2008 ANNUAL REPORT
PolyOne Corporation, with annual revenues of more than
$2.7 billion, is a leading global provider of specialized
polymer materials, services and solutions. Headquartered
outside of Cleveland, Ohio, U.S.A., PolyOne has operations
around the world. See www.polyone.com for additional
information.
our vision
PolyOne will be the world’s premier provider
of specialized polymer materials, services
and solutions.
our strategy
PolyOne is executing a transformational strategy
that consists of four core components:
Specialization differentiates us through value-
creating offerings that extend beyond products
to help customers who care about service,
technology and problem solving.
Globalization takes us into high-growth markets
where our customers are migrating, and positions
us to serve them with consistency everywhere
in the world.
Operational excellence empowers us to respond
to the voice of the customer with a relentless focus
on continuous improvement in everything we do.
Commercial excellence governs our activities
in the marketplace, where we deliver value to
customers by showing them how they can
increase their profits and grow.
In this annual report, 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. Factors that could cause our actual results
to differ materially from those implied by the forward-looking statements are described in detail on page 2 of the Form 10-K.
PolyOne is a company that lives by a simple ideal:
helping customers succeed by providing them the
technologies, services and solutions they need
industries
+ applications
to make them more competitive and to help them
grow in the global economy.
This list shows the industries we serve, with representative end-use applications.
HEALTHCARE
Medical Devices ■ Equipment ■ Pharmaceutical Packaging ■ Wellness
ELECTRICAL & ELECTRONICS
Business Machines ■ Electrical Equipment ■ Electronic Equipment ■ Power Transfer ■ Lighting
APPLIANCE
Large Appliances ■ Small Appliances
INDUSTRIAL
Agriculture ■ Fluid Handling ■ Material Handling
WIRE & CABLE
Automotive ■ Aerospace ■ Construction ■ Electrical/Electronic ■ Power/Telecommunications
BUILDING & CONSTRUCTION
Decking/Railing ■ Flooring ■ Pipe Fittings ■ Siding Trim ■ Windows/Doors ■ Window Treatments
TEXTILES
Apparel ■ Carpets ■ Fabrics
TRANSPORTATION
Mass Transit ■ Automotive ■ Trucking ■ Recreational Vehicles ■ Aerospace
PACKAGING
Food & Beverage ■ Personal Care
CONSUMER
Disposables ■ Durables ■ Sports/Leisure
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To Our Shareholders
Stephen D. Newlin Chairman, President and Chief Executive Officer
After more than 30 years in the chemical industry, 2008 was unlike any period
I have ever experienced. PolyOne was challenged to add value in a year that
consisted of two completely distinct and radically different halves; for that reason,
our annual report is about the value we strive to create for all of our stakeholders.
Our value formula for success is straightforward and it is
Regardless of the global economic conditions, our
defined by PolyOne’s commitment to our customers, share-
overall success and accomplishments in 2008 benefitted
holders, employees and communities. Our ability to execute
from improved execution of our specialization, globalization,
our strategy is on the rise, even if our stock price is not
operational excellence and commercial excellence initia-
following the same trajectory. Although I am disappointed
tives. I am proud that we delivered year-end results, before
that the returns we have delivered to our shareholders falls
special items, that equaled our prior-year performance, an
below our potential, I remain steadfast in my belief that
outcome made possible by our four-pillar strategy and the
our strategy provides a strong foundation for long-term
determination and first-rate work of PolyOne’s people.
value creation.
Early in the year, we made two significant additions to
In the first half of the year, we experienced numer-
PolyOne. On January 2, 2008, we acquired GLS Corporation,
ous triumphs that clearly demonstrated the effectiveness
the leading North American provider of specialty thermo-
of our transformational strategy. During the second half,
plastic elastomer compounds (TPEs) for consumer and
the severity and scope of the economic downturn caused a
medical applications. Days later, we announced our
dramatic drop in order volume.
acquisition of Ngai Hing PlastChem Company Ltd.,
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a vinyl compounding business based in Dongguan, China.
and inefficiencies in our U.S. supply chain, we streamlined
In the early part of the year, we also established a color
our Company. By the end of 2008, we recognized further
development center in China to serve northern China
opportunities to produce immediate cost savings as we
and Korea, and a business development office in Japan.
began planning for a company-wide global restructuring
In addition, we initiated construction of a production and
announced in January 2009.
lab facility in Mumbai, India. With these new facilities,
In 2008, we also reorganized our reporting structure
our expanded footprint demonstrated our commitment
to better reflect the specialty company we aspire to be. Our
to globalization.
three strategic platforms became Specialty, Performance
We will remember 2008 as the year that our Specialty
Products and Solutions, and PolyOne Distribution. The
business became the largest portion of our operating
Specialty platform is comprised of the reportable segments
income. In 2005, it was just 2 percent of our total operating
International Color and Engineered Materials; Specialty
income; now it comprises 34 percent. The significance of
Engineered Materials; and Specialty Color, Additives and
this occurrence is twofold. First, it demonstrates PolyOne’s
Inks. An added benefit to this reorganization of our report-
movement away from commodity-driven markets and into
ing structure is that it provides greater transparency to
specialty markets. Second, the profitability of our Specialty
our shareholders.
business helped to offset the lower earnings associated
On the commercial front, we continued to upgrade,
with our Performance Products and Solutions business,
train, and equip our sales and marketing teams to suc-
which is experiencing depressed demand in key markets
cessfully operate and win in an increasingly competitive
such as housing and automotive.
environment. We have the strongest commitment to our
Our Specialty platform expanded as we recognized
customers and are obligated to help them build a com-
that we have a unique and important role to play in help-
petitive advantage through our value-added and innovative
ing our customers meet the growing consumer demand for
solutions. This level of customer service builds loyalty with
environmentally responsible products. PolyOne Sustainable
our customers. Whether a PolyOne associate interacts
Solutions includes numerous products that meet the high
with customers on a daily basis or not, every one of us
standards we set for sustainability, and we are partnering
knows that customers are our reason for being in business.
with industry leaders such as Archer Daniels Midland
Every level of our organization is laser-focused on providing
Company, Battelle and Eastman Chemical Company to de-
exceptional customer care.
velop new products in markets that are poised for growth.
This heightened level of customer service is paying off.
Leaner and More Efficient
I am proud that two of our three platforms – Distribution and
Throughout the year, we remained agile as we adapted
Specialty – had record years in 2008. In this increasingly
to the unprecedented changes in the economic environ-
difficult environment, Performance Products and Solutions
ment. First, we shifted toward leaner and more efficient
struggled because of plummeting demand in some of its
operations in July 2008 when we began to realign our
key end markets. However, deployment of Lean initiatives
manufacturing assets to improve product delivery systems
and an aggressive commercial strategy helped to offset
and inventory management. By removing excess capacity
the blows it was dealt throughout the year.
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Strong People, Strong Future
tide. To add long-term value for our shareholders, our current
We have the people and the skills that will help our
focus is on conserving cash, liquidity, and working capital.
company outperform the competition and seize the growth
Fortifying PolyOne now will ensure that when times are
opportunities that are available in a $30 billion market.
better, we will be positioned to resume the significant
With a few recent additions to our already strong global
progress we were making toward delivering our full value.
management team – we recruited Robert M. Patterson as
Although the timeline for realizing our vision will length-
senior vice president and chief financial officer, and we re-
en, the goals remain the same. In fact, our commitment to
cruited and promoted several new general managers to fill
them has grown stronger. I am certain that our strategy
positions around the world – I am confident we have assem-
is the right one because it has been tested in both good
bled one of the best management teams in our industry.
times and bad, proving its soundness and ability to drive us
As skilled as our management team is, none of us had
toward our vision of becoming the world’s premier provider
experience with the type of rapid economic decline we saw
of specialty polymer materials, services and solutions.
in 2008. During the recent global financial crisis, we have
If last year was a story of two halves, we are prepared
seen some of the world’s most historically strong compa-
for 2009 to be a continuation of the second half of 2008.
nies stumble and we have seen some giants fall. While
PolyOne is tackling head-on the challenge of building on our
PolyOne did not get itself into this crisis, we do not intend
successes and demonstrating our value. Led by our skilled
to suffer the same fate. Our adherence to a proven strat-
management team and fueled by unflinching determination,
egy, strong execution skills, effective debt management,
a fresh perspective and relentless energy, we are up to the
business turnarounds and company-wide restructuring
task and we appreciate your support. You can count on us
initiatives will secure our future.
to be prudent and firm in our commitment to create value.
