Description
PolyOne Corporation. Director J DOUGLAS CAMPBELL bought 81,150 shares on 6-21-2012 at $ 12.87
BUSINESS OVERVIEW
Business Overview
We are a premier provider of specialized polymer materials, services and solutions with operations in specialty polymer formulations, color and additive systems, polymer distribution and specialty vinyl resins. We are also a highly specialized developer and manufacturer of performance enhancing additives, liquid colorants, and fluoropolymer and silicone colorants. Headquartered in Avon Lake, Ohio, we have employees at manufacturing sites and distribution facilities in North America, South America, Europe and Asia. We provide value to our customers through our ability to link our knowledge of polymers and formulation technology with our manufacturing and supply chain capabilities to provide value added solutions to designers, assemblers and processors of plastics (our customers). When used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” and the “Company” mean PolyOne Corporation and its subsidiaries.
PolyOne is incorporated in Ohio and headquartered in Avon Lake, Ohio. We employ approximately 4,700 people and have 60 manufacturing sites and 9 distribution facilities in North America, Europe, Asia and South America. We offer more than 52,000 polymer solutions to over 14,000 customers across the globe. In 2011, we had sales of $2.9 billion, 35% of which were to customers outside the United States.
We provide value to our customers with solutions built upon our ability to link our knowledge of polymer 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 our role in the value chain continues to become more essential as large chemical producers outsource or seek alternative channels to market to serve smaller, niche business; processors need more effective solutions to improve their profitability and competitive advantage; and international and OEM companies need reliable suppliers with global reach. Our goal is to provide our customers with specialized material and service solutions through our global reach, broad market knowledge, technical expertise, product breadth, efficient manufacturing operations, a fully integrated information technology network, and raw material procurement leverage. Our end markets are primarily in appliance, consumer, healthcare, transportation, building and construction, packaging, wire and cable, electrical and electronics, industrial and textiles.
PolyOne was formed on August 31, 2000 from the consolidation of The Geon Company (Geon) and M.A. Hanna (Hanna). Geon’s 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.
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, such as polyethylene and polypropylene, 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.
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 application.
Thermoplastic resins are found in a variety of end-use products and 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 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 proven 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 discharge, and electromagnetic shielding performance for critical applications including integrated circuit chip packaging.
Various additives can be formulated with a base resin to provide it with greater versatility and performance. Polymer formulations 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. These specialized polymers 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 in four reportable segments: (1) Global Specialty Engineered Materials; (2) Global Color, Additives and Inks; (3) Performance Products and Solutions; and (4) PolyOne Distribution. In February 2011, we sold our 50% equity interest in SunBelt Chlor Alkali Partnership (SunBelt), which was a reportable segment in prior periods. Our segments are further discussed in Note 16, Segment Information , to the accompanying consolidated financial statements.
Global Specialty Engineered Materials
Global Specialty Engineered Materials is a leading provider of custom polymer formulations, services and solutions for designers, assemblers and processors of thermoplastic materials across a wide variety of markets and end-use applications. Our product portfolio, which we believe to be one of the most diverse in our industry, includes standard and custom formulated high-performance polymer materials that are manufactured using thermoplastic resins and elastomers, which are then combined with advanced polymer additive, reinforcement, filler, colorant and/or biomaterial technologies. This segment includes GLS Corporation (GLS), which we acquired in 2008. We believe GLS offers the broadest range of soft-touch thermoplastic elastomers in the industry. Our technical and market expertise enables us to expand the performance range and structural properties of traditional engineering-grade thermoplastic resins to meet evolving customer needs. Global Specialty Engineered Materials has manufacturing, sales and service facilities located throughout North America, Europe and Asia, and with the acquisition of Uniplen Indústria de Polímeros Ltda. (Uniplen) on January 3, 2011, we further extended our global capabilities to South America. Our product development and application reach is further enhanced by the capabilities of our Innovation Centers in the United States, Germany and China, which produce and evaluate prototype and sample parts to help assess end-use performance and guide product development. Our manufacturing capabilities are targeted at meeting our customers’ demand for speed, flexibility and critical quality.
Global Color, Additives and Inks
Global Color, Additives and Inks 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. When combined with non pre-colored base resins, our colorants help customers achieve a wide array of specialized colors and effects that are targeted at the demands of today’s 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, antimicrobial, anti-static, blowing or foaming, antioxidant, lubricant, and productivity enhancement. Our colorant and additives masterbatches are used in a broad range of polymers, including those used in food and medical packaging, transportation, building products, pipe and wire and cable markets. We also provide custom-formulated liquid systems that meet a variety of customer needs and chemistries, including vinyl, natural rubber and latex, polyurethane and silicone. Our offering also includes proprietary inks and latexes for diversified markets including recreational and athletic apparel, construction and filtration, outdoor furniture and healthcare. Global Color, Additives and Inks has manufacturing, sales and service facilities located throughout North America, Europe and Asia, and South America.
On December 21, 2011, the Company completed the acquisition of all of the outstanding equity of ColorMatrix for $486.1 million net of cash acquired on a debt-free basis. ColorMatrix is a highly specialized developer and manufacturer of performance enhancing additives, liquid colorants, and fluoropolymer and silicone colorants. ColorMatrix results are included within the Global Color, Additives and Inks segment from the date of acquisition.
On October 1, 2010, we acquired Polimaster Indústria E Comércio de Pigmentos Pláticos LTDA (Polimaster), which extended our global presence in South America.
On November 30, 2010, we sold our 50% interest in BayOne Urethane Systems LLC (BayOne), a joint venture between PolyOne and Bayer Corporation, which sells liquid polyurethane systems into many of the same markets. The equity earnings from BayOne are included in Global Color, Additives and Inks’ results in 2010 and 2009.
Performance Products and Solutions
Performance Products and Solutions is an industry leader offering an array of products and services for vinyl coating, molding and extrusion processors principally in North America. Our product offerings include: vinyl compounds, vinyl resins, and specialty coating materials based largely on vinyl. We believe that Geon Performance Materials is the leading North American vinyl compounder, and the Geon name carries strong brand recognition. These products are sold to manufacturers of plastic parts and consumer-oriented products. We also offer a wide range of services including materials testing and component analysis, custom compound development, colorant and additive services, design assistance, structural analyses, process simulations and extruder screw design. Vinyl is utilized across a broad range of applications in building and construction, wire and cable, consumer and recreation markets, transportation, packaging and healthcare. This segment also includes Producer Services, which offers contract manufacturing services to resin producers and polymer marketers. 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 process technology expertise and multiple manufacturing platforms.
PolyOne Distribution
The PolyOne Distribution business distributes more than 3,500 grades of engineering and commodity grade resins, including PolyOne-produced solutions, principally to the North American market. These products are sold to over 5,700 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. In 2011, we extended our distribution operations to Asia, serving the specialized needs of the local healthcare market.
