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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
------------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003.
COMMISSION FILE NUMBER 1-16091.
POLYONE CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 34-1730488
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Suite 36-5000, 200 Public Square, Cleveland, Ohio 44114-2304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 589-4000
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 X No__
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No__
As of November 11, 2003, there were 91,749,254 common shares outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In millions, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2003 2002 2003 2002
------------- ------------ ------------ ------------
Sales $ 630.3 $ 650.7 $1,926.7 $ 1,917.9
Operating costs and expenses:
Cost of sales 539.8 548.9 1,651.3 1,598.0
Selling and administrative 67.3 68.7 209.4 224.0
Depreciation and amortization 18.2 18.2 55.1 54.6
Employee separation and plant phase-out 8.2 0.2 35.2 1.1
Loss on divestiture of equity investment - - - 1.5
Income from equity affiliates and minority interest (10.1) (11.6) (25.8) (13.6)
------------- ------------ ------------ ------------
Operating income 6.9 26.3 1.5 52.3
Interest expense (19.2) (11.6) (49.0) (31.4)
Interest income 0.3 0.1 0.6 0.6
Other (expense) income, net (3.5) 0.5 (10.1) (3.9)
------------- ------------ ------------ ------------
Income (loss) before income taxes, discontinued operations and
cumulative effect of a change in accounting (15.5) 15.3 (57.0) 17.6
Income tax expense (27.7) (5.7) (11.5) (6.6)
------------- ------------ ------------ ------------
Income (loss) before discontinued operations and cumulative effect of
change in accounting (43.2) 9.6 (68.5) 11.0
Discontinued operations:
Income from operations, net of income taxes - 0.2 - 1.3
Cumulative effect of a change in goodwill accounting,
net of income tax benefit of $1.0 million - - - (53.7)
------------- ------------ ------------ ------------
Net income (loss) $ (43.2) $ 9.8 $ (68.5) $ (41.4)
============= ============ ============ ============
Income (loss) per common share:
Basic income (loss) per share before discontinued operations and
effect of change in accounting $ (.47) $ .11 $ (.75) $ .12
Discontinued operations - - .01
Cumulative effect of a change in accounting - - - (.59)
------------- ------------ ------------ ------------
Basic income (loss) per share $ (.47) $ .11 $ (.75) $ (.46)
============= ============ ============ ============
Diluted income (loss) per share before discontinued operations and
effect of change in accounting $ (.47) $ .11 $ (.75) $ .12
Discontinued operations - - - .01
Cumulative effect of a change in accounting - - - (.58)
------------- ------------ ------------ ------------
Diluted income (loss) per share $ (.47) $ .11 $ (.75) $ (.45)
============= ============ ============ ============
Weighted average shares used to compute earnings per share:
Basic 91.1 90.7 91.0 90.6
Diluted 91.1 91.7 91.0 92.1
Dividends paid per share of common stock $ - $ .0625 $ - $ .1875
See Accompanying Notes to the Unaudited Condensed
Consolidated Financial Statements.
2
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions)
September 30, December 31,
2003 2002
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 50.4 $ 41.4
Accounts receivable, net 315.2 164.3
Inventories 259.1 253.7
Deferred income tax assets 41.2 42.1
Other current assets 22.8 12.7
------------------ ------------------
Total current assets 688.7 514.2
Property, net 653.7 682.1
Investment in equity affiliates 264.1 271.8
Goodwill, net 444.7 444.0
Other intangible assets, net 29.8 32.8
Other non-current assets 63.8 52.6
------------------ ------------------
Total assets $ 2,144.8 $ 1,997.5
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank debt $ 0.9 $ 0.7
Accounts payable 257.0 242.0
Accrued expenses 131.0 160.2
Current portion of long-term debt 0.8 91.0
------------------ ------------------
Total current liabilities 389.7 493.9
Long-term debt 785.2 492.2
Deferred income tax liabilities 40.7 39.0
Post-retirement benefits other than pensions 120.9 122.5
Other non-current liabilities, including pensions 266.0 261.2
Minority interest in consolidated subsidiaries 10.2 9.0
------------------ ------------------
Total liabilities 1,612.7 1,417.8
Shareholders' equity:
Preferred stock, 40.0 shares authorized, no shares issued - -
Common stock, $.01 par, 400.0 shares authorized, 122.2
shares issued at September 30, 2003 and December 31, 2002 1.2 1.2
Other shareholders' equity 530.9 578.5
------------------ ------------------
Total shareholders' equity 532.1 579.7
------------------ ------------------
Total liabilities and shareholders' equity $ 2,144.8 $ 1,997.5
================== ==================
See Accompanying Notes to the Unaudited Condensed
Consolidated Financial Statements.
3
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In millions)
Nine Months Ended
September 30,
----------------------------------------
2003 2002
------------------ -----------------
OPERATING ACTIVITIES
Net loss $ (68.5) $ (41.4)
Cumulative effect of a change in accounting - (53.7)
Income from discontinued operations - 1.3
------------------ -----------------
Income (loss) from continuing operations (68.5) 11.0
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Employee separation and plant phase-out charges 35.2 1.1
Cash payments on employee separation and plant phase-out (35.3) (12.1)
Depreciation and amortization 55.1 54.6
Unrealized currency (gains) losses (4.9) (10.8)
Loss on sale of assets and equity affiliate 0.2 1.5
Companies carried at equity and minority interest:
Income from equity affiliates (27.2) (15.0)
Minority interest expense 1.4 1.4
Dividends and distributions received 12.6 16.8
Deferred income taxes - 0.9
Change in assets and liabilities:
Operating working capital:
Accounts receivable (141.1) (72.3)
Inventories 1.3 (32.9)
Accounts payable 9.3 (20.1)
Accrued expenses and other (2.5) 15.7
------------------ -----------------
NET CASH USED BY OPERATING ACTIVITIES FOR CONTINUING OPERATIONS (164.4) (60.2)
INVESTING ACTIVITIES
Capital expenditures (24.9) (49.1)
(Investment in) return of capital by equity affiliates, net (0.1) 2.3
Business acquired, net of cash received (15.8) -
Proceeds from sale of assets 27.0 1.9
------------------ -----------------
NET CASH USED BY INVESTING ACTIVITIES FOR CONTINUING OPERATIONS (13.8) (44.9)
FINANCING ACTIVITIES
Change in short-term debt (90.1) (5.8)
Change in long-term debt 297.8 153.9
Debt issuance costs (14.7) (4.9)
Termination of interest rate swap agreements (2.6) 8.3
Net proceeds from the exercise of stock options - 7.0
Dividends - (16.9)
------------------ -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES FOR CONTINUING OPERATIONS 190.4 141.6
NET CASH USED BY DISCONTINUED OPERATIONS - 1.4
Effect of exchange rate on changes on cash (3.2) (2.7)
------------------ -----------------
INCREASE IN CASH AND CASH EQUIVALENTS 9.0 35.2
Cash and cash equivalents at beginning of period 41.4 18.2
------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 50.4 $ 53.4
================== =================
See Accompanying Notes to the Unaudited Condensed
Consolidated Financial Statements.
4
POLYONE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In millions, shares in thousands)
Accumulated
Common Common Other Non-
Shares Additional Retained Stock Held Share Owner
Common Held in Common Paid-In Earnings in Ownership Equity
Shares Treasury Total Stock Capital (Deficit) Treasury Trust Changes
-------- --------- --------- --------- ---------- --------- ---------- --------- ------------
BALANCE JANUARY 1, 2002 122,192 31,175 $ 713.4 $ 1.2 $ 1,072.7 $ 100.3 $ (350.1) $ (5.3) $ (105.4)
Non-owner equity changes:
Net loss (51.2) (51.2)
Translation adjustment 7.8 7.8
Net unrealized loss on
securities (0.1) (0.1)
---------
Total non-owner equity changes (43.5)
Stock-based compensation and
benefits and exercise of
options (375) 6.6 (2.0) 5.1 2.9 0.6
Adjustment to market value - 2.0 (2.0)
Cash dividends (11.2) (11.2)
-------- --------- --------- --------- ---------- --------- ---------- --------- ------------
BALANCE JUNE 30, 2002 122,192 30,800 $ 665.3 $ 1.2 $ 1,072.7 $ 37.9 $ (345.0) $ (4.4) $ (97.1)
Non-owner equity changes:
Net loss 9.8 9.8
Translation adjustment (10.4) (10.4)
Net unrealized loss on
securities (0.3) (0.3)
---------
Total non-owner equity changes (0.9)
Stock-based compensation and
benefits and exercise of
options (246) 3.0 (1.0) 3.3 0.3 0.4
Adjustment to market value - (0.5) 0.5
Cash dividends (5.8) (5.8)
-------- --------- --------- --------- ---------- --------- ---------- --------- ------------
BALANCE SEPTEMBER 30, 2002 122,192 30,554 $ 661.6 $ 1.2 $ 1,071.2 $ 41.9 $ (341.7) $ (3.6) $ (107.4)
======== ========= ========= ========= ========== ========= ========== ========= ============
BALANCE JANUARY 1, 2003 122,192 30,517 $ 579.7 $ 1.2 $ 1,069.5 $ 18.7 $ (341.1) $ (1.8) $ (166.8)
Non-owner equity changes:
Net loss (25.3) (25.3)
Translation adjustment 19.2 19.2
Net unrealized loss on
securities 0.1 0.1
---------
Total non-owner equity changes (6.0)
Adjustment to market value - 0.1 (0.1)
Stock-based compensation and
benefits (58) 1.6 (0.6) 0.7 0.7 0.8
-------- --------- --------- --------- ---------- --------- ---------- --------- ------------
BALANCE JUNE 30, 2003 122,192 30,459 $ 575.3 $ 1.2 $ 1,069.0 $ (6.6) $ (340.4) $ (1.2) $ (146.7)
Non-owner equity changes:
Net loss (43.2) (43.2)
Translation adjustment (0.4) (0.4)
Net unrealized loss on
securities 0.1 0.1
---------
Total non-owner equity changes (43.5)
Stock-based compensation and
benefits (16) 0.3 (0.3) 0.3 0.3
-------- --------- --------- --------- ---------- --------- ---------- --------- ------------
BALANCE SEPTEMBER 30, 2003 122,192 30,443 $ 532.1 $ 1.2 $ 1,068.7 $ (49.8) $ (340.1) $ (1.2) $ (146.7)
======== ========= ========= ========= ========== ========= ========== ========= ============
See Accompanying Notes to the Unaudited Condensed
Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Form 10-Q instructions and in the opinion of
management contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position, results of operations and
cash flows for the periods presented. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. These interim statements should be read in
conjunction with the financial statements and notes thereto included in the
Annual Report on Form 10-K for the year ended December 31, 2002 of PolyOne
Corporation.
In December 2002, PolyOne sold its 70% ownership interest in Softer, a leading
Italian compounder of thermoplastic materials, while licensing certain
technologies. With the sale, all historical operating results of this business
have been reported separately as discontinued operations. The business was
previously included within PolyOne's Performance Plastics segment.
Operating results for the three-month and nine-month periods ended September 30,
2003 are not necessarily indicative of the results expected in subsequent
quarters or for the year ending December 31, 2003.
NOTE B - ACCOUNTING POLICIES
STOCK-BASED COMPENSATION As provided under Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock Based Compensation," PolyOne has
elected to account for stock-based compensation under the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." Compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the PolyOne stock at the date of the grant
over the amount an option holder must pay to acquire the stock.
The following table illustrates the effect on net loss and loss per share if
PolyOne had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation, using the fair value estimate computed by the
Black-Scholes option-pricing model. The Black-Scholes option-pricing model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected share price volatility. Because PolyOne's share options have
characteristics significantly different from traded options, and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of our share options.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
(In millions, except per share data) 2003 2002 2003 2002
----------- ----------- ------------ ------------
Net income (loss), as reported $ (43.2) $ 9.8 $ (68.5) $ (41.4)
Add: Total stock-based employee compensation expense
included in reported net income (loss), net of tax 0.4 0.4 1.1 1.0
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all
awards (1.6) (1.7) (4.8) (4.4)
----------- ----------- ------------ ------------
Pro forma net income (loss) $ (44.4) $ 8.5 $ (72.2) $ (44.8)
=========== =========== ============ ============
Net income (loss) per share:
Basic - as reported $ (0.47) $ 0.11 $ (0.75) $ (0.46)
Basic - pro forma $ (0.49) $ 0.09 $ (0.79) $ (0.49)
Diluted - as reported $ (0.47) $ 0.11 $ (0.75) $ (0.45)
Diluted - pro forma $ (0.49) $ 0.09 $ (0.79) $ (0.49)
6
NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting
Standards Board (FASB) issued Interpretation No. 46 (FIN 46), "Consolidation of
Variable Interest Entities." FIN 46 requires companies to consolidate, at fair
value, the assets, liabilities and results of operations of variable interest
entities (VIEs) in which the equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated
financial support from other parties or in which they hold a controlling
financial interest through means other than the majority ownership of voting
equity. Controlling financial interests typically are present when a company
either 1) has the direct or indirect ability to make decisions about the VIE's
activities, 2) holds an obligation to absorb expected losses of a VIE, or 3) is
entitled to receive the expected residual returns of a VIE. FIN 46 requires
disclosures by companies about the nature, purpose, size and activities of VIEs
covered by its provisions, and their maximum exposure to loss. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. The consolidation requirements related to entities or
arrangements existing before February 1, 2003 have been deferred by the FASB
until the fourth quarter of 2003. We will finalize our assessment related to the
adoption of FIN 46 in the fourth quarter of 2003. However, we currently do not
believe the adoption of FIN 46 will have a significant impact on our statement
of financial position or net operating results.
PolyOne Funding Corporation, a qualifying special-purpose entity that purchases
certain of PolyOne's domestic accounts receivable, is excluded from the scope of
FIN 46 as it is accounted for in accordance with SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. SFAS No. 149 was effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June
30, 2003 except for the provisions that were cleared by the FASB in prior
pronouncements. The adoption of this statement did not have a material impact on
PolyOne's consolidated financial statements.
In June 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". The statement
addresses concerns of how to measure and classify in the statement of financial
position certain financial instruments that have characteristics of both
liabilities and equity. It requires financial instruments within the scope of
this statement to be classified as liabilities (or an asset in some
circumstances). Many of these financial instruments were previously classified
as equity. PolyOne's management does not expect that the application of the
provisions of this statement will have a material impact on our consolidated
financial statements.
RECLASSIFICATION Certain amounts for 2002 have been reclassified to conform to
the 2003 presentation.
NOTE C - GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the nine months ended September
30, 2003, by business segment, are as follows:
Elastomers and
Performance Performance
(In millions) Plastics Additives Distribution Other Total
-------------- ---------------- -------------- ------------- -------------
December 31, 2002 $ 329.7 $ 111.9 $ 1.1 $ 1.3 $ 444.0
Reversal of business
combination reserve (0.3) - - - (0.3)
Currency translation 1.3 - - - 1.3
Other (0.3) - - - (0.3)
-------------- ---------------- -------------- ------------- -------------
September 30, 2003 $ 330.4 $ 111.9 $ 1.1 $ 1.3 $ 444.7
============== ================ ============== ============= =============
7
Information regarding PolyOne's other intangible assets follows:
As of December 31, 2002
---------------------------------------------------------------
Acquisition Accumulated Currency
(In millions) Cost Amortization Translation Net
-------------- -------------- --------------- ---------------
Non-contractual customer
relationships $ 16.7 $ (3.0) $ - $ 13.7
Sales contract 12.9 (4.1) - 8.8
Patents, technology and other 15.5 (5.6) 0.4 10.3
-------------- -------------- --------------- ---------------
Total $ 45.1 $ (12.7) $ 0.4 $ 32.8
============== ============== =============== ===============
As of September 30, 2003
---------------------------------------------------------------
Acquisition Accumulated Currency
(In millions) Cost Amortization Translation Net
-------------- -------------- --------------- ---------------
Non-contractual customer
relationships $ 16.7 $ (3.8) $ - $ 12.9
Sales contract 12.9 (5.4) - 7.5
Patents, technology and other 15.5 (6.7) 0.6 9.4
-------------- -------------- --------------- ---------------
Total $ 45.1 $ (15.9) $ 0.6 $ 29.8
============== ============== =============== ===============
Amortization of other intangible assets was $0.9 million for the three-month
period ended September 30, 2003 and $3.2 million for the nine-month period ended
September 30, 2003. Amortization of other intangible assets was $1.2 million for
the three-month period ended September 30, 2002 and $3.6 million for the
nine-month period ended September 30, 2002. Amortization expense for each of the
five succeeding fiscal years is expected to be approximately $4.5 million per
year.
