
|
|
Judgments and Uncertainties
|
|
Differ from Assumptions
|
|
Income Taxes
|
|
|
|
|
We account for income taxes using the
asset and liability method. Under the asset and liability
method, deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
In addition, deferred tax assets are also recorded with respect
to net operating losses and other tax attribute carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Valuation
allowances are established when realization of the benefit of
deferred tax assets is not deemed to be more likely than not.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
|
|
The ultimate recovery of certain of our
deferred tax assets is dependent on the amount and timing of
taxable income that we will ultimately generate in the future
and other factors such as the interpretation of tax laws. This
means that significant estimates and judgments are required to
determine the extent that valuation allowances should be
provided against deferred tax assets. We have provided valuation
allowances as of December 31, 2008 aggregating $166.7 million
against such assets based on our current assessment of future
operating results and these other factors.
|
|
Although management believes that the
estimates and judgments discussed herein are reasonable, actual
results could differ, which could result in gains or losses that
could be material.
|
We recognize net tax benefits under the
recognition and measurement criteria of FIN 48, which prescribes
requirements and other guidance for financial statement
recognition and measurement of positions taken or expected to be
taken on tax returns. We record interest and penalties related
to uncertain tax positions as a component of income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Environmental Liabilities
|
|
|
|
|
Based upon estimates prepared by our
environmental engineers and consultants, we have $84.6 million
accrued at December 31, 2008 to cover probable future
environmental remediation expenditures.
|
|
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.
|
|
If further developments or resolution of
these matters are not consistent with our assumptions and
judgments, we may need to recognize a significant charge in a
future period.
|
34 POLYONE
CORPORATION
|
|
|
|
|
|
|
|
|
Effect if Actual Results
|
Description
|
|
Judgments and Uncertainties
|
|
Differ from Assumptions
|
|
Share-Based Compensation
|
|
|
|
|
We have share-based compensation plans
that include non-qualified stock options, incentive stock
options, restricted stock, restricted stock units, performance
shares, performance units and stock appreciation rights (SARs).
See Note 16, Share-Based Compensation, to the
accompanying consolidated financial statements for a complete
discussion of our stock-based compensation programs.
|
|
Option-pricing models and generally
accepted valuation techniques require management to make
assumptions and to apply judgment to determine the fair value of
our awards. These assumptions and judgments include estimating
the future volatility of our stock price, future employee
turnover rates and risk-free rate of return.
|
|
We do not believe there is a reasonable
likelihood there will be a material change in the future
estimates or assumptions we use to determine share-based
compensation expense. However, if actual results are not
consistent with our estimates or assumptions, we may be exposed
to changes in share-based compensation expense that could be
material.
|
We determine the fair value of our SARs
granted in 2008 based on the Black-Scholes method. For SARs
granted during 2007 and 2006, the option pricing model used was
a Monte Carlo simulation method.
|
|
|
|
|
We determine the fair value of our
market-based and performance-based nonvested share awards at the
date of grant using generally accepted valuation techniques and
the average of the high and low grant date market price of our
stock.
|
|
|
|
|
Management reviews its assumptions and
the valuations provided by independent third-party valuation
advisors to determine the fair value of share-based compensation
awards.
|
|
|
|
|
New Accounting
Pronouncements
FASB Statement No. 157 In
September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurement, which defines fair value,
establishes the framework for measuring fair value under
U.S. GAAP and expands disclosures about fair value
measurements. FASB Statement 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 FASB Statement
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 FASB Statement 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 FASB Statement 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.
FASB Statement No. 159 In
February 2007, the FASB issued FASB Statement 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. FASB Statement No. 159 is
effective for fiscal years beginning after November 15,
2007. The adoption of FASB Statement No. 159 had no impact
on our financial statements.
FASB Statement No. 141 (revised)
In December 2007, the FASB issued FASB
Statement 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. FASB Statement
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.
FASB Statement No. 161 In March
2008, the FASB issued FASB Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133. FASB Statement No. 161 requires
qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value
amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in
derivative agreements. FASB Statement No. 161 is effective
for fiscal years beginning after November 15, 2008. We are
evaluating the effect that adoption will have on our 2009
financial statements.
FASB Staff Position No. FAS 132(R)-1
In December 2008, the FASB issued FASB Staff
Position No. 132(R)-1, which amends FASB Statement 132(R),
Employers Disclosures About Postretirement Benefit Plan
Assets, to require more detailed disclosures about
employers plan assets, including employers
investment strategies, major categories of plan assets,
concentrations of risk within plan assets and valuation
techniques used to measure the fair value of plan assets. FASB
Staff Position No. 132(R)-1 is effective for disclosures in
financial statement for fiscal years ending after
December 15, 2009. We are evaluating the effect that
adoption will have on our 2009 financial statements.
35 POLYONE
CORPORATION
|
|
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 are subject
to interest rate risk related to our floating rate debt. As of
December 31, 2008, approximately 89% of our debt
obligations were at fixed rates. There would be no significant
impact on our interest expense or cash flows from either a 10%
increase or decrease in market rates of interest on our
outstanding variable rate debt as of December 31, 2008.
To help manage borrowing costs, we may enter into interest rate
swap agreements. Under these arrangements, we agree to exchange,
at specified intervals, the difference between fixed and
floating interest amounts on
agreed-upon
notional principal amounts. On December 30, 2008, we
terminated an interest rate swap that fixed the floating rate on
$40.0 million of borrowings under our revolving credit
facility at an effective rate of 8.4%. This swap was originally
scheduled to expire on January 9, 2009. At
December 31, 2008, there were no outstanding interest rate
swap agreements. 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. During January
2008, four of these interest rate swap agreements in the
aggregate amount of $70.0 million were terminated.
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. 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 accompanying consolidated statements of
operations. Gains and losses on these contracts generally offset
gains or losses on the assets and liabilities being hedged. At
December 31, 2008 and 2007, these agreements had a fair
value of $(0.3) million and $(2.3) million,
respectively. The estimated potential effect on the fair values
of these foreign exchange contracts, outstanding as of
December 31, 2008, given a 10% change in exchange rates
would be a $2.5 million impact to pre-tax income. We do not
hold or issue financial instruments for trading purposes. For
more information about our foreign currency exposure, see
Note 19, Financial Instruments, to the accompanying
consolidated financial statements.
We face translation risks related to the changes in foreign
currency exchange rates. Amounts invested in our foreign
operations are translated into U.S. dollars at the exchange
rates in effect at the balance sheet date. The resulting
translation adjustments are recorded as a component of
Accumulated other comprehensive income (loss) in the
Shareholders equity section of the accompanying
consolidated balance sheets. Net sales and expenses in our
foreign operations foreign currencies are translated into
varying amounts of U.S. dollars depending upon whether the
U.S. dollar weakens or strengthens against other
currencies. Therefore, changes in exchange rates may either
positively or negatively affect our net sales and expenses from
foreign operations as expressed in U.S. dollars.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Index to
Financial Statements
36 POLYONE
CORPORATION
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, 2008.
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, 2008 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, 2008 and has prepared Managements Annual
Report On Internal Control Over Financial Reporting contained on
page 73 of this Annual Report. This report concludes that
internal control over financial reporting is effective and that
no material weaknesses were identified.
|
|
|
|
|
/s/ Robert
M. Patterson
|
|
|
|
Stephen D. Newlin
|
|
Robert M. Patterson
|
Chairman, President and
|
|
Senior Vice President
|
Chief Executive Officer
|
|
and Chief Financial Officer
|
February 23, 2009
37 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, 2008, 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, 2008, 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, 2008, and 2007, and the
related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2008 of PolyOne
Corporation and our report dated February 20, 2009
expressed an unqualified opinion thereon.
Cleveland, Ohio
February 20, 2009
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,
2008 and 2007, and the related consolidated statements of
operations, shareholders equity, and cash flows for each
of the three years in the period ended December 31, 2008.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements 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 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, 2008 and 2007, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 1 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, 2008, 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 20, 2009
expressed an unqualified opinion thereon.