The economic downturn has altered the foundation
of the global economy as it influences current and future
consumption habits, changing both our Company and the
markets we serve. For that reason, late last year we began
to expand on our previously successful Lean initiatives to
Chairman, President and Chief Executive Officer
Stephen D. Newlin
include Lean Six Sigma. We are focusing on improving both
our internal and customer-facing processes to ensure that
March 18, 2009
we emerge stronger, leaner, and more specialized.
The momentum we were building as our strategy was
taking hold was abruptly interrupted by falling demand
last year. As I write this letter, our Company continues to
make adjustments in response to the changing economic
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PolyOne = Value
Value for customers, shareholders,
employees and communities. Whether
collaborating with customers to meet
their needs … implementing our
strategy to improve profitability and
performance … providing career growth
opportunities to our associates …
or embracing our role in sustaining
the world … PolyOne has the winning
formula to create significant and
lasting value.
value =
science + collaboration2
on-time
delivery performance*
vitality index % of sales
from products launched
in the last five years
81%
95%
%
8
1
%
3
1
%
1
1
05
08
*North America
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Value for customers is driven by our ability to
most pressing business and market challenges. We combine
understand and meet their needs in meaningful, measurable
this awareness with our polymer technology expertise and
economic terms. The people of PolyOne devote their world-
unsurpassed dedication to global responsiveness to develop
class science and polymer industry expertise to providing
a pipeline of value-added solutions targeted at helping
specialized products and services for our diverse customers
customers win.
around the world. We strive to collaborate with customers
Our No Surprises PledgeSM assures customers that our
to develop an in-depth understanding of their profit drivers
products contain only materials that conform to legal and
so we may focus on delivering tailored solutions that create
regulatory guidelines, and that we are committed to devel-
real value.
oping solutions that support our customers’ sustainability,
Our approach begins with a unique economic value
profit and growth goals.
assessment process and a clear analysis of our customers’
value =
science + collaboration2
Smooth tactile finish, ergonomics and aesthetic appeal are among
the key performance attributes that define the GLS Versaflex TPE used
on this highly innovative sewing tool (right). PolyOne custom-formulates
high performance compounds to exacting requirements, which help cus-
tomers develop unique, value-creating products.
value =
strategy performance
specialty platform
operating income % of total operating income
before corporate eliminations
revenue growth from
healthcare industry $ in millions
2%
34%
$180
$115
61%
growth
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Value for shareholders is guided by our strat-
processors in that country; and we increased our presence
egy, achieved through our high performance standards,
in China with the acquisition of a vinyl compounds business
and supported by our solid balance sheet. PolyOne creates
and the opening of a third color development center.
shareholder value by concentrating on four strategic areas:
Commercial Excellence – One of PolyOne’s competi-
Specialization – Our Specialty businesses continue
tive advantages is that we provide quantifiable solutions
to grow as a result of our shift in focus to higher-value-added
to help our customers realize their growth and profit
products in growth markets such as healthcare, electronics,
improvement objectives. In order to better communicate
consumer goods and packaging. We are leveraging our
the value of PolyOne offerings, we constantly upgrade the
leading knowledge of polymers, formulations and process-
skills and talent of our sales and marketing teams to focus
ing to power the Company’s growth engine.
on profitable market opportunities and programs of value-
Globalization – Our expanding geographic footprint and
added impact for our customers.
cross-selling capabilities enable us to provide consistent
Operational Excellence – Our ongoing objective is
quality and value to our global customers anywhere in the
to enhance productivity, profitability and efficiency through-
world. In 2008, we announced construction of a facility to
out our business. In the past year, we have reduced
import, manufacture and sell products in India and its sur-
manufacturing assets and realigned capacity to improve
rounding markets; we established a new presence in Japan
competitiveness. Starting in 2006, we have also seen
to focus on serving equipment manufacturers and polymer
dramatic improvements in on-time delivery rates.
value =
strategy performance
These drug vial stoppers allow hypodermic needle access without in-
troducing contamination and must reseal each and every time a needle
is inserted. PolyOne’s custom formulated GLS Thermoplastic Elastomer
meets the highly specialized and demanding needs of this critical health-
care application.
value =
growth + opportunities
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Value for employees includes supporting personal
PolyOne is dedicated to providing a safe and dynamic
growth and career opportunities for our people, while
working environment. Sustaining a stellar safety record
ensuring that the customer remains the focus of everything
continues to be a top priority of our operational excellence
we do. “Customer First” is the mantra of our associates
initiative. To foster professional development, we offer
who work in customer-facing activities, as well as those
numerous opportunities for learning, including programs
who provide operational support. We realize that the work
offered through PolyOne Academy to enhance skills in areas
of every individual and team contributes to the overall
such as leadership, project management and customer-
value our customers place on the quality of our products,
centric selling.
services and operations.
value =
growth + opportunities
safety record
for 2008
best-in-class
1.1*
industry**
average: 6.4
*PolyOne incident rate per 100 employees
**plastics and rubber products manufacturing
PolyOne Academy provides training to associates around the world. More
than 300 e-learning classes are available, as well as classroom-based
seminars and courses offered through local colleges and universities.
In 2008, more than 89 percent of associates who work in business devel-
opment participated in customer-centric selling courses.
value =
sustainability
+ commitment
one world
Value for communities involves embracing our
defined standards for sustainability – those which are
responsibility to the planet through our commitment to
renewable, recyclable, reusable, made of eco-conscious
sustainability. We recognize that we only have one world
alternative materials, or which provide other benefits such
and our actions have consequences. As a premier provider
as resource-efficient production, weight reduction, faster
of specialized polymer materials, services and solutions,
cycle times or lower energy consumption.
PolyOne is committed to meeting the needs of the present
Our associates are encouraged to devote their time and
without compromising future generations. We create value
talent to industry and community organizations. PolyOne
for our customers, associates, communities and share-
supports these efforts through corporate donations and
holders through our dedication to ethical, sustainable and
by encouraging our leaders to serve in volunteer board
fiscally responsible principles.
of director positions to provide fiscal and management
We have created the PolyOne Sustainable Solutions
guidance to organizations that benefit the communities in
brand to denote products or services that meet our
which we operate.
waste reduction
program millions of pounds
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The Frost & Sullivan Green Excellence of the
Year Award recognizes PolyOne for leadership
in the development of sustainable programs and
services. This award underscores PolyOne’s
strategic
focus on
innovative sustainable
solutions which benefit both customers and
the environment.
United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-K
¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the Securities Exchange Act of 1934
For the transition period from
to
.
Commission file number 1-16091
PolyOne Corporation
(Exact name of registrant as specified in its charter)
Ohio
(State or other jurisdiction of
incorporation or organization)
33587 Walker Road,
Avon Lake, Ohio
(Address of principal executive offices)
34-1730488
(IRS Employer Identification No.)
44012
(Zip Code)
Registrant’s telephone number, including area code
(440) 930-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $.01 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes n
No ¥
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes n
No ¥
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject
the past
90 days. Yes ¥
to such filing requirements for
No n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¥
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer n
Accelerated filer ¥
Non-accelerated filer n
Smaller reporting company n
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes n
No ¥
The aggregate market value of the registrant’s outstanding common stock held by non-affiliates on June 30, 2008,
determined using a per share closing price on that date of $6.97, as quoted on the New York Stock Exchange, was
$638,671,332.
