Securities and Exchange Commission
Washington, DC 20549
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
☐ 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
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction||(I.R.S. Employer Identification No.)|
|of incorporation or organization)|
|33587 Walker Road,|
Avon Lake, Ohio
|(Address of principal executive offices)||(Zip Code)|
Registrant’s telephone number, including area code (440) 930-1000
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol||Name of each exchange on which registered|
|Common Shares, par value $.01 per share||POL||New York Stock Exchange|
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
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 ☐ No ☑
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||☒||Accelerated filer||☐|
|Non-accelerated filer||☐||Smaller reporting company||☐|
|Emerging growth company||☐|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The aggregate market value of the registrant’s outstanding common shares held by non-affiliates on June 28, 2019, determined using a per share closing price on that date of $31.39, as quoted on the New York Stock Exchange, was $2.4 billion.
The number of shares of common shares outstanding as of February 7, 2020 was 92,281,940.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement with respect to the 2020 Annual Meeting of Shareholders.
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 management’s 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 “will,” “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 condition, 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; estimated capital expenditures; results of current and anticipated market conditions and market strategies; sales efforts; expenses; the outcome of contingencies such as legal proceedings and environmental liabilities; and financial results. Factors that could cause actual results to differ materially from those implied by these forward-looking statements include, but are not limited to:
•disruptions, uncertainty or volatility in the credit markets that could adversely impact the availability of credit already arranged and the availability and cost of credit in the future;
•the effect on foreign operations of currency fluctuations, tariffs and other political, economic and regulatory risks;
•changes in polymer consumption growth rates and laws and regulations regarding plastics in jurisdictions where we conduct business;
•fluctuations in raw material prices, quality and supply, and in energy prices and supply;
•production outages or material costs associated with scheduled or unscheduled maintenance programs;
•unanticipated developments that could occur with respect to contingencies such as litigation and environmental matters;
•an inability to achieve the anticipated financial benefit from initiatives related to acquisition integration, working capital reductions, cost reductions and employee productivity goals;
•our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends;
•information systems failures and cyberattacks;
•our ability to consummate and successfully integrate acquisitions, including the acquisition of Clariant AG’s (Clariant) masterbatch business (the Clariant Masterbatch Acquisition) and Clariant Chemicals (India) Limited’s (Clariant India) masterbatch business (the businesses are collectively referred to as Clariant Masterbatch and the acquisitions are collectively referred to as the Clariant Acquisition);
•any material adverse changes in Clariant Masterbatch;
•the ability to obtain required regulatory or other third-party approvals and consents and otherwise consummate the Clariant Acquisition;
•our ability to achieve the strategic and other objectives relating to the Clariant Acquisition, including any expected synergies; and
•other factors described in this Annual Report on Form 10-K under Item 1A, “Risk Factors.”
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and 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 filed with the Securities and Exchange Commission (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.
ITEM 1. BUSINESS
We are a premier provider of specialized and sustainable polymer materials, and polymer services and solutions. Our products include specialty engineered materials, advanced composites, color and additive systems and polymer distribution. 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 sales, manufacturing and distribution facilities across North America, South America, Europe and Asia. When used in this Annual Report on Form 10-K, the terms “we,” “us,” “our”, "PolyOne" and the “Company” mean PolyOne Corporation and its consolidated subsidiaries.
PolyOne was formed on August 31, 2000 from the consolidation of The Geon Company (Geon) and M.A. Hanna Company (Hanna). In 1948, B.F.Goodrich created a vinyl plastic division that was subsequently spun off through a public offering in 1993, creating The Geon Company, 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.
PolyOne Corporation is incorporated in Ohio and headquartered in Avon Lake, Ohio. We currently employ approximately 5,600 people and have 61 manufacturing sites and eight distribution facilities in North America, South America, Europe and Asia. We offer more than 35,000 polymer solutions to over 10,000 customers across the globe. In 2019, we had sales of $2.9 billion, approximately 45% of which were to customers outside the United States.
Using our formulation expertise and operational capabilities, we create 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 vital as our customers increasingly need reliable suppliers with a global reach and increasingly effective material-based solutions to improve their products' appeal, performance, differentiation, profitability and competitive advantage. Our goal is to provide customers with specialized and sustainable materials and solutions through our global footprint, broad market knowledge, technical expertise, product breadth, manufacturing operations, a fully integrated information technology network and raw material procurement leverage. Our end markets include healthcare, transportation, packaging, consumer, building and construction, industrial, wire and cable, electrical and electronics and appliance.
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, and styrene. These monomers are then polymerized into chains called polymers, or plastic resin, such as polyethylene and polypropylene, in their most basic forms. 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.
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, 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 composites include these base resins, but are combined with a structural filler such as glass, wood, carbon or polymer fibers to enhance strength, rigidity and structure. Further performance can be delivered through an engineered thermoplastic sheet or thick film, which may incorporate more than one resin formulation or composite in multiple layers to impart additional properties such as gas barrier, structural integrity and lightweighting.
Thermoplastics and polymer composites 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, outdoor high performance equipment, 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 wire and cable industry, thermoplastics and composites serve to protect by providing
electrical insulation, flame resistance, durability, water resistance, water swelling and color coding to engineered fibers, yarn products, 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, often replacing traditional materials such as metal and glass. In the medical industry, plastics are used for a vast array of devices and equipment, including blood and intravenous bags, medical tubing, catheters, lead replacement for radiation shielding, clamps and connectors to bed frames, curtains and sheeting, electronic enclosures and equipment housings. In the outdoor high performance industry, plastic applications are used for components and colorants for all terrain vehicles and reinforced polymers are used for various outdoor equipment and gear. 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, anti-static, electrostatic discharge, and electromagnetic shielding performance for critical applications including integrated circuit chip packaging.
Various additives can be formulated with a base resin and further engineered into a structure to provide them with greater versatility and performance. Polymer formulations and structures have advantages over metals, wood, rubber, glass 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 design freedom, processability, weight reduction, chemical resistance, flame retardance and lower cost. Plastics are renowned for their durability, aesthetics, ease of handling and recyclability.
We operate in three reportable segments: (1) Color, Additives and Inks; (2) Specialty Engineered Materials; and (3) Distribution. Previously, PolyOne had five reportable segments. However, as a result of the divestiture of the Designed Structures & Solutions segment (DSS) on July 19, 2017 and the divestiture of the Performance Products and Solutions segment (PP&S) on October 25, 2019, we have removed DSS and PP&S as separate operating segments and their results are presented as discontinued operations. Historical information has been retrospectively adjusted to reflect these changes. Please see Note 3, Discontinued Operations, to the accompanying consolidated financial statements for additional information.
Our segments are further detailed in Note 14, Segment Information, to the accompanying consolidated financial statements.
The production of plastics and the manufacturing 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 highly 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, combined with the quality of products and agility of our distribution network, allow us to compete effectively.
The primary raw materials used by our manufacturing operations are polyolefin and other thermoplastic resins, TiO2, inorganic and organic pigments, all of which we believe are in adequate supply. See the discussion of risks associated with raw material supply and costs in Item 1A, “Risk Factors”.
Patents and Trademarks
We own and maintain a number of patents and trademarks in the United States and other key countries 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, 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 cash flows. Nevertheless, we have management processes designed to rigorously protect our inventions and trademarks.
Seasonality and Backlog
Sales of our products and services are 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.
No customer accounted for more than 3% of our consolidated revenues in 2019 and we do not believe we would suffer a material adverse effect to our consolidated financial statements 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, by 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 $50.6 million in 2019, $49.6 million in 2018 and $45.3 million in 2017.
Methods of Distribution
We sell products primarily through direct sales personnel, distributors, including our 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.
In September 2018, the Great Place to Work Institute certified PolyOne as a Great Place to Work® in the U.S. based on a comparison of our employees' survey responses to those of employees at hundreds of other certified companies. We believe this reflects our commitment to better serving our associates, customers and communities, as well as further advancing our sustainability initiatives.
As of December 31, 2019, we employed approximately 5,600 people. Approximately 1% 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 correct potential environmental exposures, including compliance matters and operational risk reduction opportunities. 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 record-low injury incidence rate of 0.56 per 100 full-time workers per year in 2019 and 0.51 in 2018. The 2019 average injury incidence rate for our NAICS Code (326 Plastics and Rubber Products Manufacturing) was 3.8. We hold the American Chemistry Council's certification as a Responsible Care Management System® (RCMS) company. Certification was granted based on PolyOne's conformance to the RCMS's comprehensive environmental health, safety and security requirements. The RCMS certification affirms the importance PolyOne places on having world-class environmental, health, safety and security performance.
In January 2019, PolyOne, along with 29 other member companies, joined together as founding members of the Alliance to End Plastic Waste (AEPW). The AEPW has thus far committed over $1.5 billion to help end plastic waste in the environment through investment in infrastructure, innovation, education, and clean-up activities. The AEPW intends to enable and bring to scale solutions to minimize and manage plastic waste and promote solutions for used plastics that move towards a circular economy. Our commitment to AEPW confirms the importance we place on being a global leader in all aspects of how we define sustainability: people, products, planet and performance. We have invested and are making important contributions in each, which are discussed in depth in our most recent Annual Report and Sustainability Report.
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 European Union Restriction of the Use of Certain Hazardous Substances Directive (RoHS), Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), the Dodd-Frank Wall Street Reform and Consumer Protection Act (covering Conflict Minerals), 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.