Cleveland, Ohio
February 20, 2009
38 POLYONE
CORPORATION
Consolidated
Statements of Operations
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In millions, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Sales
|
|
$
|
2,738.7
|
|
|
$
|
2,642.7
|
|
|
$
|
2,622.4
|
|
Cost of sales
|
|
|
2,442.1
|
|
|
|
2,381.7
|
|
|
|
2,321.9
|
|
|
Gross margin
|
|
|
296.6
|
|
|
|
261.0
|
|
|
|
300.5
|
|
Selling and administrative
|
|
|
287.1
|
|
|
|
254.8
|
|
|
|
221.9
|
|
Impairment of goodwill
|
|
|
170.0
|
|
|
|
|
|
|
|
|
|
Income from equity affiliates and minority interest
|
|
|
31.2
|
|
|
|
27.7
|
|
|
|
112.0
|
|
|
Operating (loss) income
|
|
|
(129.3
|
)
|
|
|
33.9
|
|
|
|
190.6
|
|
Interest expense, net
|
|
|
(37.2
|
)
|
|
|
(46.9
|
)
|
|
|
(63.1
|
)
|
Premium on early extinguishment of long-term debt
|
|
|
|
|
|
|
(12.8
|
)
|
|
|
(4.4
|
)
|
Other expense, net
|
|
|
(4.6
|
)
|
|
|
(6.6
|
)
|
|
|
(2.8
|
)
|
|
Income (loss) before income taxes and discontinued operations
|
|
|
(171.1
|
)
|
|
|
(32.4
|
)
|
|
|
120.3
|
|
Income tax (expense) benefit
|
|
|
(101.8
|
)
|
|
|
43.8
|
|
|
|
5.3
|
|
|
Income (loss) before discontinued operations
|
|
|
(272.9
|
)
|
|
|
11.4
|
|
|
|
125.6
|
|
Loss from discontinued operations and loss on sale, net of
income taxes
|
|
|
|
|
|
|
|
|
|
|
(2.7
|
)
|
|
Net income (loss)
|
|
$
|
(272.9
|
)
|
|
$
|
11.4
|
|
|
$
|
122.9
|
|
|
|
Basic and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before discontinued operations
|
|
$
|
(2.94
|
)
|
|
$
|
0.12
|
|
|
$
|
1.36
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
Basic and diluted earnings (loss) per common share
|
|
$
|
(2.94
|
)
|
|
$
|
0.12
|
|
|
$
|
1.33
|
|
|
|
Weighted-average shares used to compute earnings (loss) per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
92.7
|
|
|
|
92.8
|
|
|
|
92.4
|
|
Diluted
|
|
|
92.7
|
|
|
|
93.1
|
|
|
|
92.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share of common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The accompanying notes to
consolidated financial statements are an integral part of these
statements.
39 POLYONE
CORPORATION
Consolidated Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In millions, except per share data)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
44.3
|
|
|
$
|
79.4
|
|
Accounts receivable (less allowance of $6.7 in 2008 and $4.8 in
2007)
|
|
|
262.1
|
|
|
|
340.8
|
|
Inventories
|
|
|
197.8
|
|
|
|
223.4
|
|
Deferred income tax assets
|
|
|
1.0
|
|
|
|
20.4
|
|
Other current assets
|
|
|
19.9
|
|
|
|
19.8
|
|
|
Total current assets
|
|
|
525.1
|
|
|
|
683.8
|
|
Property, net
|
|
|
432.0
|
|
|
|
449.7
|
|
Investment in equity affiliates and nonconsolidated subsidiary
|
|
|
20.5
|
|
|
|
19.9
|
|
Goodwill
|
|
|
163.9
|
|
|
|
288.8
|
|
Other intangible assets, net
|
|
|
69.1
|
|
|
|
6.7
|
|
Deferred income tax assets
|
|
|
0.5
|
|
|
|
69.9
|
|
Other non-current assets
|
|
|
66.6
|
|
|
|
64.2
|
|
|
Total assets
|
|
$
|
1,277.7
|
|
|
$
|
1,583.0
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
19.8
|
|
|
$
|
22.6
|
|
Short-term debt
|
|
|
6.2
|
|
|
|
6.1
|
|
Accounts payable, including amounts payable to related party
|
|
|
160.0
|
|
|
|
250.5
|
|
Accrued expenses
|
|
|
118.2
|
|
|
|
94.4
|
|
|
Total current liabilities
|
|
|
304.2
|
|
|
|
373.6
|
|
Long-term debt
|
|
|
408.3
|
|
|
|
308.0
|
|
Post-retirement benefits other than pensions
|
|
|
80.9
|
|
|
|
81.6
|
|
Pension benefits
|
|
|
225.0
|
|
|
|
82.6
|
|
Other non-current liabilities
|
|
|
83.4
|
|
|
|
87.8
|
|
Commitments and contingencies (See Note 13)
|
|
|
|
|
|
|
|
|
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 2008 and 2007
|
|
|
1.2
|
|
|
|
1.2
|
|
Additional paid-in capital
|
|
|
1,065.0
|
|
|
|
1,065.0
|
|
Accumulated deficit
|
|
|
(321.4
|
)
|
|
|
(48.5
|
)
|
Common stock held in treasury, at cost, 29.9 shares in 2008
and 29.1 shares in 2007
|
|
|
(323.8
|
)
|
|
|
(319.7
|
)
|
Accumulated other comprehensive loss
|
|
|
(245.1
|
)
|
|
|
(48.6
|
)
|
|
Total shareholders equity
|
|
|
175.9
|
|
|
|
649.4
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,277.7
|
|
|
$
|
1,583.0
|
|
|
|
The accompanying notes to
consolidated financial statements are an integral part of these
balance sheets.