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 service, performance, product innovation, product recognition, speed, delivery, quality and price. The relative importance of these factors varies among our products and services. We believe that we are the largest independent formulator of plastic materials and producer of custom and proprietary color and additive systems in the United States and Europe, with a growing presence in Asia and South America. Our competitors range from large international companies with broad product offerings to local independent custom producers whose focus is a specific market niche or product offering.
The distribution of polymer resin is also highly competitive. Speed, service, reputation, product line, brand recognition, delivery, quality and price are the principal factors affecting competition. We compete against other national independent resin distributors in North America, along with other regional distributors. Growth in the polymer 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 agility of our distribution network, allow us to compete effectively.
Raw Materials
The primary raw materials used by our manufacturing operations are polyvinyl chloride (PVC) resin, vinyl chloride monomer(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 LP, a former equity investment affiliate, 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. See the discussion of risks associated with raw material supply and costs in Items 1A “Risk Factors.”
Patents and Trademarks
We own and maintain a 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 from filing date 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
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 accounted for more than 2% of our consolidated revenues in 2011, and neither we nor any of our segments would suffer a material adverse effect if we were to lose any single customer.
Research and Development
We have substantial technology and 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 manufacturing 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 $36.9 million in 2011, $33.8 million in 2010 and $30.2 million in 2009.
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 manufacturing facilities or warehouses. We also ship some of our manufactured products to customers by rail.
Employees
As of February 1, 2012, we employed approximately 4,700 people. Less than 2% of our employees are represented by labor unions under collective bargaining agreements. We believe that relations with our employees are good, and we do not anticipate significant operating issues to occur as a result of current negotiations or when we renegotiate collective bargaining agreements as they expire.
Environmental, Health and Safety
We are subject to various environmental laws and regulations that apply to the production, use and sale of chemicals, emissions into the air, discharges into waterways and other releases of materials into the environment and the generation, handling, storage, transportation, treatment and disposal of waste material. We endeavor to ensure the safe and lawful operation of our facilities in the manufacture and distribution of products, and we believe we are in material compliance with all applicable laws and regulations.
We maintain a disciplined environmental and occupational safety and health compliance program and conduct periodic internal and external regulatory audits at our facilities to identify and categorize potential environmental exposures, including compliance 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 0.57 per 100 full-time workers per year in 2011, an improvement from 0.65 in 2010. The 2010 average injury incidence rate for our NAICS Code (326 Plastics and Rubber Products Manufacturing) was 4.8.
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 and the Consumer Product Safety Improvement Act, 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.
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 their investigation and remediation of a number of environmental waste disposal sites. While government agencies assert that PRPs are jointly and severally liable at these sites, in our experience, interim and final allocations of liability costs are generally made based on the relative contribution of waste. However, even when allocations of costs based on relative contribution of waste have been made, we cannot assure that our allocation will not increase if other PRPs do not pay their allocated share of these costs.
We incurred environmental expenses, before recoveries, of $9.7 million in 2011, $20.5 million in 2010 and $11.7 million in 2009. Our environmental expense in 2011 and 2010 related mostly to ongoing remediation. In 2011, 2010 and 2009 we received $3.3 million, $16.7 million and $23.9 million, respectively, as reimbursement of previously incurred environmental remediation costs.
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, 2011 on our accompanying consolidated balance sheet totaling $76.2 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.
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, 2011. 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 $12 million in 2012.
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 16, 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 SEC’s Public Reference Room and via the SEC’s 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 SEC’s 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 SEC’s 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 Exchange Act 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. The contents of our website are not part of this Annual Report on Form 10-K, and the reference to our website does not constitute incorporation by reference into this Form 10-K of the information contained at that site.
CEO BACKGROUND
J. Douglas Campbell
Director since 1993
Age — 70
Retired Chairman and Chief Executive Officer of ArrMaz Custom Chemicals, Inc., a specialty mining and asphalt additives and reagents producer. Mr. Campbell served in this capacity from December 2003 until the company was sold in July 2006. Mr. Campbell served as President and Chief Executive Officer and was a Director of Arcadian Corporation, a nitrogen chemicals and fertilizer manufacturer, from December 1992 until the company was sold in 1997. We believe that Mr. Campbell is particularly qualified to serve as a member of our Board because of his in-depth knowledge of our industry and his experience in holding leadership roles at other manufacturing companies. Mr. Campbell has served as chief executive officer and has held other officer positions in the oil, chemical and plastics industries. We believe that the knowledge and skills that he gained in these roles provides him with an ideal background for serving as a Director of PolyOne.
Dr. Carol A. Cartwright
Director since 1994
Age — 70
Retired President of Bowling Green State University, a public higher education institution. Dr. Cartwright served in this role from January 2009 until June 2011 and served as Interim President from July 2008 to January 2009. Dr. Cartwright served as President of Kent State University, a public higher education institution, from 1991 until her retirement in June 2006. Dr. Cartwright currently serves on the Boards of Directors of KeyCorp and FirstEnergy. From 2002 to 2008, Dr. Cartwright served on the Board of Directors of The Davey Tree Expert Company. We believe that Dr. Cartwright has gained many of the skills and attributes necessary to serve as an effective member of our Board in her 19 years of experience serving as a chief executive officer of large, complex, non-profit organizations. In her leadership role at these organizations, she has had responsibility for direct oversight for strategic planning, program development, financial management, capital construction, human resources, labor negotiations and investments. This specific experience, as well as her proven ability to lead, makes Dr. Cartwright an invaluable member of our Board.
Richard H. Fearon
Director since 2004
Age — 56
Vice Chairman and Chief Financial and Planning Officer of Eaton Corporation, a global manufacturing company, since February 2009. Mr. Fearon served as Executive Vice President, Chief Financial and Planning Officer from April 2002 until February 2009. Mr. Fearon served as a Partner of Willow Place Partners LLC, a corporate advisory firm, from 2001 to 2002 and was the Senior Vice President Corporate Development for Transamerica Corporation, a financial services organization, from 1995 to 2000. We believe that Mr. Fearon’s financial expertise, experience and knowledge of international operations, knowledge of diversified companies and corporate development expertise provide him with the qualifications and skills to serve as a valued member of our Board. Mr. Fearon’s advice with respect to financial issues affecting our company is specifically valued and utilized, especially in his role as Chair of our Audit Committee. As a sitting executive and leader at a multi-national corporation, Mr. Fearon is particularly equipped to advise our Board on current issues facing our company.