SFAS No. 142, "Goodwill and Other Intangible Assets," requires each company to
establish an annual measurement date for assessing any impairment of goodwill.
PolyOne's annual measurement date is July 1. SFAS No. 142 requires a "phase one"
valuation of each reporting unit to determine if its fair value exceeds its book
carrying value, thereby resulting in no impairment of goodwill. Where a
reporting unit's fair value does not exceed the book carrying value, then a more
detailed "phase two" valuation is required to quantify the goodwill impairment.
As of September 30, 2003, PolyOne had recorded goodwill on the balance sheet
totaling $444.7 million. Most of the goodwill is associated with three
identified reporting units - Plastic Compounds and Colors ($270.5 million),
Specialty Resins and Formulators ($59.9 million) and Elastomers and Performance
Additives ($111.9 million). During the third quarter of 2003, we completed the
required 2003 "phase one" goodwill impairment assessment and concluded that no
impairment has occurred.
On October 21, 2003, PolyOne announced its intent to pursue the sale of three
non-core business operations. The non-core business operations consist of the
Specialty Resin and Engineered Films product groups, which are included in the
Performance Plastics business, and the Elastomers and Performance Additives
business. As a result of this decision, in the fourth quarter of 2003, certain
assets, including goodwill, will be reviewed as to potential impairment and
could result in charges to earnings.
8
NOTE D - INVENTORIES
Components of inventories are as follows:
September 30, December 31,
(In millions) 2003 2002
----------------- ------------------
Finished products and in-process inventories $ 164.3 $ 159.1
Raw materials and supplies 120.4 118.5
----------------- ------------------
284.7 277.6
LIFO Reserve (25.6) (23.9)
----------------- ------------------
Total Inventories $ 259.1 $ 253.7
================= ==================
NOTE E - INCOME TAXES
Despite a 2003 third quarter consolidated pre-tax loss of $15.5 million that
included Mexico restructuring charges of $1.7 million on which no tax benefit
was recorded, the quarter's income tax expense was $27.7 million, which included
tax expense of $24.0 million related to dividends from foreign subsidiaries and
a $9.0 million tax allowance to reduce U.S. deferred income tax assets to
deferred income tax liabilities, or a net amount that is more likely than not to
be realized. Excluding the above items, the effective income tax rate for the
third quarter of 2003 is 38.4%. For the third quarter of 2002, the effective
income tax expense rate on income from continuing operations was 37.3%.
The 2003 nine-month income tax expense was $11.5 million on a consolidated
pre-tax loss of $57.0 million. The 2003 year-to-date special tax items include
tax expense of $24.0 million related to dividends from foreign subsidiaries and
a $9.0 million tax allowance. Excluding the above items, the effective income
tax rate for the first nine months of 2003 was 37.7%. For the first nine months
of 2002, the effective income tax expense rate on income from continuing
operations was 37.5%.
The income tax expense in both 2003 three and nine month periods included the
expense on foreign earnings of $24.0 million related to our intent to repatriate
certain foreign earnings in the fourth quarter of 2003. The foreign dividends
will have no significant impact on PolyOne's liquidity. Further, because of the
past three years of accumulated U.S. losses and the forecasted U.S. loss for
2003, PolyOne recorded a tax valuation allowance to reduce the U.S. net deferred
income tax assets to an amount that is more likely than not to be realized. The
charge associated with this reduction amounted to $9.0 million both 2003
periods. PolyOne intends to adjust or eliminate the tax valuation allowance in
the future when sufficient positive evidence exists to support realization of
some or all of its reserved deferred tax assets.
9
NOTE F - INVESTMENT IN EQUITY AFFILIATES
PolyOne owns 24% of Oxy Vinyls LP (OxyVinyls), a manufacturer and marketer of
PVC resins. OxyVinyls is a leading producer of PVC resins in North America. The
following table presents OxyVinyls' summarized results of operations for the
nine months ended September 30, 2003 and 2002, and summarized balance sheet
information as of September 30, 2003 and December 31, 2002.
Nine Months Ended
(In millions) September 30,
------------------------------------
2003 2002
----------------- -----------------
Net sales $ 1,292.8 $ 1,045.7
Employee severance and liabilities associated with the temporary
idling of a plant (4.0) (20.7)
Operating income 85.1 90.8
Partnership income as reported by OxyVinyls 65.9 68.7
PolyOne's ownership of OxyVinyls 24% 24%
----------------- -----------------
PolyOne's proportionate share of OxyVinyls' earnings 15.8 16.5
Amortization of the difference between PolyOne's investment and its
underlying share of OxyVinyls' equity 0.5 0.5
----------------- -----------------
Earnings of equity affiliate recorded by PolyOne $ 16.3 $ 17.0
================= =================
(In millions) September 30, December 31,
2003 2002
----------------- -----------------
Current assets $ 351.1 $ 275.1
Non-current assets 1,472.8 979.1
----------------- -----------------
Total assets 1,823.9 1,254.2
Current liabilities 167.8 164.0
Non-current liabilities 621.2 81.3
----------------- -----------------
Total liabilities $ 789.0 $ 245.3
----------------- -----------------
Partnership capital $ 1,034.9 $ 1,008.9
================= =================
OxyVinyls' income during the first nine months of 2003 reported above includes a
charge of $3.4 million in connection with a change in accounting from the
adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations," and a
charge of $4.0 million for employee severance costs associated with a personnel
reduction undertaken by OxyVinyls. Our proportionate share of these charges was
$0.8 million for the change in accounting and $1.0 million for the severance
costs. OxyVinyls income during the first nine months of 2002 reported above
includes a special, pre-tax charge of $20.7 million, related to asset write-off
and decommissioning cost associated with the permanent closure of a portion of a
plant and employee severance costs and costs associated with the temporary
idling of a plant. Our proportionate share of the 2002 special items was $4.9
million.
In April 2003, OxyVinyls exercised its purchase option related to its LaPorte,
Texas VCM plant lease for approximately $180 million, with proceeds of a loan
from Occidental Petroleum Corporation.
OxyVinyls adopted the provisions of FIN 46 on April 1, 2003, which resulted in
the consolidation of its 50% owned OxyMar VCM joint venture that was previously
accounted for as an equity investment. As a result of the OxyMar consolidation,
OxyVinyls' assets increased by approximately $373 million, liabilities increased
by approximately $399 million and negative minority interest of approximately
$27 million. There was no effect on OxyVinyls' net income or partnership capital
as a result of the consolidation.
PolyOne's Resin and Intermediates segment also includes the SunBelt Chlor-Alkali
Partnership (owned 50%) and Welvic Australia Pty Ltd. (owned 37.4%) equity
affiliates. The Performance Plastics segment includes the DH Compounding
10
Company (owned 50%) and Geon/Polimeros Andinos (owned 50%) equity affiliates.
For the one-month period ended January 31, 2003, the Performance Plastics
segment included the results for Techmer PM, LLC, an equity affiliate (owned
51%). In January 2003, we sold our unconsolidated equity ownership interest in
Techmer. Further, for the two-month period ended February 28, 2002, the Resin
and Intermediates segment included the results for Australian Vinyls
Corporation, an equity affiliate (owned 37.4%), and the Performance Plastics
segment included SPCGeon PTE Limited (owned 50%). In February 2002, Australian
Vinyls Corporation was sold and SPCGeon PTE Limited was dissolved. For the
nine-month period ended September 30, 2003, the Resin and Intermediates segment
included the results for Welvic Australia Pty Ltd, an equity affiliate (owned
37.4%). As of September 1, 2003, Welvic Australia Pty Ltd (Welvic) sold
substantially all of its net operating assets to Orica Ltd, the other partner in
the joint venture with PolyOne. Following the sale of assets, Welvic Australia
Pty Ltd will be liquidated. Through the Welvic sale of operating assets and
liquidation, PolyOne estimates it will realize approximately $2.5 million of
cash, which approximates its book carrying value. Combined summarized financial
information for these equity affiliates is presented below.
Nine Months Ended
September 30,
-------------------------------------
(In millions) 2003 2002
------------------ ------------------
Net sales $ 126.5 $ 223.1
Operating income 30.5 8.1
Net income (loss) 20.1 (3.1)
NOTE G - EARNINGS PER SHARE COMPUTATION
Weighted average shares outstanding are computed as follows:
Three Months Ended Nine Months Ended
(Shares in millions) September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Weighted-average shares - Basic:
Weighted-average shares outstanding 91.7 91.3 91.6 91.2
Less unearned portion of restricted stock awards
included in outstanding shares (0.6) (0.6) (0.6) (0.6)
-------------- -------------- -------------- --------------
91.1 90.7 91.0 90.6
============== ============== ============== ==============
Weighted-average shares - Diluted:
Weighted-average shares outstanding - basic 91.1 90.7 91.0 90.6
Plus unearned portion of restricted stock awards
included in outstanding shares - 0.6 - 0.6
Plus dilutive impact of stock options - 0.4 - 0.9
-------------- -------------- -------------- --------------
91.1 91.7 91.0 92.1
============== ============== ============== ==============
Basic earnings (loss) per common share is computed as net income (loss)
available to common shareholders divided by weighted average basic shares
outstanding. Diluted earnings (loss) per common share is computed as net income
(loss) available to common shareholders divided by weighted average diluted
shares outstanding.
For the three and nine months ended September 30, 2003, we excluded all
outstanding options from the calculation of diluted loss per share because they
would have had an anti-dilutive effect due to our net loss and due to the fact
that the exercise prices were greater than the average market price of our
common shares for the respective periods.
For the three and nine months ended September 30, 2002, the above calculation of
the dilutive impact of stock options on the weighted-average shares reflects the
impact of the options that had exercise prices that were below the average
market price of our common shares for the respective periods. For the three and
nine months ended September 30, 2002, there were 9.4 million and 6.8 million
options outstanding, respectively, that had exercise prices that exceeded the
average market price of our common shares and therefore were not included in the
calculation.
11
NOTE H - BUSINESS COMBINATIONS
On August 31, 2000, PolyOne was formed as a result of the consolidation of The
Geon Company (Geon) and M.A. Hanna Company (Hanna), with Geon as the acquiring
entity. As a result of the acquisition of Hanna, PolyOne announced plans to
incur employee separation and plant phase-out costs for incremental expenditures
to exit and consolidate activities at former Hanna locations, to sever employees
involuntarily, and to integrate operating locations and other activities of the
newly formed PolyOne.
In 2001, PolyOne announced the closing of 12 former Hanna manufacturing plants.
Of the announced sites for closings, nine were in the Performance Plastics
business segment and three were in the Elastomers & Performance Additives
segment. In 2001, one Performance Plastics and all designated Elastomers &
Performance Additives plants were closed. In 2002, five Performance Plastics
manufacturing sites closed. In January 2003, PolyOne committed to a refinement
to the original 2001 plan and decided to continue operating one facility.
Accordingly, in the first quarter of 2003, the reserve of approximately $0.3
million associated with this facility (which relates to an acquired business)
was reversed and recognized as a reduction to goodwill of the acquired business.
The two remaining facilities were closed during the second quarter of 2003.
During 2003, PolyOne adjusted its estimate of the remaining liabilities
associated with the consolidation of Geon and Hanna. As a result of the
adjustment, net expense of $1.0 million was recorded and included in "employee
separation and plant phase-out" on the Consolidated Statements of Operations.
The components of the acquisition integration liabilities are as follows:
(In millions, except employee numbers) Employee Separation Plant Phase-Out Costs
------------------------------- ------------------------------
Number of Cash Asset Write-
Employees Costs Closure Downs Total
--------------- -------------- -------------- -------------- --------------
Balance at December 31, 2002 159 $ 5.0 $ 1.5 $ 0.3 $ 6.8
Utilized in 2003 (156) (3.8) (2.9) 0.2 (6.5)
Goodwill adjustment - (0.3) - - (0.3)
Expense (income) adjustment - (0.4) 1.9 (0.5) 1.0
--------------- -------------- -------------- -------------- --------------
Balance at September 30, 2003 3 $ 0.5 $ 0.5 $ - $ 1.0
=============== ============== ============== ============== ==============
NOTE I - EMPLOYEE SEPARATION AND PLANT PHASE-OUT
PolyOne has undertaken various restructuring initiatives and incurred various
employee separation and plant phase-out costs. These costs include severance,
employee outplacement, external consulting, lease termination, facility closing
and the write-down of the carrying value of plants and equipment. These employee
separation and plant phase-out costs have been accrued and recognized as expense
in the Consolidated Statements of Operations.
2003 CHARGES Operating income for the first nine months of 2003 was reduced by
charges of $34.2 million. Of the 2003 expense, $20.7 million related to the
January 16, 2003 announcement to reduce approximately 400 staff personnel. The
costs were for employee separation, which consisted of severance and other
employee benefits. An additional $5.7 million related to the March 26, 2003
announcement and exit of an Engineered Films plant in the second quarter of
2003, which primarily related to the impairment of plant and equipment and
related exiting costs. In June 2003, the decision was made to close the Fort
Worth, Texas color additives plant, for which an expense of $3.5 million was
recorded. During the second quarter of 2003, PolyOne adjusted its estimate for
the remaining liabilities associated with restructuring initiatives announced in
prior years. As a result of the adjustment, net reserves of $4.0 million were
reversed and included in "employee separation and plant phase-out" on the
Consolidated Statements of Operations. During the third quarter of 2003, PolyOne
closed two leased Ohio administrative offices, closed a portion of the Mexico
Distribution business and reduced manufacturing personnel in the North American
plastics businesses. The impact of the third quarter closures and reductions was
to reduce operating income by $8.2 million and to terminate 112 employees. See
Note L for the breakdown of the third-quarter and year-to-date charges by
segment.
2002 CHARGES Operating income in 2002 was reduced by charges of $1.1 million for
costs associated with the consolidation of certain activities related to the
Formulator operations in the Performance Plastics segment. The costs were for
employee separation, which consisted of severance and other employee benefits.
All 43 employees were terminated in 2002.
12
The following table summarizes the provisions, payments and remaining reserves
associated with these initiatives:
(In millions, except employee numbers) Employee Separation Plant Phase-Out Costs
------------------------------- ------------------------------
Number of Cash Asset Write-
Employees Costs Closure Downs Total
--------------- -------------- -------------- -------------- --------------
Balance at December 31, 2002 40 $ 13.5 $ 1.1 $ - $ 14.6
2003 Expense, net 643 22.9 3.6 7.7 34.2
Utilized in 2003 (646) (26.5) (2.1) (7.7) (36.3)
--------------- -------------- -------------- -------------- --------------
Balance at September 30, 2003 37 $ 9.9 $ 2.6 $ - $ 12.5
=============== ============== ============== ============== ==============
NOTE J - FINANCING ARRANGEMENTS
On May 6, 2003, PolyOne completed a debt refinancing. The refinancing provided
liquidity and the funds to repay senior debt that matured in September 2003 and
to support normal operations and fund previously announced restructuring
initiatives intended to improve earnings. As part of this comprehensive
refinancing, we issued $300 million of 10.625 percent unsecured senior notes,
entered into a new three-year $225 million receivables sale facility, and
amended and restated the revolving credit facility. The 10.625 percent unsecured
senior notes rank equally with all other senior unsecured indebtedness. The new
receivables sale facility replaced the former receivables sale facility. The
security that had been extended in February 2003 to senior notes and debentures
and our guarantee of the SunBelt notes terminated as part of the debt
refinancing. Security was granted under the terms of the 2003 amended and
restated revolving credit agreement. As of September 30, 2003, PolyOne's secured
borrowings were not at levels that would trigger the security on the public
indentures.