40 POLYONE
CORPORATION
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(272.9
|
)
|
|
$
|
11.4
|
|
|
$
|
122.9
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
68.0
|
|
|
|
57.4
|
|
|
|
57.1
|
|
Loss on disposition of discontinued businesses and related plant
phaseout charge
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Deferred income tax provision (benefit)
|
|
|
89.4
|
|
|
|
(57.1
|
)
|
|
|
(12.9
|
)
|
Premium on early extinguishment of long-term debt
|
|
|
|
|
|
|
12.8
|
|
|
|
4.4
|
|
Provision for doubtful accounts
|
|
|
6.0
|
|
|
|
1.9
|
|
|
|
3.0
|
|
Stock compensation expense
|
|
|
3.0
|
|
|
|
4.3
|
|
|
|
4.5
|
|
Impairment of goodwill
|
|
|
170.0
|
|
|
|
|
|
|
|
|
|
Asset write-downs and impairment charges, net of (gain) on sale
of closed facilities
|
|
|
3.6
|
|
|
|
3.3
|
|
|
|
(0.9
|
)
|
Companies carried at equity and minority interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity affiliates and minority interest
|
|
|
(31.2
|
)
|
|
|
(27.7
|
)
|
|
|
(112.0
|
)
|
Dividends and distributions received
|
|
|
32.9
|
|
|
|
37.6
|
|
|
|
97.7
|
|
Changes in assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
60.8
|
|
|
|
(10.8
|
)
|
|
|
20.0
|
|
Decrease (increase) in inventories
|
|
|
33.6
|
|
|
|
26.7
|
|
|
|
(39.6
|
)
|
(Decrease) increase in accounts payable
|
|
|
(94.7
|
)
|
|
|
17.8
|
|
|
|
(17.2
|
)
|
Increase (decrease) in sale of accounts receivable
|
|
|
14.2
|
|
|
|
|
|
|
|
(7.9
|
)
|
Decrease in accrued expenses and other
|
|
|
(10.2
|
)
|
|
|
(10.4
|
)
|
|
|
(10.4
|
)
|
Net cash used by discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
Net cash provided by operating activities
|
|
|
72.5
|
|
|
|
67.2
|
|
|
|
111.7
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(42.5
|
)
|
|
|
(43.4
|
)
|
|
|
(41.1
|
)
|
Investment in affiliated company
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
Business acquisitions and related deposits, net of cash acquired
|
|
|
(150.2
|
)
|
|
|
(11.2
|
)
|
|
|
(1.5
|
)
|
Proceeds from sale of discontinued business
|
|
|
|
|
|
|
|
|
|
|
17.3
|
|
Proceeds from sale of assets
|
|
|
0.3
|
|
|
|
9.4
|
|
|
|
8.7
|
|
Proceeds from sale of investment in equity affiliate
|
|
|
|
|
|
|
260.5
|
|
|
|
|
|
Net cash used by discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
Net cash (used) provided by investing activities
|
|
|
(193.5
|
)
|
|
|
215.3
|
|
|
|
(16.8
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in short-term debt
|
|
|
43.3
|
|
|
|
(0.2
|
)
|
|
|
(2.1
|
)
|
Issuance of long-term debt, net of debt issuance costs
|
|
|
77.8
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(25.3
|
)
|
|
|
(264.1
|
)
|
|
|
(60.0
|
)
|
Purchase of common stock for treasury
|
|
|
(8.9
|
)
|
|
|
|
|
|
|
|
|
Premium on early extinguishment of long-term debt
|
|
|
|
|
|
|
(12.8
|
)
|
|
|
(4.4
|
)
|
Proceeds from the exercise of stock options
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
3.1
|
|
|
Net cash provided (used) in financing activities
|
|
|
88.0
|
|
|
|
(275.9
|
)
|
|
|
(63.4
|
)
|
Effect of exchange rate changes on cash
|
|
|
(2.1
|
)
|
|
|
6.6
|
|
|
|
1.9
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(35.1
|
)
|
|
|
13.2
|
|
|
|
33.4
|
|
Cash and cash equivalents at beginning of year
|
|
|
79.4
|
|
|
|
66.2
|
|
|
|
32.8
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
44.3
|
|
|
$
|
79.4
|
|
|
$
|
66.2
|
|
|
|
The accompanying notes to
consolidated financial statements are an integral part of these
statements.
41 POLYONE
CORPORATION
Consolidated
Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Common
|
|
|
Other
|
|
(In millions, except per share data;
|
|
Common
|
|
|
Shares Held
|
|
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stock Held
|
|
|
Comprehensive
|
|
shares in thousands)
|
|
Shares
|
|
|
in Treasury
|
|
|
Total
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
in Treasury
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
Balance January 1, 2006
|
|
|
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 FASB Statement 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 FASB Statement 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
|
)
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(272.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(272.9
|
)
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(25.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25.3
|
)
|
Adjustments related to FASB Statement No. 158:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit recognized during year, net of tax of $0.0
|
|
|
|
|
|
|
|
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.4
|
)
|
Net actuarial loss occurring during year, net of tax of $0.2
|
|
|
|
|
|
|
|
|
|
|
(157.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(157.8
|
)
|
Adjustment for plan amendment, net of tax of $0.0
|
|
|
|
|
|
|
|
|
|
|
(6.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.1
|
)
|
Adjustment for supplemental executive retirement plan, net of
tax of $0.0
|
|
|
|
|
|
|
|
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(469.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(1,250
|
)
|
|
|
(8.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.9
|
)
|
|
|
|
|
Stock-based compensation and benefits and exercise of options
|
|
|
|
|
|
|
391
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
122,192
|
|
|
|
(29,918
|
)
|
|
$
|
175.9
|
|
|
$
|
1.2
|
|
|
$
|
1,065.0
|
|
|
$
|
(321.4
|
)
|
|
$
|
(323.8
|
)
|
|
$
|
(245.1
|
)
|
|
|
|
|
|
|
The accompanying notes to financial
statements are an integral part of these statements.
42 POLYONE
CORPORATION
Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Note 2 DISCONTINUED OPERATIONS
Note 3 GOODWILL AND INTANGIBLE ASSETS
Note 4 EMPLOYEE SEPARATION AND PLANT
PHASEOUT
Note 5 FINANCIAL INFORMATION OF EQUITY
AFFILIATES
Note 6 FINANCING ARRANGEMENTS
Note 7 LEASING ARRANGEMENTS
Note 8 ACCOUNTS RECEIVABLE
Note 9 INVENTORIES
Note 10 PROPERTY
Note 11 OTHER BALANCE SHEET LIABILITIES
Note 12 EMPLOYEE BENEFIT PLANS
Note 13 COMMITMENTS AND RELATED-PARTY
INFORMATION
Note 14 OTHER EXPENSE, NET
Note 15 INCOME TAXES
Note 16 SHARE-BASED COMPENSATION
Note 17 SEGMENT INFORMATION
Note 18 WEIGHTED-AVERAGE SHARES USED IN
COMPUTING EARNINGS PER SHARE
Note 19 FINANCIAL INSTRUMENTS
Note 20 FAIR VALUE
Note 21 BUSINESS COMBINATION
Note 22 SHAREHOLDERS EQUITY
Note 23 SUBSEQUENT EVENTS
Note 24 SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
|
|
Note 1
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Description of
Business
PolyOne Corporation (PolyOne, Company, we, us or our) is a
premier 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)
resins. We also have three equity investments: one in a
manufacturer of caustic soda and chlorine; one in a manufacturer
of PVC compound products; and one in a formulator of
polyurethane compounds. PolyOne was incorporated in the state of
Ohio on August 31, 2000.
Our operations are located primarily in the United States,
Europe, Canada, Asia and Mexico. Our operations are reported in
six reportable segments: International Color and Engineered
Materials; Specialty Engineered Materials; Specialty Color,
Additives and Inks; Performance Products and Solutions; PolyOne
Distribution; and Resin and Intermediates. See Note 17,
Segment Information, for more information.
On July 1, 2008, we announced that, in June 2008, Producer
Services, formerly included in All Other, was combined with Geon
Performance Polymers to form the Performance Products and
Solutions operating segment. In addition, North American Color
and Additives and Specialty Inks and Polymer Systems, both
formerly included in All Other, were combined to form a new
operating segment named Specialty Color, Additives and Inks.
Prior period segment information has been reclassified to
conform to the 2008 presentation.
On March 20, 2008, we announced the formation of the
Specialty Engineered Materials segment. This segment includes
PolyOnes specialty thermoplastic elastomer (TPE) compounds
product line in Europe and Asia (historically included in
International Color and Engineered Materials), North American
Engineered Materials (historically included in All Other) and
GLS Corporation (GLS). Prior
43 POLYONE
CORPORATION
period segment information has been reclassified to conform to
the 2008 presentation.
In January 2008, we acquired 100% of the outstanding capital
stock of GLS, a global provider of specialty TPE compounds for
consumer, packaging and medical applications, for
$148.9 million, including acquisition costs net of cash
received. See Note 21, Business Combination, for
more information.
In December 2007, we 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 July 2007, we sold our 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 October 2006, we purchased the remaining 50% of our equity
investment in DH Compounding Company (DH Compounding) from a
wholly-owned subsidiary of The Dow Chemical Company for
$10.2 million. DH Compounding is consolidated in the
accompanying consolidated balance sheets, and the results of
operations are included in the accompanying consolidated
statements of operations beginning October 1, 2006. DH
Compounding is included in the Performance Products and
Solutions reporting segment.
In February 2006, we sold 82% of our Engineered Films business
for $26.7 million. This business is presented in
discontinued operations in the 2006 consolidated financial
statements. We maintain an 18% ownership interest in this
business, which is reflected in the consolidated financial
statements on the cost basis of accounting.
Unless otherwise noted, disclosures contained in these
consolidated financial statements relate to continuing
operations.
