PolyOne Announces Fourth Quarter and Full Year 2019 Results

PolyOne Corporation

Summary of Condensed Consolidated Statements of Income (Unaudited)

(In millions, except per share data)

Three Months Ended
December 31,

Year Ended
December 31,

2019

2018

2019

2018

Sales

$

658.6

$

677.1

$

2,862.7

$

2,881.0

Operating income

20.5

30.2

156.8

178.6

Net income (loss) from continuing operations attributable to PolyOne
shareholders

6.4

(1.3)

75.5

87.7

Basic earnings (loss) per share from continuing operations
attributable to PolyOne shareholders

$

0.08

$

(0.02)

$

0.98

$

1.10

Diluted earnings (loss) per share from continuing operations
attributable to PolyOne shareholders

$

0.08

$

(0.02)

$

0.97

$

1.09

Senior management uses comparisons of adjusted net income from continuing operations attributable to PolyOne shareholders and diluted adjusted earnings per share (EPS) from continuing operations attributable to PolyOne shareholders, excluding special items, to assess performance and facilitate comparability of results. Senior management believes these measures are useful to investors because they allow for comparison to PolyOne's performance in prior periods without the effect of items that, by their nature, tend to obscure PolyOne's operating results due to the potential variability across periods based on timing, frequency and magnitude. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or solely as alternatives to, financial measures prepared in accordance with GAAP. Below is a reconciliation of these non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with GAAP. See Attachment 3 for a definition and summary of special items.

Three Months Ended
December 31, 2019

Three Months Ended
December 31, 2018

Reconciliation to Condensed Consolidated Statements of
Income

$

EPS

$

EPS

Net income (loss) from continuing operations attributable to PolyOne
shareholders

$

6.4

$

0.08

$

(1.3)

$

(0.02)

Special items, after tax (Attachment 3)

19.9

0.26

20.6

0.26

Adjusted net income / EPS - excluding special items

$

26.3

$

0.34

$

19.3

$

0.24

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Reconciliation to Condensed Consolidated Statements of
Income

$

EPS

$

EPS

Net income from continuing operations attributable to PolyOne
shareholders

$

75.5

$

0.97

$

87.7

$

1.09

Special items, after tax (Attachment 3)

55.8

0.72

33.6

0.42

Adjusted net income / EPS - excluding special items

$

131.3

$

1.69

$

121.3

$

1.51

PolyOne Corporation

Condensed Consolidated Statements of Income (Unaudited)

(In millions, except per share data)

Three Months Ended
December 31,

Year Ended
December 31,

2019

2018

2019

2018

Sales

$

658.6

$

677.1

$

2,862.7

$

2,881.0

Cost of sales

505.3

536.2

2,205.5

2,256.2

Gross margin

153.3

140.9

657.2

624.8

Selling and administrative expense

132.8

110.7

500.4

446.2

Operating income

20.5

30.2

156.8

178.6

Interest expense, net

(11.9)

(15.6)

(59.5)

(62.8)

Debt extinguishment costs

—

(1.0)

—

(1.1)

Other income (expense), net

10.7

(14.9)

12.1

(12.9)

Income (loss) from continuing operations before income taxes

19.3

(1.3)

109.4

101.8

Income taxes

(12.9)

(0.2)

(33.7)

(14.4)

Net income (loss) from continuing operations

6.4

(1.5)

75.7

87.4

Income from discontinued operations, net of income taxes

458.9

12.7

513.1

72.1

Net income

$

465.3

$

11.2

$

588.8

$

159.5

Net loss (income) attributable to noncontrolling interests

—

0.2

(0.2)

0.3

Net income attributable to PolyOne common shareholders

$

465.3

$

11.4

$

588.6

$

159.8

Earnings (loss) per share attributable to PolyOne common shareholders - Basic:

Continuing operations

$

0.08

$

(0.02)

$

0.98

$

1.10

Discontinued operations

5.97

0.17

6.64

0.91

Total

$

6.05

$

0.15

$

7.62

$

2.01

Earnings (loss) per share attributable to PolyOne common shareholders - Diluted:

Continuing operations

$

0.08

$

(0.02)

$

0.97

$

1.09

Discontinued operations

5.92

0.16

6.61

0.90

Total

$

6.00

$

0.14

$

7.58

$

1.99

Cash dividends declared per share of common stock

$

0.203

$

0.195

$

0.788

$

0.720

Weighted-average shares used to compute earnings per common share:

Basic

76.9

78.6

77.2

79.7

Diluted

77.5

79.2

77.7

80.4

PolyOne Corporation

Summary of Special Items (Unaudited)

(In millions, except per share data)

Special items ⁽¹⁾

Three Months Ended December
31,

Year Ended
December 31,

2019

2018

2019

2018

Cost of sales:

   Restructuring costs

$

—

$

(0.1)

$

0.3

$

(0.6)

   Environmental remediation costs

0.3

(3.9)

(10.1)

(23.1)

   Reimbursement of previously incurred environmental costs

0.5

0.5

4.5

4.3

   Acquisition related costs

—

0.2

(2.0)

(1.6)

      Impact on cost of sales

0.8

(3.3)

(7.3)

(21.0)

Selling and administrative expense:

   Restructuring, legal and other

(4.4)

(4.8)

(19.4)

(17.0)

Acquisition earnout adjustments

(15.7)

(0.7)

(36.4)

(0.7)

   Acquisition related costs

(5.3)

(1.0)

(8.6)

(3.7)

      Impact on selling and administrative expense

(25.4)

(6.5)

(64.4)

(21.4)

      Impact on operating income

(24.6)

(9.8)

(71.7)

(42.4)

   Debt extinguishment costs

—

(1.0)

—

(1.1)

   Other income, net

0.1

0.2

0.5

0.4

   Pension & other post-retirement benefits - mark-to-market adjustment

9.5

(15.6)

9.5

(15.6)

      Impact on income from continuing operations before income taxes

(15.0)

(26.2)

(61.7)

(58.7)

Income tax (expense) benefit on above special items

(0.4)

5.5

11.1

14.7

Tax adjustments⁽²⁾

(4.5)

0.1

(5.2)

10.4

Impact of special items on net income from continuing operations
attributable to PolyOne Shareholders

$

(19.9)

$

(20.6)

$

(55.8)

$

(33.6)

Diluted earnings per common share impact

$

(0.26)

$

(0.26)

$

(0.72)

$

(0.42)

Weighted average shares used to compute adjusted earnings per
share:

   Diluted

77.5

79.2

77.7

80.4

(1)

Special items include charges related to specific strategic initiatives or financial restructuring such as: consolidation of operations; debt extinguishment costs; costs incurred directly in relation to acquisitions or divestitures, including adjustments related to contingent consideration; employee separation costs resulting from personnel reduction programs, plant realignment costs, executive separation agreements; asset impairments; mark-to-market adjustments associated with actuarial gains and losses on pension and other post-retirement benefit plans; environmental remediation costs, fines, penalties and related insurance recoveries related to facilities no longer owned or closed in prior years; gains and losses on the divestiture of operating businesses, joint ventures and equity investments; gains and losses on facility or property sales or disposals; results of litigation, fines or penalties, where such litigation (or action relating to the fines or penalties) arose prior to the commencement of the performance period; one-time, non-recurring items; and the effect of changes in accounting principles or other such laws or provisions affecting reported results.

(2)

Tax adjustments include the net tax benefit/expense from one-time income tax items, the set-up or reversal of uncertain tax position reserves and deferred income tax valuation allowance adjustments.

PolyOne Corporation

Condensed Consolidated Balance Sheets (Unaudited)

(In millions)

Year Ended
December 31, 2019

Year Ended
December 31, 2018

ASSETS

Current assets:

Cash and cash equivalents

$

864.7

$

170.9

Accounts receivable, net

326.8

347.2

Inventories, net

260.9

284.6

Current assets held for sale

—

129.7

Other current assets

54.0

66.4

Total current assets

1,506.4

998.8

Property, net

407.4

384.5

Goodwill

685.7

639.1

Intangible assets, net

469.3

422.4

Operating lease assets, net

63.8

—

Non-current assets held for sale

—

124.5

Other non-current assets

133.3

154.0

Total assets

$

3,265.9

$

2,723.3

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Short-term and current portion of long-term debt

$

18.4

$

19.4

Accounts payable

283.3

305.0

Current operating lease obligations

21.0

—

Current liabilities held for sale

—

104.5

Accrued expenses and other current liabilities

372.4

128.7

Total current liabilities

695.1

557.6

Non-current liabilities:

Long-term debt

1,210.9

1,336.2

Pension and other post-retirement benefits

56.6

54.3

Deferred income taxes

63.5

69.1

Non-current operating lease obligations

42.8

—

Non-current liabilities held for sale

—

3.3

Other non-current liabilities

144.3

162.2

Total non-current liabilities

1,518.1

1,625.1

SHAREHOLDERS' EQUITY

PolyOne shareholders' equity

1,051.9

540.0

Noncontrolling interest

0.8

0.6

Total equity

1,052.7

540.6

Total liabilities and equity

$

3,265.9

$

2,723.3

PolyOne Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)

Year Ended December 31,

2019

2018

Operating Activities

Net income

$

588.8

$

159.5

Adjustments to reconcile net income to net cash provided by operating activities:

Gain on sale of business, net of tax

(457.7)

—

Depreciation and amortization

87.5

88.5

Accelerated depreciation and fixed asset charges associated with
restructuring activities

—

3.0

Debt extinguishment costs

—

1.1

Share-based compensation expense

12.3

10.9

Changes in assets and liabilities, net of the effect of acquisitions:

Decrease (increase) in accounts receivable

32.9

(11.3)

Decrease (increase) in inventories

40.2

(10.6)

(Decrease) increase in accounts payable

(27.1)

7.9

(Decrease) increase in pension and other post-retirement benefits

(19.7)

4.8

Increase in post-acquisition earnouts

36.4

0.7

Increase (decrease) in accrued expenses and other assets and liabilities - net

8.1

(0.8)

Net cash provided by operating activities

301.7

253.7

Investing activities

Capital expenditures

(81.7)

(76.0)

Business acquisitions, net of cash acquired

(119.6)

(98.6)

Proceeds from divestiture

761.8

—

Proceeds from other assets

51.4

4.3

Net cash used by investing activities

611.9

(170.3)

Financing activities

Borrowings under credit facilities

963.4

1,152.9

Repayments under credit facilities

(1,083.9)

(1,090.3)

Purchase of common shares for treasury

(26.9)

(123.0)

Cash dividends paid

(60.9)

(56.1)

Repayment of other debt

(1.8)

(16.4)

Repayment of long-term debt

(6.5)

(6.5)

Payments on withholding tax on share awards

(2.4)

(4.1)

Debt financing costs

(0.2)

(4.6)

Net cash used by financing activities

(219.2)

(148.1)

Effect of exchange rate changes on cash

(0.6)

(8.0)

Increase (decrease) in cash and cash equivalents

693.8

(72.7)

Cash and cash equivalents at beginning of year

170.9

243.6

Cash and cash equivalents at end of year

$

864.7

$

170.9

PolyOne Corporation

Business Segment and Platform Operations (Unaudited)

(In millions)

Operating income at the segment level does not include: special items as defined in Attachment 3; corporate general and administration costs that are not allocated to segments; intersegment sales and profit eliminations; share-based compensation costs; and certain other items that are not included in the measure of segment profit and loss that is reported to and reviewed by the chief operating decision maker. These costs are included in Corporate and eliminations.

Three Months Ended
December 31,

Year Ended
December 31,

2019

2018

2019

2018

Sales:

Color, Additives and Inks

$

226.7

$

240.9

$

1,003.8

$

1,046.5

Specialty Engineered Materials

177.5

150.5

745.7

645.8

Distribution

272.4

304.8

1,192.2

1,265.4

Corporate and eliminations

(18.0)

(19.1)

(79.0)

(76.7)

Sales

$

658.6

$

677.1

$

2,862.7

$

2,881.0

Gross margin:

Color, Additives and Inks

$

73.9

$

78.1

$

338.4

$

353.4

Specialty Engineered Materials

47.7

36.9

200.2

171.7

Distribution

31.0

30.6

132.1

125.8

Corporate and eliminations

0.7

(4.7)

(13.5)

(26.1)

Gross margin

$

153.3

$

140.9

$

657.2

$

624.8

Selling and administrative expense:

Color, Additives and Inks

$

46.7

$

48.1

$

191.0

$

194.9

Specialty Engineered Materials

28.2

24.7

113.4

99.4

Distribution

14.0

13.6

56.7

54.3

Corporate and eliminations

43.9

24.3

139.3

97.6

Selling and administrative expense

$

132.8

$

110.7

$

500.4

$

446.2

Operating income:

Color, Additives and Inks

$

27.2

$

30.0

$

147.4

$

158.5

Specialty Engineered Materials

19.5

12.2

86.8

72.3

Distribution

17.0

17.0

75.4

71.5

Corporate and eliminations

(43.2)

(29.0)

(152.8)

(123.7)

Operating income

$

20.5

$

30.2

$

156.8

$

178.6

PolyOne Corporation

Reconciliation of Non-GAAP Financial Measures (Unaudited)

(In millions, except per share data)

Senior management uses gross margin before special items and operating income before special items to assess performance and allocate resources because senior management believes that these measures are useful in understanding current profitability levels and how it may serve as a basis for future performance. In addition, operating income before the effect of special items is a component of PolyOne annual and long-term employee incentive plans and is used in debt covenant computations. Senior management believes these measures are useful to investors because they allow for comparison to PolyOne's performance in prior periods without the effect of items that, by their nature, tend to obscure PolyOne's operating results due to the potential variability across periods based on timing, frequency and magnitude. Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or solely as alternatives to, financial measures prepared in accordance with GAAP. Below is a reconciliation of these non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with GAAP. See Attachment 3 for a definition and summary of special items.

Three Months Ended
December 31,

Year Ended
December 31,

Reconciliation to Consolidated Statements of Income

2019

2018

2019

2018

Sales

$

658.6

$

677.1

$

2,862.7

$

2,881.0

Gross margin - GAAP

153.3

140.9

657.2

624.8

Special items in gross margin (Attachment 3)

(0.8)

3.3

7.3

21.0

Adjusted Gross margin

$

152.5

$

144.2

$

664.5

$

645.8

Adjusted Gross margin as a percent of sales

23.2

%

21.3

%

23.2

%

22.4

%

Operating income - GAAP

20.5

30.2

156.8

178.6

Special items in operating income (Attachment 3)

24.6

9.8

71.7

42.4

   Adjusted Operating income

$

45.1

$

40.0

$

228.5

$

221.0

Adjusted Operating income as a percent of sales

6.8

%

5.9

%

8.0

%

7.7

%

The tables below reconciles pre-special income tax expense and the pre-special effective tax rate to their most directly comparable GAAP financial measures.

Three Months Ended
December 31, 2019

Three Months Ended
December 31, 2018

GAAP Results

Special Items

Adjusted Results

GAAP Results

Special Items

Adjusted Results

Income from continuing operations before
income taxes

$

19.3

$

15.0

$

34.3

$

(1.3)

$

26.2

$

24.9

Income tax expense - GAAP

(12.9)

—

(12.9)

(0.2)

—

(0.2)

Income tax impact of special items (Attachment 3)

—

0.4

0.4

—

(5.5)

(5.5)

Tax adjustments (Attachment 3)

—

4.5

4.5

—

(0.1)

(0.1)

Income tax (expense) benefit

$

(12.9)

$

4.9

$

(8.0)

$

(0.2)

$

(5.6)

$

(5.8)

Effective Tax Rate

66.8

%

23.2

%

(15.4)

%

23.3

%

Year Ended
December 31, 2019

Year Ended
December 31, 2018

GAAP
Results

Special
Items

Adjusted
Results

GAAP
Results

Special
Items

Adjusted
Results

Income from continuing operations before
income taxes

$

109.4

$

61.7

$

171.1

$

101.8

$

58.7

$

160.5

Income tax expense - GAAP

(33.7)

—

(33.7)

(14.4)

—

(14.4)

Income tax impact of special items (Attachment 3)

—

(11.1)

(11.1)

—

(14.7)

(14.7)

Tax adjustments (Attachment 3)

—

5.2

5.2

—

(10.4)

(10.4)

Income tax expense

$

(33.7)

$

(5.9)

$

(39.6)

$

(14.4)

$

(25.1)

$

(39.5)

Effective Tax Rate

30.8

%

23.1

%

14.1

%

24.6

%

Liquidity is calculated as follows:

(In millions)

As of December 31, 2019

Cash and cash equivalents

$

864.7

Revolving credit availability

281.1

Liquidity

$

1,145.8