1 ================================================================================ 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 JUNE 30, 2001. 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 --- --- As of August 7, 2001, there were 93,830,298 common shares outstanding. There is only one class of common shares.
2 Item I. Part I. Financial Information. POLYONE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Sales $ 695.4 $ 361.2 $ 1,405.1 $ 706.7 Operating costs and expenses: Cost of sales 578.8 316.5 1,177.2 617.3 Selling and administrative 77.6 20.2 159.5 44.5 Depreciation and amortization 25.9 9.4 52.3 18.9 Employee separation and plant phase-out 0.9 2.8 9.8 2.8 Merger and integration costs 0.5 -- 5.8 -- (Income) loss from equity affiliates and minority interest (5.1) (18.1) 7.0 (36.9) ---------- ---------- ---------- ---------- Operating income (loss) 16.8 30.4 (6.5) 60.1 Interest expense (10.9) (7.2) (23.8) (14.2) Interest income 1.2 0.4 1.4 0.9 Other expense, net 1.4 (0.6) (0.9) (1.2) ---------- ---------- ---------- ---------- Income (loss) before income taxes 8.5 23.0 (29.8) 45.6 Income tax (expense) benefit (6.0) (8.2) 10.9 (17.0) ---------- ---------- ---------- ---------- Net income (loss) $ 2.5 $ 14.8 $ (18.9) $ 28.6 ========== ========== ========== ========== Earnings (loss) per share of common stock: Basic $ .03 $ .31 $ (.21) $ .61 Diluted $ .03 $ .31 $ (.21) $ .60 Weighted average shares used to compute earnings per share: Basic 89.8 47.0 89.8 47.0 Diluted 90.5 47.8 90.3 48.2 Dividends paid per share of common stock $ .0625 $ .0625 $ .125 $ .125 </TABLE> See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements 1
3 POLYONE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN MILLIONS) <TABLE> <CAPTION> June 30, December 31, ASSETS 2001 2000 -------- ------------ <S> <C> <C> Current assets: Cash and cash equivalents $ 36.2 $ 37.9 Trade accounts receivable, net 198.9 330.4 Other receivables 12.8 17.1 Inventories 271.5 337.1 Deferred taxes 53.9 53.9 Other current assets 14.9 20.1 -------- -------- Total current assets 588.2 796.5 Property, net 674.1 703.8 Investment in equity affiliates 303.5 311.6 Goodwill and other intangible assets, net 546.0 540.3 Other non-current assets 109.7 108.5 -------- -------- Total assets $2,221.5 $2,460.7 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term bank debt $ 15.5 $ 237.2 Accounts payable 360.8 319.4 Accrued expenses 162.2 175.7 Current portion of long-term debt 1.5 2.6 -------- -------- Total current liabilities 540.0 734.9 Long-term debt 439.1 442.4 Deferred income tax liabilities 122.3 132.8 Post-retirement benefits other than pensions 129.4 129.9 Other non-current liabilities, including pensions 181.5 179.1 Minority interest in consolidated subsidiaries 17.7 14.0 -------- -------- Total liabilities 1,430.0 1,633.1 Shareholders' equity: Preferred stock, 40.0 shares authorized, no shares -- -- issued Common stock, $.01 par, 400.0 shares authorized, 122.2 shares issued at June 30, 2001 and December 31, 2000 1.2 1.2 Other shareholders' equity 790.3 826.4 -------- -------- Total shareholders' equity 791.5 827.6 -------- -------- Total liabilities and shareholders' equity $2,221.5 $2,460.7 ======== ======== </TABLE> See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements 2
4 POLYONE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN MILLIONS) <TABLE> <CAPTION> Six Months Ended June 30, --------------------- 2001 2000 ------- ------- <S> <C> <C> OPERATING ACTIVITIES Net income (loss) $ (18.9) $ 28.6 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Employee separation and plant phase-out 9.8 2.8 Depreciation and amortization 52.3 18.9 Companies carried at equity: Equity (income) loss, net of minority interest 7.0 (36.9) Dividends received 1.0 19.7 Provision (benefit) for deferred income taxes (4.0) 16.0 Change in assets and liabilities: Operating working capital: Accounts receivable 128.3 (33.3) Inventories 61.3 3.7 Accounts payable 46.4 (1.0) Accrued expenses and other (24.6) (19.4) ------- ------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 258.6 (0.9) INVESTING ACTIVITIES Capital expenditures (36.0) (13.9) Return of cash from equity affiliates 0.5 2.4 Proceeds from sale of assets 2.8 -- Other 3.5 -- ------- ------- NET CASH PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES 229.4 (12.4) FINANCING ACTIVITIES Change in short-term debt (222.2) 13.0 Change in long-term debt 3.1 -- Net proceeds from issuance of common stock -- 0.6 Dividends (11.3) (6.2) ------- ------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (230.4) 7.4 Effect of exchange rate changes on cash (0.7) 0.7 ------- ------- DECREASE IN CASH AND CASH EQUIVALENTS (1.7) (4.3) Cash and cash equivalents at beginning of year 37.9 51.2 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 36.2 $ 46.9 ======= ======= </TABLE> See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements 3
5 POLYONE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) (DOLLARS IN MILLIONS, SHARES IN THOUSANDS) <TABLE> <CAPTION> COMMON SHARES COMMON HELD IN COMMON SHARES TREASURY TOTAL STOCK ------------------------------------------------------------------------------ <S> <C> <C> <C> <C> BALANCE JANUARY 1, 2000 27,975 4,245 $ 334.7 $ 2.8 Non-owner equity changes: Net income 13.8 Translation adjustment (0.6) ------- Total non-owner equity changes 13.2 Stock based compensation and exercise of options (118) 1.0 Cash dividends (3.1) ------------------------------------------------------------------------------ BALANCE MARCH 31, 2000 27,975 4,127 345.8 2.8 Non-owner equity changes: Net income 14.8 Translation adjustment (3.0) ------- Total non-owner equity changes 11.8 Stock based compensation 4 25 (1.4) Formation of share ownership trust (SOT) (500) - Options exercised and shares issued from SOT 0.1 Adjustment to market value - Cash dividends (3.1) ------------------------------------------------------------------------------ BALANCE JUNE 30, 2000 27,979 3,652 $ 353.2 $ 2.8 ============================================================================== BALANCE JANUARY 1, 2001 122,192 28,315 $ 827.6 $ 1.2 Non-owner equity changes: Net loss (21.4) Translation adjustment (10.4) ------- Total non-owner equity changes (31.8) Stock-based compensation and benefits and exercise of options 16 1.1 Adjustment to market value - Cash dividends (5.6) ------------------------------------------------------------------------------ BALANCE MARCH 31, 2001 122,192 28,331 791.3 1.2 Non-owner equity changes: Net income 2.5 Translation adjustment 2.4 ------- Total non-owner equity changes 4.9 Stock-based compensation and benefits and exercise of options 12 1.0 Adjustment to market value - Cash dividends (5.7) ------------------------------------------------------------------------------ BALANCE JUNE 30, 2001 122,192 28,343 $ 791.5 $ 1.2 ============================================================================== ACCUMULATED COMMON OTHER