Consolidation and
Basis of Presentation
The consolidated financial statements include the accounts of
PolyOne and its subsidiaries. All majority-owned affiliates over
which we have control are consolidated. Investments in
affiliates and joint ventures in which our ownership is 50% or
less, or in which we do not have control but have 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.
Reclassifications
Certain reclassifications of the prior period amounts and
presentation have been made to conform to the presentation for
the current period.
Our presentation of certain expenses within the accompanying
consolidated statements of operations was changed. Depreciation
expense recorded in connection with the manufacture of our
products sold during each reporting period is now included in
Cost of sales. Depreciation expense not associated with
the manufacture of our products and amortization expense are now
included in Selling and administrative. Depreciation and
amortization were previously combined and reported in the
caption Depreciation and amortization. In connection with
these reclassifications, we added the caption Gross margin
to the accompanying consolidated statements of operations.
We believe this change in presentation provides a more
meaningful measure of cost of sales and selling and
administrative expenses and that gross margin is a widely
accepted measure of performance. The following table provides
the amounts reclassified for the years ended December 31,
2007 and 2006:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Amounts reclassified:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
44.4
|
|
|
$
|
37.8
|
|
Selling and administrative expenses
|
|
|
13.0
|
|
|
|
19.3
|
|
Depreciation and amortization
|
|
|
(57.4
|
)
|
|
|
(57.1
|
)
|
|
Total costs and expenses
|
|
$
|
|
|
|
$
|
|
|
|
|
Also, during 2008, we netted Interest income into
Interest expense resulting in one line on the
consolidated statement of operations, Interest expense,
net. See Note 6, Financing Arrangements, for
more information on interest expense, net.
These reclassifications have no effect on total assets, total
shareholders equity, net income (loss) or cash flows as
previously presented.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting
principles (U.S. GAAP) 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 related
impairment testing, goodwill impairments, 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.
Cash and Cash
Equivalents
We consider 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.
44 POLYONE
CORPORATION
Allowance for
Doubtful Accounts
We evaluate the collectability of trade receivables based on a
combination of factors. We regularly analyze significant
customer accounts and, when we become aware of a specific
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 record a specific reserve for bad debt to reduce the related
receivable to the amount we reasonably believe is collectible.
We also record 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. In estimating the
reserves, we also take into consideration the existence of
credit insurance. If circumstances related to specific customers
change, our estimates of the recoverability of receivables could
be adjusted further.
Concentrations of
Credit Risk
Financial instruments, including foreign exchange contracts and
interest rate swap agreements, along with trade accounts
receivable and notes receivable, subject us to potential credit
risk. Concentration of credit risk for trade accounts receivable
is limited due to the large number of customers constituting our
customer base and their distribution among many industries and
geographic locations. We are exposed to credit risk with respect
to notes receivable but we believe collection of the outstanding
amounts is probable. We are 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. We believe that
the risk of incurring material losses related to this credit
risk is remote. We do not require collateral to support the
financial position of our credit risks.
Sale of Accounts
Receivable
We remove trade accounts receivable that are sold from the
balance sheet at the time of sale.
Inventories
Inventories are stated at the lower of cost or market.
Approximately 34% and 38% of our inventories as of
December 31, 2008 and 2007, respectively, 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
We record property, plant and equipment 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. We use the deferral
method of accounting for planned major maintenance. We expense
repair and maintenance costs as incurred. We capitalize
replacements and betterments that increase the estimated useful
life of an asset. We capitalize interest expense on major
construction and development projects while in progress.
We retain fully depreciated assets in property and accumulated
depreciation accounts until we remove them from service. In the
case of sale, retirement or disposal, the asset cost and related
accumulated depreciation balance is removed from the respective
account, and the resulting net amount, less any proceeds, is
included as a component of income (loss) from continuing
operations in the accompanying consolidated statements of
operations.
We account for operating leases under the provisions of
Financial Accounting Standards Board (FASB) Statement
No. 13, Accounting for Leases, and FASB Technical
Bulletin No. 85-3,
Accounting for Operating Leases with Scheduled Rent
Increases. These pronouncements require us to recognize
escalated rents, including any rent holidays, on a straight-line
basis over the term of the lease for those lease agreements
where we receive the right to control the use of the entire
leased property at the beginning of the lease term.
Impairment of
Long-Lived Assets
We assess the recoverability of long-lived assets (excluding
goodwill) and identifiable acquired intangible assets with
finite useful lives, whenever events or changes in circumstances
indicate that we may not be able to recover the assets
carrying amount. We measure the recoverability of assets to be
held and used by a comparison of the carrying amount of the
asset to the expected net future undiscounted cash flows to be
generated by that asset, or, for identifiable intangibles with
finite useful lives, by determining whether the amortization of
the intangible asset balance over its remaining life can be
recovered through undiscounted future cash flows. The amount of
impairment of identifiable intangible assets with finite useful
lives, if any, to be recognized is measured based on projected
discounted future cash flows. We measure the amount of
impairment of other long-lived assets (excluding goodwill) as
the amount by which the carrying value of the asset exceeds the
fair market value of the asset, which is generally determined,
based on projected discounted future cash flows or appraised
values. We classify long-lived assets to be disposed of other
than by sale as held and used until they are disposed. We report
long-lived assets to be disposed of by sale as held for sale and
recognize those assets in the balance sheet at the lower of
carrying amount or fair value less cost to sell, and cease
depreciation.
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. FASB Statement
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 of the related
reporting unit, and when the carrying value exceeds the fair
value, the carrying value of
45 POLYONE
CORPORATION
the impaired goodwill or indefinite-lived intangible assets is
reduced to its fair value.
We use an income approach to estimate the fair value of our
reporting units. Absent an indication of fair value from a
potential buyer or similar specific transactions, we believe
that the use of this method provides reasonable estimates of a
reporting units fair value. 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. We believe 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 eight-year projection of operating results
and cash flows that is discounted using a weighted-average cost
of capital. The projection is based upon our 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. There are inherent uncertainties,
however, related to these factors and to our judgment in
applying them to this analysis. Nonetheless, we believe that
this method provides a reasonable approach to estimate the fair
value of our reporting units.
After completing our impairment testing as of July 1, 2008,
we changed the timing of the annual impairment testing to be as
of October 1 of each year. We adopted this change to assess the
recorded values of goodwill and indefinite-lived intangible
assets for potential impairment at a time more coincident with
the strategic business planning process and closer to the fiscal
year-end reporting date. This change had no effect on reported
earnings for any period presented.
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 October 1, 2009. During the fourth
quarter of 2008, indicators of potential impairment caused us to
conduct an interim impairment test as of December 31, 2008
which resulted in a non-cash goodwill impairment charge of
$170.0 million. See Note 3, Goodwill and Intangible
Assets, for further discussion of this impairment charge.
Indefinite-lived intangible assets consist of a tradename,
acquired as part of the January 2008 acquisition of GLS, which
is tested annually for impairment. The fair value of the trade
name is calculated using a relief from royalty
payments methodology. This approach involves two steps
(1) estimating reasonable royalty rates for the tradename
and (2) applying this royalty rate to a net sales stream
and discounting the resulting cash flows to determine fair
value. This fair value is then compared with the carrying value
of the tradename. Other finite-lived intangible assets, which
consist primarily of non-contractual customer relationships,
sales contracts, patents and technology, are amortized over
their estimated useful lives. The remaining lives range up to
14 years.
Notes
Receivable
As of December 31, 2008, included in Other non-current
assets is $20.5 million outstanding on a seller note
receivable due from Excel Polymers LLC who purchased our
elastomers and performance additives business in February 2006.
This note accrues interest at 10% and is due in full with
accrued interest at maturity in July 2010. Also included in
Other non-current assets as of December 31, 2008 is
$7.5 million outstanding on a seller note receivable due to
us from OSullivan Films who purchased our engineered films
business in August 2004. This note accrues interest at 7% and is
due in full with accrued interest at maturity in December 2010.