Gregory J. Goff
Director since 2011
Age — 55
President and Chief Executive Officer of Tesoro Corporation, a leading company in the independent refining and marketing business since May 2010, and Chairman and Chief Executive Officer of Tesoro Logistics, a NYSE-listed master limited partnership that owns, operates and develops crude oil and refined products and logistics assets, since April 2011. Mr. Goff served as Senior Vice President, Commercial of ConocoPhillips Corporation, an integrated energy company, from 2008 to 2010. Mr. Goff also held various other positions at ConocoPhillips from 1981 to 2008. Mr. Goff serves as a director of the American Fuels and Petrochemical Manufacturers and on the National Advisory Board of the University of Utah Business School. From 2008 to 2010, Mr. Goff served on the Board of Directors of DCP Midstream GP, LLC. We believe that, as a new Board member with proven leadership capabilities, Mr. Goff will provide a fresh perspective on our strategy and operations. Mr. Goff’s deep understanding of the energy industry and specialty chemical businesses will provide valuable insight into PolyOne’s strategic planning. His experience as the Chief Executive Officer of a large, independent refining and petroleum products marketing company and his participation as a member of national trade associations provide him with invaluable experience that can enhance our Board.
Gordon D. Harnett
Director since 1997
Age — 69
Lead Director of our Board of Directors since July 18, 2007. Retired Chairman, President and Chief Executive Officer of Materion Corp. (formerly known as Brush Engineered Materials Inc.), an international supplier and producer of high performance engineered materials. Mr. Harnett served in this capacity from 1991 until his retirement in May 2006. Mr. Harnett serves on the Boards of Directors of EnPro Industries, Inc. and Acuity Brands, Inc. From 1995 to 2011, he also served on the Board of Directors of The Lubrizol Corporation. We believe that Mr. Harnett’s extensive experience in the specialty chemicals industry provides him with unique skills in serving as a PolyOne Director. Mr. Harnett’s past experience includes leadership roles at a number of specialty chemical companies, including serving as a senior vice president of Goodrich Specialty Chemicals and president of Tremco, in addition to his role as chief executive officer at Brush Engineered Materials. Mr. Harnett is also uniquely qualified to assist our Board on international issues, as he previously resided in Canada and Japan while actively involved in the international operations of his former employers. Mr. Harnett, Chair of our Compensation Committee, is especially knowledgeable in the area of executive compensation, due to his experiences serving on the compensation committees of other public companies.
Richard A. Lorraine
Director since 2008
Age — 66
Retired Senior Vice President and Chief Financial Officer of Eastman Chemical Company, a specialty chemicals company. Mr. Lorraine served in this capacity from 2003 to 2008. Mr. Lorraine also served as Executive Vice President and Chief Financial Officer of Occidental Chemical Company, a chemical manufacturing company, from 1995 to 2003. Mr. Lorraine serves on the Board of Directors of Carus Corporation. Mr. Lorraine provides our Board with the broad business perspective that he gained in extensive leadership roles in varying industries. He is particularly equipped to advise our Board and Audit Committee on financial issues affecting our company due to his prior roles as chief financial officer. In addition, he has a significant international background and in-depth commercial experience. All of these attributes provide Mr. Lorraine with valuable skills that he shares with our Board.
Stephen D. Newlin
Director since 2006
Age — 59
Chairman, President and Chief Executive Officer of PolyOne since February 2006. Mr. Newlin served as President — Industrial Sector of Ecolab, Inc., a global leader in cleaning and sanitizing specialty chemicals, products and services from 2003 to 2006. Mr. Newlin served as President and a director of Nalco Chemical Company, a manufacturer of specialty chemicals, services and systems, from 1998 to 2001 and was Chief Operating Officer and Vice Chairman from 2000 to 2001. Mr. Newlin serves on the Board of Directors of Black Hills Corporation. From 2007 to 2012, he also served on the Board of Directors of The Valspar Corporation. We believe that, as our chief executive officer, Mr. Newlin is particularly qualified to serve on our Board. He has gained significant experience in the specialty chemical industry, serving as a top executive officer in this industry for over 30 years. In addition, in his role as our Chief Executive Officer, he has proven that he is an effective leader. He is also able to contribute his knowledge and experience with respect to international issues as a result of his global work responsibilities and living abroad. Mr. Newlin’s depth of Board experience, having served on five public company boards, has allowed him to understand his role as Chairman versus Chief Executive Officer and has provided him with the skills necessary to serve as an effective leader of our Board.
William H. Powell
Director since 2008
Age — 66
Retired Chairman and Chief Executive Officer of National Starch and Chemical Company, a specialty chemicals company. Mr. Powell served in this capacity from 1999 until his retirement in 2006. Mr. Powell serves on the Boards of Directors of Granite Construction Incorporated and FMC Corporation. From 2007 to 2011, he also served on the Board of Directors of Arch Chemicals, Inc. We believe that Mr. Powell’s previous employment as a chief executive officer has provided him with the leadership skills that are important in serving as a Director of our company. His prior employment in the specialty chemicals industry is particularly relevant. This experience gives him the knowledge and insights to provide valuable advice and strategic direction in addressing the issues facing our company. Mr. Powell also serves as a Director of other public companies, which provides him with experiences he can utilize when serving as a member of our Board.
Farah M. Walters
Director since 1998
Age — 67
President and Chief Executive Officer of QualHealth, LLC, a health care consulting firm since 2005. From 1992 until her retirement in June 2002, Ms. Walters was the President and Chief Executive Officer of University Hospitals Health System and University Hospitals of Cleveland. Ms. Walters currently serves on the Board of Directors of Celanese Corporation. From 1993 to 2006, Ms. Walters served on the Board of Directors of Kerr-McGee Corp. From 2003 to 2006, Ms. Walters served on the Board of Directors of Alpharma Inc. Ms. Walters’ extensive business experience provides her with the attributes and skills that uniquely qualify her to serve as a member of our Board of Directors. She has over ten years of experience as a chief executive officer of a $2 billion company and a proven track record of success in a leadership role. Further, she has served on the Board of Directors of other public companies, including those in the chemical industry. Ms. Walters’ business experience has provided her with the necessary background to allow her to provide practical and relevant advice on the issues facing our company.
William A. Wulfsohn
Director since 2011
Age — 50
President and Chief Executive Officer of Carpenter Technology Corporation, a NYSE-listed leading provider of specialty metals to numerous industries, since July 2010. Mr. Wulfsohn has served as a director of Carpenter since April 2009. From 2005 to 2010, he served as Senior Vice President, Coatings of PPG Industries, a global supplier of coatings and specialty products and services, and from 2003 to 2005, as Vice President, Coatings and Managing Director, PPG Europe. Prior to joining PPG, Mr. Wulfsohn worked for Morton International, a diversified wholly-owned subsidiary of chemical company Rohm & Haas, as Vice President and General Manager, Automotive Coatings; for Rohm & Haas, a global specialty materials company, as Vice President, Automotive Coatings Business Director; and for Honeywell, a diversified technology and manufacturing company, as Vice President and General Manager, Nylon System. He also worked as an Associate with McKinsey & Company, a global management consulting firm. We believe that Mr. Wulfsohn is a valuable new addition to our Board. He is a proven leader, with deep and varied experience in technology and successful business operations. His background in managing operations in Asia/Pacific provides him with international expertise that can be of value to PolyOne. Further, we believe his experience as a Chief Executive Officer of a publicly-traded specialty company has given him unique skills to assist in providing guidance on PolyOne’s continuing transformation.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
Management’s 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.