NON- ADDITIONAL STOCK HELD SHARE OWNER PAID-IN RETAINED IN OWNERSHIP EQUITY CAPITAL EARNINGS TREASURY TRUST CHANGES ---------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> BALANCE JANUARY 1, 2000 $ 297.3 $ 168.3 $ (104.5) $ - $ (29.2) Non-owner equity changes: Net income 13.8 Translation adjustment (0.6) Total non-owner equity changes Stock based compensation and exercise of (2.2) 3.1 0.1 options Cash dividends (3.1) ---------------------------------------------------------------------------------------- BALANCE MARCH 31, 2000 295.1 179.0 (101.4) - (29.7) Non-owner equity changes: Net income 14.8 Translation adjustment (3.0) Total non-owner equity changes Stock based compensation (1.0) (0.4) Formation of share ownership trust (SOT) 13.4 (13.4) Options exercised and shares issued from SO 0.1 Adjustment to market value (4.3) 4.3 Cash dividends (3.1) ---------------------------------------------------------------------------------------- BALANCE JUNE 30, 2000 $ 289.9 $ 190.7 $ (88.4) $ (9.1) $ (32.7) ======================================================================================== BALANCE JANUARY 1, 2001 $ 1,057.6 $ 169.3 $ (321.9) $ (25.5) $ (53.1) Non-owner equity changes: Net loss (21.4) Translation adjustment (10.4) Total non-owner equity changes Stock-based compensation and benefits and exercise of options 4.5 (3.4) Adjustment to market value 12.4 (12.4) Cash dividends (5.6) ---------------------------------------------------------------------------------------- BALANCE MARCH 31, 2001 1,070.0 142.3 (321.9) (33.4) (66.9) Non-owner equity changes: Net income 2.5 Translation adjustment 2.4 Total non-owner equity changes Stock-based compensation and benefits and exercise of options (0.1) (0.1) 1.0 0.2 Adjustment to market value 4.6 (4.6) Cash dividends (5.7) ---------------------------------------------------------------------------------------- BALANCE JUNE 30, 2001 $ 1,074.5 $ 139.1 $ (322.0) $ (37.0) $ (64.3) ======================================================================================== </TABLE> See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements 4
6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION PolyOne Corporation (PolyOne or Company) was formed on August 31, 2000, from the consolidation of The Geon Company (Geon) and M.A. Hanna Company (Hanna). The PolyOne consolidation has been accounted for as a purchase business combination, with Geon as the acquiring enterprise. Accordingly, the Company's condensed consolidated statements of operations under generally accepted accounting principles for the three months and the six months ended June 30, 2000 reflect only the operating results of Geon prior to the consolidation. A preliminary assessment of the fair value of the tangible and intangible assets and liabilities of the former Hanna business has been reflected in both the reported and pro forma operating results. The purchase price allocation reflected might be adjusted as estimated fair values of assets acquired and liabilities assumed are finalized. See Note K regarding a revision recorded in the second quarter of 2001. In connection with the consolidation, each outstanding share of Geon common stock was converted into two shares of PolyOne and each outstanding share of Hanna common stock was converted into one share of PolyOne. All per share data for all periods has been restated to reflect the effects of the conversion. 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 incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Operating results for the three month and six month periods ended June 30, 2001 are not necessarily indicative of the results expected in subsequent quarters or for the year ending December 31, 2001. NOTE B - ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the purchase method be used for all business combinations initiated after June 30, 2001. SFAS 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of SFAS 142, which for the Company will be January 1, 2002. The Company is currently evaluating the impact of SFAS 142. Effective January 1, 2001 the Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The standard requires all derivatives, whether designated in hedging relationships or not, to be recorded on the balance sheet at fair value. Due to the short-term nature of the Company's forward exchange contracts at June 30, 2001, the derivatives were marked to market through the income statement consistent with the Company's current accounting policy for these contracts. Accordingly, the adoption of SFAS 133 had no impact on the Company's results of operations or financial position. NOTE C - INVENTORIES Components of inventories are as follows: <TABLE> <CAPTION> June 30, December 31, (Dollars in millions) 2001 2000 ------------------ ----------------- <S> <C> <C> Finished products and in-process inventories $ 177.6 $ 201.4 Raw materials and supplies 114.1 159.8 ---------- ---------- 291.7 361.2 LIFO Reserve (20.2) (24.1) ---------- ---------- Total Inventories $ 271.5 $ 337.1 ========== ========== </TABLE> 5
7 NOTE D - INCOME TAXES The 2001 effective income tax rate for the six months year-to-date was 36.6% versus 44.1% at the end of the first quarter 2001. The 2001 second quarter reduction is principally due to the effect of non-deductible goodwill and relative level to total earnings. The year-to-date effective tax rate resulted in the second quarter's tax provision including an adjustment of $2.9 million of additional income tax expense, which lowered the quarter's earnings. NOTE E - INVESTMENT IN EQUITY AFFILIATE The Company owns 24% of OxyVinyls, LP (OxyVinyls), a manufacturer and marketer of PVC resins. OxyVinyls is the largest producer of PVC resins in North America. The following table presents OxyVinyls' summarized results of operations for the six months ended June 30, 2001 and 2000, and summarized balance sheet information as of June 30, 2001 and December 31, 2000. <TABLE> <CAPTION> For the Six Months Ended (Dollars in millions) June 30, 2001 2000 -------- -------- <S> <C> <C> Net sales $ 886.3 $1,043.0 Operating income (loss) (22.7) 151.7 Partnership income (loss) as reported by OxyVinyls (27.9) 148.3 PolyOne's ownership of OxyVinyls 24% 24% -------- -------- PolyOne's proportionate share of OxyVinyls' earnings (6.7) 35.6 Amortization of the difference between PolyOne's investment and its underlying share of OxyVinyls' equity 0.3 0.3 -------- -------- Earnings of equity affiliate recorded by PolyOne $ (6.4) $ 35.9 ======== ======== </TABLE> <TABLE> <CAPTION> (Dollars in millions) June 30, December 31, 2001 2000 -------- -------- <S> <C> <C> Current assets $ 404.7 $ 338.1 Non-current assets 984.2 1,045.1 -------- -------- Total assets 1,388.9 1,383.2 Current liabilities 185.0 238.2 Non-current liabilities 180.7 93.9 -------- -------- Total liabilities 365.7 332.1 -------- -------- Partnership capital $1,023.2 $1,051.1 ======== ======== </TABLE> OxyVinyls' loss during the