We expect 2020 cash environmental expenditures to approximate $11 million. Refer to Note 11, Commitments and Contingencies, to the accompanying consolidated financial statements for further discussion of environmental matters.
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 the noted risks, see Item 1A. "Risk Factors". For more information about our international operations, see Note 14, Segment Information, to the accompanying consolidated financial statements.
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 Securities Exchange Act of 1934 (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 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 (select Investors and then SEC 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.
ITEM 1A. RISK FACTORS
The following are certain risk factors that could affect our business, results of operations, financial position 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 following discussion is not an all-inclusive listing of risks, although we believe these are the more material risks that we face. If any of the following occur, our business, results of operations, financial position or cash flows could be adversely affected.
Risks Relating to our Business
Demand for and supply of our products and services may be adversely affected by several factors, some of which we cannot predict or control.
Several factors may affect the demand for and supply of our products and services, including:
•economic downturns or other volatility in the significant end markets that we serve;
•product obsolescence or technological changes that unfavorably alter the value/cost proposition of our products and services;
•competition from existing and unforeseen polymer and non-polymer based products;
•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;
•changes in environmental regulations that would limit our ability to sell our products and services in specific markets;
•changes in laws and regulations regarding plastic materials; and
•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.
If any of these events occur, the demand for and supply of our products and services could suffer and potentially lead to asset impairment or otherwise adversely affect our results.
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.
The occurrence of an operating problem at our facilities (e.g., an explosion, a mechanical failure, a chemical spill or a discharge of toxic or hazardous substances) may have a material adverse effect on the productivity and profitability of a particular manufacturing or distribution facility or on our operations as a whole, during and after the period of these operating difficulties. Operating problems may cause personal injury and/or loss of life, customer attrition and severe damage to or destruction of property and equipment and environmental damage. We are subject to present claims and potential future claims with respect to workplace exposure, workers’ compensation and other matters. Our property and casualty insurance, which we believe are of the types and in the amounts that are customary for the industry, may not fully insure us against all potential hazards that are incident to our business or otherwise could occur.
Environmental, health and safety laws and regulations impact our operations and financial statements.
Our operations on, and ownership of, real property are subject to environmental, health and safety laws and regulations at the national, state and local governmental levels (including, but not limited to, the RoHS and the Consumer Product Safety Improvement Act of 2008). The nature of our business exposes us to compliance costs and 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 and other harm to the environment or personal injury if they are improperly handled and released. Environmental compliance requirements imposed on us and our vendors may significantly increase the costs of these activities involving raw materials, energy, finished products and wastes. We may incur substantial costs, including fines, criminal or civil sanctions, damages, remediation costs or experience interruptions in our operations for violations of these laws.
Our operations could be adversely affected by various risks inherent in conducting operations worldwide.
Our operations are subject to risks; including, but not limited to, the following:
•changes in local government regulations and policies including, but not limited to duty or tariff restrictions, foreign currency exchange controls or monetary policy, repatriation of earnings, expropriation of property, investment limitations and tax policies;
•risks associated with the withdrawal of the United Kingdom (UK) from the European Union (EU), commonly known as "Brexit";
•political and economic instability and disruptions, including labor unrest, withdrawal or renegotiation of trade agreements, natural disasters, major public health issues, civil strife, acts of war, insurrection and terrorism;
•legislation that regulates the use of chemicals;
•disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations, including the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act;
•compliance with international trade laws and regulations, including export control and economic sanctions;
•difficulties in staffing and managing multi-national operations;
•limitations on our ability to enforce legal rights and remedies;
•reduced protection of intellectual property rights;
•other risks arising out of foreign sovereignty over the areas where our operations are conducted; and
•increasingly complex laws and regulations concerning privacy and data security, including but not limited to the European Union's General Data Protection Regulation.
On June 23, 2016, the UK held a referendum in which UK voters approved an exit from the EU. The June 2016 referendum result, and the subsequent commencement of the official withdrawal process by the UK government in March 2017, has created uncertainties affecting business operations in the UK and the EU. The long-term nature of the UK’s relationship with the EU is unclear and there is considerable uncertainty regarding when any relationship will be agreed and implemented. The long-term effects of Brexit will depend on any agreements the UK makes to retain access to EU markets, either during a transitional period or more permanently. Given the lack of comparable precedent, it is unclear what financial, trade and legal implications the withdrawal of the UK from the EU would have and how such withdrawal would affect us. It is possible that the withdrawal could, among other things, affect the legal and regulatory environments to which our businesses are subject, impact trade between the UK and the EU through potential restrictions on the free movement of goods and labor between the UK and the EU, create economic and political uncertainty in the region, and create other impediments to our ability to transact within and between the UK and EU. Less than 2% of our total consolidated sales originated in the UK and shipped to the EU for the year ended December 31, 2019.
In addition, we could be adversely affected by violations of the FCPA, UK Bribery Act and similar worldwide anti-bribery laws, as well as export controls and economic sanction laws. The FCPA, UK Bribery Act 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 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 will always protect us from the reckless or criminal acts committed by our employees or agents. If we are found to be liable for FCPA, UK Bribery Act, export control or sanction violations, we could suffer from criminal or civil penalties or other sanctions, including loss of
export privileges or authorization needed to conduct aspects of our international business, 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 demand for our products.
Natural gas, electricity, fuel, logistics and raw material costs could cause volatility in our results.
The cost of our natural gas, electricity, fuel, logistics and raw materials 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. 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 also cause fluctuations in raw materials prices, which could negatively impact demand for our products and cause volatility in our results.
We face competition from other companies.
We encounter competition in price, payment terms, 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 could also result in the loss of customers.
Cybersecurity breaches, global information systems security threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks and products, which could harm our business.
We depend on integrated information systems to conduct our business, including communicating with employees and customers, ordering and managing materials from suppliers, shipping products to customers, and analyzing and reporting results of operations. In addition, we store sensitive data, including proprietary business information, intellectual property and confidential employee or other personal data, on our servers and databases. Cybersecurity breaches, global information systems security threats and more sophisticated and targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data and communications. We continue to update our infrastructure, security tools, employee training and processes to protect against security incidents, including both external and internal threats, and to prevent their recurrence; however, our systems, networks and products may nevertheless be vulnerable to advanced persistent threats or other types of system failures. Depending on their nature and scope, such threats and system failures could potentially lead to the compromising of confidential information and communications, improper use of our systems and networks, manipulation and destruction of data, defective products, production downtimes and operational disruptions, which in turn could cause customers to cancel orders or otherwise adversely affect our reputation, competitiveness and results of operations.
Disruptions in the global credit, financial and/or currency markets could limit our access to credit or otherwise harm our financial results, which could have a material adverse impact on our business.
Global credit and financial markets experience volatility, including volatility in security prices, liquidity and credit availability, declining valuations of certain investments and significant changes in the capital and organizational structures of certain financial institutions. Market conditions may limit our ability to 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.
We are exposed to fluctuations in foreign currency exchange rates. Any significant change in the value of the currencies of the countries in which we do business against the U.S. dollar, whether precipitated by governmental monetary policy or otherwise, could affect our ability to sell products competitively and control our cost structure, which could have a material adverse effect on our business, financial condition and results of operations. For additional detail related to this risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."
The agreements governing our debt, including our revolving credit facility, term loan and other debt instruments, contain various covenants that limit our ability to take certain actions and in certain circumstances require us to meet financial maintenance tests, failure to comply with which could have a material adverse effect on us.
The agreements governing our senior secured revolving credit facility and our senior secured term loan, and the indentures and credit agreements governing our other debt, contain a number of customary restrictive covenants that, among other things, limit our ability to: sell or otherwise transfer assets, including in a spin-off, incur additional debt or liens, consolidate or merge with any entity or transfer or sell all or substantially all of our assets, pay dividends or make certain other restricted payments, make investments, enter into transactions with affiliates, create dividend or other payment restrictions with respect to subsidiaries, make capital investments and alter the business we conduct.
In addition, our revolving credit facility requires us to comply under certain circumstances with specific financial tests, under which we are required to achieve certain or specific financial and operating results. Our ability to comply with these provisions may be affected by events beyond our control. A breach of any of these covenants would result in a default under such agreements and instruments, which in certain circumstances could be a default under all of these agreements and instruments. In the event of any default, our lenders could elect to declare all amounts borrowed under the agreements, together with accrued interest thereon, to be due and payable. In such event, we cannot assure that we would have sufficient assets to pay debt then outstanding under the agreements governing our debt.
Furthermore, certain of these agreements condition our ability to obtain additional borrowing capacity, engage in certain transactions or take certain other actions, on our achievement of certain or specific financial and operating results, although our failure to achieve such results would not result in a default under such agreements. Any future refinancing of our senior secured revolving credit facility or other debt may contain similar restrictive covenants.
We have a significant amount of goodwill, and any future goodwill impairment charges could adversely impact our results of operations.
As of December 31, 2019, we had goodwill of $685.7 million. Additionally, in connection with our planned acquisition of Clariant Masterbatch, we expect that our goodwill will significantly increase. The future occurrence of a potential indicator of impairment, such as a significant adverse change in business climate, an adverse action or assessment by a regulator, unanticipated competition, a material negative change in relationships with 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, could result in goodwill impairment charges, which could adversely impact our results of operations. Based on our 2019 goodwill impairment test, performed as of October 1, 2019, no reporting units were identified as being at risk of future impairment. For additional information, see Note 4, Goodwill and Intangible Assets, to the accompanying consolidated financial statements and “Critical Accounting Policies and Estimates” included in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Risks Relating to our Planned Acquisition of Clariant Masterbatch
The Clariant Acquisition may not occur at all or may not occur in the expected time frame, which may negatively impact our share price.