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 “Cautionary Note On 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 specialty polymer formulations, color and additive systems, polymer distribution and specialty vinyl resins. We are also a highly specialized developer and manufacturer of performance enhancing additives, liquid colorants, and fluoropolymer and silicone colorants. Headquartered in Avon Lake, Ohio, with 2011 sales of $2.9 billion, we have manufacturing sites and distribution facilities in North America, Europe, Asia and South America. We currently employ approximately 4,700 people and offer more than 52,000 polymer solutions to over 14,000 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 issues resulting from the recent economic downturn, especially as it relates to affected markets such as building and
construction and transportation. Maintaining 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 included in the Restrictions on the Use of Certain Hazardous Substances and the Consumer Product Safety Information Act of 2008.
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 allows us to service our customers with consistency wherever their operations might be around the world. 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 will maintain our focus on top-line growth, improving or maintaining the cost/price relationship with regard to raw materials and improving working capital efficiency. In addition to driving top-line growth, we have established margin improvement targets for all businesses. In 2012, our capital expenditures will be focused primarily to support sales growth, our continued investment in recent acquisitions, and other strategic investments. We also continue to consider acquisitions and other synergy opportunities that complement our core platforms. These actions will ensure that we continue to invest in capabilities that advance the pace of our transformation and continue to support growth in key markets and product offerings.
We will continue our 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
Acquisitions
On December 21, 2011, the Company completed the acquisition of all of the outstanding equity of ColorMatrix for $486.1 million net of cash acquired on a debt-free basis. ColorMatrix is a highly specialized developer and manufacturer of performance enhancing additives, liquid colorants, and fluoropolymer and silicone colorants. ColorMatrix operates globally with research and development and production facilities in North America, South America, Europe and Asia and has a worldwide intellectual property portfolio of 162 patents and 107 pending patents. ColorMatrix’s results from the date of acquisition through December 31, 2011 are included within Global Color, Additives and Inks.
On January 3, 2011, we acquired the assets of Uniplen, a leading Brazilian producer of specialty engineered materials and distributor of thermoplastics. The Uniplen transaction was completed for a cash purchase price of $21.8 million with a potential for further consideration payable over three years based on achieving certain performance metrics. Uniplen’s results of operations are included within Global Specialty Engineered Materials.
Financing Facilities
On December 21, 2011, we entered into a senior secured term loan facility, maturing December 20, 2017, having an aggregate principal amount of $300.0 million. We also retired our accounts receivable facility that was set to mature in June 2012 and replaced it with a five-year senior secured revolving credit facility, which includes up to $300.0 million in revolving loans, subject to a borrowing base with advances against U.S. and Canadian accounts receivable and inventory. We have the option to increase the borrowing capacity under the revolving credit facility to $350.0 million, subject to our meeting certain requirements and obtaining commitments for such increase.
For additional information about our new financing arrangements refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources.”
Sale of SunBelt
On February 28, 2011, we sold our 50% equity interest in SunBelt to Olin Corporation (Olin) for $132.3 million in cash, the assumption by Olin of the obligations under our guarantee of senior secured notes issued by SunBelt of $42.7 million at the time of sale, $36.6 million as of December 31, 2011, and potential annual earn-out payments for the three fiscal years ending December 31, 2011, 2012 and 2013, if SunBelt meets certain performance targets. We recorded a pre-tax gain of $128.2 million, net of associated transaction costs, and $18.1 million for the earn-out related to SunBelt’s 2011 operating results, within Income related to equity affiliates for the sale of our equity interest. Until the guarantee is formally assigned to Olin, we remain obligated under the guarantee, although Olin has agreed to indemnify us for amounts that we may be obligated to pay under the guarantee.
Share Repurchase Program
In August 2008, our Board of Directors approved a stock repurchase program authorizing us to repurchase up to 10.0 million shares of our common shares in the open market or in privately negotiated transactions. On October 11, 2011, PolyOne’s Board of Directors increased the common share repurchase authorization amount by 5.25 million. We purchased 6.0 million shares at an aggregate price of $73.6 million under these authorizations in 2011. 8.0 million shares remain available for repurchase as of December 31, 2011.
Sales
Sales increased 9.2% in 2011 compared to 2010. Organic sales increased 6.3%, primarily driven by improved mix and increased market pricing associated with raw material inflation. Foreign exchange gains and acquisitions favorably impacted sales by 1.2% and 1.7%, respectively.
Sales increased 27.2% in 2010 as compared to 2009 primarily from increased demand across many of our end markets in 2010 as compared to 2009, led by gains in the transportation, consumer, building and construction, and healthcare end markets, as well as higher selling prices associated with raw material price increases.
Cost of Sales
Cost of sales as a percentage of sales increased from 83.6% in 2010 to 83.8% in 2011. Impacting cost of sales in 2011 and 2010 were favorable insurance recoveries of $3.3 million and $21.4 million, respectively, primarily related to reimbursement for previously incurred environmental costs. These items resulted in a net unfavorable increase of 0.5% to 2011 cost of sales as a percentage of sales.
Cost of sales declined to 83.6% of sales in 2010 as compared to 84.3% in 2009. Cost of sales in 2010 was favorably impacted by the realization of savings associated with the previously announced plant realignment activities and savings associated with our Lean Six Sigma initiatives. Cost of sales in 2010 and 2009 reflects gains of $21.4 million and $23.9 million, respectively, associated with legal and insurance settlements. Charges related to environmental remediation and plant related restructuring in cost of sales totaled $22.5 million in 2010 as compared to $36.1 million in 2009. In addition, cost of sales increased as a percentage of sales due to mix changes, principally due to increased sales from our Distribution business, which has lower gross margin percentages than our other businesses. Distribution sales increased from 30.3% to 34.8% of total PolyOne sales in 2010 as compared to 2009.
Selling and Administrative
These costs include selling, technology, administrative functions, corporate, and general expenses. Selling and administrative costs in 2011 increased $85.5 million in 2011 compared to 2010. The increase is primarily driven by an $81.2 million mark-to-market adjustment in 2011 associated with the re-measurement of our pension and other post-retirement plan obligations compared to a loss of $9.1 million in 2010, an increase in costs associated with our investment in commercial and technical resources, and $3.3 million of costs incurred during 2011 associated with the acquisition of ColorMatrix.