first half of fiscal 2001 reported above includes a first quarter special, pre-tax charge of $4.4 million, all of which related to involuntary severance, outplacement costs and other employee related separation benefits. The Company's proportionate share of this special item was $1.0 million. NOTE F - SHAREHOLDERS' EQUITY Effective May 2, 2001, the Board of Directors of the Company approved the termination of both the M.A. Hanna Associates Ownership Trust and The Geon Company Share Ownership Trust to simplify the administration of the Company's stock-based compensation plans. PolyOne shares remaining in the two trusts will be reacquired by the Company in accordance with the terms of the trusts and held in treasury. The termination of the two trusts does not have any impact on Company earnings, earnings per share or shareholders' equity. During the first half of fiscal 2001, the Compensation Committee of PolyOne's Board of Directors authorized the issuance of 532,800 shares of restricted PolyOne stock to certain PolyOne executives. The restricted shares were valued at $7.22 per share and were issued from The Geon Company Share Ownership Trust. Shares vest and restrictions lapse three years from the date of grant. Accordingly, the Company has recorded the grants as unearned compensation to be recognized as compensation expense over the three-year vesting period. 6
8 NOTE G - EARNINGS PER SHARE COMPUTATION Weighted average shares outstanding are computed as follows: <TABLE> <CAPTION> (Shares in millions) Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ------ ------ ------ ------ <S> <C> <C> <C> <C> Weighted average shares outstanding - Basic Average shares outstanding 90.4 48.6 90.3 48.0 Unearned portion of shares held in Share Ownership Trust -- (1.0) -- (0.4) Less unearned portion of restricted stock Awards included in outstanding shares (0.6) (0.6) (0.5) (0.6) ------ ------ ------ ------ 89.8 47.0 89.8 47.0 ====== ====== ====== ====== Weighted average shares outstanding - Diluted Average shares outstanding 90.4 48.6 90.3 48.0 Unearned portion of shares held in Share Ownership Trust -- (0.8) -- (0.4) Plus dilutive impact of stock options and stock awards 0.1 -- -- 0.6 ------ ------ ------ ------ 90.5 47.8 90.3 48.2 ====== ====== ====== ====== </TABLE> 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. As disclosed in Note A above, the historical share amounts and related per share data have been restated to reflect the conversion of each outstanding share of Geon common stock into two common shares of PolyOne. NOTE H - EMPLOYEE SEPARATION AND PLANT PHASE-OUT In June 2001, the Company announced its plans to form four Centers of Manufacturing Excellence (CMEs), as the first step in its plan to modernize its North American Plastic Compounds and Colors (PCC) manufacturing network. Three engineered materials plants have been slated for closure, following the modernization and consolidation at the CME sites. Related to this announcement, the Company has provided $4.9 million within purchase accounting for cash employee separation and plant phase-out costs. An additional $6.8 million has been accrued for asset write-downs, primarily property and equipment, associated with the plant closings. Approximately 200 positions will be eliminated with the closings. At June 30, 2001, the remaining accrual was $4.9 million, representing future cash severance and plant phase-out costs. The Company projects the plants will be closed in the second half of 2002. In June 2001, the Company also announced its plan to close its Elastomers compounding plant in Kingstree, South Carolina. The plant closing will be included as part of the acquisition purchase accounting, for which the accrual for employee separation and plant phase-out costs totaled $5.6 million. An additional $5.5 million has been accrued for property and equipment write-downs associated with the plant closing. At June 30, 2001, the remaining accrual was $5.2 million, representing future cash severance and plant closing costs. The Company projects the plant will be closed by the end of the third quarter 2001, with the elimination of approximately 145 positions. In March 2001, the Company announced its plan to eliminate 55 administrative and manufacturing positions at three sites within the engineered films operations. As a result, the Company recorded a special, pre-tax charge of $1.9 million, all of which related to involuntary severance and other employee related separation benefits. At June 30, 2001 the remaining accrual was $0.4 million representing future cash severance and benefit payments. As of June 30, 2001, all planned positions had been eliminated, 58 positions in total. In January 2001, the Company announced its plan to close four plastic compounds and colors operating plants within the United States, transferring production to other Company manufacturing sites with available capacity and eliminating 65 positions. Related to this announcement, the Company has provided $1.7 million within purchase accounting in addition recording a special, pre-tax charge of $7.0 million. The charge to earnings included a $3.8 7
9 million non-cash write-off of manufacturing assets, one-time cash involuntary employee separation benefits of $2.1 million, and anticipated cash plant phase-out costs of $1.1 million. At June 30, 2001 the Company has remaining reserves of $1.9 million representing future cash payments of employee separation and plant phase-out costs. As of June 30, 2001 two plants have been closed and 51 positions were eliminated. Remaining plant closures and eliminations are projected to occur prior to the end of the fourth quarter of 2001. During 2000, the Company recorded employee separation and plant phase-out charges of $3.4 million ($0.6 million of which pertained to inventory write-offs and was recorded in cost of sales) relating to the closing of an engineered films plant in Massachusetts. The accrual for employee separation and plant phase-out costs was $2.1 million and $1.4 million for the periods ended December 31, 2000 and June 30, 2001, respectively. The plant closed in February 2001 with the elimination of all 60 positions in the first six months of 2001. NOTE I - MERGER AND INTEGRATION COSTS During the first half of fiscal 2001 the Company recorded $5.8 million for certain costs associated with the consolidation and integration of Geon and Hanna. The majority of this cost represents executive severance in connection with a change in control resulting from the consolidation. NOTE J - FINANCING ARRANGEMENTS In the first half of fiscal 2001, the Company's accounts receivable sale facility was increased $150 million to $250 million. As of June 30, 2001, $244 million of this facility was being utilized. During May 2001 the Company also obtained amendments to the October 2000 revolving credit agreements, which included a $100 million reduction in available borrowings from an aggregate $400 million to $300 million, effectively offsetting some of the increase in the receivable sale facility. NOTE K - PURCHASE PRICE ALLOCATION As a result of the multiple business asset restructuring initiatives, an adjustment to the PolyOne formation initial purchase price allocation was recorded in the second quarter of 2001. A $23.7 million increase was offset by the write down of property, plant and equipment and the accrual of employee separation and plant closure costs. The revision had no material impact on earnings. NOTE L - SEGMENT INFORMATION The Company operates primarily in four business segments: the Performance Plastics segment, the Elastomers and Additives (E&A) segment, the Distribution segment, and the Resin and Intermediates (R&I) 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. 8