As of September 30, 2003, PolyOne had not drawn on the revolving credit
facility, although it had $25.9 million of letters of credit and $7.9 million of
loan guarantees, the majority of which related to our 50% Colombian equity joint
venture, outstanding under the facility. As noted above, on May 6, 2003, PolyOne
amended and restated its revolving credit facility. As amended and restated, it
has a three-year term and provides for up to $50.0 million in borrowings.
However, the maximum amount that may be borrowed under the revolving credit
facility is limited to an amount equal to 95% of the amount that may be borrowed
and secured without triggering the security provisions of the indentures
governing the existing senior unsecured notes and debentures. The revolving
credit facility was further amended on September 25, 2003 to prohibit any
borrowings under the facility unless, after giving effect to the borrowing, the
interest coverage ratio calculated under the agreement would not be less than 1
and the borrowed debt-to-adjusted EBITDA ratio would be not more than 4.75. The
amended and restated revolving credit facility makes available up to $35.0
million for the issuance of standby letters of credit. Obligations under the
revolving credit facility are secured by substantially all of PolyOne's domestic
intellectual property and inventory and some of PolyOne's domestic real
property.
Our amended and restated revolving credit facility and our new receivables sale
facility require, among other things, that we comply with interest coverage
ratios and for the revolving credit facility borrowed debt-to-adjusted EBITDA
earnings ratio, both of which were revised on September 25, 2003. Further, our
financing arrangements contain various restrictions and limit payments for
purposes such as capital expenditures, acquisitions and dividends.
During July 2003, PolyOne terminated all outstanding interest rate swap
agreements at a cash cost of $2.6 million. PolyOne then immediately entered into
new interest rate swap agreements on seven of its fixed-rate obligations in the
aggregate amount of $120.0 million. At September 30, 2003, these seven
agreements had a net fair value obligation of ($2.3) million. The
weighted-average interest rate for these seven agreements was 5.223%.
13
NOTE K - SALE OF ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
(In millions) September 30, December 31,
2003 2002
----------------- -----------------
Trade accounts receivable $ 153.5 $ 120.1
Retained interest in securitized accounts receivable 174.5 56.5
Allowance for doubtful accounts (12.8) (12.3)
----------------- -----------------
$ 315.2 $ 164.3
================= =================
Through May 6, 2003, PolyOne participated in a receivables sale program that
provided up to $250 million in liquidity through the sale of certain domestic
trade accounts receivable at a cost similar to high-grade commercial paper. As
part of the May 6, 2003 debt refinancing, previously discussed in Note J, we
terminated the former program and entered into a new receivables sale facility.
Under the terms of the new facility, we continue to sell our accounts receivable
to PolyOne Funding Corporation (PFC). PFC is a wholly-owned subsidiary and a
qualifying special-purpose entity (QSPE) that is bankruptcy remote and accounted
for on an equity basis. At September 30, 2003, accounts receivable totaling
$239.1 million were sold by PolyOne to PFC, and are thereby included as a
reduction of trade accounts receivable within accounts receivable on the PolyOne
Condensed Consolidated Balance Sheet. PFC in turn sells to certain purchasers an
undivided interest in our accounts receivable and realizes proceeds of up to
$225.0 million, with the maximum amount of proceeds that PFC may receive under
the facility currently limited to 85% of the then-current amount of the accounts
receivable sold to PFC. On September 25, 2003, PolyOne amended the receivables
sale facility to adjust interest coverage ratio requirements. At September 30,
2003, PFC had sold undivided interests in account receivable totaling $64.6
million. PolyOne retains an interest in the $174.5 million difference between
the amount of trade receivables sold by PolyOne to PFC and the undivided
interests sold by PFC. This interest retained by PolyOne is thereby included in
accounts receivable on the PolyOne Condensed Consolidated Balance Sheet at June
30, 2003. The new receivables sale facility also makes available up to $50.0
million for the issuance of standby letters of credit as a sub-limit within the
$225 million limit under the facility. Unlike our former receivables sale
facility, this new facility does not have termination provisions tied to our
senior debt rating.
Under this new arrangement, we receive the remaining proceeds from collection of
the receivables after deduction for the aggregate yield payable on the undivided
interests in the receivables sold by PFC, a servicer's fee, an unused commitment
fee (between 0.5% and 0.75% depending upon the amount of the unused portion of
the facility), fees for any outstanding letters of credit, and an administration
and monitoring fee ($150,000/annum).
Under this new arrangement, PolyOne continues to service the underlying accounts
receivable and we receive a service fee of 1% per annum on the average daily
amount of the outstanding interests in our receivables. As payment of the
receivables occurs, PFC purchases additional receivables from us. PolyOne,
through PFC, retains the risk of credit loss on the receivables and, accordingly
the full amount of the allowance for doubtful accounts has been retained on the
PolyOne Condensed Consolidated Balance Sheet. The purchasers have collection
rights to recover accounts receivable payments.
NOTE L - SEGMENT INFORMATION
PolyOne operates primarily in four business segments: the Performance Plastics
segment, the Elastomers and Performance Additives segment, the Distribution
segment, and the Resin and Intermediates segment. Inter-segment sales are
accounted for at prices generally approximating those for similar transactions
with unaffiliated customers and the elimination of inter-segment sales revenue
is included in the "Other" segment. Certain other corporate expenses and
eliminations are included in the "Other" segment. Business segment assets
consist primarily of customer receivables, inventories, net property and
goodwill. Cash, accounts receivable sold to a third party and certain other
assets not identified with a specific segment are included in the "Other"
segment.
Senior management uses operating income before special items as a business
segment measure of operating performance. Also, EBITDA before special items is
used by senior management as a business segment cash flow metric. Senior
management presents operating income before special items and EBITDA before
special items when discussing the business segments because senior management
believes such measures are useful in assessing the underlying earnings and cash
14
generating power of each segment. Special items include gains and losses
associated with specific strategic initiatives such as restructuring or
consolidation of operations, gains and losses attributable to divestment of
joint ventures and certain one-time items. Further, senior management believes
that excluding special items provides insight into the underlying metric
achievement level and their potential future implication. Operating income
before special items and EBITDA before special items may not be comparable to
financial performance measures presented by other companies.
(In millions) ELASTOMERS
AND
PERFORMANCE PERFORMANCE RESIN AND
THREE MONTHS ENDED SEPTEMBER 30, 2003 TOTAL PLASTICS ADDITIVES DISTRIBUTION INTERMEDIATES OTHER
----------- ------------ ------------- ------------ ------------- ----------
Sales to external customers $ 630.3 $ 419.1 $ 84.6 $ 126.6 $ - $ -
Inter-segment sales - 26.2 - 1.5 - (27.7)
----------- ------------ ------------- ---------- ------------- ----------
$ 630.3 $ 445.3 $ 84.6 $ 128.1 $ - $ (27.7)
=========== ============ ============= ========== ============= ==========
Operating income (loss) $ 6.9 $ 5.3 $ (0.4) $ 1.0 $ 7.5 $ (6.5)
Employee separation and plant
phase-out costs 8.2 5.6 0.5 0.5 - 1.6
Period plant phase-out costs incurred 1.2 - - 1.2 - -
----------- ------------ ------------- ---------- ------------- ----------
Operating income (loss) before
employee separation and plant
phase-out costs 16.3 10.9 0.1 2.7 7.5 (4.9)
Depreciation and amortization 18.2 14.2 3.0 0.4 0.1 0.5
----------- ------------ ------------- ---------- ------------- ----------
EBITDA before employee separation and
plant phase-out costs $ 34.5 $ 25.1 $ 3.1 $ 3.1 $ 7.6 $ (4.4)
=========== ============ ============= ========== ============= ==========
Total assets $ 2,144.8 $ 1,415.6 $ 258.0 $ 148.5 $ 245.3 $ 77.4
Capital expenditures $ 8.8 $ 7.6 $ 0.6 $ 0.2 $ - $ 0.4
(In millions) ELASTOMERS AND
PERFORMANCE PERFORMANCE RESIN AND
THREE MONTHS ENDED SEPTEMBER 30, 2002 TOTAL PLASTICS ADDITIVES DISTRIBUTION INTERMEDIATES OTHER
----------- ------------ -------------- ------------ ------------- ----------
Sales to external customers $ 650.7 $ 422.1 $ 95.2 $ 133.4 $ - $ -
Inter-segment sales - 26.8 - 2.4 - (29.2)
----------- ------------ ------------- ---------- ------------- ----------
$ 650.7 $ 448.9 $ 95.2 $ 135.8 $ - $ (29.2)
=========== ============ ============= ========== ============= ==========
Operating income (loss) $ 26.3 $ 15.6 $ 5.0 $ 2.4 $ 7.3 $ (4.0)
Employee separation and plant
phase-out costs 0.2 0.2 - - - -
Period plant phase-out costs incurred 0.5 0.5 - - - -
Plant phase-out accelerated
depreciation 0.5 0.5 - - - -
Restructuring and plant idling costs
incurred by equity affiliates* 4.1 - - - 4.1 -
----------- ------------ ------------- ---------- ------------- ----------
Operating income (loss) before plant
phase-out costs and restructuring
and plant idling costs incurred by 31.6 16.8 5.0 2.4 11.4 (4.0)
equity affiliate
Depreciation and amortization 17.7 13.9 2.7 0.4 0.6 0.1
----------- ------------ ------------- ---------- ------------- ----------
EBITDA before plant phase-out costs
and restructuring and plant idling
costs incurred by equity affiliate $ 49.3 $ 30.7 $ 7.7 $ 2.8 $ 12.0 $ (3.9)
=========== ============ ============= ========== ============= ==========
Total assets $ 2,131.0 $ 1,409.9 $ 276.5 $ 157.9 $ 233.1 $ 53.6
Capital expenditures $ 16.1 $ 13.5 $ 0.9 $ 0.2 $ - $ 1.5
* 2002 costs include PolyOne's share of OxyVinyls' employee severance, plant
phase-out costs and liabilities associated with the temporary idling of a
plant in December 2001.
15
(In millions) ELASTOMERS
AND
PERFORMANCE PERFORMANCE RESIN AND
NINE MONTHS ENDED SEPTEMBER 30, 2003 TOTAL PLASTICS ADDITIVES DISTRIBUTION INTERMEDIATES OTHER
----------- ------------ ------------- ------------ ------------- ----------
Sales to external customers $ 1,926.7 $ 1,268.3 $ 266.0 $ 392.4 $ - $ -
Inter-segment sales - 85.1 - 4.8 - (89.9)
----------- ------------ ------------- ---------- ------------- ----------
$ 1,926.7 $ 1,353.4 $ 266.0 $ 397.2 $ - $ (89.9)
=========== ============ ============= ========== ============= ==========
Operating income (loss) $ 1.5 $ (1.1) $ 1.1 $ 5.9 $ 17.2 $ (21.6)
Employee separation and plant
phase-out costs 35.2 22.9 2.4 1.3 - 8.6
Period plant phase-out costs incurred 2.4 1.2 - 1.2 - -
Equity affiliate - employee severance
costs and cumulative effect of a
change in accounting 1.8 - - - 1.8 -
----------- ------------ ------------- ---------- ------------- ----------
Operating income (loss) before
employee separation, plant
phase-out costs and equity
affiliate employee severance costs
and cumulative effect of a change
in accounting 40.9 23.0 3.5 8.4 19.0 (13.0)
Depreciation and amortization 55.1 43.6 9.1 1.2 0.2 1.0
----------- ------------ ------------- ---------- ------------- ----------
EBITDA before employee separation,
plant phase-out costs and equity .
affiliate employee severance costs
and cumulative effect of a change
in accounting $ 96.0 $ 66.6 $ 12.6 $ 9.6 $ 19.2 $ (12.0)
=========== ============ ============= ========== ============= ==========
Capital expenditures $ 24.9 $ 21.5 $ 2.3 $ 0.5 $ - $ 0.6
(In millions) ELASTOMERS
AND
PERFORMANCE PERFORMANCE RESIN AND
NINE MONTHS ENDED SEPTEMBER 30, 2002 TOTAL PLASTICS ADDITIVES DISTRIBUTION INTERMEDIATES OTHER
----------- ------------ ------------ ------------ ------------- ----------
Sales to external customers $ 1,917.9 $ 1,247.4 $ 282.7 $ 387.8 $ - $ -
Inter-segment sales - 74.5 - 6.0 - (80.5)
----------- ------------ ------------ ---------- ------------- ----------
$ 1,917.9 $ 1,321.9 $ 282.7 $ 393.8 $ - $ (80.5)
=========== ============ ============ ========== ============= ==========
Operating income (loss) $ 52.3 $ 45.3 $ 11.7 $ 8.1 $ 0.5 $ (13.3)
Employee separation and plant
phase-out costs 1.1 1.1 - - - -
Period plant phase-out costs incurred 0.7 0.7 - - - -
Plant phase-out accelerated
depreciation 1.5 1.5 - - - -
Loss on divestiture of equity
investments 1.5 - - - 1.5 -
Restructuring and plant idling costs
incurred by equity affiliates* 4.9 - - - 4.9 -
----------- ------------ ------------ ---------- ------------- ----------
Operating income (loss) before
employee separation, plant
phase-out costs, plant idling costs
and loss on equity investment 62.0 48.6 11.7 8.1 6.9 (13.3)
Depreciation and amortization 53.1 41.5 9.1 1.4 0.6 0.5
----------- ------------ ------------ ---------- ------------- ----------
EBITDA before employee separation,
plant phase-out costs, plant idling
costs and loss on equity investment $ 115.1 $ 90.1 $ 20.8 $ 9.5 $ 7.5 $ (12.8)
=========== ============ ============ ========== ============= ==========
Capital expenditures $ 49.1 $ 36.6 $ 3.2 $ 0.5 $ - $ 8.8
* 2002 costs include PolyOne's share of OxyVinyls' employee severance, plant
phase-out costs and liabilities associated with the temporary idling of a
plant in December 2001.
16
A breakdown of the Performance Plastics segment's sales for the three and nine
months ended September 30, 2003 and the changes versus the same periods in 2002,
by primary product group, is as follows:
Three months ended September 30, 2003 Nine months ended September 30, 2003
------------------------------------------- ------------------------------------------
2003 2003 2003 2003 2003 2003
Sales $ Sales $ Shipment Lbs. Sales $ Sales $ Shipment Lbs.
% of % Change % Change % of % Change % Change
Total vs. 2002 vs. 2002 Total vs. 2002 vs. 2002
------------- ------------- --------------- ------------ ------------ --------------
North American Plastic
Compounds and Colors (PC&C):
Vinyl Compounds 37% - -5% 36% - -5%
Colors and Additives 11% -7% -7% 11% -5% -2%
Engineered Materials 7% -10% -13% 7% -9% -13%
International PC&C 24% 17% 9% 24% 26% 16%
Specialty Resin and Formulators 14% -7% -10% 14% -5% -8%
Engineered Films 7% -16% -16% 8% -10% -9%
------------- ------------- --------------- ------------ ------------ --------------
Performance Plastics 100% -1% -6% 100% 2% -4%
On October 21, 2003, PolyOne announced its intent to pursue the sale of three
non-core business operations. The non-core business operations consist of the
Specialty Resins and Engineered Films product groups, which are included in the
Performance Plastics business, and the Elastomers and Performance Additives
business. The following is summary financial information regarding the non-core
business operations (Specialty Resins and Engineered Films) included in the
Performance Plastics business segment.