Selling and administrative costs in 2010 increased by $79.3 million compared to 2009. Selling and administrative costs in 2009 includes curtailment gains of $40.4 million associated with the phase out of certain of our other post-retirement benefit plans and amendments to certain pension plans. Additionally, the mark-to-market pension adjustment recorded within selling and administrative costs resulted in a $25.6 million gain in 2009 compared to a $9.1 million loss in 2010.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Our Business
We are a premier provider of specialized polymer materials, services and solutions with operations in specialty polymer formulations, color and additive systems, polymer distribution and specialty vinyl resins. We are also a highly specialized developer and manufacturer of performance enhancing additives, liquid colorants, and fluoropolymer and silicone colorants. Headquartered in Avon Lake, Ohio, we have employees at manufacturing sites and distribution facilities in North America, South America, Europe and Asia. We provide value to our customers through our ability to link our knowledge of polymers and formulation technology with our manufacturing and supply chain capabilities to provide value added solutions to designers, assemblers and processors of plastics (our customers). When used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our” and the “Company” mean PolyOne Corporation and its subsidiaries.
Sales
Sales increased 8.7% in the first quarter of 2012 compared to the first quarter of 2011 driven by a 7.2% increase due to the acquisition of ColorMatrix, a 2.3% increase in organic sales, primarily as a result of improved mix and increased market pricing associated with raw material inflation; partially offset by 0.8% due to unfavorable currency exchange rates.
Cost of Sales
These costs include raw materials, plant conversion, distribution, environmental remediation and plant-related restructuring charges. As a percent of sales, cost of sales declined from 82.9% in the first quarter of 2011 to 82.0% in the first quarter of 2012. The improvement in cost of sales as a percentage of sales was driven primarily by the increase in sales associated with the acquisition of ColorMatrix, a specialty platform business, which, like our other specialty businesses has higher gross margins than our other segments. Additionally, cost of sales as a percentage of sales was unfavorably impacted 0.7% for the three months ended March 31, 2012 as a result of the step-up to fair value of acquired ColorMatrix inventory that was primarily sold during the first quarter of 2012.
Selling and Administrative
These costs include selling, technology, administrative functions, corporate and general expenses and amortization of intangible assets. Selling and administrative expense increased during the three month period ended March 31, 2012 compared to the three-month period ended March 31, 2011 principally due to the addition of ColorMatrix which resulted in increased selling and administrative expense and higher amortization expense associated with the acquired intangible assets. Additionally, higher incentive compensation was recognized during the three months ended March 31, 2012 compared to three months ended March 31, 2011.
Income related to previously owned equity affiliates
Income related to previously owned equity affiliates for the first quarter of 2012 decreased as compared to the corresponding period in 2011 primarily due to the net gain on the sale of our equity investment in SunBelt of $128.2 million that was recorded in the first quarter of 2011. The net gain associated with our sale of our equity investment in SunBelt is reflected within Corporate and eliminations in our segments.
Interest Expense, net
Interest expense, net increased in the first quarter of 2012 as compared to the first quarter of 2011 due to a higher average debt balance during the first quarter of 2012 as a result of our new term loan that we borrowed under in December 2011 in connection with the acquisition of ColorMatrix.
Other Expense, net
Other expense, net includes administrative fees associated with our revolving credit facility, foreign currency gains and losses and other miscellaneous items. The increase in Other expense, net in the first quarter of 2012 compared to the first quarter of 2011 is primarily a result of the $0.5 million gain associated with the earn-out from our sale of O’Sullivan Films that was recognized in the first quarter of 2011 while no such gain was recognized in the first quarter of 2012.
Income Tax Expense
Income tax expense was $11.3 million for the first quarter of 2012 compared to $60.9 million in the first quarter of 2011. The decrease in income tax expense is primarily related to the income taxes on the sale of our 50% equity interest in SunBelt joint venture during the first quarter of 2011. In addition, our interim provision was impacted by a decrease in valuation allowances of $0.1 million in the first quarter of 2012 and $2.4 million in the first quarter of 2011.
SEGMENT INFORMATION
Operating income is the primary financial measure that is reported to the chief operating decision maker for purposes of allocating resources to segments and assessing segment 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 .
Global Specialty Engineered Materials
Sales decreased $9.9 million, or 6.5%, in the first quarter of 2012 compared to the first quarter of 2011. Sales decreased 5.3% primarily due to decreased demand in Europe, slightly offset by increased pricing associated with raw material inflation and improved mix. Additionally, currency exchange rates unfavorably impacted sales by 1.2%.
Operating income decreased $2.2 million in the first quarter of 2012 as compared to the first quarter of 2011 driven primarily by the decreased demand in Europe.
Global Color, Additives and Inks
Sales increased $42.7 million, or 30.4%, in the first quarter of 2012 compared to the first quarter of 2011. Sales increased by 36.9% as a result of the ColorMatrix acquisition. This increase was partially offset by a decrease in organic sales of 3.7% and unfavorable currency exchange rates of 2.8%. Organic sales decreased primarily as a result of decreased demand in Europe, slightly offset by increased pricing associated with raw material inflation and improved mix.
Operating income increased $6.1 million in the first quarter of 2012 as compared to the first quarter of 2011 primarily due to the acquisition of ColorMatrix, partially offset by lower demand in Europe.
Performance Products and Solutions
Sales increased $14.9 million, or 7.1%, in the first quarter of 2012 compared to the first quarter of 2011, primarily due to increased pricing and mix.
Operating income increased $3.5 million in the first quarter of 2012 compared to the first quarter of 2011 primarily due to increased sales and expanding margins as a result of improved pricing and mix.
PolyOne Distribution
Sales increased $16.0 million, or 6.5%, in the first quarter of 2012 compared to the first quarter of 2011. Sales improved due to increased volumes, principally in the healthcare, appliance and transportation end markets, as well as increased market pricing associated with raw material inflation.
Operating Activities— In the first three months of 2012, net cash used by operating activities was $20.1 million as compared to $39.4 million in the first three months of 2011. The reduction in net cash used by operating activities was driven primarily by lower incentive payments in the first quarter of 2012 related to our 2011 performance, compared to higher incentive payments for the first quarter of 2011, related to 2010 performance.
Working capital as a percentage of sales for the three month period ended March 31, 2012 was 9.2% compared to 9.5% for the three month period ended March 31, 2011. Days sales outstanding for the three month period ended March 31, 2012 improved to 42.9 from 43.1 during the three months ended March 31, 2011.
Investing Activities— Cash provided by investing activities during the first three months of 2012 was $11.0 million, primarily reflecting cash proceeds of $18.5 million from year one of the potential three year earn-out from the sale of our 50% equity investment in SunBelt, partially offset by capital expenditures of $7.9 million.