The number of shares of common stock outstanding as of February 19, 2009 was 92,356,154.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference certain information from the registrant’s definitive
Proxy Statement with respect to the 2009 Annual Meeting of Shareholders.
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PART I
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
In this Annual Report on Form 10-K, statements that are not
reported financial results or other historical information are “for-
ward-looking statements” within the meaning of the Private Secu-
rities Litigation Reform Act of 1995. Forward-looking statements
give current expectations or forecasts of future events and are not
guarantees of future per formance. They are based on manage-
ment’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 connec-
tion with any discussion of future operating or financial per for-
these include statements
mance and/or sales.
relating to future actions; prospective changes in raw material
costs, product pricing or product demand; future per formance;
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:
In particular,
(cid:129) the effect on foreign operations of currency fluctuations,
tariffs and other political, economic and regulatory risks;
(cid:129) changes in polymer consumption growth rates where Poly-
One conducts business;
(cid:129) 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;
(cid:129) fluctuations in raw material prices, quality and supply and in
energy prices and supply;
(cid:129) production outages or material costs associated with sched-
uled or unscheduled maintenance programs;
(cid:129) unanticipated developments that could occur with respect to
contingencies such as litigation and environmental matters,
including any developments that would require any increase
in our costs and/or reserves for such contingencies;
(cid:129) an inability to achieve or delays in achieving or achievement
of less than the anticipated financial benefit from initiatives
related to PolyOne’s specialization strategy, operational
excellence initiatives, cost reductions and employee produc-
tivity goals;
(cid:129) an inability to raise or sustain prices for products or services;
(cid:129) an inability to maintain appropriate relations with unions and
employees;
(cid:129) the possibility that the degradation in the North American
is more severe than
building and construction market
anticipated;
(cid:129) the timing of plant closings in connection with the recently
announced manufacturing realignments;
(cid:129) separation and severance amounts that differ from original
estimates because of the timing of employee terminations;
(cid:129) amounts for non-cash charges relating to property, plant and
equipment that differ from the original estimates because of
the ultimate fair market value of such property, plant and
equipment;
(cid:129) amounts required for capital expenditures at remaining loca-
tions changing based on the level of expenditures required to
shift production capacity;
(cid:129) our ability to realize anticipated savings and operational
including those
benefits from our realigning of assets,
related to closure of certain production facilities;
(cid:129) disruptions, uncertainty or volatility in the credit markets
that may limit our access to capital;
(cid:129) other factors affecting our business beyond our control,
including, without limitation, changes in the general econ-
omy, changes in interest rates and changes in the rate of
inflation; and
(cid:129) other factors described in this Annual Repor t on Form 10-K
under Item 1A, “Risk Factors.”
We cannot guarantee that any forward-looking statement will
be realized, although we believe we have been prudent in our plans
and assumptions. Achievement of future results is subject to risks,
uncertainties and 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 state-
ments, whether as a result of new information, future events or
otherwise, except as otherwise required by law. You are advised,
however, to consult any further disclosures we make on related
subjects in our reports on Forms 10-Q, 8-K and 10-K furnished to
the SEC. You should understand that it is not possible to predict or
identify all risk factors. Consequently, you should not consider any
such list to be a complete set of all potential risks or uncertainties.
ITEM 1. BUSINESS
Business Overview
We are a premier provider of specialized polymer materials, ser-
vices and solutions with operations in thermoplastic compounds,
specialty polymer formulations, color and additive systems, ther-
moplastic resin distribution and specialty polyvinyl chloride (PVC)
resins. We also have three equity investments: one in a manufac-
turer of caustic soda and chlorine; one in a manufacturer of PVC
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compound products; and one in a formulator of polyurethane com-
pounds. When used in this Annual Report on Form 10-K, the terms
“we,” “us,” “our” and the “Company” mean PolyOne Corporation
and its subsidiaries.
We are incorporated in Ohio and our headquarters are in Avon
Lake, Ohio. We employ approximately 4,400 people and have 46
manufacturing sites and 11 distribution facilities in North America,
Europe and Asia, and joint ventures in North America and
South America. We offer more than 35,000 polymer solutions to
over 10,000 customers across the globe. In 2008, we had sales of
$2.7 billion, 37% of which were to customers outside the United
States.
We provide value to our customers through our ability to link our
knowledge of polymers and formulation technology with our manu-
facturing and supply chain processes to provide an essential link
between large chemical producers (our raw material suppliers) and
designers, assemblers and processors of plastics (our customers).
We believe that large chemical producers are increasingly outsourc-
ing less-than-railcar business; polymer and additive producers need
multiple channels to market; processors continue to outsource
compounding; and international companies need suppliers with
global reach. Our goal is to provide our customers with specialized
material and service solutions through our global reach, product
platforms, low-cost manufacturing operations, a fully integrated
information technology network, broad market knowledge and raw
material procurement leverage. Our end markets are primarily in the
building and construction materials, wire and cable, transpor tation,
durable goods, packaging, electrical and electronics, medical and
telecommunications markets, as well as many
industrial
applications.
PolyOne was formed on August 31, 2000 from the consolida-
tion of The Geon Company (Geon) and M.A. Hanna (Hanna). Geon’s
roots date back to 1927 when BFGoodrich scientist Waldo Semon
produced the first usable vinyl polymer. In 1948, BFGoodrich cre-
ated a vinyl plastic division that was subsequently spun off through
a public offering in 1993, creating Geon, a separate publicly-held
company. Hanna was formed in 1885 as a privately-held company
and became publicly-held in 1927. In the mid-1980s, Hanna began
to divest its historic mining and shipping businesses to focus on
polymers. Hanna purchased its first polymer company in 1986 and
completed its 26th polymer company acquisition in 2000.
Recent Developments
Purchase of businesses
In January 2008, we acquired 100% of the outstanding capital stock
of GLS Corporation (GLS), a global provider of specialty thermoplas-
tic elastomer (TPE) compounds for consumer, packaging and med-
ical applications.
Polymer Industry Overview
Polymers are a class of organic materials that are generally pro-
duced by converting natural gas or crude oil derivatives into
monomers, such as ethylene, propylene, vinyl chloride and styrene.
These monomers are then polymerized into chains called polymers,
or plastic resin, in its most basic form. Large petrochemical com-
panies, including some in the petroleum industry, produce a major-
ity of the monomers and base resins because they have direct
access to the raw materials needed for production. Monomers
make up the majority of the variable cost of manufacturing the base
resin. As a result, the cost of a base resin tends to move in tandem
with the industry market prices for monomers and the cost of raw
materials and energy used during production. Resin selling prices
can move in tandem with costs, but are largely driven by supply and
demand balances. Through our equity interest in SunBelt Chlor-
Alkali Partnership (SunBelt), we realize a portion of the economic
benefits of a base resin producer for PVC resin, one of our major raw
materials.
Thermoplastic polymers make up a substantial majority of the
resin market and are characterized by their ability to be reshaped
repeatedly into new forms after heat and pressure are applied.
Thermoplastics offer versatility and a wide range of applications.
The major types of thermoplastics include polyethylene, polyvinyl
chloride, polypropylene, polystyrene, polyester and a range of spe-
cialized engineering resins. Each type of thermoplastic has unique
qualities and characteristics that make it appropriate for use in a
particular product.