10 POLYONE CORPORATION AND SUBSIDIARIES SEGMENT INFORMATION (DOLLARS IN MILLIONS) <TABLE> <CAPTION> PERFORMANCE ELASTOMERS & RESIN & THREE MONTHS ENDED JUNE 30, 2001 TOTAL PLASTICS ADDITIVES DISTRIBUTION INTERMEDIATES OTHER ------- --------- ----------- ------------ ------------- --------- <S> <C> <C> <C> <C> <C> <C> Net Sales $ 695.4 $ 484.6 $ 105.8 $ 117.8 $ -- $ (12.8) Operating income (loss) 16.8 16.1 3.2 -- 2.1 (4.6) Employee separation and plant phase-out costs 0.9 0.9 -- -- -- -- Period cost of closed facilities 0.2 0.2 -- -- -- -- Merger and integration costs 0.5 -- -- -- -- 0.5 ------------------------------------------------------------------------------ Operating income (loss) before employee separation, plant phase-out and closed facilities, and merger and integration costs 18.4 17.2 3.2 -- 2.1 (4.1) Depreciation and amortization 25.9 19.3 4.4 0.9 -- 1.3 ------------------------------------------------------------------------------ Operating income (loss) before employee separation, plant phase-out and closed facilities, and merger and integration costs and depreciation and amortization $ 44.3 $ 36.5 $ 7.6 $ 0.9 $ 2.1 $ (2.8) ============================================================================== Total assets $2,221.5 $1,529.9 $ 317.4 $ 169.7 $ 252.6 $ (48.1) Capital Expenditures $ 16.7 $ 4.7 $ 2.0 $ 0.1 $ -- $ 9.9 <CAPTION> PERFORMANCE ELASTOMERS & RESIN & THREE MONTHS ENDED JUNE 30, 2000 TOTAL PLASTICS ADDITIVES DISTRIBUTION INTERMEDIATES OTHER ------- --------- ----------- ------------ ------------- --------- <S> <C> <C> <C> <C> <C> <C> Net Sales $ 361.2 $ 361.2 $ -- $ -- $ -- $ -- Operating income (loss) 30.4 18.8 -- -- 15.8 (4.2) Employee separation and plant phase-out costs 2.8 2.8 -- -- -- Directors pension termination 0.8 -- -- -- -- 0.8 Write-off debt placement cost 0.8 -- -- -- -- 0.8 ------------------------------------------------------------------------------ Operating income (loss) before employee separation, plant phase-out, directors pension termination and write-off debt placement costs 34.8 21.6 -- -- 15.8 (2.6) Depreciation and amortization 9.4 9.4 -- -- -- -- ------------------------------------------------------------------------------ Operating income (loss) before employee separation, plant phase-out, directors pension termination and write-off debt placement costs and depreciation and amortization $ 44.2 $ 31.0 $ -- $ -- $ 15.8 $ (2.6) ============================================================================== Total assets $1,201.1 $ 934.8 $ -- $ -- $ 262.8 $ 3.5 Capital expenditures $ 7.6 $ 7.6 $ -- $ -- $ -- $ -- </TABLE> 9
11 <TABLE> <CAPTION> POLYONE CORPORATION AND SUBSIDIARIES SEGMENT INFORMATION (DOLLARS IN MILLIONS) PERFORMANCE ELASTOMERS & RESIN & SIX MONTHS ENDED JUNE 30, 2001 TOTAL PLASTICS ADDITIVES DISTRIBUTION INTERMEDIATES OTHER ------- --------- ----------- ------------ ------------- --------- <S> <C> <C> <C> <C> <C> <C> Net Sales $1,405.1 $ 973.4 $ 215.5 $ 238.9 $ -- $ (22.7) Operating income (loss) (6.5) 14.2 5.9 1.1 (13.3) (14.4) Employee separation and plant phase-out costs 10.8 9.8 -- -- 1.0 -- Period cost of closed facilities 0.2 0.2 -- -- -- -- Merger and integration costs 5.8 -- -- -- -- 5.8 ---------------------------------------------------------------------------- Operating income (loss) before employee separation, plant phase-out and closed facilities, and merger and integration costs 10.3 24.2 5.9 1.1 (12.3) (8.6) Depreciation and amortization 52.3 38.3 8.7 1.7 -- 3.6 ---------------------------------------------------------------------------- Operating income (loss) before employee separation, plant phase-out and closed facilities, and merger and integration costs and depreciation and amortization $ 62.6 $ 62.5 $ 14.6 $ 2.8 $ (12.3) $ (5.0) ============================================================================ Capital Expenditures $ 36.0 $ 10.7 $ 6.5 $ 0.4 $ -- $ 18.4 <CAPTION> PERFORMANCE ELASTOMERS & RESIN & SIX MONTHS ENDED JUNE 30, 2000 TOTAL PLASTICS ADDITIVES DISTRIBUTION INTERMEDIATES OTHER ------- --------- ----------- ------------ ------------- --------- <S> <C> <C> <C> <C> <C> <C> Net Sales $ 706.7 $ 706.7 $ -- $ -- $ -- $ -- Operating income (loss) 60.1 36.0 -- -- 32.3 (8.2) Employee separation and plant phase-out costs 2.8 2.8 -- -- -- -- Directors pension termination 0.8 -- -- -- -- 0.8 Write-off debt placement cost 0.8 -- -- -- -- 0.8 ----------------------------------------------------------------------------- Operating income (loss) before employee separation, plant phase-out, directors pension termination and write-off debt placement costs 64.5 38.8 -- -- 32.3 (6.6) Depreciation and amortization 18.9 18.9 -- -- -- -- ----------------------------------------------------------------------------- Operating income (loss) before employee separation, plant phase-out, directors pension termination and write-off debt placement costs and depreciation and amortization $ 83.4 $ 57.7 $ -- $ -- $ 32.3 $ (6.6) ============================================================================= Capital expenditures $ 13.9 $ 13.9 $ -- $ -- $ -- $ -- </TABLE> NOTE M - COMMITMENTS AND CONTINGENCIES There are pending or threatened against the Company or its 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. The Company believes that any liability that may finally be determined will not have a material adverse effect on the Company's consolidated financial position. The Company has accrued for environmental liabilities based upon estimates prepared by its environmental engineers and consultants to cover probable future environmental expenditures related to previously contaminated sited. The accrual, totaling approximately $56.9 million at June 30, 2001, represents the Company's best estimate for the remaining remediation costs based upon information and technology currently available. Depending upon the results of future testing and the ultimate remediation alternatives to be undertaken at these sites, it is possible that the ultimate costs to be incurred could be more than the accrual recorded by as much as $19.0 million. The Company's estimate of the liability may be revised as new regulations and technologies are developed or additional information is obtained. Additional information related to the Company's environmental liabilities is included in Note N to the consolidated financial statements incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 10