Financing Activities— Net cash provided by financing activities in the first three months of 2012 was $2.3 million, which includes a quarterly principal repayment of $0.8 million on our term loan, repurchases of $1.4 million of our outstanding common shares, and cash dividends paid of $3.6 million; offset by cash proceeds and income tax benefits of $5.7 million related to the exercise of equity awards and $2.4 million received from non-controlling interests related to the funding of our joint venture in Saudi Arabia.
Debt
As of March 31, 2012, long-term debt totaled $706.4 million, with maturities ranging from 2015 to 2020. Current maturities of long-term debt are $3.0 million as of March 31, 2012.
Aggregate maturities of long-term debt for the next five years are: 2013 — $3.0 million; 2014 — $3.0 million; 2015 — $53.0 million; 2016 — $3.0; 2017 — $285.0; and thereafter — $360.0 million.
On December 21, 2011, we entered into a five-year senior secured revolving credit facility, which includes up to $300.0 million in revolving loans, subject to a borrowing base with advances against U.S. and Canadian accounts receivable and inventory. We have the option to increase the borrowing capacity under the revolving credit facility to $350.0 million, subject to our meeting certain requirements and obtaining commitments for such increase. The agreement governing the revolving credit facility contains customary covenants including maximum capital expenditures and a financial covenant to maintain a minimum fixed charge ratio of 1.1x, which only comes into effect when excess availability falls below 10% of the maximum credit. As of March 31, 2012, there were no outstanding borrowings under the revolving credit facility, and we had availability of $156.0 million.
Guarantee
On February 28, 2011, we sold our 50% equity interest in SunBelt to Olin for $132.3 million in cash and the assumption by Olin of the obligations under our guarantee of senior secured notes issued by SunBelt of $42.7 million at the time of sale, $36.6 million as of March 31, 2012. Unless the guarantee is formally assigned to Olin, we remain obligated under the guarantee, although Olin has agreed to indemnify us for amounts that we may be obligated to pay under the guarantee.
Contractual Obligations
We have future obligations under various contracts relating to debt and interest payments, operating leases, pension and postretirement benefit plans and purchase obligations. During the three months ended March 31, 2012, there were no material changes to these obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2011.
CONF CALL
Joseph P. Kelley
Thank you, Mike. Good morning and welcome everyone joining us on the call today. Before beginning we would like to remind you that statements made during this conference call, which are not historical facts maybe considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance.
They’re based on management’s expectations and involve a number of business risks and uncertainties any of which could cause actual results to differ materially from those expressed and/or implied by the forward-looking statements. Some of these risks and uncertainties can be found in the company’s filings with the Securities and Exchange Commission as well as in today’s press release.
During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the PolyOne website where the company describes the non-GAAP measures and provides a reconciliation of them to the most comparable GAAP financial measures. Operating results referenced during today’s call will be comparing the fourth quarter of 2009 to the fourth quarter of 2008, unless otherwise stated.
Joining me today on the call is our Chairman, President and Chief Executive Officer, Steve Newlin, and Senior Vice President and Chief Financial Officer, Bob Patterson. Now I will turn the call over to Bob who will review the quarterly results.
Robert M. Patterson
Thanks Joe and thanks again to everyone who is joining us on the call this morning. As always we welcome the opportunity to speak to our investors and analysts about the recent performance of PolyOne. This morning we announced our results for the fourth quarter and the full year of 2009 as well as recent changes to our global organization structure.
For the fourth quarter of 2009, we reported sales of 553 million and net income of 24 million or $0.25 per share. This compares favorably with the fourth quarter of 2008 when we reported sales of 542 million and a net loss of 283 million or $3.07 per share. Before special items and tax adjustments enumerated in our release today we reported earnings of $0.14 per share versus $0.08 per share for the fourth quarter of 2008. Our earnings per share nearly doubled from the fourth quarter of last year on the strength of operating income improvement from our specialty and distribution platforms.
The fourth quarter of last year included a 16.5 million benefit from LIFO versus a 3.2 million benefit during the fourth quarter of this year. Ex-LIFO, the earnings improvement is even greater as mixed improvements combined with lower raw material cost restructuring savings added 500 basis points to the gross margin versus the prior year. We are very pleased with this margin expansion, but we are even more energized by the top-line gains. The fourth quarter represents a return to growth for PolyOne after four consecutive quarters of declining year-over-year revenues associated with the recession.
Driving this growth in the fourth quarter was our specialty and distribution platforms which saw double digit sales increases over prior year levels. Also noteworthy is the sequential growth in revenues from the third quarter of this year which we find encouraging for two reasons. First, the addition of new business gains has allowed us to overcome the seasonal decline of revenues traditionally experienced during the fourth quarter, and second we do believe we are seeing some positive demand momentum as we head into this year.
Lets now take a closer look at each of our platforms and their related performance during the quarter. Performance products and solutions reported sales of a 158 million in the fourth quarter; the 19% sales decline from the fourth quarter of 2008 is driven by a 16% decline in average selling prices principally attributable to business where prices are indexed to publicly disclosed raw material benchmarks. The remaining 3% volume decline is related to building and construction demand in the US.
Seasonally, the fourth quarter is traditionally the weakest for this segment as its historical performance is closely tied to new housing starts and the construction cycle. While this year was no exception these results are encouraging because this is the lowest year-over-year decline in quarterly volume this platform has seen since the second quarter of 2007.
PPS achieved 8.1 million in operating income or 5.1% of sales. This is down from the 16 million reported in the fourth quarter of last year. However, last year included 15.1 million of life full benefits versus 800,000 in the fourth quarter of 2009.
Ex-LIFO operating income increased by $6million as restructuring savings, lower raw material costs, and approved mix more than offset operating income loss due to the volume declines.
As you know we have taken significant costs out of this business over the last 2 years. We used to believe that our break even point was 1.2 million annualized housing starts and in 2009 we achieved operating income of six and half percent of sales on starts of 5,60,000.
The majority of these cost savings are permanent in nature so, as volumes recover, we are positioned to leverage the lower cost structure to deliver profit margin expansion. Our specialty platform reported sales of 228 million for the fourth quarter which is a 14% increase over the prior year principally due to a 13% pick up in volume. The more significant fourth quarter specialty revenue gains were achieved in Asia, and Europe which grew 38% and 24% respectively and we are driven by improving demand dynamics for electronics in Asia and automotive in Europe. While the revenue increase in the specialty platform mainly resulted from International growth each of the three specialty businesses contributed to profit margin expansion driven by improved volume mix, lower raw material costs, and restructuring savings Specialty operating income increased nearly 10 fold to 18.4 million or 8.1% of sales compared to 1.9 million or 1% of sales for the fourth quarter of 2008.
Our distribution platform delivered sales of 190 million in the fourth quarter versus 173 million in the prior year fourth quarter.
The 10% increase was driven by a 13% volume increase, with slightly lower selling prices as commodity costs fell year-over-year. Compared to the prior year distributions operating income increased 3.3 million to 9.5 million principally due to higher volume and lower bad debt expense. We have always said that this business is scalable and that has never been more apparent than this quarter as a 10% increase in sales versus the prior year fourth quarter improved operating income from 3.6% to 5% of sales a new record for this business.