(In millions) Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ---------- ---------- -----------
Operations:
Sales $ 52.7 $ 61.9 $ 170.4 $ 189.3
Operating income, before special items (3.6) (2.3) (10.7) 2.2
Other Data:
EBITDA, before special items $ (0.9) $ 0.4 $ (2.5) $ 10.4
Assets, as of September 30 $ 206.8 $ 227.9
NOTE M - COMMITMENTS AND CONTINGENCIES
There are pending or threatened against PolyOne or our subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the ordinary
course of business with respect to employment, commercial, product liability and
environmental matters, which seek damages or other remedies. In addition, we
have been named in various lawsuits involving multiple claimants and defendants
relating to alleged asbestos exposure in the past by, among others, workers and
their families at plants owned by us or our predecessors or on board ships owned
or operated by us or our predecessors. We believe that any liability that may
finally be determined should not have a material adverse effect on our
consolidated financial position.
PolyOne has accrued for environmental liabilities based upon estimates prepared
by our environmental engineers and consultants to cover probable future
environmental expenditures related to previously contaminated sites. The
accrual, totaling approximately $54.5 million at September 30, 2003, represents
our best estimate for the remaining remediation costs based upon information and
technology currently available. PolyOne believes that it is reasonably possible
that additional costs may be incurred beyond the amounts accrued as a result of
new information, newly discovered conditions or a change in the law. However,
such additional costs, if any, cannot be currently estimated. Additional
information related to our environmental liabilities is included in Note P to
the consolidated financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2002.
In connection with the formation of OxyVinyls, PolyOne had guaranteed $42.3
million of OxyVinyls' borrowings from Occidental Petroleum Corporation. This
guarantee terminated effective June 30, 2003. PolyOne also has guaranteed $91.4
17
million of SunBelt's outstanding senior secured notes in connection with a
chlor-alkali facility in Macintosh, Alabama. The debt matures in 2017.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Below is a summary of consolidated operating results for the three and
nine-month periods ended September 30, 2003 and 2002. Also summarized are the
special items included in these periods.
Summary of Consolidated Operating Results Three Months Ended Nine Months Ended
(In millions, except per share data) September 30, September 30,
----------------------------- ------------------------------
2003 2002 2003 2002
------------- -------------- -------------- --------------
Sales $ 630.3 $ 650.7 $ 1,926.7 $ 1,917.9
Operating income $ 6.9 $ 26.3 $ 1.5 $ 52.3
Net income (loss) $ (43.2) $ 9.8 $ (68.5) $ (41.4)
(Income) from discontinued operations, net of taxes - (0.2) - (1.3)
Cumulative effect of a change in accounting, net of taxes - - - 53.7
------------- -------------- -------------- --------------
Income (loss) before discontinued operations and
cumulative effect of a change in accounting (43.2) 9.6 (68.5) 11.0
Income (loss) per share, diluted $ (0.47) $ 0.11 $ (0.75) $ (0.45)
Income (loss) per share before discontinued operations and
cumulative effect of a change in accounting $ (0.47) $ 0.11 $ (0.75) $ 0.12
Per share effect of excluding special costs, increase $ 0.43 $ 0.03 $ 0.64 $ 0.07
18
Summary of Special Items Three Months Ended Nine Months Ended
(In millions) September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
-------------- ------------- ------------- -------------
Employee separation and plant phase-out cost (1) $ (8.2) $ (0.2) $ (35.2) $ (1.1)
Period plant phase-out costs incurred (2) (1.2) (0.5) (2.4) (0.7)
Equity affiliate - employee severance, liabilities
associated with the temporary idling of a plant and
cumulative effect of a change in accounting (3) - (4.1) (1.8) (4.9)
Loss on divestiture of equity investment (4) - - - (1.5)
-------------- ------------- ------------- -------------
Subtotal - impact on EBITDA (expense) (9.4) (4.8) (39.4) (8.2)
Plant phase-out accelerated depreciation (2) - (0.5) - (1.5)
-------------- ------------- ------------- -------------
Subtotal - impact on operating expense (9.4) (5.3) (39.4) (9.7)
Loss on sale (5) - - (0.2) -
-------------- ------------- ------------- -------------
Total - impact on pre-tax expense (9.4) (5.3) (39.6) (9.7)
Income tax benefit on above items 3.0 1.9 14.7 3.5
Foreign tax dividend (6) (24.0) - (24.0) -
Tax allowance (7) (9.0) - (9.0) -
-------------- ------------- ------------- -------------
Total after-tax (expense) before discontinued operations
and cumulative effect of a change in accounting $ (39.4) $ (3.4) $ (57.9) $ (6.2)
============== ============= ============= =============
(1) These costs include severance, employee outplacement, external outplacement
consulting, lease termination, facility closing costs and the write-down of
the carrying value of plants and equipment related to restructuring
initiatives. The 2003 expense relates to the following:
-- January 16, 2003 announcement to reduce approximately 400 staff
personnel.
-- March 26, 2003 announcement to exit an Engineering Films plant in
Yerington, Nevada.
-- June 2003 decision to close the Fort Worth, Texas plant.
-- Second quarter reversal of restructuring costs provided for in prior
years.
-- Third quarter reduction of 112 North American plastics personnel (71
in manufacturing and 41 in sales and administration). Manufacturing
reductions include the shutdown of the St. Remi, Quebec powder
production, elimination of vinyl compound production shifts and staff
reductions at the Macedonia, Ohio engineered materials plant.
-- Third quarter closure of two leased Ohio administrative offices.
-- Third quarter closure of a portion of the Mexico distribution
business. The restructuring costs include asset write-offs totaling
$0.4 million.
The 2002 expense was associated with the consolidation of certain
activities related to the Formulator operations in the Performance Plastics
business segment.
(2) These are plant and phase-out costs associated with the 2001 Geon
restructuring initiatives that are to be recognized as period costs versus
when the restructuring initiative was approved. In connection with the
acquisition of Hanna and resulting formation of PolyOne, management
developed several initiatives to capture the strategic value of the
combined former Geon and former Hanna businesses. This resulted in several
announcements in 2001 that former Geon plants and Hanna plants would be
closed. The initiatives also included the termination of corporate and
other positions at Geon and former Hanna locations. The 2003 third quarter
expense is for the write-off of inventory and receivables as a result of
the decision to close the Mexico distribution business.
(3) The second quarter 2003 expense relates to employee severance costs
associated with a personnel reduction undertaken by OxyVinyls. In addition,
the 2003 first nine months expense includes a charge for the cumulative
effect of a change in accounting upon OxyVinyls adoption of SFAS No. 143
"Accounting for Asset Retirement Obligations." The 2002 costs include
PolyOne's share of OxyVinyls employee severance, plant phase-out costs and
liabilities associated with the temporary idling of a plant in December
2001 and the asset write-off and decommissioning costs related to the
permanent closure of a portion of a plant in 2002.
(4) Includes the 2002 first quarter loss on our divestiture of our 37.4%
investment in the PVC resin operations of Australian Vinyls Corporation.
(5) Loss recorded for the sale of our European vinyl compounding business.
(6) U.S. tax expense related to foreign subsidiary dividends to be paid in the
fourth quarter of 2003.
(7) Tax allowance to reduce net U.S. deferred income tax assets resulting from
operating loss carry-forwards
19
TOTAL COMPANY REPORTED RESULTS
For the U.S. economy, the Economic Index of U.S. Industrial Production
Manufacturing (Excluding Selected High Technology Industries) increased in the
2003 third quarter slightly, or 0.3% over the 2003 second quarter, but was
approximately 2% below the third quarter of 2002. Europe's GDP growth in the
third quarter of 2003 was estimated to be flat with the same 2002 period per the
October 2003 Consensus Forecasts. In Asia, 2003 GDP growth continues at a pace
forecasted as 3.3% for 2003.
Third quarter 2003 sales of $630.3 million were $20.4 million, or 3% lower than
third quarter 2002. Each business segment reported sales decreases in the third
quarter of 2003 compared to the same period a year ago. Within the Performance
Plastics business segment, the International Plastic Compounds and Colors (PC&C)
product group realized a 17% sales increase in the quarter, which included the
effects of the December 2002 Transcolor acquisition and currency translation.
Excluding the effects of the Transcolor acquisition and currency translation,
the International PC&C sales decreased 2%. Also, within the Performance Plastics
business segment, the Vinyl Compounding product group's sales were flat compared
with the same period last year.
For the nine months ended September 30, 2003, sales were $1,926.7 million, which
was $8.8 million above the same period in 2002. For the first nine months of
2003 versus 2002, Performance Plastics reported sales growth of 2% and
Distribution sales increased 1%. The 2003 year-to-date Elastomers and
Performance Additives sales decreased 6% compared to the same period in 2002.
Within Performance Plastics, the International PC&C sales increase of 26%
benefited $30.2 million from the December 2002 acquisition of Transcolor and
approximately $38.2 million from favorable Euro-to-U.S. dollar currency
exchange. Before the effects of the Transcolor acquisition and currency
translation, the 2003 first nine months International PC&C sales were 1% below
the 2002 same period.
PolyOne reported operating income of $6.9 million for the third quarter of 2003,
a decrease of $19.4 million compared to the same period last year. Of the 2003
operating income decrease of $19.4 million, special items represented $4.1
million of the change. The special items impacting operating income in both
third quarters primarily relate to restructuring initiatives. In addition to
previously announced restructuring initiatives, the 2003 third quarter special
items reflected the decision to reduce North American manufacturing and overhead
staffing, close two Ohio administrative offices and close a portion of the
Mexico Distribution business. See the table under "Summary of Special Items,"
which provides additional information on special items. The 2003 third quarter
$15.3 million decrease in operating income before special items was largely the
result of decreases in Performance Plastics of $5.9 million, Elastomers and
Performance Additives of $4.9 million and Resin and Intermediates (R&I) of $3.9
million. Within PolyOne's operating businesses (total Company excluding the R&I
segment) the margin associated with lower sales volumes and lower product
material margins, particularly in vinyl compounds and engineered films, more
than offset benefits from cost savings initiatives and favorable currency
translation of approximately $0.9 million.
In the first nine months of 2003, PolyOne had operating income of $1.5 million
versus operating income of $52.3 million in the same 2002 period. For the nine
months ended September 30, the 2003 special items in operating income,
consisting primarily of restructuring costs and losses on divestments, were
expense of $39.4 million versus expense of $9.7 million for the same period in
2002. For the nine month period, the 2003 versus 2002 decrease in operating
income before special items of $21.1 million primarily resulted from decreases
in Performance Plastics of $25.6 million and Elastomers and Performance
Additives of $8.2 million, which was partially offset by an increase in the R&I
segment of $12.1 million. The earnings decreases in Performance Plastics and
Elastomers and Performance Additives largely were due to higher material costs
that have not been fully recovered in higher selling prices and lower sales
volumes. The margin compression was most severe in the North American Vinyl
Compounds, Specialty Resins and Engineered Films operations. The improvement in
the R&I segment resulted from higher SunBelt earnings of $14.5 million that were
partially offset by lower OxyVinyls earnings of $3.8 million. The $14.6 million
reduction in the 2003 year-to-date selling and administrative expense was
largely driven by personnel reductions in connection with the various
restructuring initiatives.
Interest expense in the third quarter of 2003 of $19.2 million increased $7.6
million compared to the same quarter in 2002. The higher 2003 interest expense
was primarily due to the issuance of $300 million of 10.625 percent unsecured
senior notes during the second quarter of 2003. Interest expense in the first
nine months of 2003 of $49.0 million increased $17.6 million compared to the
same period in 2002. The higher 2003 interest expense primarily was due to the
issuance of $300 million of 10.625 percent unsecured senior notes in the second
quarter of 2003 and the issuance of $200 million of 8.875 percent unsecured
senior notes in the second quarter of 2002.
20
In the third quarter of 2003, other expense, net, which included the finance
costs associated with the receivables sale facility, foreign currency gains and
losses and other miscellaneous expenses, totaled $3.5 million, an increase of
$4.0 million over the same period in 2002. The increase was primarily due to a
$2.1 million increase from the impact of foreign currency losses and an $0.5
million increase in the finance costs associated with the receivables sale
facility. Additionally, the 2002 expense included an $0.8 million gain from the
sale of property. Other expense, net included the finance costs associated with
the receivables sale facility, foreign currency gains and losses and other
miscellaneous expenses. In the first nine months of 2003, other expense, net
totaled $10.1 million, an increase of $6.2 million over the same period in 2002.
The increase was primarily due to a $3.7 million increase from the impact of
foreign currency losses and an $0.8 million increase in the finance costs
associated with the receivables sale facility. The 2003 other expense, net also
included a purchase premium of $0.8 million on the early buy-back and retirement
of a portion of the unsecured senior notes that matured in September 2003.
Despite a 2003 third quarter consolidated pre-tax loss of $15.5 million that
included Mexico restructuring charges of $1.7 million on which no tax benefit
was recorded, the quarter's income tax expense was $27.7 million. The quarter's
special tax items included tax expense of $24.0 million related to the
repatriation of earnings from foreign subsidiaries and a $9.0 million tax
allowance to reduce the U.S. deferred income tax assets to deferred income tax
liabilities, or a not amount that is more likely than not to be realized.
Excluding the above items, the effective income tax rate for the third quarter
of 2003 was 38.4%. For the third quarter of 2002, the effective income tax
expense rate on income from continuing operations was 37.3%. The 2003 nine-month
income tax expense was $11.5 million on a consolidated pre-tax loss of $57.0
million. The 2003 year-to-date special tax items included the above noted items.
Excluding the above items, the effective income tax rate for the first nine
months of 2003 was 37.7%. For the first nine months of 2002, the effective
income tax expense rate on income from continuing operations was 37.5%.
The third quarter 2003 net loss was $43.2 million versus a net income of $9.8
million in the third quarter of 2002. The 2003 third quarter loss included
special charges after-tax of $39.4 million compared to 2002 charges of $3.4
million. The net loss before discontinued operations and cumulative effect of a
change in accounting for the nine months ended September 30, 2003 was $68.5
million compared to a 2002 nine-month net income before discontinued operations
and cumulative effect of a change in accounting of $11.0 million. The 2003
year-to-date loss included special after-tax charges of $57.9 million compared
to 2002 charges of $6.2 million.
21
BUSINESS SEGMENT INFORMATION
Senior management uses operating income before special items as a business
segment measure of operating performance. Also, EBITDA before special items is
used by senior management as a business segment cash flow metric. Senior
management presents operating income before special items and EBITDA before
special items when discussing the business segments because senior management
believes these measures are useful in assessing the underlying earnings and cash
generating power of each segment. Special items include gains and losses
associated with specific strategic initiatives such as restructuring or
consolidation of operations, gains and losses attributable to divestment of
joint ventures, and certain one-time items. Further, senior management believes
that excluding special items provides insight into the underlying metric
achievement level and their potential future implication. Operating income
before special items and EBITDA before special items may not be comparable to
financial performance measures presented by other companies. For additional
information regarding business segment data, see Note L to the Quarterly
Condensed Consolidated Financial Statements.