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PolyOne Corporation (PolyOne or Company) was formed on August 31, 2000, from the consolidation of The Geon Company (Geon) and M.A. Hanna Company (Hanna). The PolyOne consolidation has been accounted for as a purchase business combination, with Geon as the acquiring enterprise. Accordingly, PolyOne's "Reported Results" under generally accepted accounting principles (GAAP) for the three and six months ended June 30, 2000 reflect only the operating results of former Geon. In the commentary that follows, "Pro Forma Operating Results" will also be provided because of the significant and pervasive impact of the consolidation on comparative data. The pro forma operating results assume that the consolidation of Geon and Hanna occurred prior to the periods presented. Further, the pro forma operating results assume that Hanna's sale of its Cadillac Plastic business in the second quarter of 2000 occurred prior to the periods presented. A preliminary assessment of the fair value of the tangible and intangible assets and liabilities of the former Hanna business on August 31, 2000 has been reflected in both the 2001 reported results and pro forma operating results. The purchase price allocation reflected may be adjusted as estimated fair values of assets acquired and liabilities assumed are finalized. The pro forma operating results do not include future profit improvements and cost savings or associated costs, including restructuring costs expected to result from the integration of Geon and Hanna. The pro forma operating results are provided for illustrative purposes only, and may not necessarily indicate the operating results that would have occurred or future operating results of PolyOne. Below is a summary of consolidated operating results showing both the "Reported Results" for the three and six months ended June 30, 2001 and 2000 and the "Pro Forma Results" for the three and six months ended June 30, 2000. Also summarized are the special items included in these periods. 11
13 SUMMARY OF CONSOLIDATED OPERATING RESULTS (IN MILLIONS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> Reported Results Pro Forma Results -------------------------------- ------------------- Quarterly Results 2Q01 2Q00 2Q00 - ----------------- ------------------ ------------ ------------------- <S> <C> <C> <C> Sales $695.4 $ 361.2 $833.0 Operating income (loss) 16.8 30.4 52.1 Operating income (loss) before special items 18.4 34.8 56.5 Operating income before special items, depreciation and amortization 44.3 44.2 82.8 Net income (loss) 2.5 14.8 34.6 Special items (income) - after tax (1.5) 3.1 (7.4) Net income (loss) before special items $ 1.0 $ 17.9 $ 27.2 Earnings (loss) per share, diluted $ .03 $ .31 $ .37 Per share effect of special items, expense (income) $ (.02) $ .06 $ (.08) </TABLE> <TABLE> <CAPTION> Pro Forma Reported Results Results -------------------------------- ------------------- Six Months Year-to-Date 1H01 1H00 1H00 - ----------------------- ------------------ ------------ ------------------- <S> <C> <C> <C> Sales $ 1,405.1 $706.7 $ 1,658.2 Operating income (loss) (6.5) 60.1 103.2 Operating income before special items 10.3 64.5 107.6 Operating income before special items, depreciation and amortization 62.6 83.4 160.0 Net income (loss) (18.9) 28.6 60.8 Special items (income) - after tax 8.1 3.1 (7.4) Net income (loss) before special items $ (10.8) $ 31.7 $ 53.4 Earnings (loss) per share, diluted $ (.21) $ .60 $ .65 Per share effect of special items, expense (income) $ .09 $ .06 $ (.08) </TABLE> Senior management uses (1) operating income before special items and/or (2) operating income before special items and depreciation and amortization (similar to EBITDA, which is used by stock market analysts) to assess performance and allocate resources to business segments. Special items include gains and losses associated with specific strategic initiatives such as restructuring or consolidation of operations, gains or losses attributable to acquisitions or formation of joint ventures, and certain other one-time items. In addition, the Company's management uses net income before special items as a measure of the Company's overall earnings performance. Operating income before special items and net income before special items are non-GAAP measures and may not be comparable to financial performance measures presented by other companies. 12
14 <TABLE> <CAPTION> Pro Forma (Dollars in millions) Reported Results Results ------------------------------------ -------------- Quarter 2Q01 2Q00 2Q00 - ------- ---------------- --------------- -------------- <S> <C> <C> <C> Net income - as reported $ 2.5 $14.8 $34.6 SPECIAL ITEMS: Employee separation and plant phase-out cost (0.9) (2.8) (2.8) Merger and integration cost (0.5) - - Period cost of closed facilities (0.2) - - OxyVinyls employee separation cost - - - Directors pension termination - (0.8) (0.8) Write-off debt placement cost - (0.8) (0.8) ---------------- --------------- -------------- Subtotal - operating income (1.6) (4.4) (4.4) Litigation settlement gain 4.1 - - Investment write-down - - - Other restructuring cost - (0.6) (0.6) ---------------- --------------- -------------- Subtotal - pre-tax 2.5 (5.0) (5.0) - after-tax 1.5 (3.1) (3.1) Hanna reversal of income tax reserve - - 10.5 ---------------- --------------- -------------- Net income excluding special items $ 1.0 $17.9 $27.2 ================ =============== ============== </TABLE> <TABLE> <CAPTION> Pro Forma Reported Results Results ------------------------------------ -------------- Six Months Year-to-Date 1H01 1H00 1H00 - ----------------------- ---------------- --------------- -------------- <S> <C> <C> <C> Net income (loss) - as reported $(18.9) $ 28.6 $ 60.8 SPECIAL ITEMS: Employee separation and plant phase-out cost (9.8) (2.8) (2.8) Merger and integration cost (5.8) - - Period cost of closed facilities (0.2) - - OxyVinyls employee separation cost (1.0) - - Directors pension termination - (0.8) (0.8) Write-off debt placement cost - (0.8) (0.8) ---------------- --------------- -------------- Subtotal - operating income (16.8) (4.4) (4.4) Litigation settlement gain 4.1 - - Investment write-down (0.6) - - Other restructuring cost - (0.6) (0.6) ---------------- --------------- -------------- Subtotal - pre-tax (13.3) (5.0) (5.0) - after-tax (8.1) (3.1) (3.1) Hanna reversal of income tax reserve - - 10.5 ---------------- --------------- -------------- Net income (loss) excluding special items $(10.8) $ 31.7 $ 53.4 ================ =============== ============== </TABLE> TOTAL COMPANY REPORTED RESULTS Total second quarter 2001 sales were $695.4 million or $334.2 million higher than second quarter 2000 sales on a reported basis. Sales in the second quarter of 2001 for each business segment reflected continued weak demand across most markets but particularly in markets related to auto production. First half of 2001 sales were $1,405.1 13