Litigation
Reserves
FASB Statement No. 5, Accounting for Contingencies,
requires that we accrue for loss contingencies associated
with outstanding litigation, claims and assessments for which
management has determined it is probable that a loss contingency
exists and the amount of loss can be reasonably estimated. We
expense professional fees associated with litigation claims and
assessments as incurred.
Derivative
Financial Instruments
FASB Statement 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.
We are exposed to foreign currency changes and interest rate
fluctuations in the normal course of business. We have
established policies and procedures that manage these exposures
through the use of financial instruments. By policy, we do not
enter into these instruments for trading purposes or speculation.
We enter into intercompany lending transactions 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 with major
financial institutions. 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 accompanying consolidated statements of operations.
Realized gains and losses on these contracts offset the foreign
exchange gains and losses on the underlying transactions. Our
forward contracts have original
46 POLYONE
CORPORATION
maturities of one year or less. See Note 19, Financial
Instruments, for more information.
During 2008, 2007 and 2006, we used interest rate swap
agreements that modified the exposure to interest risk by
converting fixed-rate debt to a floating rate. Changes in the
fair value of derivative financial instruments were recognized
in the period when the change occurred in either net income or
shareholders equity (as a component of accumulated other
comprehensive income or loss), depending on whether the
derivative was being used to hedge changes in fair value or cash
flows. These interest rate swaps qualified as fair value hedges
in accordance with FASB Statement No. 133. The interest
rate swap and instrument being hedged were marked to market in
the balance sheet. The net effect on our operating results was
that interest expense on the portion of fixed-rate debt being
hedged was recorded based on the variable rate that was stated
within the swap agreement. No other cash payments were made
unless the contract was terminated prior to its maturity. In
this case, the amount paid or received at settlement was
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. As of December 31, 2008, there were no open
interest rate swaps that are designated for hedge accounting
treatment in accordance with FASB Statement No. 133. See
Note 7, Financing Arrangements, for more information.
In January 2008, we entered into a floating to fixed interest
rate swap. This derivative was not designated as a hedge and, as
a result, was marked to market with the resulting gain and loss
recognized as interest expense in the accompanying consolidated
statements of operations. This agreement was terminated on
December 30, 2008.
Pension and Other
Postretirement Plans
We account for our pensions and other postretirement benefits in
accordance with FASB Statements No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, No. 87, Employers Accounting for
Pensions and No. 106, Employers Accounting for
Postretirement Benefits Other than Pensions. We adopted FASB
Statement No. 158 on December 31, 2006. FASB Statement
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 plans 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 FASB Statement 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 of our
accumulated other comprehensive loss. We also recorded an
adjustment of $2.7 million to increase accumulated other
comprehensive loss to record our proportionate share of
OxyVinyls adoption of FASB Statement No. 158. The
adoption of FASB Statement No. 158 had no effect on our
compliance with the financial covenants contained in the
agreements governing our debt and our receivables sales
facility, and is not expected to affect our financial position,
operating results or cash flows in future periods.
Comprehensive
Income
Accumulated other comprehensive loss at December 31, 2008
and 2007 are as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
(5.0
|
)
|
|
$
|
20.3
|
|
Amortization of unrecognized losses, transition obligation and
prior service costs
|
|
|
(240.1
|
)
|
|
|
(68.9
|
)
|
|
|
|
$
|
(245.1
|
)
|
|
$
|
(48.6
|
)
|
|
|
Marketable
Securities
Marketable securities are classified as available for sale and
are presented at current market value. Net unrealized gains and
losses, that are deemed to be temporary, on available for sale
securities are reflected in accumulated other comprehensive
income or loss in shareholders equity in the accompanying
consolidated balance sheets. An impairment loss on available for
sale securities is recognized in Other expense when a
decline in value is deemed to be
other-than-temporary.
Fair Value of
Financial Instruments
FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, requires disclosures of the fair
value of financial instruments. Our financial instruments
include: cash and cash equivalents; short and long-term debt;
foreign exchange contracts; interest rate swaps; and available
for sale securities.
The carrying amount of cash and cash equivalents approximates
fair value. The carrying amounts of our short-term borrowings
approximate fair value. The fair value of our senior notes,
debentures and medium-term notes is based on quoted market
prices. The carrying amount of our borrowings under
variable-interest rate revolving credit agreements and other
long-term borrowings approximates fair value. The fair value of
short-term foreign exchange contracts is based on exchange rates
at December 31, 2008. The fair value of interest rate swap
agreements, obtained from the respective financial institutions,
is based on current rates of interest and is computed as the net
present value of the remaining exchange obligations under the
terms of the contract. The fair value of available for sale
securities is based on quoted market prices. See Note 19,
Financial Instruments, for further discussion.
47 POLYONE
CORPORATION
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 other income, net in the accompanying consolidated
statements of operations.
Revenue
Recognition
We recognize revenue when the revenue is realized or realizable,
and has been earned. We record sales when a firm sales agreement
is in place, shipment has occurred and collectability of the
fixed or determinable sales price is reasonably assured.
Shipping and
Handling Costs
Shipping and handling costs are included in cost of sales.
Research and
Development Expense
Research and development costs, which were $26.5 million in
2008, $21.6 million in 2007 and $20.3 million in 2006,
are charged to expense as incurred.
Environmental
Costs
We expense 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 our proportionate share of the
cost can be reasonably estimated.
Equity
Affiliates
We account for our investments in equity affiliates under
Accounting Principles Board (APB) Opinion No. 18, The
Equity Method of Accounting for Investments in Common Stock.
We recognize our proportionate share of the income of equity
affiliates. Losses of equity affiliates are recognized to the
extent of our 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. As of December 31, 2008 and 2007, there were no
deferred losses related to equity investees.
We recognize impairment losses in the value of investments that
we judge to be other than temporary. See Note 5,
Financial Information of Equity Affiliates, for more
information.
Share-Based
Compensation
As of December 31, 2008, we had one active share-based
employee compensation plan, which is described more fully in
Note 16, Share-Based Compensation.
PolyOne accounts for share-based compensation under the
provisions of FASB Statement No. 123 (revised 2004),
Share-Based Payment. FASB Statement No. 123(R)
requires us 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
accompanying consolidated statements of operations. Under the
modified prospective transition method, compensation cost
recognized during the year ended December 31, 2006 includes
(a) compensation cost for all share-based payments granted
prior to, but not yet vested as of, January 1, 2006, based
on the grant date fair value estimated in accordance with the
original provisions of FASB Statement 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
FASB Statement No. 123(R). Total share-based compensation
cost for the years ended December 31, 2008, 2007 and 2006,
respectively, was $3.0 million, $4.3 million and
$4.5 million pre-tax.
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. In accordance with FASB Statement
No. 109, Accounting for Income Taxes
(SFAS No. 109), we evaluate our deferred income taxes
to determine if a valuation allowance should be established
against the deferred tax assets or if the valuation allowance
should be reduced based on consideration of all available
evidence, both positive and negative, using a more likely
than not standard.
New Accounting
Pronouncements
FASB Statement No. 157 In
September 2006, the FASB issued FASB Statement No. 157,
Fair Value Measurements, which defines fair value,
establishes the framework for measuring fair value under
U.S. GAAP and expands disclosures about fair value
measurements. In February 2008, the FASB issued FASB Staff
Position
157-2,
Effective Date of FASB Statement No. 157, that
delayed the effective date of FASB Statement 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 FASB Statement No. 157 on
January 1, 2008, and such adoption did not have a material
impact on our financial statements. We are evaluating the effect
that adoption of the deferred portion of FASB Statement
No. 157 will have on our financial statements in 2009,
specifically in the areas of measuring fair value in business
combinations and goodwill
48 POLYONE
CORPORATION
impairment tests. See Note 20, Fair Value, for
information on our fair value assets and liabilities.
FASB Statement No. 159 In
February 2007, the FASB issued FASB Statement 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. FASB Statement No. 159 was
effective January 1, 2008. The adoption of FASB Statement
No. 159 had no impact on our financial statements.