Thermoplastic resins are found in a number of end-use prod-
ucts and in a variety of markets, including packaging, building and
construction, wire and cable, transpor tation, medical, furniture and
furnishings, durable goods, institutional products, electrical and
electronics, adhesives, inks and coatings. Each type of thermoplas-
tic resin has unique characteristics (such as flexibility, strength or
durability) suitable for use in a particular end-use application. The
packaging industry, the largest consumer of plastics, requires
plastics that help keep food fresh and free of contamination while
providing a variety of options for product display, and offering
advantages in terms of weight and user-friendliness. In the building
and construction industry, plastic provides an economical and
energy efficient replacement for other traditional materials in piping
applications, siding, flooring, insulation, windows and doors, as well
as structural and interior or decorative uses. In the wire and cable
industry, thermoplastics serve to protect by providing electrical
insulation, flame resistance, durability, water resistance, and color
coding to wire coatings and connectors. In the transportation indus-
try, plastic has proved to be durable, lightweight and corrosion
resistant while offering fuel savings, design flexibility and high
per formance. In the medical industry, plastics help save lives by
safely providing a range of transparent and opaque thermoplastics
that are used for a vast array of devices including blood and intra-
venous bags, medical tubing, masks, lead replacement for radiation
shielding, clamps and connectors to bed frames, curtains and
sheeting, and electronic enclosures. In the electronics industry,
plastic enclosures and connectors not only enhance safety through
electrical insulation, but thermally and electrically conductive plas-
tics provide heat transferring, cooling, antistatic, electrostatic
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discharge, and electromagnetic shielding per formance for critical
applications including integrated circuit chip packaging.
with advanced polymer additive, reinforcement, filler, colorant and
biomaterial technologies.
Various additives can be combined with a base resin to provide
it with greater versatility and per formance. These combinations are
known as plastic compounds. Plastic compounds have advantages
over metals, wood, rubber and other traditional materials, which
have resulted in the replacement of these materials across a wide
spectrum of applications that range from automobile parts to con-
struction materials. Plastic compounds offer advantages compared
to traditional materials that include processability, weight reduction,
chemical resistance, flame retardance and lower cost. Plastics
have a reputation for durability, aesthetics, ease of handling and
recyclability.
PolyOne Segments
We operate within six reportable segments: International Color and
Engineered Materials; Specialty Engineered Materials; Specialty
Color, Additives and Inks; Per formance Products and Solutions;
PolyOne Distribution; and Resin and Intermediates. For more infor-
mation about our segments, see Note 17, Segment Information, to
the accompanying consolidated financial statements.
International Color and Engineered Materials:
The International Color and Engineered Materials operating seg-
ment combines the strong regional heritage of our color and additive
masterbatches and engineered materials operations to create glo-
bal capabilities with plants, sales and service facilities located
throughout Europe and Asia.
We operate 12 facilities in Europe (Belgium, France, Germany,
Hungary, Poland, Spain, Sweden and Turkey) and six facilities in
Asia (China, Singapore and Thailand).
Working in conjunction with our Specialty Color, Additives and
Inks and Specialty Engineered Materials operating segments, we
provide solutions that meet our international customers’ demands
for both global and local manufacturing, service and technical
support.
Our International Color and Engineered Materials segment had
sales to external customers of $587.4 million, with operating
income of $20.4 million, in 2008 and total assets of $341.2 million
as of December 31, 2008.
Specialty Engineered Materials:
The Specialty Engineered Materials operating segment is a leading
provider of custom plastic compounding services and solutions for
processors of thermoplastic materials across a wide variety of
markets and end-use applications including those that currently
employ traditional materials such as metal. Specialty Engineered
Materials’ product portfolio, one of the broadest in our industry,
includes standard and custom formulated high-per formance poly-
mer compounds that are manufactured using a full range of ther-
moplastic compounds and elastomers, which are then combined
With a depth of compounding expertise, we are able to expand
the per formance range and structural properties of traditional
engineering-grade thermoplastic resins that meet our customers’
unique per formance requirements. Our product development and
application reach is further enhanced by the capabilities of our
North American Engineered Materials Solutions Center, which pro-
duces and evaluates prototype and sample parts to help assess
end-use per formance and guide product development. Our manu-
facturing capabilities, which include a facility located in Avon Lake,
Ohio, are targeted at meeting our customers’ demand for speed,
flexibility and critical quality.
This segment also includes the business of GLS, which we
acquired in January 2008. GLS, which is headquar tered in McHenry,
Illinois, is a global developer of innovative TPE with facilities in
North America, Europe and China, and offers the broadest range of
soft-touch TPE materials in the industry.
Our Specialty Engineered Materials segment had total sales of
$252.3 million, of which sales to external customers were
$223.0 million, with operating income of $12.9 million, in 2008
and total assets of $215.8 million as of December 31, 2008.
Specialty Color, Additives and Inks:
The Specialty Color, Additives and Inks operating segment is a
leading provider of specialized color and additive concentrates as
well as inks and latexes.
Color and additive products include an innovative array of
colors, special effects and per formance-enhancing and eco-friendly
solutions. Our color masterbatches contain a high concentration of
color pigments and/or additives that are dispersed in a polymer
carrier medium and are sold in pellet, liquid, flake or powder form.
When combined with non pre-colored base resins, our colorants
help our customers achieve a wide array of specialized colors and
effects that are targeted at the demands of today’s highly design-
oriented consumer and industrial end markets. Our additive master-
batches encompass a wide variety of per formance enhancing char-
acteristics and are commonly categorized by the function that they
per form, such as UV stabilization, anti-static, chemical blowing,
antioxidant and lubricant, and processing enhancement.
Our colorant and additives masterbatches are used in most
plastics manufacturing processes,
including injection molding,
extrusion, sheet, film, rotational molding and blow molding through-
out the plastics industry, particularly in the packaging, transpor ta-
tion, consumer, outdoor decking, pipe and wire and cable markets.
They are also incorporated into such end-use products as stadium
seating, toys, housewares, vinyl siding, pipe, food packaging and
medical packaging.
This segment also provides custom-formulated liquid systems
that meet a variety of customer needs and chemistries, including
vinyl, natural rubber and latex, polyurethane and silicone. Products
include proprietary fabric screen-printing inks and latexes for
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diversified markets that
range from recreational and athletic
apparel, construction and filtration to outdoor furniture and health-
care. In addition, we have a 50% interest in BayOne Urethane
Systems, L.L.C. (BayOne), a joint venture between PolyOne and
Bayer Corporation, which sells liquid polyurethane systems into
many of the same markets.
Our Specialty Color, Additives and Inks segment had total sales
of $228.6 million, of which sales to external customers were
$225.8 million, with operating income of $13.5 million, in 2008
and total assets of $139.7 million as of December 31, 2008.
Performance Products and Solutions:
The Per formance Products and Solutions operating segment is a
global leader offering an array of products and services for vinyl
coating, molding and extrusion processors. Our product offerings
include: rigid, flexible and dry blend vinyl compounds; industry-
leading dispersion, blending and specialty suspension grade vinyl
resins; and specialty coating materials based largely on vinyl. These
products are sold to a wide variety of manufacturers of plastic parts
and consumer-oriented products. We also offer a wide range of
services to the customer base utilizing these products to meet the
ever changing needs of our multi-market customer base. These
services include materials testing and component analysis, custom
compound development, colorant and additive services, design
assistance, structural analyses, process simulations and extruder
screw design.
Much of the revenue and income for Per formance Products and
Solutions is generated in North America. However, production and
sales in Asia and Europe constitute a minor but growing portion of
this segment. In addition, we own 50% of a joint venture producing
and marketing vinyl compounds in Latin America.
Vinyl is one of the most widely used plastics, utilized in a wide
range of applications in building and construction, wire and cable,
consumer and recreation markets, transportation, packaging and
healthcare. Vinyl resin can be combined with a broad range of
additives, resulting in per formance versatility, particularly when fire
resistance, chemical resistance or weatherability is required. We
believe we are well-positioned to meet the stringent quality, service
and innovation requirements of this diverse and highly competitive
marketplace.
This operating segment also includes Producer Services, which
offers custom compounding services to resin producers and pro-
cessors that design and develop their own compound and master-
batch recipes. Customers often require high quality, cost effective
and confidential services. As a strategic and integrated supply chain
partner, Producer Services offers resin producers a way to develop
custom products for niche markets by using our compounding
expertise and multiple manufacturing platforms.