On December 19, 2019, we entered into a definitive share purchase agreement (the Agreement) with Clariant and a definitive business transfer agreement (the BTA) with Clariant India, pursuant to which, among other things, and subject to the satisfaction or waiver of specified conditions, we will acquire Clariant Masterbatch.
The consummation of the Clariant Acquisition is not assured. The Clariant Acquisition is subject to risks and uncertainties, including the risks that the necessary regulatory approvals will not be obtained, the risk that PolyOne may be required to divest certain businesses or assets in connection with the Clariant Acquisition, or that other closing conditions will not be satisfied. We cannot predict whether and when such conditions will be required or satisfied.
We may not realize the growth opportunities and cost synergies that are anticipated from the Clariant Acquisition or may experience other difficulties integrating Clariant Masterbatch.
The benefits that are expected to result from the Clariant Acquisition will depend, in part, on our ability to realize the anticipated growth opportunities and cost synergies as a result of the Clariant Acquisition. Our success in realizing these growth opportunities and cost synergies, and the timing of this realization, depends on the successful integration of Clariant Masterbatch. There can be no assurance that we will successfully or cost-effectively integrate Clariant Masterbatch. The failure to do so could have an adverse effect on our business, financial condition, results of operations and cash flow.
We will incur additional debt to complete the Clariant Acquisition. Our ability to generate cash to service this debt depends on many factors beyond our control.
At December 31, 2019, we had total debt of approximately $1,242.8 million. We expect to incur approximately $650 million of debt to complete the Clariant Acquisition.
Our ability to make payments on our debt, fund our other liquidity needs, and make planned capital expenditures will depend on our ability to generate cash in the future. A significant portion of our operations are conducted by our subsidiaries. Our cash flows and our ability to service our indebtedness, including our ability to pay the interest on and principal of our debt when due, may be dependent upon cash dividends and other distributions or other transfers from our subsidiaries. Our ability to generate cash, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
The degree to which we are currently leveraged and will be leveraged following the consummation of the Clariant Acquisition could have important consequences for shareholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
Headquartered in Avon Lake, Ohio, we operate globally with principal locations consisting of 61 manufacturing sites and eight distribution facilities in North America, South America, Europe and Asia. We own the majority 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:
|Specialty Engineered Materials||Color, Additives and Inks||Distribution|
|1. Birmingham, Alabama||1. Glendale, Arizona||25. Tianjin, China||1. Rancho Cucamonga, California|
|2. Englewood, Colorado||2. Phoenix, Arizona||26. Tabor, Czech Republic||2. Chicago, Illinois|
|3. Montrose, Colorado||3. Fort Smith, Arkansas||27. Odkarby, Finland||3. Eagan, Minnesota|
|4. North Haven, Connecticut||4. Bethel, Connecticut||28. Cergy, France||4. Edison, New Jersey|
|5. McHenry, Illinois||5. Kennesaw, Georgia||29. Tossiat, France||5. Statesville, North Carolina|
|6. Winona, Minnesota||6. Elk Grove Village, Illinois||30. Diez, Germany||6. Elyria, Ohio|
|7. Hickory, North Carolina||7. La Porte, Indiana||31. Gyor, Hungary||7. La Porte, Texas|
|8. Avon Lake, Ohio||8. St. Louis, Missouri||32. Pune, India||8. Brampton, Ontario, Canada|
|9. Hatfield, Pennsylvania||9. Lockport, New York||33. Milan, Italy||(8 Distribution Facilities)|
|10. Changzhou, China||10. Pineville, North Carolina||34. Toluca, Mexico|
|11. Shenzhen, China||11. Berea, Ohio||35. Eindhoven, Netherlands|
|12. Suzhou, China||12. Massillon, Ohio||36. Lima, Peru|
|13. Gaggenau, Germany||13. North Baltimore, Ohio||37. Kutno, Poland|
|14. Melle, Germany||14. Norwalk, Ohio||38. Jeddah, Saudi Arabia|
|15. Leeuwarden, Netherlands||15. Lehigh, Pennsylvania||39. Alicante, Spain|
|16. Barbastro, Spain||16. Mountain Top, Pennsylvania||40. Barcelona, Spain|
|17. Istanbul, Turkey||17. Vonore, Tennessee||41. Pamplona, Spain|
|18. Leek, United Kingdom||18. Assesse, Belgium||42. Bangkok, Thailand|
|Shanghai, China (2)||19. Itupeva, Brazil||43. Knowsley, United Kingdom|
|Pune, India (1)||20. Novo Hamburgo, Brazil||Shenzhen, China (1)|
|Pamplona, Spain (1)||21. Pudong (Shanghai), China||Suwanee, Georgia (2)|
|(18 Manufacturing Plants)||22. & 23. Shanghai, China (3)||Pamplona, Spain (2)|
|24. Suzhou, China||(43 Manufacturing Plants)|
(1)Facility is not included in manufacturing plants total as it is also included as part of another segment.
(2)Facility is not included in manufacturing plants total as it is a design center/lab.
(3)There are two manufacturing plants located in Shanghai, China.
ITEM 3. LEGAL PROCEEDINGS
Information regarding certain legal proceedings can be found in Note 11, Commitments and Contingencies, to the accompanying consolidated financial statements and is incorporated by reference herein.
ITEM 4. MINE SAFETY DISCLOSURES
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Executive officers are elected by our Board of Directors to serve one-year terms. The following table lists the name of each person serving as an executive officer of the Company, their age, and position with the Company as of February 7, 2020.
|Robert M. Patterson||47 || ||Chairman, President and Chief Executive Officer|
|Bradley C. Richardson||61 || ||Executive Vice President, Chief Financial Officer|
|Michael A. Garratt||56 || ||Senior Vice President, Chief Commercial Officer|
|J. Scott Horn||64 || ||Senior Vice President, President of Distribution |
|Lisa K. Kunkle||51 || ||Senior Vice President, General Counsel and Secretary|
|M. John Midea, Jr. ||55 || ||Senior Vice President, Global Operations and Process Improvement|
|Woon Keat Moh||46 || ||Senior Vice President, President of Color, Additives and Inks|
|Chris L. Pederson||53 || ||Senior Vice President, President of Specialty Engineered Materials|
|Joel R. Rathbun||47 || ||Senior Vice President, Mergers & Acquisitions|
|João José San Martin Neto||59 || ||Senior Vice President, Chief Human Resources Officer|
Robert M. Patterson: Chairman, President and Chief Executive Officer, May 2016 to date. President and Chief Executive Officer, May 2014 to May 2016. Executive Vice President and Chief Operating Officer, March 2012 to May 2014. Executive Vice President and Chief Financial Officer, January 2011 to March 2012. Senior Vice President and Chief Financial Officer, May 2008 to January 2011. 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.
Bradley C. Richardson: Executive Vice President, Chief Financial Officer, November 2013 to date. Executive Vice President, Chief Financial Officer of Diebold, Incorporated (an integrated self-service delivery manufacturer for the banking industry and security systems) from November 2009 through November 2013. Executive Vice President, Corporate Strategy and Chief Financial Officer at Modine Manufacturing Company (a manufacturer of thermal management systems and components) from 2003 to 2009. Vice President, Performance Management Planning and Control, Chief Financial Officer, Upstream, BP Amoco, London, (a producer of oil, natural gas, and petro chemicals) from 2000 to 2003. Mr. Richardson serves on the Board of Directors of Brady Corporation and is Chair of its Audit Committee.
Michael A. Garratt: Senior Vice President, Chief Commercial Officer, April 2016 to date. Senior Vice President, President of Performance Products and Solutions, September 2013 to April 2016. President, Marmon Utility (a manufacturer of medium-high voltage utility, subsea and down-hole power cables and molded insulator systems) from March 2011 to September 2013. Chief Operating Officer, Excel Polymers (a custom thermoset rubber formulator) from November 2009 to December 2010. Vice President and General Manager - Americas Compounding and Performance Additives, Excel Polymers from March 2009 to November 2009. Vice President and General Manager - Industrial and Consumer, Excel Polymers from December 2005 to March 2009. From April 1996 to June 2005, Mr. Garratt worked for DuPont Dow Elastomers, a joint venture of Dupont and Dow (global manufacturers of engineered thermoset rubber and thermoplastic elastomer materials) in market development and product management positions, culminating in a regional commercial leadership role for Europe, the Middle East and Africa.
J. Scott Horn: Senior Vice President, President of Distribution, July 2017 to date. General Manager, Distribution, 2000 to July 2017. Vice President of M.A. Hanna Resin Distribution from 1995 to 2000, when PolyOne was formed. President, Fiberchem, Inc. (a leading regional distributor of thermoplastic and thermoset resins) from 1991, upon acquisition of Fiberchem by PolyOne’s predecessor, M.A. Hanna Company, to 1995. Mr. Horn worked in various roles of increasing responsibility at Fiberchem from 1981 to 1991.
Lisa K. Kunkle: Senior Vice President, General Counsel and Secretary, May 2015 to date. Vice President, General Counsel and Secretary, August 2007 to May 2015, Assistant General Counsel February 2007 to August 2007. Partner, Jones Day (a global law firm) from January 2006 to February 2007. Associate, Jones Day from August 1995 to January 2006.