15 million, $698.4 million more than first half 2000 on a reported basis. Second quarter and first half 2001 sales are below the same period in 2000 on a comparable pro forma basis, see pro forma commentary below. The operating income for the second quarter of 2001 was $16.8 million compared to income of $30.4 million in the second quarter of 2000. Operating income before special items, depreciation and amortization (OIBSIDA) was $44.3 million in the second quarter of 2001 and essentially flat with the second quarter of 2000. OIBSIDA was relatively the same for the second quarter of 2001 and 2000 due to a decrease in the performance in Resin & Intermediates of $13.7, which was offset primarily by the increase of $5.5 for Performance Platics and the inclusion of $7.6 for Elastomers & Additives. Second quarter 2001 OIBSIDA is below the same period in 2000 on a comparable pro forma basis, see commentary below. The operating loss for the first half of 2001 was $6.5 million versus $60.1 million operating profit during the first half of 2000 on a reported basis. OIBSIDA was $62.6 million in the first half of 2001 compared to $83.4 million in the first half of 2000. The primary driver for the lower results period to period was the deterioration of the Resin & Intermediates earnings by $44.6 million. TOTAL COMPANY RESULTS VERSUS 2000 PRO FORMA Total sales of $695.4 million in the second quarter 2001 were 17% below the pro forma second quarter of 2000. The decline in second quarter sales from 2000 pro forma to 2001 was across all business units and related to weakness in the underlying markets and the U.S. economy, in particular automotive and electronics. Automotive production was down 12% from the second quarter of 2000 to the second quarter of 2001. It is reported that demand in the domestic manufacturing sector is at the lowest level seen since the 1991 recession. Total sales for the first half of 2001 were $1,405.1 million versus $1,658.2 million for the first half of 2000 on a pro forma basis, a 15% decline. The year over year decline in sales reflects the tremendous change in the strength of the economy, particularly in the automotive and electronic markets. The housing market also weakened by 3% year over year. It is estimated that the sales volume decline from the first half of 2000 to the first half of 2001 negatively impacted operating income by approximately $70 million. The operating income in the second quarter of 2001 of $16.8 million was $35.3 million lower versus a pro forma second quarter 2000 income of $52.1. Second quarter 2001 OIBSIDA of $44.3 million was $38.5 million lower than second quarter 2000 pro forma OIBSIDA of $82.8 million. The first half 2001 operating loss was $6.5 million versus pro forma income of $103.2 in first half 2000 and the first half 2001 OIBSIDA was $62.6 million versus pro forma first half 2000 OIBSIDA of $160.0 million. The quarterly and half year decline in earnings in 2001 from 2000 pro forma results was driven by lower volume across all businesses and weaker results in the Resin & Intermediates equity earnings which were partially offset by cost reductions. BUSINESS SEGMENT INFORMATION Below is a summary of business segment information showing both the "Reported Results" for the three and six months ended June 30, 2001 and 2000 and the "Pro Forma Results" for the three and six months ended June 30, 2000. 14
16 <TABLE> <CAPTION> (Dollars in millions) Pro Forma Reported Results Results ---------------------------------------------- ------------------ Quarterly Results 2Q01 2Q00 2Q00 - ----------------- ---------------------- --------------- ------------------ <S> <C> <C> <C> Sales: Performance Plastics $ 484.6 $ 361.2 $ 586.4 Elastomers & Additives 105.8 - 122.9 Distribution 117.8 - 132.2 Resin & Intermediates - - - Other (12.8) - (8.5) ---------------------- --------------- ------------------ $ 695.4 $ 361.2 $ 833.0 ====================== =============== ================== Operating income (loss) before special items: Performance Plastics $ 17.2 $ 21.6 $ 32.5 Elastomers & Additives 3.2 - 7.0 Distribution - - 4.3 Resin & Intermediates 2.1 15.8 15.8 Other (4.1) (2.6) (3.1) ---------------------- --------------- ------------------ $ 18.4 $ 34.8 $ 56.5 ====================== =============== ================== Operating income (loss) before special items, depreciation and amortization: Performance Plastics $ 36.5 $ 31.0 $ 53.2 Elastomers & Additives 7.6 - 11.8 Distribution 0.9 - 5.1 Resin & Intermediates 2.1 15.8 15.8 Other (2.8) (2.6) (3.1) ---------------------- --------------- ------------------ $ 44.3 $ 44.2 $ 82.8 ====================== =============== ================== </TABLE> <TABLE> <CAPTION> Pro Forma Reported Results Results ---------------------------------------------- ------------------ Six Months Year-to-Date 1H01 1H00 1H00 - ----------------------- ---------------------- --------------- ------------------ <S> <C> <C> <C> Sales: Performance Plastics $ 973.4 $ 706.7 $1,154.4 Elastomers & Additives 215.5 - 255.8 Distribution 238.9 - 261.1 Resin & Intermediates - - - Other (22.7) - (13.1) ---------------------- --------------- ------------------ $ 1,405.1 $ 706.7 $1,658.2 ====================== =============== ================== Operating income (loss) before special items: Performance Plastics $ 24.2 $ 38.8 $ 58.1 Elastomers & Additives 5.9 - 16.4 Distribution 1.1 - 7.3 Resin & Intermediates (12.3) 32.3 32.3 Other (8.6) (6.6) (6.5) ---------------------- --------------- ------------------ $ 10.3 $ 64.5 $ 107.6 ====================== =============== ================== Operating income (loss) before special items, depreciation and amortization: Performance Plastics $ 62.5 $ 57.7 $ 99.5 Elastomers & Additives 14.6 - 25.8 Distribution 2.8 - 8.9 Resin & Intermediates (12.3) 32.3 32.3 Other (5.0) (6.6) (6.5) ---------------------- --------------- ------------------ $ 62.6 $ 83.4 $ 160.0 ====================== =============== ================== </TABLE> 15