(In millions) Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
-------------- ------------- ------------- -------------
OPERATIONS:
Sales:
Performance Plastics $ 445.3 $ 448.9 $ 1,353.4 $ 1,321.9
Elastomers and Performance Additives 84.6 95.2 266.1 282.7
Distribution 128.1 135.8 397.1 393.8
R&I - - - -
Other (27.7) (29.2) (89.9) (80.5)
-------------- ------------- ------------- -------------
$ 630.3 $ 650.7 $ 1,926.7 $ 1,917.9
============== ============= ============= =============
Operating income before special items:
Performance Plastics $ 10.9 $ 16.8 $ 23.0 $ 48.6
Elastomers and Performance Additives 0.1 5.0 3.5 11.7
Distribution 2.7 2.4 8.4 8.1
R&I 7.5 11.4 19.0 6.9
Other (4.9) (4.0) (13.0) (13.3)
-------------- ------------- ------------- -------------
$ 16.3 $ 31.6 $ 40.9 $ 62.0
============== ============= ============= =============
OTHER DATA:
EBITDA before special items:
Performance Plastics $ 25.1 $ 30.7 $ 66.6 $ 90.1
Elastomers and Performance Additives 3.1 7.7 12.6 20.8
Distribution 3.1 2.8 9.6 9.5
R&I 7.6 12.0 19.2 7.5
Other (4.4) (3.9) (12.0) (12.8)
-------------- ------------- ------------- -------------
$ 34.5 $ 49.3 $ 96.0 $ 115.1
============== ============= ============= =============
22
COMMENTARY ON BUSINESS SEGMENT OPERATING RESULTS
PERFORMANCE PLASTICS had third quarter 2003 sales of $445.3 million, compared
with sales of $448.9 million in the third quarter of 2002. For the nine-month
period ended September 30, 2003, sales totaled $1,353.4 million, or $31.5
million above the same period in 2002. A breakdown of the 2003 second quarter
and nine months segment sales, by primary product group, is as follows:
Three months ended September 30, 2003 Nine months ended September 30, 2003
------------------------------------------- ------------------------------------------
2003 2003 2003 2003 2003 2003
Sales $ Sales $ Shipment Lbs. Sales $ Sales $ Shipment Lbs.
% of % Change % Change % of % Change % Change
Total vs. 2002 vs. 2002 Total vs. 2002 vs. 2002
------------- ------------- --------------- ------------ ------------ --------------
North American Plastic
Compounds and Colors (PC&C):
Vinyl Compounds 37% - -5% 36% - -5%
Colors and Additives 11% -7% -7% 11% -5% -2%
Engineered Materials 7% -10% -13% 7% -9% -13%
International PC&C 24% 17% 9% 24% 26% 16%
Specialty Resin and Formulators 14% -7% -10% 14% -5% -8%
Engineered Films 7% -16% -16% 8% -10% -9%
------------- ------------- --------------- ------------ ------------ --------------
Performance Plastics 100% -1% -6% 100% 2% -4%
The only product group to report sales growth in the 2003 third quarter was
International PC&C, which benefited $8.8 million from the December 2002
acquisition of Transcolor and approximately $8.7 million from favorable
Euro-to-U.S. dollar currency exchange. Before the effects of the Transcolor
acquisition and currency translation, the 2003 third quarter International PC&C
sales were 2% below the 2002 third quarter and volume was down 2% for the same
period. The North American Vinyl Compounds sales were flat with the same quarter
last year, while the pounds shipped were down 5% on weaker demand. Since a year
ago, vinyl compound selling prices have increased but are not sufficient to
fully recover higher raw material costs. In the 2003 third quarter, the North
American Colors and Additives sales revenue was a combined 2% higher than the
same quarter last year in Packaging, Wire & Cable, and Producer Services
markets, but was offset by a 14% decline in sales in other market platforms,
especially Custom Molding and Automotive. Color average selling prices were
higher in all markets except Pipe & Fittings. The decrease in North American
Engineered Materials sales was primarily due to lower pounds shipped in nearly
all markets and was partially offset by increased selling prices in most markets
and a sales mix that resulted in an overall higher average selling price per
pound. In the Specialty Resins and Formulators product group, the lower sales
volumes (Specialty Resins down 14% and Formulators down 5%) were partially
offset by increased average selling prices in both Specialty Resins and in
Formulators. Engineered Films sales decreased both in the custom and automotive
operations. The automotive industry production and PolyOne supplied platforms
were down approximately 8% versus the 2002 third quarter. The remainder of the
automotive sales decline was due to old programs terminating over approximately
the past twelve months. Softening in several applications reduced custom sales,
especially Thin Films and other industrial markets, as well as the movement of
Office Products overseas.
For 2003 year-to-date, within Performance Plastics, the International PC&C sales
increase of 26% benefited $30.2 million from the December 2002 acquisition of
Transcolor and approximately $38.2 million from favorable Euro-to-U.S. dollar
currency exchange. Before the effects of the Transcolor acquisition and currency
translation, the 2003 first nine months International PC&C sales were 1% below
the 2002 same period, while volume increased 2% during the period. North
American Vinyl Compound 2003 shipments were 5% below the comparable last year
period, primarily lead by decrease in sales volumes in Wire & Cable and
Packaging with higher average selling prices offsetting the volume decrease. The
North American Colors and Additives 2003 year-to-date shipments are 2% below the
2002 same period, led by decreases from market erosion in Custom Molding (26%
decline) and 18% lower sales volumes in Automotive, nearly offset by a combined
17% increase in Pipe & Fittings and Producer Services markets. While Color
selling prices increased in most markets, the sales mix resulted in a lower
overall average 2003 nine-month selling price. The North American Engineered
Materials sales and shipment weakness for the 2003 and 2002 nine months was
largely due to lower volumes in most markets except Wire & Cable. Also, the 2003
year-to-date Engineered Films sales and shipments decrease versus the same 2002
period was largely in the automotive operations and caused by lower automotive
industry sales and the terminating of old platform programs. Film sales also
decreased in the Loose-leaf and Thin Films markets of the custom operations.
23
Operating income before special items for the Performance Plastics segment in
the third quarter of 2003 was $10.9 million, a decrease of $5.9 million compared
to the third quarter of 2002. This decrease in operating income before special
items resulted from a combination of the margin associated with the lower sales
and margin compression in North American Vinyl Compounds and Engineered Films
due to the impact of modestly higher PVC resin. These negative impacts to income
were partially offset by lower costs from restructuring initiatives and
favorable currency translation of $0.9 million. The third quarter 2003 U.S.
industry average PVC resin selling price was approximately 0.5 cents per pound
above the same period in 2002.
Operating income before special items for the Performance Plastics segment in
the first nine months of 2003 was $23.0 million, or $25.6 million below the same
period in 2002. The lower 2003 year-to-date operating income before special
items was largely due to lower sales volumes and higher material costs that have
not been fully recovered in higher selling prices. The margin compression was
most severe in the North American Vinyl Compounds, Specialty Resins and
Engineered Films operations. The 2003 year-to-date U.S. industry average PVC
resin selling price was nearly 7 cents per pound above the same period in 2002.
ELASTOMERS AND PERFORMANCE ADDITIVES sales were $84.6 million in the third
quarter of 2003, a $10.6 million, or 11%, decrease compared to the same quarter
in 2002. The 2003 third quarter shipment volume in pounds was down 14% versus
2002. In the third quarter of 2003 compared to 2002, elastomer compounding sales
(excludes rolls and additives) decreased $9.1 million. Contributing to the sales
decrease were weak industrial and automotive industry production levels.
Additives revenue declined $1.7 million from slower customer demand, while rolls
sales increased $0.2 million from new 2003 business. For the first nine months
of 2003 sales were $266.1 million, or 6% below the same period in 2002, which
was in line with the lower shipment volumes. The year-to-date decreases in sales
revenue occurred in compounding, which was down 5.6%, and in additives, which
was down 15.8%. Rolls revenues increased 2.8%. Compounding and additives
revenues were down due to weaker industrial and automotive demand. In addition,
compounding revenue was also impacted due to the fact that a few significant
customers took some mixing business back in-house.
Operating income before special items in the third quarter of 2003 was $0.1
million, or $4.9 million below the same quarter in 2002. The 2003 year-to-date
operating income before special items was $3.5 million, or $8.2 million below
the first nine months of 2002. For both the 2003 third quarter and year-to-date
periods, lower sales volumes were the primary driver of lower earnings with some
reduction from energy-related raw material costs outpacing increases in selling
prices.
DISTRIBUTION sales in the third quarter of 2003 were $128.1 million, or 6% below
the same quarter in 2002. The shipment volume in pounds when comparing the same
periods was down 12% in 2003. For the 2003 third quarter versus the comparable
period in 2002, U.S. and Canada sales decreased by 3% while the shipment volume
declined 7%. In Mexico, sales declined by approximately 50% due to a decision to
exit a portion of the business. Sales in the first nine months of 2003 were
$397.1 million, 1% above the same period in 2002. U.S. and Canada sales
increased 4% and sales volumes decreased 2% while Mexico sales and volumes
declined. In the U.S., volumes benefited from continued strength of sales of
PolyOne produced vinyl compounds while sales of commodity resins were down.
Average selling prices increased due to sales mix and higher commodity resin
prices.
Operating income before special items in the third quarter of 2003 was $2.7
million, or $0.3 million above the third quarter of 2002. The 2003 increase in
operating income before special items was primarily due to the reduction of
costs in Mexico and lower spending in the U.S. and Canada more than offsetting
the lower sales. Operating income before special items in the first nine months
of 2003 was $8.4 million, or $0.3 million above 2002 year-to-date.
R&I operating income before special items, consisting of equity income from
joint ventures, allocated overhead support cost and costs associated with past
operations, was $7.5 million for the third quarter of 2003, or $3.9 million
below the third quarter of 2002. PolyOne's share of equity earnings before
special items in the third quarter of 2003 compared to the same quarter in 2002
decreased from OxyVinyls by $8.1 million and was partially offset by an increase
from SunBelt of $2.3 million. OxyVinyls third quarter earnings in 2003 versus
2002 suffered from higher energy costs of approximately $1.75 per million BTU's
and lower PVC resin margins due to higher average industry ethylene cost of
approximately 4.5 cents per pound and higher chlorine cost of approximately $15
per ton. The OxyVinyls chlor-alkai operations benefited from higher industry
caustic soda prices of approximately $50 per ton. Comparing the quarters, the
average industry spread of PVC resin selling prices over ethylene and chlorine
costs decreased by approximately 2.0 cents per pound. The SunBelt earnings
improvement was primarily driven by the higher average industry selling prices
of chlorine and of caustic soda in the third quarter of 2003 versus the same
period a year ago.
24
In the first nine months of 2003, the R&I segment had operating income before
special items of $19.0 million or $12.1 million above the same period in 2002.
The improvement in the R&I segment resulted from higher SunBelt earnings of
$14.5 million that was partially offset by lower OxyVinyls earnings of $3.8
million. For the nine months of 2003 versus 2002, the average industry selling
price for chlorine increased approximately $120 per ton and caustic soda
increased approximately $65 per ton. For the comparable nine-month periods,
OxyVinyls earnings decreased primarily due to higher average natural gas costs
of approximately $2.30 per million BTU's, which was largely offset by higher
chlor-alkali earnings driven the higher industry average selling prices of
chlorine and caustic soda, while the average industry spreads of PVC selling
prices over ethylene and chlorine costs were nearly flat.
OTHER consists primarily of corporate governance costs that are not allocated to
business segments and inter-segment profit elimination. Operating income before
special items was an expense of $4.9 million in the third quarter of 2003
compared to an expense of $4.0 million in the same quarter of 2002. The third
quarter inter-segment elimination of profit in inventory in 2003 was $1.1
million greater than 2002. For the nine-month periods, the 2003 operating income
before special items was an expense of $13.0 million, or $0.3 million below
2002.
CASH FLOWS
For the nine months ended September 30, 2003 operating activities from
continuing operations used cash of $164.4 million. For the nine-month period,
the amount sold under the receivables sale facility was reduced $95.3 million.
For the first nine months of 2003 working capital increased $278.7 million.
Before changes in the level of accounts receivable sold, operating activities
utilized cash of $69.1 million in the first nine months of 2003. Commercial
working capital (trade accounts receivables before receivables sold plus FIFO
inventories less accounts payables) increased $47.6 million in the nine months
ended September 30, 2003. Cash funding of restructuring initiatives was $35.3
million in the first nine months of 2003. The level of accounts receivable sold
decreased $95.3 million in the first nine months of 2003. When comparing the
nine months ended September 30, 2003 versus the nine months ended September 30,
2002, net cash used by continuing operations for operating activities increased
$104.2 million. This increase was primarily due to EBITDA for the nine months
ended September 30, 2003 being $50.3 million lower than the comparable period in
2002, plus a reduction in the level of accounts receivables sold of $70.1
million, and plus a reduction in accrued expenses and other of $25.5 million
largely due to increased payments of employee separation and plant phase-out
costs, that was partially offset by a smaller 2003 increase in the level of
commercial working capital.
Investing activities from continuing operations for the nine months ended
September 30, 2003 used cash of $13.8 million. Cash spending for the nine months
ended September 30, 2003 included capital expenditures of $24.9 million and
businesses acquired of $15.8 million. Also, the first nine months of 2003
included proceeds from the sale of assets of $27.0 million.
Cash provided by financing activities from continuing operations for the nine
months ended September 30, 2003 was $190.4 million, primarily reflecting the
issuance of $300 million of 10.625% unsecured senior notes and subsequent
reduction of short-term debt. No dividends were paid in the first nine months of
2003.
25
Commercial Working Capital (CWC) is a non-GAAP financial measure used by
management to support its cash management activities. Management presents CWC
because it believes CWC is useful to investors as it focuses on that portion of
GAAP working capital that would be expected to impact liquidity as changes in
sales levels occur. CWC may not be a comparable metric to that used by other
companies. The table below is a reconciliation of GAAP working capital to
PolyOne's defined Commercial Working Capital.
Reconciliation of GAAP Working Capital to CWC
(In millions) September 30, 2003
-------------------
Total current assets $ 688.7
Total current liabilities (389.7)
-------------------
Working Capital (GAAP) 299.0
Add: Short-term and current long-term debt 1.7
Accrued liabilities 131.0
Receivable securitization and LIFO reserve 90.2
Deduct: Cash (50.4)
Deferred tax asset, current (41.2)
Other current assets (22.8)
-------------------
Commercial Working Capital $ 407.5
===================
Trade Accounts Receivable before Receivables Sold $ 379.8
FIFO Inventories 284.7
Accounts Payable (257.0)
-------------------
Total $ 407.5
===================
CAPITAL RESOURCES AND LIQUIDITY
As of September 30, 2003, PolyOne had existing facilities to access available
capital resources (receivables sale facility, secured revolving credit facility,
uncommitted short-term credit lines and senior unsecured notes and debentures)
totaling approximately $985.7 million. As of September 30, 2003, PolyOne had
utilized $851.5 million of these facilities and approximately $134.2 million was
available to be drawn while remaining in compliance with all facilities. The
utilized facilities consisted of long-term debt of $785.9 million (including
$777.5 million of senior unsecured notes and debentures), short-term debt of
$0.9 million, capital leases of $0.1 million and receivables sold of $64.6
million.
Of the capital resource facilities available to PolyOne as of September 30,
2003, the portion of the receivables sale facility that was actually sold
provided security in connection with the transfer of ownership of these
receivables. Each indenture governing our senior unsecured notes and debentures
and our guarantee of the SunBelt notes allows for a specific level of secured
debt, above which security must be provided on each such indenture. The
receivables sale facility does not constitute debt under the covenants
associated with the senior unsecured notes and debentures. As of September 30,
2003, PolyOne sold accounts receivable of $64.6 million and had guaranteed
unconsolidated equity affiliate debt of $91.4 million for SunBelt.
On May 6, 2003, PolyOne completed a debt refinancing. The refinancing provided
liquidity and the funds to repay senior debt that matured in September 2003 and
to support normal operations and fund previously announced restructuring
initiatives intended to improve earnings. As part of this comprehensive
refinancing, we issued $300 million of 10.625 percent unsecured senior notes,
entered into a new three-year $225 million receivables sale facility, and
amended and restated the revolving credit facility. The 10.625 percent unsecured
senior notes rank equally with all other senior unsecured indebtedness. The new
receivables sale facility replaced the former receivables sale facility. The
security that had been extended in February 2003 to senior notes and debentures
and our guarantee of the SunBelt notes terminated as part of the debt
refinancing. Security was granted under the terms of the 2003 amended and
restated revolving credit agreement. As of September 30, 2003, PolyOne's secured
borrowings were not at levels that would trigger the security on the indentures
governing the senior notes and debentures and guarantee of the SunBelt notes.