M. John Midea, Jr.: Senior Vice President, Global Operations and Process Improvement, February 2015 to date. President and Chief Executive Officer, Resco Products (a refractory products company) from August 2012 to October 2014. President and Chief Operating Officer, Ennis Traffic Safety Solutions (a traffic safety and infrastructure company) from June 2008 to July 2012. Vice President, North American - General Industrial, Valspar Corporation (a manufacturer of paints and coatings) from June 2007 to May 2008. Vice President and General Manager, Power Coatings, Valspar Corporation from February 2002 to June 2007.
Woon Keat Moh: Senior Vice President, President of Color, Additives and Inks, January 2020 to date. Vice President of Asia, January 2019 to December 2019. General Manager of Specialty Engineered Materials Asia, December 2014 to December 2018. Sales Director of Color and Additives Asia, February 2011 to November 2014. Business Development Manager, Color and Additives Asia, February 2010 to January 2011. From October 1999 to January 2010, Mr. Moh worked for Clariant AG (a global manufacturer of color and additives masterbatch) in various roles of increasing responsibility, culminating in a commercial leadership role in Southeast Asia. He also served as a technical sales executive for Bayer AG (a manufacturer of pigments, dyestuffs, additives, chemical auxiliaries for textile, leather, paper and plastic industry) with its Specialty Products division from 1997 to 1999.
Chris L. Pederson: Senior Vice President, President of Specialty Engineered Materials, November 2018 to date. Vice President, Strategy, Hexcel Corporation (a global leader in advanced composites technology) from March 2017 to November 2018. Vice President, Aerospace of Cytec Engineered Materials (a producer of specialty bonding adhesives and composite materials) from November 2009 to February 2016. Vice President, Research and Development of Cytec from January 2004 to November 2009. Mr. Pederson served as a Senior Engineer at Boeing (a global aerospace company) from 1992 to 2001.
Joel R. Rathbun: Senior Vice President, Mergers and Acquisitions, January 2016 to date. General Manager, Specialty Engineered Materials North America, February 2013 to January 2016. Vice President, Mergers and Acquisitions, June 2011 to February 2013. Mr. Rathbun served as Senior Vice President, Mergers and Acquisitions, Moelis & Company (an American global independent investment bank) from January 2008 to June 2011. He also served as Executive Director, Mergers and Acquisitions of CIBC World Markets (an investment bank in the domestic and international equity and debt capital markets) from 2006 to 2008.
João José San Martin Neto: Senior Vice President, Chief Human Resources Officer, November 2016 to date. Senior Director, Human Resources, Color, Additives and Inks, February 2013 to November 2016. Group Global Director, Human Resources, Engineered Products and Solutions from November 2012 to February 2013. Vice President Human Resources, Alcoa Power and Propulsion (a business unit of Alcoa Inc. specializing in titanium and aluminum castings) from May 2009 to October 2012. Vice President Human Resources, Alcoa Electrical & Electronic Solutions (a business unit of Alcoa Inc. specializing in the design, development and production of electrical and electronic distribution systems) from August 2003 to April 2009.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common shares, $0.01 par value per share, are traded on the New York Stock Exchange under the symbol “POL.”
As of February 7, 2020, there were 1,704 holders of record of our common shares.
We currently have an authorized common share repurchase program. For the full year 2019, we repurchased 1 million common shares at a weighted average share price of $26.91. During the three months ended December 31, 2019, we repurchased zero common shares as shown in the table below.
|Period||Total Number of Shares Purchased||Weighted Average Price Paid Per Share||Total Number of Shares Purchased as Part of Publicly Announced Program|
Maximum Number of Shares that May Yet be Purchased Under the Program(1)
|October 1 to October 31||— || ||$||— || ||— || ||2,107,472 || |
|November 1 to November 30||— || ||$||— || ||— || ||2,107,472 || |
|December 1 to December 31||— || ||— || ||— || ||2,107,472 || |
|Total||— || ||$||— || ||— || |
(1) On August 18, 2008, we announced that our Board of Directors approved a common share repurchase program authorizing PolyOne to purchase up to 10.0 million of its common shares. On each of October 11, 2011 and October 23, 2012, we further announced that our Board of Directors had increased the common share repurchase authorization by an additional 5.3 million shares and 13.2 million shares, respectively. On May 16, 2016, we announced that we would increase our share buyback by 7.3 million shares to 10.0 million shares. As of December 31, 2019, approximately 2.1 million shares remained available for purchase under these authorizations, which have no expiration. Purchases of common shares may be made by open market purchases or privately negotiated transactions and may be made pursuant to Rule 10b5-1 plans and accelerated share repurchases.
ITEM 6. SELECTED FINANCIAL DATA
Refer to Item 7, “Management’s 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)||2019||2018||2017||2016||2015|
|Sales||$||2,862.7 || ||$||2,881.0 || ||$||2,590.3 || ||$||2,349.4 || ||$||2,313.0 || |
|Operating income||156.8 || ||178.6 || ||173.1 || ||170.4 || ||177.7 || |
|Net income from continuing operations||75.7 || ||87.4 || ||111.1 || ||101.3 || ||95.4 || |
|Net income from continuing operations attributable to PolyOne shareholders||75.5 || ||87.7 || ||111.0 || ||101.5 || ||95.3 || |
|Cash dividends declared per common share||$||0.788 || ||$||0.720 || ||$||0.580 || ||$||0.495 || ||$||0.420 || |
|Earnings per share from continuing operations attributable to PolyOne shareholders:|
|Basic||$||0.98 || ||$||1.10 || ||$||1.36 || ||$||1.21 || ||$||1.09 || |
|Diluted||$||0.97 || ||$||1.09 || ||$||1.35 || ||$||1.19 || ||$||1.07 || |
|Total assets||$||3,273.3 || ||$||2,723.3 || ||$||2,705.3 || ||$||2,735.8 || ||$||2,620.3 || |
|Long-term debt||$||1,210.9 || ||$||1,336.2 || ||$||1,276.4 || ||$||1,239.4 || ||$||1,127.6 || |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Unless otherwise noted, the discussion that follows includes a comparison of our results of operations, liquidity and capital resources, and cash flows for fiscal years 2019 and 2018. For a discussion of changes from fiscal year 2017 to fiscal year 2018, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018, filed as Exhibit 99.1 to our Current Report on Form 8-K, filed with the SEC on January 28, 2020.
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.”
We are a premier provider of specialized and sustainable polymer materials and polymer services and solutions. Our products include specialty engineered materials, advanced composites, color and additive systems and polymer distribution. 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 2019 sales of $2.9 billion, we have manufacturing sites and distribution facilities across North America, South America, Europe and Asia. We currently employ approximately 5,600 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 capabilities to provide value-added solutions to designers, assemblers and processors of plastics (our customers).
Our business faces macroeconomic exposures resulting from economic downturns, especially as it relates to cyclical markets such as building and construction, automotive and industrial. In addition, with 57% and 48% of our respective Color, Additives and Inks and Specialty Engineered Materials segments' sales outside the United States, we experience volatility related to foreign currency fluctuations, most significantly the Euro. Increasing profitability during periods of raw material price volatility is another challenge. Further, we strive 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 RoHS and the Consumer Product Safety Improvement 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 with superior customer service.
We are also committed to sustainability through our four cornerstones of people, products, planet, and performance. We have invested in and are making important contributions to each, which are discussed in depth in our most recent Annual Report and Sustainability Report.
In the short term, we will maintain our focus on sales growth with expanding margins, with a goal of offsetting economic headwinds in certain end markets and geographies, raw material volatility and logistics cost inflation. Longer term, we will continue to focus on accelerating the launch of new products and collaborating with our customers to develop new and unique solutions for their benefit while focusing on our four cornerstones of sustainability - people, products, planet and performance - to ensure the growth we achieve is sustainable for us
and our customers. Capital expenditures will be focused primarily to support sales growth, 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 our core capabilities and continue to support growth in key markets and product offerings.
We will continue our enterprise-wide Lean Six Sigma program directed at improving margin, 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 and commitment to sustainability include improving health and wellness, protecting the environment, globalizing and localizing and increasing energy efficiency. Examples of how our strategy supports these trends can be found in numerous initiatives: active participation in the medical device market, leveraging our global footprint to deliver consistent solutions globally, light weighting and metal replacement and development of solutions that respond to ever-changing market needs by offering alternatives to traditional materials.
On January 2, 2019, the Company acquired Fiber-Line, LLC (Fiber-Line), a global leader in polymer coated engineered fibers and composite materials, for total consideration of $152.7 million, net of cash acquired and inclusive of contingent consideration. Fiber-Line's results are reported in the Specialty Engineered Materials segment. The preliminary purchase price allocation resulted in intangible assets of $77.1 million, goodwill of $47.0 million, and net working capital of $24.9 million.
On October 25, 2019, PolyOne completed the divestiture of its Performance Products and Solutions business segment (PP&S) for $775 million in cash, subject to a working capital adjustment. Previously, PP&S was included as a separate operating segment. As a result of the sale, the PP&S operating segment results are now reported as discontinued operations. Historical information has been retrospectively adjusted to reflect these changes.
On December 19, 2019, the Company entered into the Agreement with Clariant, and separately entered into the BTA with Clariant India. Pursuant to the Agreement and the BTA, PolyOne has agreed to acquire the masterbatch businesses of Clariant and Clariant India for a net purchase price of $1.45 billion in cash, subject to customary working capital and net debt adjustments. Each of the Agreement and the BTA contain certain customary termination rights, and, with respect to the Agreement only, the requirement that PolyOne pay a termination fee in the event the Agreement is terminated under certain conditions.