17 COMMENTARY ON BUSINESS SEGMENT OPERATING RESULTS PERFORMANCE PLASTICS had second quarter 2001 sales of $484.6 million, which were 17% below pro forma second quarter 2000. A breakdown of the 2001 second quarter segment sales, by primary product group, is as follows: <TABLE> <CAPTION> % Change 2Q01 Sales vs. % of ------------ Sales 2Q00 PF ------------ ------------ <S> <C> <C> Vinyl Compounds 37% -23% Engineered Materials 19% -15% Color & Additives 21% -15% Specialty Resin & Formulators 14% -12% Engineered Films 9% -14% ------------ ------------ Performance Plastics 100% -17% ============ ============ </TABLE> International sales comprised 19% of the Performance Plastics segment. International sales decreased in the second quarter of 2001 by 11% from second quarter pro forma 2000. The second quarter decrease from pro forma 2000 to 2001 was due to European automotive and electronic market weakness, an unfavorable EURO exchange impact of 6% and Asian weakness related to lower export sales and to the electronics industry slowdown. International sales were 20% of Performance Plastics for the first half of 2001, down 4% in total revenue from pro forma first half 2000. The total Performance Plastics segment's 17% lower second quarter 2001 sales versus pro forma 2000 was driven primarily by lower US auto production and electronics market (wire and cable and business machines). In addition the strength of PVC resin during the second quarter 2000 drove even higher the compound demand as customers switched to powder compounds when resin was not available, which also impacted the mix of products and selling prices. The decrease in powder compounds sales of 32% from second quarter 2000 to second quarter 2001 was an important factor in the 23% drop in vinyl compounds sales from second quarter 2000 to second quarter 2001. Total Performance Plastics segment's first half sales of $973.4 million was 16% below 2000 first half pro forma sales driven primarily by automotive production (down 15% year over year) and the electronics markets. Year to year sales were also reduced by housing starts averaging 3% lower for the first half of 2001 versus the first half of 2000 which impacted sales to applications such as wire and cable, windows and flooring. OIBSIDA was $36.5 million in the second quarter of 2001 and $16.7 million below pro forma second quarter of 2000. OIBSIDA for the first half of 2001 was $62.5 million, a $37.0 million decline from the pro forma first half of 2000. Compared to 2000, the 2001 second quarter and half year decrease in OIBSIDA was primarily sales volume driven. ELASTOMERS & PERFORMANCE ADDITIVES sales were $105.8 million in the second quarter of 2001. The second quarter 2001 sales were 14% below the pro forma second quarter 2000 and first half 2001 sales of $215.5 million were 16% below pro forma first half 2000. In both cases, the change from the period a year ago was primarily driven by reduced domestic automotive production and tire tolling impacting both the elastomers and the performance additives markets. OIBSIDA in the second quarter of 2001 was $7.6 million compared to $11.8 million in the pro forma second quarter of 2000. Second quarter 2001 earnings versus pro forma second quarter 2000 earnings were lower primarily due to the decrease in auto related shipments. Continuing "LEAN" manufacturing initiatives have resulted in lower manufacturing costs versus last year, but have not been enough to offset the lower volumes. OIBSIDA in the first half of 2001 was $14.6 million versus $25.8 million in the pro forma first half of 2000, again related to automotive production declines and economic conditions reducing demand. 16
18 DISTRIBUTION sales in the second quarter of 2001 were $117.8 million and 11% below pro forma second quarter 2000. Sales in the first half of 2001 were $238.9 million, 9% below the same pro forma period last year. The change year over year for both the quarter and the half year was driven by volume declines. OIBSIDA in the second quarter of 2001 was $0.9 million and $4.2 million below pro forma second quarter of 2000. OIBSIDA in the first half of 2001 was $2.8 million, $6.1 million lower than the same pro forma period last year. Year over year changes for the quarter and half year were driven by lower sales volumes and margins, partially offset by cost benefits related to consolidating facilities. RESIN & INTERMEDIATES (R&I) operating income before special items, consisting of equity income from joint ventures, allocated overhead support cost and cost associated with past operations was $2.1 million for the second quarter of 2001. The 2001 second quarter operating income was $13.7 million lower than the pro forma second quarter 2000 earnings, due primarily to decreased earnings from PolyOne's 24% investment in OxyVinyls. PolyOne's equity earnings from OxyVinyls in the second quarter 2001 and pro forma second quarter 2000 was income (before special charges) of $5.3 million and $16.7 million, respectively. The first half 2001 operating income for the resins and intermediates business segment was a loss of $12.3 million, a $44.6 million decline from the same period last year. The primary change was OxyVinyls' results driven by lower PVC resin volumes and margins as well as substantially higher energy costs that adversely affected OxyVinyls' chlor-alkali business. Domestic PVC resin industry demand continued to be weak as effective capacity utilization approximated 87% in second quarter 2001 compared to 97% in the second quarter of 2000. Domestic PVC resin industry capacity utilization for the first half of 2001 was 88% compared to 97% in the first half of 2000. During the second quarter of 2001 versus second quarter 2000, lower capacity utilization resulted in lower average domestic PVC resin price of approximately $0.06/lb. However, the lower second quarter 2001 resin selling price was offset by lower ethylene and chlorine cost, resulting in industry resin spreads (selling prices of PVC resin less the cost of ethylene and chlorine) that were slightly above the same quarter last year. The lower second quarter 2001 OxyVinyls' earnings versus a year ago resulted primarily from lower sales demand and increased natural gas cost. Higher natural gas cost negatively impacted the quarter's equity earnings by approximately $3 million versus second quarter 2000. OTHER consists primarily of corporate governance costs that are not allocated to business segments. These unallocated costs before special items were $4.1 million in the second quarter of 2001 and $8.6 million for the first six months of 2001. CAPITAL RESOURCES AND LIQUIDITY For the first half of 2001, the Company generated $229.4 million of cash from operating and investing activities. Operating activities contributed $258.6 million of cash driven by a $236.0 million reduction in operating working capital. The reduction in operating working capital was comprised of a $143.9 million increase in the sale of accounts receivable plus a $92.1 million reduction that resulted from management initiatives. Approximately one-half of the capital expenditures in the first six months of 2001 were in support of three key initiatives: projectOne (common SAP system platform), Smart$ource (leveraging indirect or non-material purchases with ARIBA software) and Performance Plastics manufacturing reconfiguration. During the first half of 2001, the Company's accounts receivable sale facility was increased to $250 million. As of June 30, 2001, $244 million of this facility was being utilized. During the quarter ended June 30, 2001, the Company obtained amendments to the October 2000 revolving credit agreements, which resulted in a $100 million reduction in available borrowings from an aggregate $400 million to $300 million, effectively offsetting some of the increase in the receivable sale facility. Capital expenditures for 2001 are projected to be between $80 million and $85 million. Management intends to continue to fund key strategic initiatives, such as projectOne, reconfiguring the manufacturing assets of the Performance Plastics business, and Smart$ource. Cash used by financing activities during the first half of 2001 reflect a reduction in short-term debt and the payment of dividends. 17