FASB Statement No. 141 (revised 2007)
In December 2007, the FASB issued FASB
Statement 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. FASB Statement
No. 141(R) is effective for business combinations for which
the acquisition date is on or after January 1, 2009. We are
evaluating the effect that adoption will have on our 2009
financial statements.
FASB Statement No. 161 In March
2008, the FASB issued FASB Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133. FASB Statement No. 161 requires
qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value
amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in
derivative agreements. FASB Statement No. 161 is effective
for fiscal years beginning after November 15, 2008. We are
evaluating the effect that adoption will have on our 2009
financial statements.
FASB Staff Position No. FAS 132(R)-1
In December 2008, the FASB issued FASB Staff
Position No. 132(R)-1, which amends FASB Statement 132(R),
Employers Disclosures About Postretirement Benefit Plan
Assets, to require more detailed disclosures about
employers plan assets, including employers
investment strategies, major categories of plan assets,
concentrations of risk within plan assets and valuation
techniques used to measure the fair value of plan assets. FASB
Staff Position No. 132(R)-1 is effective for disclosures in
financial statements for fiscal years ending after
December 15, 2009. We are evaluating the effect that
adoption will have on our 2009 financial statements.
|
|
Note 2
|
DISCONTINUED
OPERATIONS
|
In February 2006, we 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. We retained an 18% ownership
interest in the company. Under EITF Issue
No. 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
(revised), 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.
During 2006, we 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 U.S. GAAP, the results of
discontinued operations, as presented below, do not include any
depreciation or amortization expense.
|
|
|
|
|
(In millions)
|
|
2006
|
|
|
|
|
Sales
|
|
$
|
9.6
|
|
|
|
|
|
|
Pre-tax income from operations
|
|
$
|
0.4
|
|
Pre-tax loss on disposition of businesses
|
|
|
(3.1
|
)
|
|
|
|
|
(2.7
|
)
|
Income tax expense, net of valuation allowance
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(2.7
|
)
|
|
|
|
|
Note 3
|
GOODWILL AND
INTANGIBLE ASSETS
|
In accordance with FASB Statement No. 141, Business
Combinations, purchase accounting requires that the total
purchase price of acquisitions be allocated to the fair value of
assets acquired and liabilities assumed based on their fair
values at the acquisition date, with amounts exceeding the fair
values being recorded as goodwill. As such, the acquisition of
GLS resulted in the addition of $44.1 million of goodwill
and $65.7 million in identifiable intangibles during the
year ended December 31, 2008. See Note 21, Business
Combination, for more information on the GLS
49 POLYONE
CORPORATION
acquisition. The following table details the changes in the
carrying amount of goodwill:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
288.8
|
|
|
$
|
287.0
|
|
Acquisition of businesses
|
|
|
45.2
|
|
|
|
1.8
|
|
Impairment
|
|
|
(170.0
|
)
|
|
|
|
|
Translation and other adjustments
|
|
|
(0.1
|
)
|
|
|
|
|
|
Balance at end of year
|
|
$
|
163.9
|
|
|
$
|
288.8
|
|
|
|
Goodwill as of December 31, 2008 and 2007, by operating
segment, was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
International Color and Engineered Materials
|
|
$
|
72.0
|
|
|
$
|
72.0
|
|
Specialty Engineered Materials
|
|
|
44.1
|
|
|
|
|
|
Specialty Color, Additives and Inks
|
|
|
33.8
|
|
|
|
33.8
|
|
Performance Products and Solutions
|
|
|
12.4
|
|
|
|
181.4
|
|
PolyOne Distribution
|
|
|
1.6
|
|
|
|
1.6
|
|
|
Total
|
|
$
|
163.9
|
|
|
$
|
288.8
|
|
|
|
FASB Statement No. 142, Goodwill and Other
Intangibles, requires that our annual, and any interim,
impairment assessment be performed at the reporting
unit level. At October 1, 2008, PolyOne had five
reporting units that had a significant amount of goodwill: Geon
Compounds; International Color and Engineered Materials; GLS;
Specialty Inks and Polymer Systems; and Specialty Coatings.
Under the provisions of FASB Statement No. 142, these five
reporting units were tested for impairment as of October 1,
2008 and the fair values of the income approach exceeded the
carrying value of each reporting unit. During the fourth quarter
of 2008, indicators of potential impairment caused us to conduct
an interim impairment test. Those indicators included the
following: a significant decrease in market capitalization; a
decline in recent operating results; and a decline in our
business outlook primarily due to the macroeconomic environment.
In accordance with FASB Statement No. 142, we completed
step one of the impairment analysis and concluded that, as of
December 31, 2008, the fair value of two of our reporting
units was below their respective carrying values, including
goodwill. The two reporting units that showed potential
impairment were Geon Compounds and Specialty Coatings (reporting
units within Performance Products and Solutions). As such, step
two of the impairment test was initiated in accordance with FASB
Statement No. 142. Due to its time consuming nature, the
step-two analysis has not been completed as of the date of this
filing. In accordance with paragraph 22 of Statement
No. 142, we have recorded an estimate in the amount of
$170.0 million as a non-cash goodwill impairment charge as
of December 31, 2008. We expect to complete the step-two
analysis during the first quarter of 2009.
In addition, during the third quarter of 2008, we assessed
goodwill of our equity affiliates and as a result of this
review, recorded a non-cash impairment charge of
$2.6 million related to our proportionate share of a
write-down of goodwill of Geon Polimeros Andinos (GPA), our
equity affiliate (owned 50%) and part of the Performance
Products and Solutions operating segment. This impairment
charge, included in Income from equity affiliates and
minority interest on the accompanying consolidated
statements of operations and reflected on the line Corporate
and eliminations in Note 17, Segment
Information, mainly resulted from declines in current and
projected operating results and cash flows of the equity
affiliate. See Note 5, Financial Information of Equity
Affiliates, for a discussion of the related impairment of
the investment in GPA during 2008.
Information regarding PolyOnes finite-lived other
intangible assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
Acquisition
|
|
|
Accumulated
|
|
|
Currency
|
|
|
|
|
(In millions)
|
|
Cost
|
|
|
Amortization
|
|
|
Translation
|
|
|
Net
|
|
|
|
|
Non-contractual customer relationships
|
|
$
|
37.0
|
|
|
$
|
(9.2
|
)
|
|
$
|
|
|
|
$
|
27.8
|
|
Sales contract
|
|
|
11.4
|
|
|
|
(10.2
|
)
|
|
|
|
|
|
|
1.2
|
|
Patents, technology and other
|
|
|
8.8
|
|
|
|
(3.2
|
)
|
|
|
1.3
|
|
|
|
6.9
|
|
|
Total
|
|
$
|
57.2
|
|
|
$
|
(22.6
|
)
|
|
$
|
1.3
|
|
|
$
|
35.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
At December 31, 2008, PolyOne had $33.2 million of
indefinite-lived other intangible assets that are not subject to
amortization, consisting of a trade name acquired as part of the
January 2, 2008 GLS acquisition. This indefinite-lived
intangible asset was tested for impairment as of October 1,
2008. The fair value of the tradename is calculated using a
relief from royalty payments methodology. This
approach involves two steps (1) estimating a reasonable
royalty rate for the tradename and (2) applying this
royalty rate to a net sales stream and discounting the resulting
cash flows to determine fair value. This fair value is then
compared with the carrying value of the tradename. During 2008,
no impairment adjustments relating to indefinite-lived other
intangible assets were determined to be required.
Amortization of other finite-lived intangible assets was
$3.3 million for the year ended December 31, 2008,
$2.1 million for the year ended December 31, 2007 and
$2.1 million for the year ended December 31, 2006.