The closing of each acquisition is expected to occur in mid-2020, subject to the receipt of regulatory approvals, the satisfaction or waiver of customary closing conditions and, in the case of the Clariant India masterbatch acquisition, shareholder approval of Clariant India.
We intend to use (i) a portion of the net proceeds from the sale of PP&S, (ii) the net proceeds, after deducting the underwriters' discount but before deducting offering expenses, of approximately $496.8 million from the issuance of common shares in an underwritten public offering that we completed in February 2020 and (iii) the net proceeds of an anticipated senior unsecured notes offering to finance the Clariant Acquisition, including the payment of related fees and expenses. Refer to “Liquidity” for more information regarding the financing for the Clariant Acquisition.
Highlights and Executive Summary
A summary of PolyOne’s sales, operating income, income from continuing operations, net of income taxes and net income from continuing operations attributable to PolyOne common shareholders is included in the following table:
|Sales||$||2,862.7 || ||$||2,881.0 || ||$||2,590.3 || |
|Operating income||156.8 || ||178.6 || ||173.1 || |
|Net income from continuing operations, net of income taxes||75.7 || ||87.4 || ||111.1 || |
|Net income from continuing operations attributable to PolyOne common shareholders||75.5 || ||87.7 || ||111.0 || |
|Results of Operations|| || ||Variances — Favorable (Unfavorable)|
| || || |
2019 versus 2018
2018 versus 2017
|(Dollars in millions, except per share data)||2019||2018||2017||Change||%|
|Sales||$||2,862.7 || ||$||2,881.0 || ||$||2,590.3 || ||$||(18.3)|| ||(0.6)||%||$||290.7 || ||11.2 ||%|
|Cost of sales||2,205.5 || ||2,256.2 || ||1,993.9 || ||50.7 || ||2.2 ||%||(262.3)|| ||(13.2)||%|
|Gross margin||657.2 || ||624.8 || ||596.4 || ||32.4 || ||5.2 ||%||28.4 || ||4.8 ||%|
|Selling and administrative expense||500.4 || ||446.2 || ||423.3 || ||(54.2)|| ||(12.1)||%||(22.9)|| ||(5.4)||%|
|Operating income||156.8 || ||178.6 || ||173.1 || ||(21.8)|| ||(12.2)||%||5.5 || ||3.2 ||%|
|Interest expense, net||(59.5)|| ||(62.8)|| ||(60.8)|| ||3.3 || ||5.3 ||%||(2.0)|| ||(3.3)||%|
|Debt extinguishment costs||— || ||(1.1)|| ||(0.3)|| ||1.1 || ||nm || ||(0.8)|| ||nm || |
|Other income (expense), net||12.1 || ||(12.9)|| ||(0.1)|| ||25.0 || ||nm || ||(12.8)|| ||nm || |
|Income from continuing operations before income taxes||109.4 || ||101.8 || ||111.9 || ||7.6 || ||7.5 ||%||(10.1)|| ||(9.0)||%|
|Income tax expense||(33.7)|| ||(14.4)|| ||(0.8)|| ||(19.3)|| ||nm || ||(13.6)|| ||nm || |
|Net income from continuing operations||$||75.7 || ||$||87.4 || ||$||111.1 || ||$||(11.7)|| ||(13.4)||%||$||(23.7)|| ||(21.3)||%|
|Income (loss) from discontinued operations, net of income taxes||513.1 || ||72.1 || ||(168.7)|| ||441.0 || ||nm || ||240.8 || ||nm || |
|Net income (loss)||588.8 || ||159.5 || ||(57.6)|| ||429.3 || ||nm || ||217.1 || ||nm || |
|Net loss (income) attributable to noncontrolling interests||(0.2)|| ||0.3 || ||(0.1)|| ||(0.5)|| ||nm || ||(0.4)|| ||nm || |
|Net income (loss) attributable to PolyOne common shareholders||$||588.6 || ||$||159.8 || ||$||(57.7)|| ||$||428.8 || ||nm || ||$||217.5 || ||nm || |
|Earnings (loss) per share attributable to PolyOne common shareholders - basic:|
|Continuing operations||$||0.98 || ||$||1.10 || ||$||1.36 || |
|Discontinued operations||6.64 || ||0.91 || ||(2.07)|| |
|Total||$||7.62 || ||$||2.01 || ||$||(0.71)|| |
|Earnings (loss) per share attributable to PolyOne common shareholders - diluted:|
|Continuing operations||$||0.97 || ||$||1.09 || ||$||1.35 || |
|Discontinued operations||6.61 || ||0.90 || ||(2.05)|| |
|Total||$||7.58 || ||$||1.99 || ||$||(0.70)|| |
nm - not meaningful
Sales decreased $18.3 million, or 0.6%, in 2019 compared to 2018, as growth provided by acquisitions of 4.3% was offset by organic sales decline of 3.4% and unfavorable foreign exchange of 1.5%.
Cost of sales
As a percent of sales, cost of sales decreased from 78.3% in 2018 to 77.0% in 2019, primarily as a result of improved mix and lower environmental remediation costs.
Selling and administrative expense
These costs include selling, technology, administrative functions, corporate and general expenses. Selling and administrative expense in 2019 increased $54.2 million compared to 2018, primarily driven by costs associated with earnout adjustments and acquisitions.
Interest expense, net
Interest expense, net decreased $3.3 million in 2019 compared to 2018 due to favorable impact from net investment hedges, partially offset by the impact of increased interest rates associated with our variable rate debt and higher average outstanding balances. See Note 15, Derivatives and Hedging, to the accompanying consolidated financial statements for detail on hedging instruments.
Other income (expense), net
The Company adopted Accounting Standards Update (ASU) 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on January 1, 2018. As a result, all components of net periodic benefit cost, except for service costs, are presented here. For further detail, see Note 10, Employee Benefit Plans, to the accompanying consolidated financial statements.
Debt extinguishment costs
Debt extinguishment costs of $1.1 million for 2018 include the write-off of unamortized deferred financing costs and premium and consent payments in connection with the amendments of our senior secured term loan due 2026 and our senior secured revolving credit facility. There were no debt extinguishment costs incurred in 2019. See Note 5, Financing Arrangements, to the accompanying consolidated financial statements for additional information.
The Company is subject to taxation in the U.S. and numerous foreign jurisdictions. In determining the effective income tax rate, the Company analyzes various factors, including annual earnings, the laws of taxing jurisdictions in which the earnings were generated, the impact of state and local income taxes, the ability to use tax credits, net operating loss carryforwards, and available tax planning alternatives. Discrete items, including the effect of changes in tax laws, statutory tax rates, and valuation allowances or other non-recurring tax adjustments are reflected in the period in which they occur as an addition to, or reduction from, the income tax provision.
The Tax Cuts and Jobs Act (TCJA) was enacted on December 22, 2017. Among other things, effective in 2018, the TCJA reduced the U.S. federal corporate tax rate from 35% to 21%, exempts from U.S. federal income taxation dividends from certain foreign corporations to their U.S. shareholders, eliminates or reduces the effect of various federal tax deductions and creates new taxes on certain outbound payments and future foreign earnings generated after 2017. The TCJA required U.S. companies to pay a one-time transition tax on earnings of foreign corporate subsidiaries that were at least ten-percent owned by such U.S. companies and that were previously deferred from U.S. taxation.
As of December 31, 2018, we completed our accounting for the tax effects of the enactment of the TCJA. In compliance with the one-year measurement period of the SEC's Staff Accounting Bulletin 118 (SAB 118) (issued December 22, 2017), we have finalized the effects of the TCJA on our existing deferred income tax balances, the one-time transition tax and, as discussed below, the impact the TCJA had on our indefinite reinvestment assertion pursuant to Accounting Principles Board 23 (APB 23). These finalized effects are included as components of income tax expense from continuing operations and are noted in the following tabular reconciliation.
As of December 31, 2018, we completed our analysis with respect to the impact of the TCJA on our continuing assertion that our foreign earnings are indefinitely reinvested pursuant to APB 23 of Accounting Standards Codification 740-30 (ASC 740-30). APB 23 provides guidance that US companies do not need to recognize tax effects on foreign earnings that are indefinitely reinvested. Our assertion has changed with respect to certain earnings of foreign affiliates in certain countries, which resulted in a recognition of tax liabilities. As of December 31, 2018, and as noted in the following tabular reconciliation, the Repatriation of certain foreign earnings from prior and current periods totaled 9.4%. This consisted of an impact of 7.5% to our provision from a decision to repatriate prior year earnings after completing our analysis with respect to the TCJA and 1.9% pertaining to our decision to repatriate certain current year earnings. For the year ended December 31, 2019, the rate impact was 1.6% pertaining to our decision to repatriate certain current year earnings. The rest of our foreign earnings are indefinitely reinvested pursuant to APB 23 and our policy. No deferred income taxes were recorded on outside basis differences as it was not practicable to determine the provision impact, if any, due to the complexities associated with this calculation.
We elected to recognize the resulting tax on global intangible low-taxed income (GILTI) and the deduction of foreign-derived intangible income (FDII) as a period expense in the period the tax is incurred.