As of September 30, 2003, PolyOne had not drawn on the revolving credit
facility, although it had $25.9 million of letters of credit and $7.9 million of
loan guarantees, the majority of which related to its 50% Colombian equity joint
venture,
26
outstanding under the facility. As noted above, on May 6, 2003, PolyOne amended
and restated its revolving credit facility. As amended and restated, it has a
three-year term and provides for up to $50.0 million in borrowings. However, the
maximum amount that may be borrowed under the revolving credit facility is
limited to an amount equal to 95% of the amount that may be borrowed and secured
without triggering the security provisions of the indentures governing the
existing senior unsecured notes and debentures. The revolving credit facility
was further amended on September 25, 2003 to prohibit any borrowings under the
facility unless, after giving effect to the borrowing, the interest coverage
ratio calculated under the agreement would be not less than 1 and the borrowed
debt-to-adjusted EBITDA ratio would be not more than 4.75. The amended and
restated revolving credit facility makes available up to $35.0 million for the
issuance of standby letters of credit. Obligations under the revolving credit
facility are secured by substantially all of PolyOne's domestic intellectual
property and inventory and some of PolyOne's domestic real property.
PolyOne's amended and restated revolving credit facility and the new receivables
sale facility require, among other things, PolyOne to maintain certain interest
coverage and borrowed debt-to-adjusted EBITDA earnings ratios. Further, the
financing arrangements limit payments for purposes such as capital expenditures,
acquisitions and dividends. On September 25, 2003, the required financial ratios
in the financing arrangements were amended. The following table summarizes the
current defined financial covenant ratios for the remainder of 2003 and 2004
under the amended and restated revolving credit facility (both ratios apply) and
the new receivables sale facility (only the interest coverage ratio applies to
the receivables sale facility):
Borrowed
Debt-to-
Interest Adjusted
Coverage Ratio EBITDA
Ratio
(Minimum) (Maximum)
----------------- -------------------
Agreement compliance
Third quarter of 2003 .50 20.00
Fourth quarter of 2003 .65 15.00
First quarter of 2004 .75 13.00
Second quarter of 2004 1.00 10.25
Third quarter of 2004 1.50 7.50
Fourth quarter of 2004 1.90 5.75
On May 6, 2003, PolyOne terminated its former receivables sale facility and
entered into a new receivables sale facility. Under the terms of the agreement
governing the new facility, the Company is allowed to sell accounts receivable
and realize proceeds of up to $225.0 million. However, the maximum amount of
proceeds that may be received is limited to 85% of the amount of eligible
domestic accounts receivable sold. The new receivables sale facility also makes
available up to $50.0 million for the issuance of standby letters of credit.
Although the former receivables sale facility contained a provision that would
allow the purchasers of the accounts receivable to terminate the facility if
senior debt ratings fell below specified levels, the new receivables sale
facility does not contain any credit ratings provision. On September 25, 2003,
PolyOne amended the receivables sale facility to adjust interest coverage ratio
requirements.
The realization of profitable operations will be important to (1) maintaining
the existing levels of available capital resources, (2) any refinancing of a
portion of the existing capital resources, and (3) the execution of our
announced restructuring initiatives. The sum of EBITDA ($111.4 million) and
special items totaled approximately $124 million in the year 2002. In the first
nine months of 2003, the sum of EBITDA ($56.6 million) and special items totaled
$96.0 million, or $19.1 million below the comparable amount in 2002. EBITDA must
cover expenditures for financing costs (interest expense and discount on sale of
accounts receivable, which were approximately $53 million in the first nine
months of 2003 and are projected to be $72 million for the full year), spending
associated with restructuring, cash taxes, capital expenditures and cash to fund
sales growth through increased working capital requirements. Cash spending for
the restructuring initiatives to-date (North American manufacturing
improvements, business unit initiatives and the selling and administrative
cost-reduction program) was approximately $39 million in the first nine months
of 2003 and is projected to be approximately $47 million for the year. Capital
expenditures for the year 2003 are projected to be approximately $35 to $40
million. In December 2002, PolyOne announced that it would suspend the payment
of dividends commencing in the first quarter of 2003.
27
In the first nine months of 2003, PolyOne contributed, primarily in the third
quarter, approximately $16 million to its qualified defined benefit pension
plans, which exceeded the 2003 required minimum funding of approximately $1
million. PolyOne currently estimates that there will be no required minimum
funding in 2004. Market asset performance in 2003 will impact the final minimum
funding requirements in 2005. An assumed 8.75% long-term rate of return on
pension assets in 2003 would produce a projected minimum funding requirement by
September 15, 2005 of approximately $36 million. The actual 2003 nine-month
asset return was approximately 14% (each 1% return on asset variance in 2003
from 8.75% impacts the 2005 minimum funding by approximately $1 million).
However, PolyOne intends to continue funding in excess of any minimum required
for the qualified defined benefit pension plans during calendar 2004, which
would reduce any otherwise required funding by September 15, 2005.
Based on its current projected operations, PolyOne believes that it should be
able to continue to manage and control working capital, discretionary spending
and capital expenditures, and that cash flow generated from operations, along
with the borrowing capacity under the revised revolving credit facility and new
receivables sale facility, should be adequate to fund its operations and to meet
its debt service requirements.
Senior management uses EBITDA and EBITDA before special items, both of which are
non-GAAP financial measures, as cash flow metrics. PolyOne believes that EBITDA
and EBITDA before special items are useful to investors as cash flow metrics,
both at the consolidated and business segment levels, to assess liquidity and
operating cash flow available for working capital, investing activities,
financing activities and other spending, such as restructuring. When PolyOne's
management reviews results, special items are excluded from EBITDA in order to
enhance the understanding of their current level and their potential future
implications. Below is a reconciliation of EBITDA and EBITDA before special
items to net cash used by operating activities for continuing operations, which
is the most directly comparable GAAP measure. We are also supplementally
providing a reconciliation of EBITDA and EBITDA before special items to net loss
for informational purposes.
Reconciliation of EBITDA and EBITDA before special items to
Cash Flow and Operating Results
Nine Months Ended
September 30, 2003
--------------------------------
(In millions) Cash Operating
Flow Results
------------- ---------------
Net cash used by operating activities for continuing operations ($164.4)
Net loss ($68.5)
Cumulative effect of a change in accounting
Income from discontinued operations
Income tax expense (benefit) 11.5
Interest expense, net 48.4
Other expense, net 10.1
Depreciation and amortization 55.1
Payments of interest, taxes and discount on sale of receivables 38.4
Equity and minority interest income (loss) 25.8
Dividends and distributions received (12.6)
Realized currency gains (losses) 8.9
Investment writedown and asset losses (0.2)
Receivables sale facility, decrease 95.3
Commercial working capital 47.6
Accrued expenses and other 17.8
------------- ---------------
EBITDA 56.6 56.6
Special items, expense 39.4 39.4
------------- ---------------
EBITDA before special items $96.0 $96.0
============= ===============
ACCOUNTING POLICIES AND ESTIMATES
Note C of the 2002 Annual Consolidated Financial Statements contains a summary
of PolyOne's accounting policies and commentary on the nature of estimates made
in the preparation of the financial statements. The following is a description
of important management judgments relating to the PolyOne 2002 Annual
Consolidated Financial Statements and the Quarterly Condensed Consolidated
Financial Statements for the three and nine-month periods ended September 30,
2003 (Unaudited).
28
ENVIRONMENTAL ACCRUED LIABILITY. PolyOne has accrued $54.5 million to cover
future environmental remediation expenditures, and believes none of these
matters, either individually or in the aggregate, should have a material adverse
effect on its capital expenditures, earnings, cash flow or liquidity. The
accrual represents PolyOne's best estimate of the remaining probable remediation
costs based upon information and technology currently available. PolyOne
believes that it is reasonably possible that additional costs may be incurred
beyond the amounts accrued as a result of new information, newly discovered
conditions or a change in the law. However, the additional costs, if any, cannot
be currently estimated. For additional discussion, refer to Note P to the Annual
Consolidated Financial Statements and to Note M to the Quarterly Condensed
Consolidated Financial Statements.
RESTRUCTURING COSTS. As of September 30, 2003, PolyOne had an accrued liability
of $13.5 million for future estimated employee severance and plant closing
costs. This liability related to costs remaining in association with current
year and prior year restructuring initiatives. During the current year, the
liability was increased by $35.2 million, which related to current year
initiatives and adjustments to the remaining estimated liabilities for prior
year announced initiatives. Current year initiatives, totaling $38.5 million,
included two plant closures, the reduction of approximately 400 staff personnel
and 112 North American plastics personnel, the closure of two leased facilities
in Ohio and the closure of a portion of the Mexico Distribution business. During
2003, PolyOne adjusted its estimate for the remaining liabilities associated
with restructuring initiatives announced in prior years. As a result of the
adjustment, net reserves of $3.0 million were reversed and included in "employee
separation and plant phase-out" on the Consolidated Statements of Operations. In
addition, in 2003, PolyOne committed to a refinement to a prior year initiative
and decided to continue operating one facility. Accordingly, in 2003, the
reserve of approximately $0.3 million associated with this facility (which
relates to an acquired business) was reversed and recognized as a reduction to
goodwill of the acquired business.
In addition, as of September 30, 2003, the net property carrying value to be
realized for the plants closed or to be closed was $9.0 million (some assets
will be transferred to other locations as production ceases). For additional
discussion, refer to Notes F and G to the Annual Consolidated Financial
Statements and to Notes H and I to the Quarterly Condensed Consolidated
Financial Statements.
EQUITY INVESTMENT. In December 2001, OxyVinyls, of which PolyOne owns 24%
interest, announced the temporary idling of its Deer Park, Texas, chlor-alkali
plant due to low industry capacity utilization and low product market selling
prices. As of December 31, 2001, OxyVinyls had accrued $13.8 million for future
employee severance and liabilities associated with the temporary idling of the
Deer Park plant. In 2002, OxyVinyls recognized an additional $2.2 million of
expense associated with the temporary plant idling, plus an additional expense
of $17.0 million in the third quarter related to the permanent closing of
specific production assets included in the idled plant. The permanent closing
costs included $14.5 million for the impairment of the fixed assets as well as
$2.5 million for decommissioning costs. As of September 30, 2003, OxyVinyls had
fully utilized the accrual for future employee severance liabilities and
decommissioning costs. The plant had a net property carrying value by OxyVinyls
at September 30, 2003 of approximately $116.6 million, which is anticipated to
be realized through future operations upon the restart of the plant. OxyVinyls
will maintain the Deer Park chlor-alkali plant in a standby mode pending further
strengthening in overall economic conditions and improved demand for caustic
soda.
GOODWILL. As of September 30, 2003, our recorded goodwill totaled $444.7
million. Most of the goodwill is associated with three identified reporting
units - Plastic Compounds and Colors ($270.5 million), Specialty Resins and
Formulators ($59.9 million) and Elastomers and Performance Additives ($111.9
million). SFAS No. 142, "Goodwill and Other Intangible Assets," requires an
annual assessment for potential impairment of goodwill. During 2002, we elected
to make July 1 our annual assessment date. During the third quarter of 2003, we
completed the required 2003 "phase one" goodwill impairment assessment and
concluded that no impairment has occurred.
While we determined that there was no additional goodwill impairment as of the
annual assessment on July 1, 2003, the future occurrence of a potential
indicator of impairment, such as a significant adverse change in legal factors
or business climate, an adverse action or assessment by a regulator,
unanticipated competition, loss of key personnel or a more-likely-than-not
expectation that a reporting unit or a significant portion of a reporting unit
will be sold or disposed of, would result in our having to perform another
"phase-one" valuation analysis, as required under SFAS No. 142, for some or all
of our reporting units prior to the next required 2004 annual assessment. These
types of events and the resulting analysis could result in additional charges
for goodwill and other asset impairments in the future. Any future goodwill
impairment could impact our borrowings under the existing debt agreements.
29
Any future occurrence of a defined potential indicator of impairment and the
resulting analysis could result in charges against earnings for goodwill and
other asset impairments in the future. Any future goodwill impairment would have
no impact on PolyOne's required financial ratios under the receivables sale
facility and the revolving credit facility. However, the available borrowings
under the revolving credit facility would effectively be reduced by 10% of any
after-tax impairment write-off. The October 21, 2003 announcement concerning the
potential sale of non-core business operations will result in a 2003 fourth
quarter assessment of potential goodwill impairment for the Specialty Resin and
Formulators and Elastomers and Performance Additives reporting units.
DEFERRED TAX BENEFIT FOR OPERATING LOSS CARRYFORWARDS. As of September 30, 2003,
PolyOne had no net domestic deferred tax asset and had recorded cumulative
allowances of approximately $41 million.
The income tax expense on the pre-tax loss from continuing operations was $27.7
million in the 2003 third quarter and $11.5 million for the first nine months of
2003. The expense in both 2003 periods included the income tax expense on
foreign earnings plus $24.0 million related to our intent to distribute foreign
dividends in the 2003 fourth quarter. The foreign dividend distribution results
in higher income tax expense because of our inability to utilize domestic
foreign tax credits. The foreign dividends will have no significant impact on
PolyOne's liquidity. Further, because of the past three years of accumulated
U.S. losses, no tax benefit can be recorded on future domestic losses.
Therefore, PolyOne's 2003 losses from U.S. operations have been reduced by $9.0
million, the value of its otherwise deferred tax credits, in both 2003 periods.
PolyOne intends to adjust or eliminate the tax valuation allowance in the future
when sufficient positive evidence exists to support realization of some or all
of its reserved deferred tax assets. See the discussion in Note R to the Annual
Consolidated Financial Statements.
30
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
In this report on Form 10-Q, 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 "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe" and other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to future actions; prospective changes in raw
material costs, product pricing or product demand; future performance or results
of current and anticipated market conditions and market strategies; sales
efforts; expenses; the outcome of contingencies such as legal proceedings; and
financial results. Factors that could cause actual results to differ materially
include, but are not limited to, the following:
- -- an inability to achieve or delays in achieving or achievement of less than
the anticipated financial benefit from the initiatives related to
restructuring programs including cost reduction and employee productivity
goals
- -- a delay or inability to achieve targeted debt level reductions through
divestitures or other means
- -- the effect on foreign operations of currency fluctuations, tariffs,
nationalization, exchange controls, limitations on foreign investment in
local businesses and other political, economic and regulatory risks
- -- changes in U.S., regional or world polymer and/or rubber consumption growth
rates affecting PolyOne's markets
- -- changes in global industry capacity or in the rate at which anticipated
changes in industry capacity come online in the polyvinyl chloride (PVC),
chlor-alkali, vinyl chloride monomer (VCM) or other industries in which
PolyOne participates
- -- fluctuations in raw material prices, quality and supply and in energy
prices and supply, in particular fluctuations outside the normal range of
industry cycles
- -- production outages or material costs associated with scheduled or
unscheduled maintenance programs
- -- costs or difficulties and delays related to the operation of joint venture
entities
- -- lack of day-to-day operating control, including procurement of raw
materials, of equity or joint venture affiliates;
- -- partial control over investment decisions and dividend distribution policy
of the OxyVinyls partnership and other minority equity holdings of PolyOne
- -- an inability to launch new products and/or services within PolyOne's
various businesses
- -- the possibility of goodwill impairment
- -- an inability to maintain any required licenses or permits
- -- an inability to comply with any environmental laws and regulations
- -- an inability or delay in finding buyers of non-core assets for reasonable
and acceptable terms
- -- an inability to access the receivables sale facility as a result of
breaching covenants
- -- any poor performance of our pension plan assets and any obligation on our
part to fund our pension plan
- -- a delay or inability to bring the North American colors and performance
additives and the engineered materials product platforms to profitability
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could vary
materially from those anticipated, estimated or projected. Investors should bear
this in mind as they consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our Form 10-Q, 8-K and 10-K reports to the Securities and Exchange
Commission. You should understand that it is not possible to predict or identify
all such factors. Consequently, you should not consider any such list to be a
complete set of all potential risks or uncertainties.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PolyOne is exposed to market risk from changes in interest rates on debt
obligations and from changes in foreign currency exchange rates. Information
related to these risks and our management of the exposure is included in
"Management's Analysis - Consolidated Statements of Cash Flows" in the 2002
Annual Report under the caption "Market Risk Disclosures" included in our Annual
Report on Form 10-K. PolyOne periodically enters into interest rate swap
agreements that convert fixed-rate obligations to floating rates. During July
2003, PolyOne terminated all outstanding interest rate swap agreements at a cash
cost of $2.6 million. PolyOne then immediately entered into new interest rate
swap agreements on seven of its fixed-rate obligations in the aggregate amount
of $120.0 million. These exchange agreements are perfectly effective as defined
by SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging
Activities." At September 30, 2003, these seven agreements had a net fair value
obligation of ($2.3) million. The weighted-average interest rate for these seven
agreements was 5.223%. There have been no material changes in the market risk
faced by us from December 31, 2002 to September 30, 2003. We have updated the
disclosure concerning our financing arrangements, which is included in Note J in
this Quarterly Report.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our Principal Executive Officer and Principal Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
as of the end of the period covered by this Quarterly Report. Based upon that
evaluation, the Principal Executive Officer and Principal Financial Officer
concluded that, as of the end of the period covered by this Quarterly Report,
our disclosure controls and procedures were effective in timely alerting them to
the material information relating to us (or our consolidated subsidiaries)
required to be included in our periodic SEC filings.