19 For the foreseeable future, the Company believes it will have sufficient funds from operations and existing credit facilities and other available permitted borrowings to support dividends, debt service requirements, and normal capital and operating expenditures. ENVIRONMENTAL MATTERS The Company is subject to various laws and regulations concerning environmental matters. The Company is committed to a long-term environmental protection program that reduces releases of hazardous materials into the environment as well as to the remediation of identified existing environmental concerns. The Company has been notified by federal and state environmental agencies and by private parties that it may be a potentially responsible party in connection with several environmental sites. The Company has accrued $56.9 million to cover future environmental remediation expenditures, and does not believe any of the matters either individually or in the aggregate will have a material adverse effect on its capital expenditures, earnings, cash flow or liquidity. The accrual represents the Company's best estimate for the remaining remediation costs, based upon information and technology currently available. Depending upon the results of future testing and the ultimate remediation alternatives taken at these sites, it is possible that the ultimate costs to be incurred could be more or less than the accrual at June 30, 2001, by as much as $19.0 million or $15.0 million, respectively. Certain factors that may affect these forward-looking comments are discussed under "Cautionary Note on Forward-Looking Statements." Additional information related to the Company's environmental liabilities is included in Note N to the consolidated financial statements incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 2000. CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS This Report on Form 10-Q contains statements concerning trends and other forward-looking information affecting or relating to PolyOne Corporation and its industries that are intended to qualify for the protections afforded "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from such statements for a variety of factors including, but not limited to: (1) the risk that the former Geon and Hanna businesses will not be integrated successfully; (2) an inability to achieve or delays in achieving savings related to the consolidation and restructuring programs; (3) unanticipated delays in achieving or inability to achieve cost reduction and employee productivity goals; (4) costs related to the consolidation of Geon and Hanna; (5) 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; (6) unanticipated changes in world, regional or U.S. plastic, rubber and PVC consumption growth rates affecting the Company's markets; (7) unanticipated changes in global industry capacity or in the rate at which anticipated changes in industry capacity come online in the PVC, VCM, chlor-alkali or other industries in which the Company participates; (8) fluctuations in raw material prices and supply, in particular, fluctuations outside the normal range of industry cycles; (9) unanticipated production outages or material costs associated with scheduled or unscheduled maintenance programs; (10) unanticipated delay in realizing, or inability to realize, expected cost savings from acquisitions; (11) unanticipated costs or difficulties and delays related to the operation of the joint venture entities; (12) lack of day-to-day operating control, including procurement of raw material feedstocks, of the OxyVinyls partnership; (13) lack of direct control over the reliability of delivery and quality of the primary raw materials utilized in the Company's products; and (14) partial control over investment decisions and dividend distribution policy of the OxyVinyls partnership. 18
20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company 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 the Company's management of the exposure is included in "Management's Analysis - Consolidated Balance Sheets" in the 2000 Annual Report under the caption "Market Risk Disclosures" incorporated by reference from the Company's Annual Report on Form 10-K. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on May 2, 2001. As described in the 2001 Proxy Statement, the following action was taken: a) The eleven nominees for directors were elected. The votes for directors were as follows: <TABLE> <CAPTION> Number of Shares Number of Share Voted For Votes Withheld ---------------- --------------- <S> <C> <C> James K. Baker 84,609,391 912,626 J. Douglas Campbell 84,617,551 904,466 Carol A. Cartwright 84,499,293 1,022,724 Gale Duff-Bloom 84,600,631 921,386 Wayne R. Embry 84,573,091 948,926 Robert A. Garda 84,614,824 907,193 Gordon D. Harnett 84,651,047 906,970 David H. Hoag 84,602,117 919,900 D. Larry Moore 84,616,222 905,795 Thomas A. Waltermire 84,612,347 909,670 Farah M. Walters 84,599,395 922,622 </TABLE> ITEM 5. OTHER INFORMATION: None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits: See exhibit index on page 21. (b) Reports on Form 8-K from April 1, 2001 through June 30, 2001: - Form 8-K filed on April 3, 2001 announcing a restructuring of the business and manufacturing functions of the engineered films manufacturing operations. 19
21 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. August 14, 2001 POLYONE CORPORATION /s/ W. D. Wilson ---------------- W. D. Wilson Vice President and Chief Financial Officer (Authorized Officer and Principal Financial Officer) /s/ G. P. Smith --------------- G. P. Smith Corporate Controller and Assistant Treasurer (Principal Accounting Officer) 20
22 <TABLE> <CAPTION> Exhibit Index ------------- Exhibit No. Form 10-Q Under Reg. Exhibit S-K, Item 601 No. Description of Exhibit - ------------------ --------------- ---------------------------------------------------------------------- <S> <C> <C> <C> <C> (4) 4(A) Amendment No.1 to the Five-Year Credit Agreement dated March 31, 2001 between the Company, Citicorp USA and the other banks signatory thereto a copy of which will be provided to the Commission upon request. (4) 4(B) Amendment No. 1 to the 364-Day Credit Agreement dated March 31, 2001 between the Company, Citicorp USA and the other banks signatory thereto a copy of which will be provided to the Commission upon request. </TABLE> 21