During the third quarter we announced a Markee (ph) win for Poly one distribution as we were named the primary distributor of thermoplastic products for Dupont engineering polymers in North America. The fourth quarter results included full quarter of this new business and we are pleased to report that the customer account transition is going very well. Our resident intermediate segment which consists of our sunbelt joint venture delivered operating income of 2 million which is 2.4 million below the prior year and down almost 2 million from the third quarter of 2009.
Some belts earnings are disappointing and unfortunately they are tied directly to ECU pricing. as the sales volume is effectively flat. Corporate and other costs before special items were $5 million higher than last year principally due to the reversal of long term incentive accruals in the fourth quarter of 2008 an incremental pension expense in 2009 partially offset by reduced retiree medical benefit costs.
Turning now to cash, during the fourth quarter of 2009, cash declined 18 million as we made a $11 million advanced contribution to our pension funds acquired the specialty health care company New England Eurosane for 11.5 million and retired medium term notes of 20 million. These are offset partially by proceeds from our sale of non core assets and cash flow from operations. At year end cash and liquidity were 223 million and 336 million respectively which are both substantially higher than the 44 million of cash and 166 million of liquidity reported at the beginning of 2009. While the sale of our equity investment in Geon Andinos and subsequent acquisition of NEU was slightly cash positive during the quarter that is not the most significant communication point about these two deals rather, they are a perfect illustration of the ongoing portfolio repositioning of PolyOne toward a more specialized product portfolio.
Clearly this repositioning slowed in 2009 has we focused on restructuring, preserving cash and liquidity, but as we move into 2010 and with substantially more cash on the balance sheet, expects to engage in more rigorous M&A process. We will focus on building our specialty platform in geographic market such as Latin America and the Middle East. While our priority is clearly to continue to add to our specialty businesses, we will not overlook properly valued potential synergy place in our other business.
With that I will now turn the call over to our chairman and CEO Steve Newlin.
Stephen D. Newlin
Well thanks Bob and good morning everyone. The Fourth Quarter of 2009 brings to a close the challenging fiscal year and economic environment I’ve ever seen in my career, consumer confidence and industrial demand declined to the lowest level in decades, two of our largest in-markets, housing and auto were particularly hard hit. I’m proud to say that our management team responded swiftly to the crisis and despite a 22% decline in demand we finished the year with a better balance sheet that we’ve ever had and full year earnings well into the black (ph).
For us, the first half of 2009 was consumed with implementing restructuring actions to permanently lower the company’s cost structure and improve our balance sheet the results of these actions were immediately impactful. As we’ve generated substantial free cash flow and demonstrated sustainable earnings improvement. As a result we were able to increase our focus on winning profitable new business and growing to top line during the second half of the year.
Since Bob focused on the quarterly remarks, I’d like to make some remarks about our full year accomplishments and our strategy and outlook as we move into the next decade. For the full year of 2009 sales totaled 2.1 billion reflecting a 25% decrease from ‘08 levels as demand fell 22%, despite the decline and demand of revenues, we delivered earnings per share of $0.37 just $0.04 shy of 2008. Bob mentioned we began 2009 with 44 million in cash, 166 million of available liquidity and just over $500 million of debt and we finished the year with 223 million in cash and 336 million of available liquidity and debt was reduced to $457 million. This substantial improvement in our financial position resulted from a company wide effect to cut costs, prune on profitable or high credit-risk business and expand margins of reduced working capital.
These improvements were facilitated and accelerated by our newly launched Lean Six Sigma efforts. You follow many companies out there and you frequently hear them reference Lean Six Sigma principles and initiatives they employ to reduce waves and improve efficiency across their business prosthesis. Many do this very well and have been reaping benefits for years. Admittedly PolyOne was late to the game in adopting this frame work, but we are off to a really terrific start. In fact, we’re apparently off to a better start than anyone else in 2009.
On January 19th of 2010 PolyOne was awarded the very prestigious Process Excellence Award for the best Lean Six Sigma startup program at the International Quality and Productivity center’s 11th annual Lean Six Sigma and process improvement summit. I’m very proud to say this puts us in an elite group of impressive companies such as EcoLab and ING who are previous award winners. This exclusive award acknowledged our program as the best. Out of over 400 applicants in setting organizational direction, delivering business benefits and initiating cultural change. But to us it was much more than just an award, it’s really a statement about the new PolyOne and it symbolizes how we changed our corporate culture. We made voice of the customer the basis for our competitive differentiation and strategic execution and Lean Six Sigma has helped in driving change and bringing rigor discipline and accountability into our organization and I think the results speak for themselves.
Gross margins for the full year 2009 before special items increased from 12.5% in ’08 to 17.1% in the face of the 22% decline and demand. In addition, we reduced average working capital as percentage sales from 13.4% in 2008 to 10.7% in 2009. Again, down to main environment. We believe this is world class performance and clearly distinguishes PolyOne from our peers. We decreased our average state sales and inventory from 56 days exiting 2008 to 38 days exiting 2009. All while maintaining exemplary on-time delivery performance. I can tell you these accomplishments would not have been possible without the implementation of LSS and specifically focussed projects executed by our first class of black belts.
But it doesn’t end here. PolyOne has already begun training at second class of black belts and by the end of this year, more than 25% of PolyOne’s associates around the world will have completed training including 1% of our employees will hold LSS black belt certification. The expenses size and scope of the LSS training ensures global cross business and cross functional support and expertise for the processed improvement projects. And I would like to recognize and express my sincere thanks to Tom Kedrowski in the PolyOne Leadership Team and Employees without whom our Lean Six Sigma implementation success would not have been possible.
Next, I would like to highlight the success of our distribution platform. 2009 marked an unusual year as several of the largest global chemical companies consolidated their North American lecithin (indiscernible) polymer distribution and selected PolyOne is their national distributor. Our distribution business, which already had a leading position in this phase, was able to secure distribution agreements with many marke suppliers including Bauer, Ineos, and DuPont (ph).
We won this business and earned it by consistently demonstrating exemplary customers’ service and on-time delivery that we believe makes us the supplier of choice in the polymer industry. These market share shifts have allowed our distribution platforms overcome the traditionally seasonally slow fourth quarter report top-line growth versus the third quarter this year while achieving record profitability through mixed improvements and leveraging our cross structure. This business is stable and the results are evident as we’ve improved return-on-sales to 4% in 2009, they were on a great projectory toward achieving our stated goal of 5% return-on-sales for POD.