There were no significant changes made in our internal control over financial
reporting during the period covered by this Quarterly Report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
32
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No.
Under Reg.S-K, Form 10-Q
Item 601 Exhibit No. Description of Exhibit
------------------- ------------- --------------------------------------------------------------
(10) 10.1 Amendment No. 2 to the $50 million Five Year Credit
Agreement dated October 30, 2000, among PolyOne Corporation,
Citicorp USA, Inc. and the other banks signatory thereto, as
amended and restated as of May 6, 2003 (Dated as of
September 25, 2003)
(10) 10.2 Amendment No. 1 to the U.S. $225 million Trade Receivables
Purchase Agreement, dated as of May 6, 2003 among PolyOne
Funding Corporation, as the Seller, PolyOne Corporation, as
the Servicer, the Banks and other Financial Institutions
party thereto, as Purchasers, Citicorp USA, Inc. as the
Agent, and National City Commercial Finance, Inc., as the
Syndication Agent (Dated as of September 25, 2003)
(31) 31.1 Certification of Thomas A. Waltermire, President and Chief
Executive Officer, pursuant to SEC Rules 13a-14(a) and
15d-14(a), as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
(31) 31.2 Certification of W. David Wilson, Vice President and Chief
Financial Officer, pursuant to SEC Rules 13a-14(a) and
15d-14(a), as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
(32) 32.1 Certification of Thomas A. Waltermire, President and Chief
Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
(32) 32.2 Certification of W. David Wilson, Vice President and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K from July 1, 2003 through September 30, 2003:
-- Form 8-K, filed on July 11, 2003 under Item 12, announced a
press release filed on July 9, 2003, whereby we
pre-announced earnings for the second quarter of 2003.
-- Form 8-K, filed on July 31, 2003 under Items 11 and 12,
discussed the early termination of a blackout trading
restriction and announced a press release filed on July 29,
2003, whereby we announced second quarter 2003 earnings.
-- Form 8-K, furnished on July 31, 2003 under Item 12,
announced a supplement to the second quarter earnings
release filed on July 29, 2003.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 14, 2003 POLYONE CORPORATION
/s/ W. David Wilson
--------------------
W. David Wilson
Vice President and Chief Financial Officer
(Authorized Officer and Principal Financial Officer)
/s/ Gregory P. Smith
--------------------
Gregory P. Smith
Corporate Controller and Assistant Treasurer
(Principal Accounting Officer)
34
POLYONE CORPORATION
Index to Exhibits
EXHIBIT DESCRIPTION
--------------- ----------------------------------------------------------------------------------------
10.1 Amendment No. 2 to the $50 million Five Year Credit Agreement dated October 30, 2000,
among PolyOne Corporation, Citicorp USA, Inc. and the other banks signatory thereto,
as amended and restated as of May 6, 2003 (Dated as of September 25, 2003)
10.2 Amendment No. 1 to the U.S. $225 million Trade Receivables Purchase Agreement, dated
as of May 6, 2003 among PolyOne Funding Corporation, as the Seller, PolyOne
Corporation, as the Servicer, the Banks and other Financial Institutions party
thereto, as Purchasers, Citicorp USA, Inc. as the Agent, and National City Commercial
Finance, Inc., as the Syndication Agent (Dated as of September 25, 2003)
31.1 Certification of Thomas A. Waltermire, President and Chief Executive Officer, pursuant
to SEC Rules 13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of W. David Wilson, Vice President and Chief Financial
Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a), as adopted pursuant to section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Thomas A. Waltermire, President and Chief Executive Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of W. David Wilson, Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
35
Exhibit 10.1
AMENDMENT NO. 2 TO
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of September 25, 2003
AMENDMENT NO. 2 TO AMENDED AND RESTATED CREDIT AGREEMENT among
POLYONE CORPORATION, an Ohio corporation (the "Borrower"), the banks, financial
institutions and other institutional lenders parties to the Amended and Restated
Credit Agreement referred to below (collectively, the "Lenders") and CITICORP
USA, INC., as administrative agent (the "Agent") for the Lenders.
PRELIMINARY STATEMENTS:
(1) The Borrower, the Lenders and the Agent have entered into
an Amended and Restated Credit Agreement dated as of May 6, 2003, as amended by
Amendment No. 1 dated as of August 27, 2003 (such Agreement, as amended, amended
and restated, supplemented or otherwise modified from time to time, the "Credit
Agreement"; terms defined in the Credit Agreement are used herein as therein
defined).
(2) The Borrower has requested, and the Required Lenders have
agreed, that the Credit Agreement be amended as hereinafter set forth.
SECTION 1. Amendment to Credit Agreement. The Credit Agreement is,
effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 2, hereby amended as follows:
(1) Section 2.02(a) is hereby amended by deleting the phrase
"Exhibit B" in the seventh line therein and replacing it with the phrase
"Exhibit B-1";
(2) Section 2.03(a)(i) is hereby amended to (a) add the phrase
"in substantially the form of Exhibit B-2" immediately after the phrase "or
telecopier or telex" in the second sentence thereof and (b) add the following
sentence at the end thereof:
"Unless otherwise precluded by the context, in this Agreement,
including without limitation, Sections 2.03 and 3.02 hereof, the use of
the words `issue' or `issuance' with respect to a Letter of Credit
shall be deemed to include the renewal or extension of a Letter of
Credit.";
(3) Section 3.02(a) is hereby amended to (a) delete the word
"and" from the end of clause (iii) thereof, (b) add the word "and" to the end of
clause (iv) thereof immediately following the semicolon, and (c) add the
following provision in its appropriate numerical order:
"(v) in the case of a Borrowing, after giving pro forma effect
to such Borrowing as if such Borrowing were made on the first day of
the period of determination, the Interest Coverage Ratio most recently
calculated would not be less than 1.00:1 and the Borrowed Debt/Adjusted
EBITDA Ratio most recently calculated
would not be more than 4.75:1; and, in the case of an issuance of a
Letter of Credit, the aggregate Available Amount of the Letters of
Credit outstanding will not exceed $35,000,000, unless, after giving
pro forma effect to such Issuance as if such Issuance were made on the
first day of the period of determination, the Interest Coverage Ratio
most currently calculated would not be less than 1.00:1 and the
Borrower Debt/Adjusted EBITDA Ratio most recently calculated would not
be more than 4.75:1;";
(4) Section 5.03(a) is hereby amended and restated in its
entirety to read as follows:
(a) Interest Coverage Ratio. Maintain an Interest Coverage
Ratio during each fiscal quarter set forth below of not less than the
ratio set opposite such fiscal period:
-------------------------------------------------- -------------------
Period Ratio
-------------------------------------------------- -------------------
July 1, 2003 through September 30, 2003 0.50:1
-------------------------------------------------- -------------------
October 1, 2003 through December 31, 2003 0.65:1
-------------------------------------------------- -------------------
January 1, 2003 through March 31, 2004 0.75:1
-------------------------------------------------- -------------------
April 1, 2004 through June 30, 2004 1.00:1
-------------------------------------------------- -------------------
July 1, 2004 through September 30, 2004 1.50:1
-------------------------------------------------- -------------------
October 1, 2004 through December 31, 2004 1.90:1
-------------------------------------------------- -------------------
January 1, 2005 through March 31, 2005 2.25:1
-------------------------------------------------- -------------------
April 1, 2005 through June 30, 2005 2.50:1
-------------------------------------------------- -------------------
July 1, 2005 through March 31, 2006 2.75:1
-------------------------------------------------- -------------------
April 1, 2006 through June 30, 2006 3.00:1
-------------------------------------------------- -------------------
July 1, 2006 and thereafter 3.25:1
-------------------------------------------------- -------------------
(5) Section 5.03(b) is hereby amended and restated in its
entirety to read as follows:
(b) Borrowed Debt/Adjusted EBITDA Ratio. Maintain a Borrowed
Debt/Adjusted EBITDA Ratio during each fiscal quarter set forth below
of not more than the ratio set opposite such fiscal period:
--------------------------------------------------- ------------------
Period Ratio
--------------------------------------------------- ------------------
July 1, 2003 through September 30, 2003 20.00:1
--------------------------------------------------- ------------------
October 1, 2003 through December 31, 2003 15.00:1
--------------------------------------------------- ------------------
2
January 1, 2004 through March 31, 2004 13.00:1
- --------------------------------------------------- ----------------------------
April 1, 2004 through June 30, 2004 10.25:1
- --------------------------------------------------- ----------------------------
July 1, 2004 through September 30, 2004 7.50:1
- --------------------------------------------------- ----------------------------
October 1, 2004 through December 31, 2004 5.75:1
- --------------------------------------------------- ----------------------------
January 1, 2005 through March 31, 2005 4.85:1
- --------------------------------------------------- ----------------------------
April 1, 2005 through June 30, 2005 4.50:1
- --------------------------------------------------- ----------------------------
July 1, 2005 through September 30, 2005 4.25:1
- --------------------------------------------------- ----------------------------
October 1, 2005 through March 31, 2006 3.85:1
- --------------------------------------------------- ----------------------------
April 1, 2006 through June 30, 2006 3.75:1
- --------------------------------------------------- ----------------------------
July 1, 2006 and thereafter 3.25:1
- --------------------------------------------------- ----------------------------
(6) Exhibit B is hereby re-deisgnated to be "Exhibit B-1" and
is hereby amended to (a) delete the word "and" at the end of clause (B) thereof,
(b) change the period at the end of clause (C) thereof to a semicolon and add
the word "and" to the end of said clause (C) immediately following such
semicolon, and (c) add the following after clause (C) thereof:
"(D) the Available Capital (as defined in the Receivables
Purchase Agreement) under the Receivables Financing, after giving
effect to all Capital Investments (as defined in the Receivables
Purchase Agreement) is less than $5,000,000; and
(E) after giving pro forma effect to such Proposed Borrowing
as if such Borrowing were made on the first day of the period of
determination, the Interest Coverage Ratio most recently calculated
would not be less than 1.00:1 and the Borrowed Debt/Adjusted EBITDA
Ratio most recently calculated would not be more than 4.75:1;";
(7) Exhibit B-2 attached as Annex I hereto is hereby added to
the Credit Agreement.
3
SECTION 2. Conditions to Effectiveness. This Amendment shall become
effective as of the date first above written when, and only when the Agent shall
have received (i) counterparts of this Amendment executed by the Borrower and
the Required Lenders, (ii) certified copies of the resolutions of the Board of
Directors of the Borrower approving this Amendment and (iii) in immediately
available funds, for the ratable benefit of the Lenders, an amendment fee in the
amount of $62,500. This Amendment is subject to the provisions of Section 8.01
of the Credit Agreement.
SECTION 3. Representations and Warranties of the Company. The Company
represents and warrants as follows:
(a) The execution, delivery and performance by the Borrower of
this Amendment and the Credit Agreement, as amended hereby, and the consummation
of the transactions contemplated hereby, are within the Borrower's corporate
powers, have been duly authorized by all necessary corporate action, and do not
(i) contravene the Borrower's charter or code of regulations, (ii) violate any
applicable law, rule, regulation, order, writ judgment, injunction, decree,
determination or award, or (iii) breach or result in a default under, or result
in the acceleration of (or entitle any party to accelerate) the maturity of any
obligation of the Borrower under, or result in or require the creation of any
Lien upon any property of the Borrower pursuant to the terms of any agreement or
instrument binding on or affecting the Borrower or any of its properties other
than in favor of the Collateral Trustee for the benefit of the Secured Parties.
(b) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body or any
other third party is required for the due execution, delivery and performance by
the Borrower of this Amendment and the Credit Agreement, as amended hereby.
(c) This Amendment and the Credit Agreement, as amended
hereby, have been duly executed and delivered by the Borrower. This Amendment
and the Credit Agreement, as amended hereby, are the legal, valid and binding
obligation of the Borrower enforceable against the Borrower in accordance with
their respective terms, subject to bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the rights of creditors generally and to
general equitable principles.
(d) The representations and warranties contained in the Loan
Documents are correct on and as of the date of this Amendment, as though made on
and as of such date.
SECTION 4. Reference to and Effect on the Credit Agreement.
(a) On and after the effectiveness of this Amendment, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or
words of like import referring to the Credit Agreement, and each reference in
each of the other Loan Documents to "the Credit Agreement", "thereunder",
"thereof" or words of like import referring to the Credit Agreement, shall mean
and be a reference to the Credit Agreement, as amended by this Amendment.
(b) The Credit Agreement and each of the other Loan Documents,
as specifically amended by this Amendment, is and shall continue to be in full
force and effect and is hereby in all respects ratified and confirmed. Without
limiting the generality of the foregoing,
4
the Collateral Documents and the Collateral described therein do and shall
continue to secure the payment of all Obligations of the Loan Parties under the
Loan Documents, in each case as amended by this Amendment.
(c) The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of any Lender or the Agent under the Credit Agreement
or any other Loan Document, nor constitute a waiver of any provision of the
Credit Agreement.
SECTION 5. Costs and Expenses. The Borrower agrees to pay on demand all
costs and expenses of the Agent in connection with the preparation, execution,
delivery and administration, modification and amendment of this Amendment and
the other instruments and documents to be delivered hereunder (including,
without limitation, title insurance premiums and search fees and the reasonable
fees and expenses of counsel for the Agent) in accordance with the terms of
Section 8.04 of the Credit Agreement
SECTION 6. Execution in Counterparts. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute but one and the same agreement.
Delivery of an executed counterpart of a signature page to this Amendment by
telecopier shall be effective as delivery of a manually executed counterpart of
this Amendment.
SECTION 7. Governing Law. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of New York.