Our Per formance Products and Solutions segment had total
sales of $1,001.4 million, of which sales to external customers
were $910.9 million, with operating income of $34.9 million, in
2008 and total assets of $321.8 million as of December 31, 2008.
PolyOne Distribution:
The PolyOne Distribution operating segment distributes more than
3,500 grades of engineering and commodity grade resins, including
PolyOne-produced compounds, to the North American market.
These products are sold to over 5,000 custom injection molders
and extruders who, in turn, convert them into plastic parts that are
sold to end-users in a wide range of industries. Representing over
20 major suppliers, we offer our customers a broad product port-
folio, just-in-time delivery from multiple stocking locations and local
technical support.
Our PolyOne Distribution segment had total sales of
$796.7 million, of which sales to external customers were
$791.6 million, with operating income of $28.1 million, in 2008
and total assets of $149.8 million as of December 31, 2008.
Resin and Intermediates:
This segment consists almost entirely of our 50% equity interest in
SunBelt and our former 24% equity interest in OxyVinyls LP (Oxy-
Vinyls), through its disposition date of July 6, 2007. SunBelt, a
producer of chlorine and caustic soda, is a partnership with Olin
Corporation. OxyVinyls, a producer of PVC resins, vinyl chloride
monomer (VCM), and chlorine and caustic soda, was a partnership
with Occidental Chemical Corporation. In 2008, SunBelt had pro-
duction capacity of approximately 320 thousand tons of chlorine
and 358 thousand tons of caustic soda. Most of the chlorine
manufactured by SunBelt is consumed by OxyVinyls to produce
PVC resin. Caustic soda is sold on the merchant market to cus-
tomers in the pulp and paper, chemical, building and construction
and consumer products industries. We report the results of our
SunBelt joint venture under the equity method.
Our Resin and Intermediates segment had operating income of
$28.6 million in 2008 and had total assets of $7.3 million as of
December 31, 2008. We also received $29.5 million of cash from
dividends and distributions from our Resin and Intermediates seg-
ment equity affiliates in 2008.
Competition
The production of compounded plastics and the manufacture of
custom and proprietar y formulated color and additives systems for
the plastics industry are highly competitive. Competition is based
on speed, delivery, service, per formance, product innovation, prod-
uct recognition, quality and price. The relative importance of these
factors varies among our products and services. We believe that we
are the largest independent compounder of plastics and producer of
custom and proprietar y formulated color and additive masterbatch
systems in the United States and Europe, with a growing presence
in Asia. Our competitors range from large international companies
with broad product offerings to local
independent custom com-
pounders whose focus is a specific market niche or product
offering.
The distribution of polymer resin is also highly competitive.
Speed, delivery, service, brand recognition, quality and price are the
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principal factors affecting competition. We compete against other
national independent resin distributors in North America, along with
other regional distributors. Growth in the thermoplastic resin and
compound distribution market is directly correlated with growth in
the base polymer resins market.
We believe that the strength of our company name and repu-
tation, the broad range of product offerings from our suppliers and
our speed and responsiveness, coupled with the quality of products
and flexibility of our distribution network, allow us to compete
effectively.
Raw Materials
The primary raw materials used by our manufacturing operations
are PVC resin, VCM, polyolefin and other thermoplastic resins,
plasticizers, inorganic and organic pigments, all of which we believe
are in adequate supply. We have long-term supply contracts with
OxyVinyls under which the majority of our PVC resin and all of our
VCM is supplied. These contracts will expire in 2013, although they
contain two five-year renewal provisions that are at our option. We
believe these contracts should assure the availability of adequate
amounts of PVC resin and VCM. We also believe that the pricing
under these contracts provides PVC resins and VCM to us at a
competitive cost. We also periodically obtain raw materials from
foreign suppliers. See discussion of risks associated with raw
material supply and costs in Item 1A. Risk Factors.
Patents and Trademarks
We own and maintain a large number of U.S. and foreign patents
and trademarks that contribute to our competitiveness in the mar-
kets we serve because they protect our inventions and product
names against infringement by others. Patents exist for 20 years if
all fees are paid, and trademarks have an indefinite life based upon
continued use. While we view our patents and trademarks to be
valuable because of the broad scope of our products and services
and brand recognition we enjoy, we do not believe that the loss or
expiration of any single patent or trademark would have a material
adverse effect on our results of operations, financial position or the
continuation of our business. Nevertheless, we have implemented
management processes designed to protect our inventions and
trademarks.
Seasonality and Backlog
Sales of our products and services are slightly seasonal as demand
is generally slower in the first and fourth calendar quarters of the
year. Because of the nature of our business, we do not believe that
our backlog is a meaningful indicator of the level of our present or
future business.
Working Capital Practices
The nature of our business does not require us to carry significant
amounts of inventories to meet the delivery requirements for our
products or services or assure ourselves of a continuous allotment
of goods from suppliers. Our products are generally manufactured
with a short turnaround time, and the scheduling of manufacturing
activities from customer orders generally includes enough lead time
to assure delivery of an adequate supply of raw materials. We offer
payment terms to our customers that are competitive. We generally
allow our customers to return merchandise if pre-agreed quality
standards or specifications are not met; however, we employ quality
assurance practices that seek to minimize customer returns. Our
customer returns are immaterial.
Significant Customers
No customer accounts for more than 3% of our consolidated rev-
enues, and neither we nor any of our operating segments would
suffer a material adverse effect if we were to lose any single
customer.
Research and Development
We have substantial technology development capabilities. Our
efforts are largely devoted to developing new product formulations
to satisfy defined market needs, providing quality technical services
to evaluate alternative raw materials, assuring the continued suc-
cess of our products for customer applications, providing technol-
ogy to improve our products, processes and applications, and
providing support to our manufacturing plants for cost reduction,
productivity and quality improvement programs. We operate
research and development centers that support our commercial
development activities and manufacturing operations. These facil-
ities are equipped with state-of-the-ar t analytical, synthesis, poly-
mer characterization and testing equipment, along with pilot plants
and polymer compounding operations that simulate specific pro-
duction processes that allow us to rapidly translate new technolo-
gies into new products.
Our investment in product research and development was
$26.5 million in 2008, $21.6 million in 2007 and $20.3 million
in 2006. In 2009, we expect our investment in research and
development
to increase moderately as we deploy greater
resources to focus on material and service innovations.
Methods of Distribution
We sell products primarily through direct sales personnel, distrib-
utors, including our PolyOne Distribution segment, and commis-
sioned sales agents. We primarily use truck carriers to transpor t our
products to customers, although some customers pick up product
at our operating facilities or warehouses. We also ship some of our
manufactured products to customers by railroad cars.
Employees
As of February 1, 2009, we employed approximately 4,400 people.
Approximately 83 employees were represented by labor unions
under collective bargaining agreements that expire on July 31,
2010 (15 employees), October 31, 2010 (20 employees), Novem-
ber 30, 2010 (15 employees), January 31, 2011 (29 employees)
and May 31, 2013 (four employees). We believe that relations with
our employees are good, and we do not anticipate significant
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operating issues to occur as a result of current negotiations or when
we renegotiate collective bargaining agreements as they expire.
regulations, more stringent regulation of the use and disposal of
plastics may have an adverse effect on our business.
Environmental, Health and Safety
We are subject to various environmental laws and regulations that
apply to the production, use and sale of chemicals, emissions into
the air, discharges into waterways and other releases of materials
into the environment and the generation, handling, storage, trans-
portation, treatment and disposal of waste material. We endeavor
to ensure the safe and lawful operation of our facilities in the
manufacture and distribution of products, and we believe we are
in material compliance with all applicable laws and regulations.