50 POLYONE
CORPORATION
We expect amortization expense on other finite-lived intangibles
for the next five years to be as follows:
|
|
|
|
|
Year
|
|
|
|
(In millions)
|
|
Amount
|
|
|
|
|
2009
|
|
$
|
3.3
|
|
2010
|
|
|
3.3
|
|
2011
|
|
|
3.0
|
|
2012
|
|
|
2.7
|
|
2013
|
|
|
2.7
|
|
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
accompanying consolidated statements of operations. No
impairment charges were recorded in 2008 or 2006.
|
|
Note 4
|
EMPLOYEE
SEPARATION AND PLANT PHASEOUT
|
Management has undertaken certain restructuring initiatives to
reduce costs and, as a result, we have incurred employee
separation and plant phaseout costs.
Employee separation costs include one-time termination benefits
including 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. We maintain 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, 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. Employee separation costs also include
on-going postemployment benefits accounted for under FASB
Statement No. 112, Postemployment Benefits, which
are accrued when it is probable that a liability has been
incurred and the amount can be reasonably estimated. Employee
separation costs are recorded in the accompanying consolidated
statements of operations on the lines Cost of sales and
Selling and administrative.
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
accompanying consolidated statements of operations 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 our other
facilities are transferred at net book value.
Employee separation and plant phaseout costs associated with
continuing operations are reflected on the line Corporate and
eliminations in Note 17, Segment Information.
A summary of total employee separation and plant phaseout costs,
including where the charges are recorded in the accompanying
consolidated statements of operations, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Cost of sales
|
|
$
|
29.3
|
|
|
$
|
1.4
|
|
|
$
|
0.2
|
|
Selling and administrative
|
|
|
10.4
|
|
|
|
0.8
|
|
|
|
(0.2
|
)
|
|
Total employee separation and plant phaseout
|
|
$
|
39.7
|
|
|
$
|
2.2
|
|
|
$
|
|
|
|
|
Included in employee separation and plant phaseout costs shown
in the preceding table were charges of $6.6 million,
included in Cost of sales, and $0.3 million,
included in Selling and administrative, for accelerated
depreciation on assets related to the 2008 restructuring
initiatives discussed below. Cash payments for employee
separation and plant phaseout costs during 2008, 2007 and 2006
were $5.5 million, $1.5 million and $1.8 million,
respectively.
2008 Activity In July 2008, we announced the
restructuring of certain manufacturing assets, primarily in
North America. We are closing certain production facilities,
including seven in North America and one in the United Kingdom,
resulting in a net reduction of approximately 150 positions. We
expect to incur one-time pre-tax charges of approximately
$28 million related to these actions, of which
$20.0 million has been recorded during 2008. In total,
these one-time charges will include cash costs of approximately
$15 million related to severance and site closure costs
with the remaining $13 million of non-cash costs related to
asset write-downs and accelerated depreciation, of which
$10.0 million has been recorded during 2008.
In January 2009, we announced that we will enact further cost
saving measures that include eliminating approximately 370 jobs
worldwide, implementing reduced work schedules for another 100
to 300 employees, closing our Niagara, Ontario facility and
idling certain other capacity. Additionally, we are planning
other actions that include freezing corporate officer salaries
throughout 2009. We expect to incur one-time pre-tax charges of
approximately $45 million related to these actions, of
which $18.3 million has been recorded during the fourth
quarter of 2008, which represents benefits to be provided under
ongoing benefit arrangements or required by statutory law. In
total, these one-time charges will include cash costs of
approximately $35 million related to severance and site
closure costs with the remaining $10 million of non-cash
costs related to asset write-downs and accelerated depreciation.
51 POLYONE
CORPORATION
The following table details the charges and changes to the
reserves associated with these initiatives for the year ended
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Separation
|
|
|
Plant Phaseout Costs
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Asset
|
|
|
|
|
(Dollars in millions, except employee numbers)
|
|
Employees
|
|
|
Costs
|
|
|
Cash Closure
|
|
|
Write-downs
|
|
|
Total
|
|
|
|
|
Balance at January 1, 2008
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Charge
|
|
|
699
|
|
|
|
26.1
|
|
|
|
2.2
|
|
|
|
10.0
|
|
|
|
38.3
|
|
Utilized
|
|
|
(173
|
)
|
|
|
(2.4
|
)
|
|
|
(1.5
|
)
|
|
|
(10.0
|
)
|
|
|
(13.9
|
)
|
|
Balance at December 31, 2008
|
|
|
526
|
|
|
$
|
23.7
|
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
24.4
|
|
|
|
In addition to the above, during 2008, we incurred
$1.1 million related to executive severance agreements,
which was included in Selling and administrative in the
accompanying consolidated statements of operations. We paid
$1.0 million related to executive severance agreements. Our
liability for unpaid executive severance costs was
$1.0 million at December 31, 2008 and will be paid
over the next 20 months.
2007 Activity 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
Specialty Color, Additives and Inks operating segment.
The closure and exit from our Commerce, California facility was
completed in the first quarter of 2007, during which we 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, we paid $0.9 million for executive severance.
Accrued executive severance costs at December 31, 2007 were
$1.0 million.
In September 2007, we announced the closure of two manufacturing
lines at our 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 were accrued
at December 31, 2007.
In addition, during 2007, $0.3 million of other non-cash
charges were incurred as we adjusted previous carrying values of
assets held for sale.
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 our Commerce, California facility to our 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 our plant phaseout activities.
During 2006, we paid $1.2 million under an executive
separation agreement between PolyOne and Thomas A. Waltermire,
our former President, Chief Executive Officer and a Director.
|
|
Note 5
|
FINANCIAL
INFORMATION OF EQUITY AFFILIATES
|
SunBelt Chlor-Alkali Partnership (SunBelt) is the most
significant of our 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)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
SunBelt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
173.0
|
|
|
$
|
180.6
|
|
|
$
|
186.7
|
|
Operating income
|
|
$
|
73.6
|
|
|
$
|
91.3
|
|
|
$
|
104.3
|
|
Partnership income as reported by SunBelt
|
|
$
|
65.1
|
|
|
$
|
82.0
|
|
|
$
|
94.6
|
|
PolyOnes ownership of SunBelt
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
|
Earnings of equity affiliate recorded by PolyOne
|
|
$
|
32.5
|
|
|
$
|
41.0
|
|
|
$
|
47.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summarized balance sheet as of December 31:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
22.4
|
|
|
$
|
27.8
|
|
|
|
|
|
Non-current assets
|
|
|
107.7
|
|
|
|
109.6
|
|
|
|
|
|
|
Total assets
|
|
|
130.1
|
|
|
|
137.4
|
|
|
|
|
|
|
Current liabilities
|
|
|
19.7
|
|
|
|
21.0
|
|
|
|
|
|
Non-current liabilities
|
|
|
97.5
|
|
|
|
109.7
|
|
|
|
|
|
|
Total liabilities
|
|
|
117.2
|
|
|
|
130.7
|
|
|
|
|
|
|
Partnership interest
|
|
$
|
12.9
|
|
|
$
|
6.7
|
|
|
|
|
|
|
|
OxyVinyls, a former 24% owned affiliate, 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 $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 July 6, 2007, we sold our 24% interest in OxyVinyls, a
manufacturer and marketer of PVC resins, for cash proceeds of
$261 million.
52 POLYONE
CORPORATION
The following table presents OxyVinyls summarized
financial results for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
(In millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
OxyVinyls:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,107.4
|
|
|
$
|
2,476.0
|
|
Operating income
|
|
$
|
11.6
|
|
|
$
|
274.8
|
|
Partnership income (loss) as reported by OxyVinyls
|
|
$
|
(2.0
|
)
|
|
$
|
246.2
|
|
PolyOnes ownership of OxyVinyls
|
|
|
24
|
%
|
|
|
24
|
%
|
|
PolyOnes proportionate share of OxyVinyls earnings
(loss)
|
|
|
(0.5
|
)
|
|
|
59.1
|
|
Amortization of the difference between PolyOnes investment
and its underlying share of OxyVinyls equity
|
|
|
0.3
|
|
|
|
0.6
|
|
|
Earnings (loss) of equity affiliate recorded by PolyOne
|
|
$
|
(0.2
|
)
|
|
$
|
59.7
|
|
|
|
We recorded an impairment of $14.8 million on our OxyVinyls
investment during 2007 due to an other than temporary decline in
value. It is included in Income from equity affiliates and
minority interest in the accompanying consolidated
statements of operations. 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 17, Segment Information).