5
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
POLYONE CORPORATION
By /s/ John Rastetter
--------------------------------------------
Title: Treasurer
CITICORP USA, INC.,
as Agent and as Lender
By /s/ Carolyn A. Sheridan
--------------------------------------------
Title: Managing Director & Vice President
NATIONAL CITY BANK,
as Issuing Bank and as Lender
By /s/ James Ritchie
--------------------------------------------
Title: Vice President
NATIONAL CITY COMMERCIAL FINANCE, INC.,
as Lender
By /s/ James Ritchie
--------------------------------------------
Title: Vice President
KEYBANK NATIONAL ASSOCIATION,
as Lender
By /s/ Marianne T. Meil
--------------------------------------------
Title: Vice President
Annex I
EXHIBIT B-2 - FORM OF NOTICE OF
ISSUANCE
- -------------,
as an Issuing Bank under the
Credit Agreement referred to
below
[Date]
Attention: Bank Loan Syndications Department
Ladies and Gentlemen:
The undersigned, PolyOne Corporation, refers to the Amended and
Restated Credit Agreement, dated as of May 6, 2003 (as amended or modified from
time to time, the "Credit Agreement", the terms defined therein being used
herein as therein defined), among the undersigned, certain Lenders parties
thereto and Citicorp USA, Inc., as Agent for said Lenders, and hereby gives you
notice, irrevocably, pursuant to Section 2.03 of the Credit Agreement that the
undersigned hereby requests an issuance of a Letter of Credit under the Credit
Agreement, and in that connection sets forth below the information relating to
such issuance (the "Proposed Issuance") as required by Section 2.03(a) of the
Credit Agreement:
(a) The Business Day of the Proposed Issuance is _______________, 200_.
(b) The Available Amount of such Letter of Credit is $____________.
(c) The expiration date of such Letter of Credit is ____, 200_.
(d) The name and address of the beneficiary of such Letter of Credit is
as follows:
NAME:___________________
ADDRESS:________________
________________
(e) The form of such Letter of Credit is attached hereto as Annex II.
The undersigned hereby certifies that the following statements are true
on the date hereof, and will be true on the date of the Proposed Issuance:
1. the representations and warranties contained in the Loan Documents are
correct, before and after giving effect to the Proposed Issuance and to
the application of the proceeds therefrom, as though made on and as of
such date;
2. no event has occurred and is continuing, or would result from such
Proposed Issuance or from the application of the proceeds therefrom,
that constitutes a Default;
3. the Indenture Limit exceeds the aggregate principal amount of the
Advances plus the aggregate Available Amount of all Letters of Credit to
be outstanding after giving effect to such Proposed Issuance, as
evidenced by the calculations set forth on Annex I hereto; and
4. after giving effect to such Proposed Issuance, the aggregate Available
Amount of the Letters of Credit outstanding will not exceed $35,000,000,
unless, after giving pro forma effect to such Proposed Issuance as if
such Proposed Issuance were made on the first day of the period of
determination, the Interest Coverage Ratio most recently calculated
would not be less than 1.00:1 and the Borrower Debt/Adjusted EBITDA
Ratio most recently calculated would not be more than 4.75:1.
Very truly yours,
POLYONE CORPORATION
By
---------------------------------
Title:
2
ANNEX I
2002 2003
POLYONE POLYONE
AMOUNT % GEON INDENTURE HANNA 9 3/8 INDENTURE HANNA MTNS INDENTURE INDENTURE
-------- -------------- --------------------- ---------- --------- ---------
Consolidated Tangible Assets 5%
Consolidated Net Tangible Assets 10%
Consolidated Shareholders Equity 10%
Consolidated Net Tangible Assets 10%
MAXIMUM LIMIT X .95
-------------- --------------------- ---------- --------- ---------
ANNEX II
[Insert Form of Letter of Credit]
Exhibit 10.2
AMENDMENT NO. 1
AMENDMENT NO. 1 dated as of September 25, 2003 (this
"Amendment"), to the Receivables Purchase Agreement, dated as of May 6, 2003 (as
amended to the date hereof, the "Receivables Purchase Agreement"), among Polyone
Funding Corporation, a Delaware corporation (the "Seller"), Polyone Corporation,
an Ohio corporation ("PolyOne"), as the Servicer (as therein defined), the
Purchasers (as therein defined), Citicorp USA, Inc., a Delaware corporation, as
administrative agent (the "Agent") for the Purchasers and the other Owners (as
therein defined), Citibank, N.A., a national association, as issuing bank (the
"Issuing Bank"), and National City Commercial Finance, Inc., an Ohio
corporation, as the syndication agent. Capitalized terms used herein but not
defined herein are used as defined in the Receivables Purchase Agreement.
W I T N E S S E T H:
WHEREAS, the Seller, the Servicer, the Purchasers, the Issuing
Bank and the Agent are party to the Receivables Purchase Agreement and the
undersigned Purchasers constitute the Required Purchasers;
WHEREAS, the Seller has requested that the Agent and the
Purchasers constituting the Required Purchasers agree to amend the Receivables
Purchase Agreement to reduce the Interest Coverage Ratio the Servicer is
required to maintain; and
WHEREAS, pursuant to Section 11.01 (Amendments, Etc.) of the
Receivables Purchase Agreement, the consent of the Required Purchasers is
required to amend the provisions of the Receivables Purchase Agreement as set
forth herein;
NOW, THEREFORE, in consideration of the premises and the
covenants and obligations contained herein the parties hereto agree as follows:
SECTION 1. AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT. Section 5.07 of
the Receivables Purchase Agreement is, effective as of the Amendment Effective
Date and subject the satisfaction (or due waiver) of the conditions set forth in
Section 2 (Conditions Precedent to the Effectiveness of this Amendment) hereof,
hereby amended by deleting the table therein in its entirety and replacing it
with the following table:
-------------------------------------------- -----------------
FISCAL QUARTER RATIO
-------------------------------------------- -----------------
September 30, 2003 0.50 to 1
-------------------------------------------- -----------------
December 31, 2003 0.65 to 1
-------------------------------------------- -----------------
March 31, 2004 0.75 to 1
-------------------------------------------- -----------------
June 30, 2004 1.00 to 1
-------------------------------------------- -----------------
September 30, 2004 1.50 to 1
-------------------------------------------- -----------------
December 31, 2004 1.90 to 1
-------------------------------------------- -----------------
March 31, 2005 2.00 to 1
-------------------------------------------- -----------------
June 30, 2005 2.25 to 1
-------------------------------------------- -----------------
-------------------------------------------- -----------------
September 30, 2005 and thereafter 2.5 to 1
-------------------------------------------- -----------------
SECTION 2. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AMENDMENT
This Amendment shall become effective as of the date first
written above when, and only when, each of the following conditions precedent
shall have been satisfied (the "Amendment Effective Date") or duly waived by the
Agent:
(a) CERTAIN DOCUMENTS
The Agent shall have received each of the following, each dated the
Amendment Effective Date (unless otherwise agreed by the Agent), in form and
substance satisfactory to the Agent and in sufficient copies for each Purchaser:
(i) this Amendment, duly executed by the Seller, the Servicer,
the Agent and Purchasers constituting Required Purchasers; and
(ii) such additional documentation as the Agent may reasonably
require.
(b) FEES AND EXPENSES PAID
The Seller shall have paid to the Agent:
(i) on behalf of each Purchaser approving this Amendment on or
prior to 5:00 pm on September 25, 2003, an amendment fee equal to
one-eighth of one percent (0.125%) of the aggregate amount of the
Commitments of each consenting Purchaser and each other fee payable in
connection with this Amendment; and
(ii) all other obligations of the Seller due under the
Transaction Documents, after giving effect to this Amendment, on or before
the later of the date hereof and the Amendment Effective Date and all
costs and expenses of the Agent in connection with the preparation,
reproduction, execution and delivery of this Amendment and all other
Transaction Documents entered into in connection herewith (including,
without limitation, the reasonable fees and out-of-pocket expenses of
counsel for the Agent with respect thereto and all other Transaction
Documents) and all other costs, expenses and fees due under any
Transaction Document.
SECTION 3. REPRESENTATIONS AND WARRANTIES
On and as of the date hereof and as of the Amendment Effective Date,
after giving effect to this Amendment, the Seller hereby represents and warrants
to the Agent and each Purchaser as follows:
(a) this Amendment has been duly authorized, executed and delivered by
the Seller and the Servicer and constitutes a legal, valid and binding
obligation of the Seller and the Servicer, enforceable against the Seller and
the Servicer in accordance with its terms and the Receivables Purchase Agreement
as amended by this Amendment and constitutes the legal, valid and binding
obligation of the Seller and the Servicer, enforceable against the Seller and
the Servicer in accordance with its terms;
(b) each of the representations and warranties contained in Article IV
(Representations and Warranties) of the Receivables Purchase Agreement, the
other Transaction Documents or in any certificate, document or financial or
other statement furnished at any time under or in connection therewith is true
and correct in all material respects on and as of the date hereof and the
Amendment Effective Date, in each case as if made on and as of such date and
except to the extent that
2
such representations and warranties specifically relate to a specific date, in
which case such representations and warranties shall be true and correct in all
material respects as of such specific date; provided, however, that references
therein to the "Receivables Purchase Agreement" shall be deemed to refer to the
Receivables Purchase Agreement as amended hereby and after giving effect to the
consents and waivers set forth herein;
(c) after giving effect to this Amendment, no Potential Event of
Termination or Event of Termination (except for those that may have been duly
waived) shall have occurred and be continuing, either on the date hereof or on
the Amendment Effective Date; and
(d) no litigation has been commenced against the Seller, the Servicer,
or any Originator or any of their respective Subsidiaries seeking to restrain or
enjoin (whether temporarily, preliminarily or permanently) the performance of
any action by the Seller, the Servicer, or an Originator required or
contemplated by this Amendment, the Receivables Purchase Agreement or any
Transaction Document, in each case as amended hereby (if applicable).
SECTION 4. REFERENCE TO THE EFFECT ON THE TRANSACTION DOCUMENTS
(a) As of the Amendment Effective Date, each reference in the
Receivables Purchase Agreement to "this Agreement," "hereunder," "hereof,"
"herein," or words of like import, and each reference in the other Transaction
Documents to the Receivables Purchase Agreement (including, without limitation,
by means of words like "thereunder," "thereof" and words of like import), shall
mean and be a reference to the Receivables Purchase Agreement as amended hereby,
and this Amendment and the Receivables Purchase Agreement shall be read together
and construed as a single instrument. Each of the table of contents and lists of
Exhibits and Schedules of the Receivables Purchase Agreement shall be amended to
reflect the changes made in this Amendment as of the Amendment Effective Date.
(b) Except as expressly amended hereby or specifically waived above,
all of the terms and provisions of the Receivables Purchase Agreement and all
other Transaction Documents are and shall remain in full force and effect and
are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of the Purchasers, Issuing Bank or the Agent under any of the
Transaction Documents, nor constitute a waiver or amendment of any other
provision of any of the Transaction Documents or for any purpose except as
expressly set forth herein.
(d) This Amendment is a Transaction Document.
SECTION 5. EXECUTION IN COUNTERPARTS
This Amendment may be executed in any number of counterparts and by
different parties in separate counterparts, each of which when so executed shall
be deemed to be an original and all of which taken together shall constitute one
and the same agreement. Signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are attached to the same document. Delivery of an executed counterpart by
telecopy shall be effective as delivery of a manually executed counterpart of
this Amendment.
SECTION 6. GOVERNING LAW
This Amendment shall be governed by and construed in accordance with
the law of the State of New York.
3
SECTION 7. SECTION TITLES
The section titles contained in this Amendment are and shall be without
substantive meaning or content of any kind whatsoever and are not a part of the
agreement between the parties hereto, except when used to reference a section.
SECTION 8. NOTICES
All communications and notices hereunder shall be given as provided in
the Transaction Documents.
SECTION 9. SEVERABILITY
The fact that any term or provision of this Agreement is held invalid,
illegal or unenforceable as to any person in any situation in any jurisdiction
shall not affect the validity, enforceability or legality of the remaining terms
or provisions hereof or the validity, enforceability or legality of such
offending term or provision in any other situation or jurisdiction or as applied
to any person
SECTION 10. SUCCESSORS
The terms of this Amendment shall be binding upon, and shall inure to
the benefit of, the parties hereto and their respective successors and assigns.
SECTION 11. WAIVER OF JURY TRIAL
EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES TRIAL BY JURY IN ANY
ACTION OR PROCEEDING WITH RESPECT TO THIS AMENDMENT OR ANY OTHER TRANSACTION
DOCUMENT.
4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Waiver to be executed by their respective officers thereunto duly authorized, as
of the date first above written.
POLYONE FUNDING CORPORATION,
as Seller
By: /s/ John Rastetter
-----------------------------
Name: John Rastetter
Title: President
POLYONE CORPORATION,
as Servicer
By: /s/ John Rastetter
-----------------------------
Name: John Rastetter
Title: Treasurer
CITICORP USA, INC.,
as Agent and Purchaser
By: /s/ David Jaffe
-----------------------------
Name: David Jaffe
Title: Vice President
NATIONAL CITY COMMERCIAL FINANCE, INC.,
as Syndication Agent and Purchaser
By: /s/ James C. Ritchie
-----------------------------
Name: James C. Ritchie
Title: Vice President
THE CIT GROUP/BUSINESS CREDIT, INC.,
as a Purchaser
By: /s/ Renee M. Singer
-----------------------------
Name: Renee M. Singer
Title: Vice President
[Signature Page To Amendment]
FLEET CAPITAL CORPORATION,
as a Purchaser
By: /s/ Michael Kerneklian
--------------------------------
Name: Michael Kerneklian
Title: Vice President
GMAC COMMERCIAL FINANCE LLC,
as a Purchaser
By: /s/ John Buff
--------------------------------
Name: John Buff
Title: Managing Director
MERRILL LYNCH CAPITAL,
a division of Merrill Lynch Business
Financial Services, Inc.,
as an Initial Purchaser
By: /s/ Tara Wrobel
--------------------------------
Name: Tara Wrobel
Title: Vice President
LASALLE BUSINESS CREDIT, LLC,
as an Initial Purchaser
By: /s/ Daniel K. Clancy
--------------------------------
Name: Daniel K. Clancy
Title: Vice President
PNC BANK, N.A.,
as an Initial Purchaser
By: /s/ Jacqueline MacKenzie
--------------------------------
Name: Jacqueline MacKenzie
Title: Assistant Vice President
ORIX BUSINESS CREDIT GROUP,
A DIVISION OF
ORIX FINANCIAL SERVICES, INC.,
as an Initial Purchaser
By: /s/ D. Darby Jones
--------------------------------
Name: D. Darby Jones
Title: Vice President
[Signature Page To Amendment]
U.S. BANK NATIONAL ASSOCIATION,
as an Initial Purchaser
By: /s/ David A. Hickey
--------------------------------
Name: David A. Hickey
Title: AVP
WHITEHALL BUSINESS CREDIT CORPORATION,
as an Initial Purchaser
By: /s/ Joseph A. Klapkowski
--------------------------------
Name: Joseph A. Klapkowski
Title: Duly Authorized Signatory
[Signature Page To Amendment]
EXHIBIT 31.1
CERTIFICATION
I, Thomas A. Waltermire, President and Chief Executive Officer of PolyOne
Corporation ("registrant"), certify that:
1. I have reviewed this report on Form 10-Q of PolyOne Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
November 14, 2003
/s/ Thomas A. Waltermire
- ----------------------------------------
Thomas A. Waltermire
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, W. David Wilson, Vice President and Chief Financial Officer of PolyOne
Corporation ("registrant"), certify that:
1. I have reviewed this report on Form 10-Q of PolyOne Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
November 14, 2003
/s/ W. David Wilson
- ----------------------------------------
W. David Wilson
Vice President and Chief Financial
Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of PolyOne Corporation (the
"Company") for the period ended September 30, 2003, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Thomas A.
Waltermire, President and Chief Executive Officer of the Company, do hereby
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company as of the dates and for the periods expressed in the
Report.
/s/ Thomas A. Waltermire
- ------------------------
Thomas A. Waltermire
President and Chief Executive Officer
November 14, 2003
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of PolyOne Corporation (the
"Company") for the period ended September 30, 2003, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, W. David Wilson,
Vice President and Chief Financial Officer of the Company, do hereby certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company as of the dates and for the periods expressed in the
Report.
/s/ W. David Wilson
- -------------------
W. David Wilson
Vice President and Chief Financial Officer
November 14, 2003
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