We maintain a disciplined environmental and occupational
safety and health compliance program and conduct periodic internal
and external regulatory audits at our facilities to identify and cat-
egorize potential environmental exposures, including compliance
matters and any actions that may be required to address them. This
effort can result in process or operational modifications, the instal-
lation of pollution control devices or cleaning up grounds or facil-
ities. We believe that we are in material compliance with all
applicable requirements.
We are strongly committed to safety as evidenced by our injury
incidence rate of 1.09 per 100 full-time workers per year in 2008,
an improvement from 1.14 in 2007. The 2007 average injury
incidence rate for our NAICS Code (326 Plastics and Rubber Prod-
ucts Manufacturing) was 6.4.
In our operations, we must comply with product-related gov-
ernmental law and regulations affecting the plastics industry gen-
erally and also with content-specific law, regulations and non-
governmental standards. We believe that compliance with current
governmental laws and regulations and with non-governmental con-
tent-specific standards will not have a material adverse effect on
our financial position, results of operations or cash flows. The risk
of additional costs and liabilities, however, is inherent in certain
plant operations and certain products produced at these plants, as
is the case with other companies in the plastics industry. Therefore,
we may incur additional costs or liabilities in the future. Other
developments, such as increasingly strict environmental, safety
and health laws, regulations and related enforcement policies,
including those under the Restrictions on the Use of Certain Haz-
ardous Substances (RoHS) and the Consumer Product Safety Infor-
mation Act of 2008, the implementation of additional content-
specific standards, discovery of unknown conditions, and claims
for damages to property, persons or natural resources resulting
from plant emissions or products could also result in additional
costs or liabilities.
A number of foreign countries and domestic communities have
enacted, or are considering enacting, laws and regulations concern-
ing the use and disposal of plastic materials. Widespread adoption
of these laws and regulations, along with public perception, may
have an adverse impact on sales of plastic materials. Although
many of our major markets are in durable, longer-life applications
that could reduce the impact of these kinds of environmental
During 2004, the U.S. Environmental Protection Agency (EPA)
conducted multimedia audits at two of our facilities, pursuant to
which certain fines and penalties have been asserted by the EPA.
See Item 3., “Legal Proceedings”, for additional information.
We have been notified by federal and state environmental
agencies and by private parties that we may be a potentially respon-
sible party (PRP) in connection with the investigation and remedia-
tion of a number of environmental waste disposal sites. While
government agencies assert that PRPs are jointly and severally
liable at these sites, in our experience, interim and final allocations
of liability costs are generally made based on the relative contribu-
tion of waste. However, even when allocations of costs based on
relative contribution of waste have been made, we cannot assure
that our allocation will not increase if other PRPs do not pay their
allocated share of these costs.
Based on September 2007 court rulings (see Note 13, Com-
mitments and Related-Par ty Information, to the accompanying con-
solidated financial statements) in the case of Westlake Vinyls,
Inc. v. Goodrich Corporation, et al. and a settlement agreement
related to the former Goodrich Corporation (now owned by Westlake
Vinyls, Inc.) Calvert City facility, we recorded a charge during 2007 of
$15.6 million for past remediation costs payable to Goodrich Cor-
poration. We also adjusted our environmental reserve for future
remediation costs, a portion of which already related to the Calvert
City site, resulting in an additional charge of $28.8 million in 2007.
We incurred total environmental expenses of $14.6 million in
2008, $48.8 million in 2007 and $2.5 million in 2006. Our envi-
ronmental expense in 2008 was driven by higher utility cost esti-
mates necessary to support
remediation. Our environmental
expenses in 2007 were largely driven by the charges stemming
from the aforementioned Calvert City settlement and subsequent
reserve adjustment. Environmental expense is presented net of
insurance recoveries of $1.5 million in 2008 and $8.1 million in
2006. There were no insurance recoveries in 2007. The insurance
recoveries all related to inactive or formerly owned sites.
We also conduct investigations and remediation at certain of
our active and inactive facilities and have assumed responsibility for
the resulting environmental liabilities from operations at sites we or
our predecessors formerly owned or operated. We believe that our
potential continuing liability at these sites will not have a material
adverse effect on our results of operations or financial position. In
addition, we voluntarily initiate corrective and preventive environ-
mental projects at our facilities. Based on current information and
estimates prepared by our environmental engineers and consult-
ants, we had reserves as of December 31, 2008 on our accompa-
nying consolidated balance sheet totaling $84.6 million to cover
probable future environmental expenditures related to previously
contaminated sites. This figure represents our best estimate of
probable costs for remediation, based upon the information and
technology currently available and our view of the most likely
remedy.
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Depending upon the results of future testing, the ultimate
remediation alternatives undertaken, changes in regulations,
new information, newly discovered conditions and other factors,
it is reasonably possible that we could incur additional costs in
excess of the amount accrued at December 31, 2008. Such costs,
if any, cannot be currently estimated. We may revise our estimate of
this liability as new regulations or technologies are developed or
additional information is obtained.
We expect cash paid for environmental remediation expendi-
tures will be approximately $14 million in 2009.
International Operations
Our international operations are subject to a variety of risks, includ-
ing currency fluctuations and devaluations, exchange controls, cur-
rency restrictions and changes in local economic conditions. While
the impact of these risks is difficult to predict, any one or more of
them could adversely affect our future operations. For more infor-
mation about our international operations, see Note 17, Segment
Information, to the accompanying consolidated financial state-
ments, which is incorporated by reference into this Item 1.
Where You Can Find Additional Information
telephone number
Our principal executive offices are located at 33587 Walker Road,
Avon Lake, Ohio 44012, and our
is
(440) 930-1000. We are subject to the information reporting
requirements of the Exchange Act, and, in accordance with these
requirements, we file annual, quarterly and other reports, proxy
statements and other information with the SEC relating to our
business, financial results and other matters. The reports, proxy
statements and other information we file may be inspected and
copied at prescribed rates at the SEC’s Public Reference Room and
via the SEC’s website (see below for more information).
You may inspect a copy of the reports, proxy statements and
other information we file with the SEC, without charge, at the SEC’s
Public Reference Room, 100 F Street, N.E., Room 1580,
Washington, D.C. 20549, and you may obtain copies of the reports,
proxy statements and other information we file with the SEC, from
those offices for a fee. You may obtain information on the operation
the SEC at
of
1-800-SEC-0330. Our filings are available to the public at the SEC’s
website at http://www.sec.gov.
the Public Reference Room by
calling
Our Internet address is www.polyone.com. Our Annual Reports
on Form 10-K, Quarterly Repor ts on Form 10-Q, Current Reports on
Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
free of charge, on our website
of 1934 are available,
(www.polyone.com, select Investors and then SEC Edgar filings)
or upon written request, as soon as reasonably practicable after we
electronically file or furnish them to the SEC. These reports are also
available on the SEC’s website at www.sec.gov.
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ITEM 1A. RISK FACTORS
The following are certain risk factors that could affect our business,
financial position, results of operations or cash flows. These risk
factors should be considered along with the forward-looking state-
ments contained in this Annual Repor t on Form 10-K because these
factors could cause our actual results or financial condition to differ
materially from those projected in forward-looking statements. The
risks that are discussed below are not the only ones we face. If any
of the following risks occur, our business, financial position, results
of operations or cash flows could be negatively affected.
Demand for and supply of our products and services may be
adversely affected by several factors, some of which we cannot
predict or control, that could adversely affect our financial posi-
tion, results of operations or cash flows.
Several factors may affect the demand for and supply of our prod-
ucts and services, including:
(cid:129) economic downturns in the significant end markets that we
serve;
(cid:129) product obsolescence, technological changes that unfavor-
ably alter the value / cost proposition of our products and
services;
(cid:129) competition from existing and unforeseen polymer and non-
polymer based products;
(cid:129) declines in general economic conditions or reductions in
industrial production growth rates, both domestically and
globally, which could impact our customers ability to pay
amounts owed to us;
(cid:129) changes in environmental regulations that would limit our
ability to sell our products and services in specific
markets; and
(cid:129) inability to obtain raw materials or supply products to custom-
ers due to factors such as supplier work stoppages, supply
shortages, plant outages or regulatory changes that may limit
or prohibit overland transportation of certain hazardous mate-
rials and exogenous factors, like severe weather.