A reconciliation of the applicable U.S. federal statutory tax rate to the consolidated effective income tax rate from continuing operations along with a description of significant or unusual reconciling items is included below.
| ||Twelve Months Ended December 31,|
|Federal statutory income tax rate||21.0 ||%||21.0 ||%||35.0 ||%|
|Tax on GILTI||1.9 || ||3.3 || ||— || |
|Repatriation on certain foreign earnings from prior and current periods||1.6 || ||9.4 || ||0.8 || |
|Net impact of non-deductible acquisition earnouts||2.8 || ||0.2 || ||— || |
|Tax on one-time gain from sale of other assets||6.0 || ||— || ||— || |
|U.S. tax reform, transition tax||0.2 || ||2.1 || ||17.8 || |
|U.S. tax reform, tax effect on net deferred tax liabilities||— || ||(5.4)|| ||(18.0)|| |
|Tax impact of FDII deduction||(2.0)|| ||(0.4)|| ||— || |
|Research and development credit||(2.8)|| ||(0.8)|| ||(1.4)|| |
|Domestic production activities deduction||— || ||(1.1)|| ||(2.4)|| |
|Amended prior period tax returns and corresponding favorable audit adjustments||(0.7)|| ||— || ||(6.8)|| |
|Tax benefits on certain foreign investments||— || ||— || ||(12.8)|| |
|State and local tax, net||4.2 || ||2.3 || ||0.2 || |
|Foreign tax rate differential||(8.9)|| ||(12.1)|| ||(20.0)|| |
|Foreign permanent items||7.5 || ||(1.6)|| ||2.4 || |
|Net impact of uncertain tax positions||(2.4)|| ||(0.6)|| ||4.8 || |
|Changes in valuation allowances||1.7 || ||(3.4)|| ||1.4 || |
|Other||0.7 || ||1.2 || ||(0.3)|| |
|Effective income tax rate||30.8 ||%||14.1 ||%||0.7 ||%|
2019 compared to 2018
For 2019, the Company decided to repatriate certain current year foreign earnings that will be remitted in the future which had an unfavorable tax impact of $1.8 million (1.6%). This was lower than 2018, as the decision was to repatriate certain foreign earnings from both current and prior periods having an unfavorable tax impact of $9.6 million (9.4%).
The increase in the State and local tax, net line resulted from an unfavorable state tax audit decision combined with higher domestic earnings in 2019.
The increase in the Foreign permanent items line primarily related to the non-deductibility of interest expense relating to the receipt of tax-exempt dividends which caused an unfavorable tax effect of $10.3 million (9.4%).
The increase in the benefit in the Net impact of uncertain tax positions line resulted from the expiration of statute of limitations and favorable tax settlements.
The unfavorable change reflected in the Changes in valuation allowances line from 2018 to 2019 resulted from operational losses and the absence of the realizability of deferred tax assets that occurred in 2018.
2018 compared to 2017
The increase in the Repatriation on certain foreign earnings from 2017 to 2018 line items resulted from a decision to repatriate certain foreign earnings from 2018 and 2017.
The increase in the State and local tax, net line resulted from an unfavorable state tax audit decision.
In 2018, Foreign permanent items line included a favorable tax treatment of a foreign intellectual property transaction.
The benefit reflected in the Changes in valuation allowances line resulted from the realizability of a deferred tax asset for one of our foreign entities.
Operating income is the primary measure that is reported to our chief operating decision maker for purposes of making decisions about allocating resources to the segments and assessing their 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 phase-in costs; costs incurred directly in relation to acquisitions or divestitures; integration costs; executive separation agreements; share-based compensation costs; environmental remediation costs and other liabilities for facilities no longer owned or closed in prior years; actuarial gains and losses associated with our pension and post-retirement benefit plans; and certain other items that are not included in the measure of segment profit or loss that is reported to and reviewed by our chief operating decision maker. These costs are included in Corporate and eliminations.
PolyOne has three reportable segments: (1) Color, Additives and Inks; (2) Specialty Engineered Materials; and (3) Distribution.
Our segments are further discussed in Note 14, Segment Information, to the accompanying consolidated financial statements.
Sales and Operating Income — 2019 compared with 2018 and 2018 compared with 2017
| || || || |
2019 versus 2018
2018 versus 2017
|(Dollars in millions)||2019||2018||2017||Change||% Change||Change||% Change|
|Color, Additives and Inks||$||1,003.8 || ||$||1,046.5 || ||$||893.2 || ||$||(42.7)|| ||(4.1)||%||$||153.3 || ||17.2 ||%|
|Specialty Engineered Materials||745.7 || ||645.8 || ||624.3 || ||99.9 || ||15.5 ||%||21.5 || ||3.4 ||%|
|Distribution||1,192.2 || ||1,265.4 || ||1,154.6 || ||(73.2)|| ||(5.8)||%||110.8 || ||9.6 ||%|
|Corporate and eliminations||(79.0)|| ||(76.7)|| ||(81.8)|| ||(2.3)|| ||(3.0)||%||5.1 || ||6.2 ||%|
|Sales||$||2,862.7 || ||$||2,881.0 || ||$||2,590.3 || ||$||(18.3)|| ||(0.6)||%||$||290.7 || ||11.2 ||%|
|Color, Additives and Inks||$||147.4 || ||$||158.5 || ||$||138.6 || ||$||(11.1)|| ||(7.0)||%||$||19.9 || ||14.4 ||%|
|Specialty Engineered Materials||86.8 || ||72.3 || ||75.5 || ||14.5 || ||20.1 ||%||(3.2)|| ||(4.2)||%|
|Distribution||75.4 || ||71.5 || ||72.6 || ||3.9 || ||5.5 ||%||(1.1)|| ||(1.5)||%|
|Corporate and eliminations||(152.8)|| ||(123.7)|| ||(113.6)|| ||(29.1)|| ||(23.5)||%||(10.1)|| ||(8.9)||%|
|Operating income||$||156.8 || ||$||178.6 || ||$||173.1 || ||$||(21.8)|| ||(12.2)||%||$||5.5 || ||3.2 ||%|
|Operating income as a percentage of sales:|
|Color, Additives and Inks||14.7 ||%||15.1 ||%||15.5 ||%||(0.4)||%||points||(0.4)||%||points|
|Specialty Engineered Materials||11.6 ||%||11.2 ||%||12.1 ||%||0.4 ||%||points||(0.9)||%||points|
|Distribution||6.3 ||%||5.7 ||%||6.3 ||%||0.6 ||%||points||(0.6)||%||points|
|Total||5.5 ||%||6.2 ||%||6.7 ||%||(0.7)||%||points||(0.5)||%||points|
Color, Additives and Inks
Sales decreased $42.7 million, or 4.1%, in 2019 compared to 2018. Growth in sustainable solutions and the packaging and healthcare end markets, as well as continued gains in pricing and mix, were more than offset by continued weakness in the Chinese automotive end market as well as the North American consumer and industrial markets. Unfavorable foreign exchange reduced sales by 2.5%.
Operating income decreased $11.1 million in 2019 compared to 2018. Unfavorable foreign exchange and the continued softness in the automotive and consumer end markets drove the decline.
Specialty Engineered Materials
Sales increased $99.9 million, or 15.5%, in 2019 compared to 2018. Acquisitions contributed 19.0% growth while North America composites, healthcare, and the wire and cable end markets contributed as well. These gains were partially offset by unfavorable foreign exchange of 2.4% and weakness in the transportation and electronic end markets.
Operating income increased by $14.5 million in 2019 compared to 2018 as a result of acquisitions and margin expansion from improved mix, which were partially offset by unfavorable foreign exchange.
Sales decreased $73.2 million, or 5.8%, in 2019 compared to 2018 due to lower volume and average selling prices, reflecting raw material deflation.
Operating income increased $3.9 million in 2019 compared to 2018 as a result of improved mix and pricing.
Corporate and Eliminations
Corporate and eliminations increased $29.1 million in 2019 compared to 2018. This increase was primarily as a result of adjustments to estimated earnout liabilities due to better than expected results from recent acquisitions. See Note 2, Business Combinations to the accompanying condensed consolidated financial statements for further details.
Liquidity and Capital Resources
Our objective is to finance our business through operating cash flow and an appropriate mix of debt and equity. By laddering the maturity structure, we avoid concentrations of debt maturities, reducing liquidity risk. We may from time to time seek to retire or purchase our outstanding debt with cash and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. We may also seek to repurchase our outstanding common shares. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved have been and may continue to be material.
The following table summarizes our liquidity as of December 31, 2019:
|Cash and cash equivalents||$||864.7 || |
|Revolving credit availability||281.1 || |
|Liquidity||$||1,145.8 || |
As of December 31, 2019, approximately 29% of the Company’s cash and cash equivalents resided outside the United States.
Based on current projections, we believe that we will be able to continue to manage and control working capital, discretionary spending and capital expenditures and that cash provided by operating activities, along with available borrowing capacity under our revolving credit facilities, will allow us to maintain adequate levels of available capital to fund our operations, meet debt service obligations, continue paying dividends, and opportunistically repurchase outstanding common shares.
In connection with the Clariant Acquisition, on December 19, 2019, we entered into a Commitment Letter with a number of banks (the Commitment Parties), pursuant to which the Commitment Parties have provided a 12-month commitment for a $1.15 billion senior unsecured bridge loan facility (the Bridge Facility) for purposes of funding the Clariant Acquisition. The Commitment Parties’ commitments under the Bridge Facility were subsequently reduced on a dollar-for-dollar basis by the net proceeds from the issuance of common shares in an underwritten public offering that we completed in February 2020. The Company currently intends to issue new senior unsecured notes in lieu of borrowing under the Bridge Facility.