I’d also like to point out that the combination of improved working capital management and increased profitability resulted in this business delivering an impressive ROIC of 39% exiting 2009. If you look around the distribution space, I think you find this to be best in class performance. We further believe we’re winning new distribution business as a result of our specific and very successful focus on growing our healthcare business. Healthcare customers now represent 20% of POD sales and our success in this industry is being noticed by suppliers who want PolyOne to help them expand their healthcare sales.
As you know, we selected healthcare as a target growth market three years ago for all of PolyOne not just distribution. Our global healthcare team is drawn to 24 dedicated marketing and sales resources. In 2009, healthcare sales exceeded a $160 million and our acquisition of NEU in December. Only for these demands, our commitment to growing PolyOne’s medical business. The NEU acquisition provides this with valuable new technology in applications as well as established healthcare customer relationships.
I’d like to publicly welcome all the NEU employees to PolyOne team, and I’m pleased to report that in the first 40 days in aggression is on schedule. Now, for some comments about performance, products, and solutions for PPNS (ph), this is our business most heavily connected to US housing and auto with GEON is the recognized industry leading brand. The PPNS team has responded most abruptly to the significant downturn in the economy.
In spite of 33% decline in sales from 2008, PPNS achieved profitability improvement over the prior year earning 6.5% return on sales in 2009. I think this is a superb achievement given the end-market demand, and it gives us great confidence in our ability to reach or proceed to our stated goal of 8-10% return on sales as housing and auto markets improve. Our operational commercial excellence strategies have played critical roles in the transformation of this platform. We dramatically lowered the break-even point of this business, and much of the increased profitability can be assigned to this savings. However, in the midst of very trying times there are also some great examples of commercial excellence and specialization in PPNS.
Metallic-look nylon compounds introduced at the NPE, National Plastics Exposition, in June of this past year is a great example. By combining our color masterbatch technology with our vinyl compounding knowledge, we created a specialty application that has a metallic-looking sheen that allows customers to eliminate costly and environmentally unfriendly painting operations from their production. This is a terrific example of listening to the customer, but it also illustrates the tremendous power and value of cross-selling.
No other PolyOne competitor has the breadth and depth of product offerings represented by our three platforms, nor the number of touch points – customer touch points provided by our distribution business. Be assured, cross-selling will become a much more important element of our sales and marketing efforts going forward and we expect to have more wins like this, I tell you about in the future.
While cross-selling will help all of our platforms, I particularly energize about the opportunity to bring specialty solutions to distribution in PPNS customers. As you know, we’ve been on a mission to transform PolyOne into a specialty company. And the challenges of 2009 only served as fuel to accelerate this transformation. During the second half of 2009, specialty platform achieved record levels of operating income totaling $38 million, or 8.3% of sales. The full year sales of 863 million comprised over 40% of the consolidated company sales, and operating margins expanded to 6.1% of sales for the full-year 2009. We are on track for achieving our stated objective of double digit return on sales for this business by 2012.
Last year’s performance of this platform represents the fourth consecutive year in which we’ve expanded substantially the specialty profitability. We attribute this to our relentless focus on innovation and competitive differentiation. As you know, you heard us talk about how we measure our specialty platform innovation success through our vitality index. Vitality index measures the percent of total sales from products introduced in the last five years. And exiting 2009, we achieved a new vitality index record of 39%. This is significant progress from when we introduced this metric in 2006. And I can stress enough how important this is as we must continually innovate and evolve our product portfolio to serve the changing needs of our customers.
Some examples of innovative new products driving the improvement in the vitality index and the overall performance of the specialty platform are color concentrates for wood-plastic products and flame-retardant wire-and-cable solutions for use in alternative energy applications. We’ve also expanded our offering of bio-derived materials with our Versaflex TPE product and our reSound heat- resistant bio-compounds.
During 2009 we advanced our joint development agreement with Archer Daniels Midland to develop bio-based plasticizers for durable goods as alternatives for the petroleum-based materials widely used today. Sales of bio-based or biodegradable products grew 52% in 2009. Although the base is small, we believe evolving trends in legislation will create demand for these products at growth rates that far exceed those of petroleum-based plasticizers. We believe we are uniquely positioned to capitalize on this growth.
Our focus on specialty growth is absolutely unwavering. And over the last three years we’ve overhauled our commercial philosophy, our leadership team, our innovation process, and how we recognize and reward our people. And in doing so we’ve radically shifted the earnings profile of our company by reducing our dependence on traditionally cyclical commodity end markets and equity investment earnings.
Our full-year 2009 results demonstrate this as the specialty platform contributed 36% of total business unit operating income compared with just 2% in 2005. Our stated goal is to drive at least 50% of our earnings from the specialty platform by 2012.
So, just to summarize 2009, it’s no secret that we began the year in very treacherous waters. Having successfully navigated the storm by generating cash, reducing cost and restoring profitability during the first two quarters, we were able to shift our focus later in the year to top-line growth and winning the business. Managing thorough this economic crisis we learned a lot about our true capabilities as a management team and as a company. And I’m extremely proud of how our associates responded. We’ve clearly improved the company’s financial strength and demonstrated substantial and sustainable earnings improvement.
In 2010 our top priorities will be profitable top line growth and a continued successful deployment of LSS to reduce cost in working capital. We believe we are seeing positive momentum on both fronts and we expect to grow from each of our three strategic platforms which will increase sales next year.
To accelerate our performance we made a series of major improvements to our organization’s structure effective January 1, 2020. We believe these changes will help us better serve our global customers, drive execution of our four strategic pillars, leverage our strong geographic footprint. Broadly, the specialty platform has essentially been changed from regionally organized along geographic lines to being global organized around productive customer lines.
It’s fully detailed in today’s release, Craig Nikrant is now leading our global Specialty Engineered Materials business; and John Van Hulle is leading our global Color, Additives and Inks business, Bernard Baert has assumed the role of President of Europe and International; and Dr. Willie Chien as President of Asia, our highest growth region.
Tom Kedrowski assumed direct responsibility for global sourcing overseeing the procurement of all raw materials, in-direct materials and services on a global basis. So all of our business units and functionaries are now organized globally. But we are also able to reap the strong benefits from international geographic leaders whose experience in leadership will help Polyone deliver consistency in growth.
I am very proud that we could make – announce changes to global organization with team members we already have in place. We’ll be able to deliver our innovative global solutions with a local touch to better serve our more than 10,000 customers operating in more than 130 countries around the world.
So let me just summarize by saying I am pleased with our fourth quarter and full-year results for 2009. And I think we are seeing positive momentum heading into 2010. While we are confident we will be able to grow earnings from our strategic platforms next year, we remain cautious about the speed and the extent of an economic recovery. And we expect margin expansion maybe challenged by raw material inflation which we have not seen since 2008. That being said, I think we have the best team in the industry to deal with these challenges and look forward to seeing our 2010 results unfold.
This concludes our prepared remarks and I would now like to turn the call back to Michael to open the line for your questions.
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Fund Letters