If any of these factors occur, the demand for and supply of our
products and services could suffer, which would adversely affect
our financial position, results of operations and cash flows.
Our manufacturing operations are subject to hazards and other
risks associated with polymer production and the related stor-
age and transportation of raw materials, products and wastes.
Our manufacturing operations are subject to the usual hazards and
risks associated with polymer production and the related storage
and transpor tation of raw materials, products and wastes. These
hazards and risks include, but are not limited to:
(cid:129) explosions, fires, inclement weather and natural disasters;
(cid:129) mechanical failure resulting in protracted or short duration
unscheduled downtime;
(cid:129) regulatory changes that affect or limit the transpor tation of
raw materials;
(cid:129) inability to obtain or maintain any required licenses or
permits;
(cid:129) interruptions and environmental hazards such as chemical
spills, discharges or releases of toxic or hazardous sub-
stances or gases into the environment or workplace; and
(cid:129) storage tank leaks or other issues resulting from remedial
activities.
The occurrence of any of these operating problems at our
facilities may have a material adverse effect on the productivity
and profitability of a particular manufacturing facility or on our
operations as a whole, during and after the period of these oper-
ating difficulties. These operating problems may also cause per-
sonal injury and loss of life, severe damage to or destruction of
property and equipment and environmental damage. We are subject
to present and potential future claims with respect to workplace
exposure, workers’ compensation and other matters. Although we
maintain property and casualty insurance of the types and in the
amounts that we believe are customary for the industry, we are not
fully insured against all potential hazards that are incident to our
business.
Extensive environmental, health and safety laws and regula-
tions impact our operations and assets, and compliance with
these regulations could adversely affect our financial position,
results of operations or cash flows.
Our operations on and ownership of real property are subject to
extensive environmental, health and safety laws and regulations at
the national, state and local governmental levels. The nature of our
business exposes us to risks of liability under these laws and
regulations due to the production, storage, transpor tation, recycling
or disposal and/or sale of materials that can cause contamination
or personal
injury if they are released into the environment or
workplace. Environmental laws may have a significant effect on
the costs of these activities involving raw materials, finished prod-
ucts and wastes. We may incur substantial costs, including fines,
damages, criminal or civil sanctions, remediation costs, or experi-
ence interruptions in our operations for violations of these laws.
Also, federal and state environmental statutes impose strict,
and under some circumstances, joint and several liability for the
cost of investigations and remedial actions on any company that
generated the waste, arranged for disposal of the waste, trans-
ported the waste to the disposal site or selected the disposal site,
as well as on the owners and operators of these sites. Any or all of
the responsible parties may be required to bear all of the costs of
clean up, regardless of fault or legality of the waste disposal or
ownership of the site, and may also be subject to liability for natural
resource damages. We have been notified by federal and state
environmental agencies and private parties that we may be a
potentially responsible party in connection with certain sites. We
may incur substantial costs for some of these sites. It is possible
that we will be identified as a potentially responsible party at more
sites in the future, which could result in our being assessed sub-
stantial investigation or cleanup costs.
We may also incur additional costs and liabilities as a result of
increasingly strict environmental, safety and health laws, regula-
tions and related enforcement policies, including those that restrict
the use of lead and phthalates under the Restriction on the Use of
Certain Hazardous Substances (RoHS) and the Consumer Product
Safety Information Act of 2008.
The European business community has adopted REACH, a
legislative act to cover Registration, Evaluation, Authorization and
Restriction of Chemicals. The goal of this legislation, which became
effective in June 2007, is to minimize risk to human health and to
the environment. We have a global team of experts to provide our
customers with compliance solutions to adapt to these regulations.
As these regulations evolve, we will endeavor to remain in compli-
ance with REACH.
We also conduct investigations and remediation at some of our
active and inactive facilities, and have assumed responsibility for
environmental
liabilities based on operations at sites formerly
owned or operated by our predecessors or by us.
We accrue costs for environmental matters that have been
identified when it is probable that these costs will be required and
when they can be reasonably estimated. However, accruals for
estimated costs, including, among other things, the ranges asso-
ciated with our accruals for future environmental compliance and
remediation, may be too low or we may not be able to quantify the
potential costs. We may be subject to additional environmental
liabilities or potential liabilities that have not been identified. We
expect that we will continue to be subject to increasingly stringent
environmental, health and safety laws and regulations. We antici-
pate that compliance with these laws and regulations will continue
to require capital expenditures and operating costs, which could
adversely affect our financial position, results of operations or cash
flows.
Because our operations are conducted worldwide, they are
inherently affected by risk.
As noted above in Item 1. “Business,” we have extensive operations
outside of the United States. Revenue from these operations (prin-
cipally from Canada, Mexico, Europe and Asia) was 37% in 2008,
37% in 2007 and 34% in 2006 of our total revenue during these
periods. Long-lived assets of our foreign operations represented
31% in 2008, 34% in 2007 and 32% in 2006 of our total long-lived
assets.
International operations are subject to risks, which include, but
are not limited to, the following:
(cid:129) changes in local government regulations and policies, includ-
ing, but not limited to foreign currency exchange controls or
monetary policy; repatriation of earnings; expropriation of
property; duty or tariff restrictions; investment limitations;
and tax policies;
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(cid:129) political and economic instability and disruptions, including
labor unrest, civil strife, acts of war, guerilla activities, insur-
rection and terrorism;
existing operations and in managing strategic investments could
occur. Furthermore, we may not realize the degree, or timing, of
benefits initially anticipated, which could adversely affect our busi-
(cid:129) legislation that regulates the use of chemicals;
ness, financial position, results of operations or cash flows.
(cid:129) disadvantages of competing against companies from coun-
tries that are not subject to U.S. laws and regulations,
including the Foreign Corrupt Practices Act (FCPA);
Our results of operations may be adversely affected by the
results of operations of SunBelt.
(cid:129) difficulties in staffing and managing multi-national operations;
SunBelt is our largest equity investment. The earnings of this
(cid:129) limitations on our ability to enforce legal rights and remedies;
(cid:129) reduced protection of intellectual property rights; and
(cid:129) other risks arising out of foreign sovereignty over the areas
where our operations are conducted.
In addition, we could be adversely affected by violations of the
FCPA and similar worldwide anti-briber y laws. The FCPA and similar
anti-briber y laws in other jurisdictions generally prohibit companies
and their
intermediaries from making improper payments to
non-U.S. officials for the purpose of obtaining or retaining business.
Our policies mandate compliance with these anti-bribery laws. We
operate in many parts of the world that have experienced govern-
mental corruption to some degree and, in certain circumstances,
strict compliance with anti-briber y laws may conflict with local cus-
toms and practices. We cannot assure you that our internal controls
and procedures always will protect us from the reckless or criminal
acts committed by our employees or agents. If we are found to be
liable for FCPA violations (either due to our own acts or our inad-
vertence or due to the acts or inadvertence of others), we could
suffer from criminal or civil penalties or other sanctions, which
could have a material adverse effect on our business.
Any of these risks could have an adverse effect on our inter-
national operations by reducing the demand for our products or
reducing the prices at which we can sell our products, which could
result in an adverse effect on our business, financial position,
results of operations or cash flows. We may not be able to continue
to operate in compliance with applicable customs, currency
exchange control regulations, transfer pricing regulations or any
other laws or regulations that we may be subject to. In addition,
these laws or regulations may be modified in the future, and we may
not be able to operate in compliance with those modifications.
We engage in acquisitions and joint ventures, and may encoun-
ter unexpected difficulties identifying, pricing or integrating
those businesses.