Expected sources of cash in 2020 outside of the Clariant Acquisition include cash from operations and available liquidity under our revolving credit facility, if needed. Outside of the Clariant Acquisition, expected uses of cash in 2020 include select specialty acquisitions, interest payments, cash taxes, dividend payments, share repurchases, environmental remediation costs and capital expenditures. Capital expenditures are currently estimated to be approximately $65.0 million in 2020, primarily to support sales growth, our continued investment in recent acquisitions and other strategic investments.
Additionally, as further described in Note 11, Commitments and Contingencies, to the accompanying consolidated financial statements, we may incur additional uses of cash for environmental remediation at the former Goodrich Corporation Calvert City site.
The following summarizes our cash flows from operating, investing and financing activities.
|Cash provided by (used by):|
|Operating Activities||$||300.8 || ||$||253.7 || ||$||202.4 || |
|Investing Activities||611.9 || ||(170.3)|| ||(119.4)|| |
|Financing Activities||(218.3)|| ||(148.1)|| ||(72.7)|| |
|Effect of exchange rate on cash||(0.6)|| ||(8.0)|| ||6.6 || |
|Net increase (decrease) in cash and cash equivalents||$||693.8 || ||$||(72.7)|| ||$||16.9 || |
In 2019, net cash provided by operating activities was $300.8 million as compared to $253.7 million in 2018. This increase was primarily as a result of working capital improvements.
In 2018, net cash provided by operating activities was $253.7 million as compared to $202.4 million in 2017. The increase in net cash provided by operating activities of $51.3 million primarily reflects improved working capital as well as a receipt of $27.9 million of U.S. federal income tax refunds.
Net cash provided by investing activities during 2019 of $611.9 primarily reflects $119.6 million for the acquisition of Fiber-Line, and $81.7 million of capital expenditures, $761.8 proceeds from the divestiture of PP&S, and $51.4 million cash proceeds from the sale of other assets.
Net cash used by investing activities during 2018 of $170.3 million reflects acquisitions of $98.6 million and capital expenditures of $76.0 million.
Net cash used by financing activities in 2019 primarily reflects $60.3 million of dividends paid, repurchases of our outstanding common shares of $26.9 million, net repayments of $120.5 million under our senior secured revolving credit facility, and from proceeds received from the sale of PP&S.
Net cash used by financing activities in 2018 primarily reflects repurchases of $123.0 million of our outstanding common shares, cash dividends paid of $56.1 million, and repayment of debt of $22.9 million. Net borrowings of $62.6 million under our revolving credit facilities partially offset these uses.
The following table summarizes debt as presented at December 31, 2019 and 2018.
|(In millions)||December 31, 2019||December 31, 2018|
|Senior secured revolving credit facility due 2022||$||— || ||$||120.1 || |
|Senior secured term loan due 2026||614.7 || ||619.8 || |
|5.25% senior notes due 2023||596.3 || ||595.0 || |
|Other Debt||18.3 || ||20.7 || |
|Total Debt||$||1,229.3 || ||$||1,355.6 || |
|Less short-term and current portion of long-term debt||18.4 || ||19.4 || |
|Total long-term debt, net of current portion||$||1,210.9 || ||$||1,336.2 || |
On April 11, 2018, the Company entered into a fifth amendment to its senior secured term loan. Under the terms of the amended senior secured term loan, the margin was reduced by 25 basis points to 175 basis points. At the Company's discretion, interest is based upon (i) a margin rate of 175 basis points plus the 1-, 2-, 3-, or 6-month LIBOR, subject to a floor of 75 basis points, or (ii) a margin rate of 75 basis points plus a Prime Rate, subject to a floor of 175 basis points. On November 9, 2018, the Company entered into a sixth amendment to its senior secured term loan, which extended the maturity to 2026. Repayments in the amount of one percent of the aggregate principal amount as of August 3, 2016 are payable annually, while the remaining balance matures on January 30, 2026. The weighted average annual interest rate under the senior secured term loan for the year ended December 31, 2019 and 2018 was 4.01% and 3.80%, respectively. The total principal repayments for the year ended December 31, 2019 were $6.5 million.
The Company maintains a senior secured revolving credit facility, which matures on February 24, 2022 and provides a maximum borrowing facility size of $450.0 million, subject to a borrowing base with advances against certain U.S. and Canadian accounts receivable, inventory and other assets as specified in the agreement. On June 28, 2019, the Company amended and restated its senior secured revolving credit facility to, among other things, add a European line of credit, up to the euro equivalent of $50.0 million, subject to a borrowing base with advances against certain European accounts receivable. Advances under the U.S. portion of our revolving credit facility bear interest, at the Company’s option, at a Base Rate or a LIBOR Rate plus an applicable margin. The Base Rate is a fluctuating rate equal to the greater of (i) the Federal Funds Rate plus one-half percent, (ii) the prevailing LIBOR Rate plus one percent, and (iii) the prevailing Prime Rate. The applicable margins vary based on the Company’s daily average excess availability during the previous quarter. The weighted average annual interest rate under this facility for the year ended December 31, 2019 and 2018 was 3.90% and 3.35%, respectively. As of December 31, 2019, we had no borrowings under our revolving credit facility, which had remaining availability of $279.4 million. As of December 31, 2018, we had borrowings of $120.1 million under our revolving credit facility, which had remaining availability of $279.4 million.
The agreements governing our revolving credit facility and our senior secured term loan, and the indentures and credit agreements governing other debt, contain a number of customary financial and restrictive covenants that, among other things, limit our ability to: sell or otherwise transfer assets, including in a spin-off, incur additional debt or liens, consolidate or merge with any entity or transfer or sell all or substantially all of our assets, pay dividends or make certain other restricted payments, make investments, enter into transactions with affiliates, create dividend or other payment restrictions with respect to subsidiaries, make capital investments and alter the business we conduct. As of December 31, 2019, we were in compliance with all covenants.
As of both December 31, 2019 and 2018, the Company maintained a credit line of $12.0 million with Saudi Hollandi Bank. The credit line has an interest rate equal to the Saudi Arabia Interbank Offered Rate plus a fixed rate of 0.85% and is subject to annual renewal. Borrowings under the credit line were primarily used to fund capital expenditures related to the manufacturing facility in Jeddah, Saudi Arabia. As of December 31, 2019, letters of credit under the credit line were immaterial and borrowings were $10.3 million with a weighted average annual interest rate of 3.14%. As of December 31, 2018, letters of credit under the credit line were immaterial and borrowings were $10.7 million with a weighted average annual interest rate of 3.35%. As of December 31, 2019 and 2018, there was remaining availability on the credit line of $1.7 million and $1.3 million, respectively.
For additional information about our debt obligations, see Note 5, Financing Arrangements, to the accompanying consolidated financial statements.
Letters of Credit
Our revolving credit facility provides up to $50.0 million for the issuance of letters of credit, $10.3 million of which was used at December 31, 2019. These letters of credit are issued by the bank in favor of third parties and are mainly related to insurance claims.
Contractual Cash Obligations
The following table summarizes our obligations under debt agreements, operating leases, interest obligations, pension and other post-retirement plan obligations and purchase obligations as of December 31, 2019:
| ||Payment Due by Period|
|(In millions)||Total||2020||2021 & 2022||2023 & 2024||Thereafter|
|Total debt (1)||$||1,242.8 || ||$||18.4 || ||$||14.7 || ||$||614.0 || ||$||595.7 || |
|Operating leases||71.7 || ||24.0 || ||27.3 || ||12.6 || ||7.8 || |
|Interest on long-term debt obligations (2)||355.0 || ||70.6 || ||126.4 || ||101.6 || ||56.4 || |
|Pension and post-retirement obligations (3)||44.3 || ||5.0 || ||9.9 || ||9.1 || ||20.3 || |
|Purchase obligations (4)||35.8 || ||21.5 || ||13.7 || ||0.6 || ||— || |
|Total||$||1,749.6 || ||$||139.5 || ||$||192.0 || ||$||737.9 || ||$||680.2 || |
(1)Total debt includes both the current and long-term portions of debt and capital lease obligations.
(2)Represents estimated contractual interest payments for all outstanding debt.
(3)Pension and post-retirement obligations relate to our U.S. and international pension and other post-retirement plans. The expected payments associated with these plans represent an actuarial estimate of future assumed payments based upon retirement and payment patterns for a 10 year period. Due to uncertainties regarding the assumptions involved in estimating future required contributions to our pension and non-pension postretirement benefit plans, including: (i) interest rate levels, (ii) the amount and timing of asset returns and (iii) what, if any, changes may occur in pension funding legislation, the estimates in the table may differ materially from actual future payments.
(4)Purchase obligations are primarily comprised of service agreements related to telecommunication, information technology, utilities and other manufacturing plant services and certain capital commitments.
The table excludes the liability for unrecognized income tax benefits, because we cannot predict with reasonable certainty the timing of cash settlements, if any, with the applicable taxing authorities. At December 31, 2019, the gross liability for unrecognized income tax benefits, including interest and penalties, totaled $12.6 million.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that we are aware of as defined in Item 303(a)(4)(ii) of Regulation S-K.
Critical Accounting Policies and Estimates
Significant accounting policies are described more fully in Note 1, Description of Business and 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 consolidated financial statements and accompanying notes. We base our estimates on historical experience and assumptions that we believe are reasonable considering 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.
|Description|| ||Judgments and Uncertainties|| ||Effect if Actual Results|
Differ from Assumptions
|Environmental Liabilities|| || |
• Based upon our estimates, we had an undiscounted accrual of $112.0 million at December 31, 2019 for probable future environmental expenditures. Any such provision is recognized using the Company's best estimate of the amount of loss incurred, or at the lower end of an estimated range, when a single best estimate is not determinable.