On October 1, 2006, we purchased the remaining 50% interest
in DH Compounding from a subsidiary of The Dow Chemical Company.
DH Compounding is now fully consolidated in the financial
statements of PolyOne. Prior to the acquisition of DH
Compounding, it was accounted for as an equity affiliate and was
reflected in Specialty Color, Additives and Inks operating
segment together with BayOne Urethane Systems, L.L.C. (BayOne)
equity affiliate (owned 50%). The Performance Products and
Solutions operating segment includes the GPA equity affiliate
(owned 50%). The Altona Properties equity affiliate (owned
37.4%) is included in the Resin and Intermediates operating
segment.
Combined summarized financial information for these equity
affiliates follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
Net sales
|
|
$
|
112.2
|
|
|
$
|
116.8
|
|
Operating income
|
|
|
7.7
|
|
|
|
8.1
|
|
Partnership income as reported by other equity affiliates
|
|
|
6.6
|
|
|
|
6.5
|
|
Equity affiliate earnings recorded by PolyOne
|
|
|
3.3
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Summarized balance sheet as of December 31:
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
31.4
|
|
|
$
|
37.0
|
|
Non-current assets
|
|
|
12.3
|
|
|
|
14.6
|
|
|
Total assets
|
|
$
|
43.7
|
|
|
$
|
51.6
|
|
|
|
Current liabilities
|
|
$
|
24.6
|
|
|
$
|
32.2
|
|
Non-current liabilities
|
|
|
1.6
|
|
|
|
3.1
|
|
|
Total liabilities
|
|
$
|
26.2
|
|
|
$
|
35.3
|
|
|
|
During the third quarter of 2008, we recorded a non-cash
impairment charge of $2.6 million related to our
proportionate share of a write-down of goodwill of GPA mainly
resulting from declines in current and projected operating
results and cash flows of the equity affiliate. In addition,
during the third quarter of 2008, as a result of these declined
projections, we recorded a $2.1 million charge related to
an impairment in our investment in GPA. Our proportionate share
of 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 GPA.
These impairments are not reflected in the above equity
affiliate earnings because they are excluded as a measure of
segment operating income or loss that is reported to and
reviewed by the chief operating decision maker and are reflected
on the line Corporate and eliminations in Note 17,
Segment Information. These impairments are recorded in
Income from equity affiliates and minority interest in
the accompanying consolidated statements of operations.
|
|
Note 6
|
FINANCING
ARRANGEMENTS
|
Short-term debt At December 31, 2008,
$6.2 million of short-term notes issued by certain of our
European subsidiaries were outstanding. This short-term debt has
maturities of less than one year, is renewable with the consent
of both parties and is prepayable.
The weighted-average interest rate on total short-term
borrowings was 4.4% at December 31, 2008 and 6.0% at
December 31, 2007.
53 POLYONE
CORPORATION
Long-term debt Long-term debt as of December
31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(Dollars in millions)
|
|
2008(1)
|
|
|
2007(1)
|
|
|
|
|
8.875% senior notes due 2012
|
|
$
|
279.2
|
|
|
$
|
199.2
|
|
7.500% debentures due 2015
|
|
|
50.0
|
|
|
|
50.0
|
|
Medium-term notes:
|
|
|
|
|
|
|
|
|
7.16% medium-term notes due 2008
|
|
|
|
|
|
|
9.8
|
|
6.89% medium-term notes due 2008
|
|
|
|
|
|
|
9.8
|
|
6.91% medium-term notes due 2009
|
|
|
19.8
|
|
|
|
19.2
|
|
6.52% medium-term notes due 2010
|
|
|
19.6
|
|
|
|
18.8
|
|
6.58% medium-term notes due 2011
|
|
|
19.5
|
|
|
|
18.5
|
|
Revolving credit facility borrowings, facility expires 2011
|
|
|
40.0
|
|
|
|
|
|
6.0% promissory note due in equal monthly installments through
2009
|
|
|
|
|
|
|
5.3
|
|
|
Total long-term debt
|
|
$
|
428.1
|
|
|
$
|
330.6
|
|
Less current portion
|
|
|
19.8
|
|
|
|
22.6
|
|
|
Total long-term debt, net of current portion
|
|
$
|
408.3
|
|
|
$
|
308.0
|
|
|
|
|
|
|
(1) |
|
Book values include unamortized
discounts and adjustments related to hedging instruments, as
applicable.
|
Aggregate maturities of long-term debt for the next five years
are: 2009 $19.8 million; 2010
$19.6 million; 2011 $59.5 million;
2012 $279.2 million; 2013
$0.0 million; and thereafter $50.0 million.
During April 2008, we sold an additional $80.0 million in
aggregate principal amount of 8.875% senior notes due 2012.
Net proceeds from the offering were used to reduce the amount of
receivables previously sold under the receivables sale facility.
On January 3, 2008, we entered into a revolving credit
facility 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
$40.0 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
facility fee of 4.77%. On January 9, 2008, we borrowed
$40.0 million under the agreement, which is included in
Long-term debt in the accompanying consolidated balance
sheet at December 31, 2008.
In connection with the $40.0 million borrowed under the
revolving credit facility, we entered into a $40.0 million
floating to fixed interest rate swap expiring on January 9,
2009, resulting in an effective interest rate of 8.4%. This
derivative is not treated as a hedge and, as a result, is marked
to market, with the resulting gain and loss recognized as
interest expense in the accompanying consolidated statements of
operations. On December 30, 2008, this agreement was
terminated.
During 2007 and 2006, we repurchased $241.4 million and
$58.6 million aggregate principal amounts of our
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 accompanying consolidated statements
of operations. 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, net
in the accompanying consolidated statements of operations in
2007 and 2006, respectively. Also, during 2008, 2007 and 2006,
$20.0 million, $20.0 million and $0.7 million of
aggregate principal amount of our medium-term notes became due
and were paid, respectively.
During 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. This promissory note resulted from the purchase
of the remaining 50% interest in DH Compounding. For further
discussion of this purchase, see Note 1, Summary of
Significant Accounting Policies. During 2008, we paid the
remaining $5.3 million of aggregate principal on this note.
Included in Interest expense, net for the years ended
December 31, 2008, 2007 and 2006 is interest income of
$3.4 million, $4.5 million and $3.4 million.
Total interest paid on long-term and short-term borrowings was
$37.1 million in 2008, $45.7 million in 2007 and
$62.2 million in 2006.
As of December 31, 2008, our secured borrowings were not at
levels that would trigger the security provisions of the
indentures governing our senior notes and debentures and our
guarantee of the SunBelt notes. See Note 13, Commitments
and Related-Party Information.
Guarantee Agreement We entered into a
definitive Guarantee and Agreement with Citicorp USA, Inc.,
KeyBank National Association and National City Bank on
June 6, 2006. Under this Guarantee and Agreement, we
guarantee some treasury management and banking services provided
to us and our subsidiaries, such as foreign currency forwards,
letters of credit and bank overdrafts. This guarantee is secured
by our inventories located in the United States.
We are exposed to market risk from changes in interest rates on
debt obligations. We periodically enter into interest rate swap
agreements that modify our exposure to interest rate risk by
converting fixed-rate obligations to floating rates or floating
rate obligations to fixed rates. As of December 31, 2008,
there were no open interest rate swap agreements. As of
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. The weighted-average interest
rate for these agreements was 8.8% as of December 31, 2007.
54 POLYONE
CORPORATION
The following table shows the interest rate impact of the swap
agreements during 2008, 2007