• With respect to the former Goodrich Corporation Calvert City site, the United States Environmental Protection Agency (USEPA) issued its Record of Decision (ROD) in September 2018, selecting a remedy consistent with our accrual assumptions. In April 2019, the respondents signed an Administrative Settlement Agreement and Order on Consent with the USEPA to conduct the remedial design. In October 2019, the USEPA sent a Special Notice Letter to PolyOne, Westlake Vinyls, and Goodrich Corporation, inviting negotiation of a Consent Decree to perform the remedial actions at the site. On December 23, 2019, the three companies submitted to the USEPA a Good Faith Offer letter agreeing to negotiate a Consent Decree, along with a draft proposed Consent Decree and draft remedial action Work Plan.
• Franklin-Burlington, a subsidiary of PolyOne's former DSS business, is listed as a cooperating party along with approximately 70 other companies. The cooperating parties are working with the EPA on the lower Passaic River Study Area. Based on currently available information as of December 31, 2019, we have not identified evidence that Franklin-Burlington contributed any of the primary contaminants of concern to the lower Passaic River and therefore have not accrued for costs of remediation to the lower Passaic River.
• In some cases, the Company recovers a portion of the costs relating to these obligations from insurers or other third parties; however, the Company records such amounts only when they are collected.
• This accrual represents our best estimate of the remaining probable costs based upon information and technology currently available. 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.
• If further developments or resolution of these matters are not consistent with our assumptions and judgments, we may need to recognize a significant adjustment in a future period.
• As we progress through certain benchmarks such as completion of the remedial investigation and feasibility study, issuance of a record of decision and remedial design, additional information will become available that may require an adjustment to our existing reserves.
|Description|| ||Judgments and Uncertainties|| ||Effect if Actual Results|
Differ from Assumptions
|Pension and Other Post-retirement Plans|
• We account for our defined benefit pension plans and other post-retirement plans in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Update (ASC) Topic 715, Compensation — Retirement Benefits. We immediately recognize actuarial gains and losses in our operating results in the year in which the gains or losses occur. In 2019, we recognized a $9.6 million benefit as a result of the recognition of these actuarial gains, which favorably impacted net income (loss), comprehensive income (loss) and the funded status of our pension plans. primarily the result of actual asset returns that were higher than our assumed returns and mortality assumptions. Partially offsetting these gains was a decrease in our discount rate.
• Asset returns and interest rates significantly affect the value of future assets and liabilities of our pension and post-retirement plans and therefore the funded status of our 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 corporate bonds with maturities that correspond to the timing of our benefit obligations, referred to as the bond matching approach.
• To develop our expected long-term return on plan assets, we consider historical and forward looking long-term asset returns and the expected investment portfolio mix of plan assets. The weighted-average expected long-term rate of return on plan assets was 5.68% for 2019, 5.09% for 2018 and 6.08% for 2017.
• Life expectancy is a significant assumption that impacts our pension and other post-retirement benefits obligation. During 2019, we adopted the MP-2018 mortality improvement scale which was issued by the Society of Actuaries in October 2019.
• The weighted average discount rates used to value our pension liabilities as of December 31, 2019 and 2018 were 4.11% and 3.62%, respectively, post-retirement liabilities were 3.98% and 3.60%, respectively. As of December 31, 2019, an increase/decrease in the discount rate of 50 basis points, holding all other assumptions constant, would have increased or decreased pre-tax income and the related pension and post-retirement liability by approximately $19.4 million. An increase/decrease in the discount rate of 50 basis points as of December 31, 2019 would result in a change of approximately $1.3 million in the 2020 net periodic benefit cost.
• The expected long-term return on plan assets utilized as of January 1, 2019 and 2018 was 5.68% and 5.09%, respectively. An increase/decrease in our expected long-term return on plan assets of 50 basis points as of December 31, 2019, would result in a change of approximately $2.2 million to 2019 net periodic benefit cost.
• We account for income taxes using the asset and liability method under ASC Topic 740. 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.
• We recognize net tax benefits under the recognition and measurement criteria of ASC Topic 740, Income Taxes, 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.
• 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. We have provided valuation allowances as of December 31, 2019, aggregating to $16.2 million primarily against certain foreign and state net operating loss carryforwards based on our current assessment of future operating results and other factors. At December 31, 2019, the gross liability for unrecognized income tax benefits, including interest and penalties, totaled $12.6 million.
• Undistributed and indefinitely reinvested earnings for certain consolidated non-U.S. subsidiaries were approximately $395 million as of December 31, 2019. No provision was made on these earnings as APB 23 of ASC 740-30 provides guidance that U.S. companies do not need to recognize tax effects on foreign earnings that are indefinitely reinvested. Additionally, no deferred income taxes were recorded on outside basis differences as it was not practicable to determine the provision impact, if any, due to the complexities associated with this calculation.
• Although management believes that the estimates and judgments discussed herein are reasonable, actual results could differ, which could result in income tax expense or benefits that could be material.
|Description|| ||Judgments and Uncertainties|| ||Effect if Actual Results|
Differ from Assumptions
• Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies. We follow the guidance in ASC 350, Intangibles — Goodwill and Other, including subsequent updates, and test goodwill for impairment at least annually, absent a triggering event that would warrant 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.
• We have identified our reporting units at the operating segment level, or in most cases, one level below the operating segment level. Goodwill is allocated to the reporting units based on the estimated fair value at the date of acquisition.
• We estimated fair value using the best information available to us, including market information and discounted cash flow projections using the income approach.
• The income approach requires us to make assumptions and estimates regarding projected economic and market conditions, growth rates, operating margins and cash expenditures. Sensitivity analyses were performed around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.
• If actual results are not consistent with our assumptions and estimates, we may be exposed to goodwill impairment charges.
• The fair value of the reporting unit is based on a number of subjective factors including: (a) appropriate consideration of valuation approaches, (b) the consideration of our business outlook and (c) weighted average cost of capital (discount rate), growth rates and market multiples for our estimated cash flows.
• Based on our 2019 annual impairment test performed on October 1st, we determined there were no reporting units considered to be at risk of future impairment due to the fair value's proximity to the carrying value. We believe that the current assumptions and estimates are reasonable, supportable and appropriate. The business could be impacted by unforeseen changes in market factors or opportunities, which could impact our existing assumptions used in our impairment test. As such, there can be no assurance that these estimates and assumptions made for the purposes of the goodwill impairment test will prove to be accurate predictions of future performance.
|Indefinite-lived Intangible Assets|
• Indefinite-lived intangible assets represent trade names associated with acquired companies.
• We estimate the fair value of trade names using a “relief from royalty payments” approach. This approach involves two steps: (1) estimating reasonable royalty rate for the trade name 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 trade name.
• If actual results are not consistent with our assumptions and estimates, we may be exposed to impairment charges related to our indefinite lived trade name
• Based on our 2019 annual impairment test, no trade names were considered at risk.
Recent and Future Adoption of Accounting Standards
Information regarding recent and future adoption of accounting standards can be found in Note 1, Description of Business and Summary of Significant Accounting Policies, to the accompanying consolidated financial statements and is incorporated by reference herein.
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 — Interest on our revolving credit facility and senior secured term loan is based upon a Prime rate or LIBOR, plus a margin. Interest on the credit line with Saudi Hollandi Bank is based upon SAIBOR plus a fixed rate of 0.85%. There would be no material 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, 2019.
Foreign currency exposure — We enter into intercompany 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 may enter into foreign exchange forward contracts and derivative instruments. Gains and losses on these contracts generally offset gains and losses on the assets and liabilities being hedged.
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 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
|Reports of Independent Registered Public Accounting Firm|
|Consolidated Financial Statements:|
|Consolidated Statements of Income (Loss)|
|Consolidated Statements of Comprehensive Income (Loss)|
|Consolidated Balance Sheets|
|Consolidated Statements of Cash Flows|
|Consolidated Statements of Shareholders’ Equity|
|Notes to Consolidated Financial Statements|
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 consolidated financial statements and disclosures included in this Annual Report fairly present in all material respects the consolidated financial position, results of operations, shareholders’ equity and cash flows of PolyOne Corporation as of and for the year ended December 31, 2019.
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 Company’s disclosure controls and procedures at December 31, 2019 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 Corporation’s 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 Company’s transactions are properly recorded and reported to permit the preparation of the Company’s consolidated financial statements in conformity with generally accepted accounting principles; and the Company’s 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 PolyOne’s internal control over financial reporting as of December 31, 2019 and has prepared Management’s Annual Report On Internal Control Over Financial Reporting contained on page 68 of this Annual Report, which concludes that as of December 31, 2019, PolyOne’s internal control over financial reporting is effective and that no material weaknesses were identified.
|/s/ ROBERT M. PATTERSON||/s/ BRADLEY C. RICHARDSON|
|Robert M. Patterson||Bradley C. Richardson|
|Chairman, President and Chief Executive Officer||Executive Vice President and Chief Financial Officer|
February 18, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of PolyOne Corporation
Opinion on Internal Control over Financial Reporting
We have audited PolyOne Corporation’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, PolyOne Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of PolyOne Corporation as of December 31, 2019 and 2018, the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes of PolyOne Corporation and our report dated February 18, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s 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 “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s 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 company’s 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 company’s 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.
/s/ Ernst & Young
February 18, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of PolyOne Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PolyOne Corporation (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income (loss), comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 18, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.