Attainment of our strategic plan objectives may require, in part,
strategic acquisitions or joint ventures intended to complement or
expand our businesses globally or add product technology that
accelerates our specialization strategy, or both. Success will
depend on our ability to identify, price and complete these trans-
actions or arrangements, and integrate the businesses acquired in
these transactions as well as develop satisfactor y working arrange-
ments with our strategic partners in the joint ventures. Unexpected
difficulties in completing and integrating acquisitions with our
partnership may be significantly affected by changes in the com-
modity cycle for hydrocarbon feedstocks and for chlor-alkali prod-
ucts. If the profitability of SunBelt is adversely affected, we may
receive less cash distributions from the partnership or we may be
required to make cash contributions to the partnership, either of
which could adversely affect our financial position, results of oper-
ations or cash flows.
Natural gas, electricity, fuel and raw material costs, and other
external factors beyond our control, as well as downturns in the
home repair and remodeling and new home sectors of the econ-
omy, can cause wide fluctuations in our margins.
The cost of our natural gas, electricity, fuel and raw materials, and
other costs, may not correlate with changes in the prices we receive
for our products, either in the direction of the price change or in
absolute magnitude. Natural gas and raw materials costs represent
a substantial part of our manufacturing costs, and energy costs, in
particular electricity and fuel, represent a component of the costs to
manufacture building products. Most of the raw materials we use
are commodities and the price of each can fluctuate widely for a
variety of reasons, including changes in availability because of
major capacity additions or reductions or significant facility operat-
ing problems. Other external factors beyond our control can cause
volatility in raw materials prices, demand for our products, product
prices, sales volumes and margins. These factors include general
economic conditions, the level of business activity in the industries
that use our products, competitors’ actions, international events
and circumstances, and governmental regulation in the United
States and abroad. These factors can also magnify the impact of
economic cycles on our business. While we attempt to pass through
price increases in energy costs and raw materials, we have been
unsuccessful in doing so in some circumstances in the past and
there can be no reassurance that we can do so in the future.
Additionally, our products used in housing, transportation and
building and construction markets are impacted by changes in
North American demand in these sectors, which may be significantly
affected by changes in economic and other conditions such as
gross domestic product levels, employment levels, demographic
trends, legislative actions and consumer confidence. These factors
can lower the demand for and pricing of our products, which could
cause our net sales and net income to decrease.
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We face competition from other polymer and chemical compa-
nies, which could adversely affect our sales, results of opera-
tions or cash flows.
Adverse credit market conditions may significantly affect our
access to capital, cost of capital and ability to meet liquidity
needs.
We actively compete with companies that produce the same or
similar products, and in some instances with companies that pro-
duce different products that are designed for the same end uses.
We encounter competition in price, delivery, service, performance,
product innovation, product recognition and quality, depending on
the product involved.
We expect that our competitors will continue to develop and
introduce new and enhanced products, which could cause a decline
in the market acceptance of our products. In addition, our compet-
itors could cause a reduction in the selling prices of some of our
products as a result of intensified price competition. Competitive
pressures can also result in the loss of major customers. An inability
to compete successfully could have an adverse effect on our finan-
cial position, results of operations or cash flows.
We may also experience increased competition from compa-
nies that offer products based on alternative technologies and
processes that may be more competitive or better in price or
per formance, causing us to lose customers and result in a decline
in our sales volume and earnings.
Additionally, some of our customers may already be or may
become large enough to justify developing in-house production
capabilities. Any significant reduction in customer orders as a result
of a shift to in-house production could adversely affect our sales and
operating profits.
A major failure of our information systems could harm our
business.
We depend on integrated information systems to conduct our busi-
ness. We may experience operating problems with our information
systems as a result of system failures, viruses, computer “hackers”
or other causes. Any significant disruption or slowdown of our
systems could cause customers to cancel orders or cause standard
business processes to become ineffective, which could adversely
affect our financial position, results of operations or cash flows.
Our business depends upon good relations with our employees.
We may experience difficulties in maintaining appropriate relations
with unions and employees in certain locations. About 2% of our
employees are represented by, or are in negotiations to be repre-
sented by, labor unions. In addition, problems or changes affecting
employees in certain locations may affect relations with our employ-
ees at other locations. The risk of labor disputes, work stoppages or
other disruptions in production could adversely affect us. If we
cannot successfully negotiate or renegotiate collective bargaining
agreements or if the negotiations take an excessive amount of time,
there may be a heightened risk of a prolonged work stoppage. Any
work stoppage could have a material adverse effect in the produc-
tivity and profitability of a manufacturing facility or in our operations
as a whole.
Disruptions, uncertainty or volatility in the credit markets may
adversely impact our ability to access credit already arranged
and the availability and cost of credit to us in the future. These
market conditions may limit our ability to replace, in a timely man-
ner, maturing liabilities and access the capital necessary to grow
and maintain our business. Accordingly, we may be forced to delay
raising capital, issue shorter tenors than we prefer or pay unattrac-
tive interest rates, which could increase our interest expense,
decrease our profitability and significantly reduce our
financial
flexibility. There can be no assurances that government responses
to the disruptions in the financial markets will stabilize the markets
or increase liquidity and the availability of credit. Longer term
disruptions in the capital and credit markets as a result of uncer-
tainty, changing or increased regulation, reduced alternatives or
failures of significant financial institutions could adversely affect
our access to liquidity needed for our business. Any disruption could
require us to take measures to conserve cash until the markets
stabilize or until alternative credit arrangements or other funding for
our business needs can be arranged. Such measures could include
deferring capital expenditures and reducing or eliminating future
share repurchases or other discretionary uses of cash. Overall, our
results of operations, financial condition and cash flows could be
materially adversely affected by disruptions in the credit markets.
The current global financial crisis may have significant effects
on our customers and suppliers that would result in material
adverse effects on our business and operating results.
The current global financial crisis, which has included, among other
things, significant reductions in available capital and liquidity from
banks and other providers of credit, substantial reductions and
fluctuations in equity and currency values worldwide, and concerns
that the worldwide economy may enter into a prolonged reces-
sionary period, may materially adversely affect our customers’
access to capital or willingness to spend capital on our products
or their ability to pay for products that they will order or have already
ordered from us. In addition, the current global financial crisis may
materially adversely affect our suppliers’ access to capital and
liquidity with which to maintain their inventories, production levels
and product quality, which could cause them to raise prices or lower
production levels.
Also, availability under our receivable sales facility may be
adversely impacted by credit quality and per formance of our cus-
tomer accounts receivable. The availability under the receivable
sales facility is based on the amount of receivables that meet the
eligibility criteria of the receivable sales facility. As receivable losses
increase or credit quality deteriorates, the amount of eligible receiv-
ables declines and, in turn, lowers the availability under the facility.
These potential effects of the current global financial crisis are
difficult to forecast and mitigate. As a consequence, our operating
results for a particular period are difficult to predict, and, therefore,
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prior results are not necessarily indicative of results to be expected
in future periods. Any of the foregoing effects could have a material
adverse effect on our business, results of operations and financial
condition.
We have a significant amount of goodwill, and any future good-
will impairment charges could adversely impact our results of
operations.
We completed the annual impairment review required by Financial
Accounting Standards Board (FASB) Statement No. 142, Goodwill
and Other Intangible Assets, as of October 1, 2008 and determined
that there was no impairment. However, on February 5, 2009, our
management determined that a non-cash goodwill
impairment
charge of $170.0 million related to our Geon Compounds and
Specialty Coatings businesses within the Per formance Products
and Solutions segment would be required in the fourth quarter of
2008. This charge is preliminary based on management’s best
estimates. Management expects to revise this charge during the
first quarter 2009 after completing a formal step-two test. As of
December 31, 2008, after the impact of the $170.0 million impair-
ment charge, we had goodwill remaining of $163.9 million.
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, unantic-
ipated competition, a material negative change in relationships with
significant customers, strategic decisions made in response to
economic or competitive conditions, loss of key personnel or a
more-likely-than-not expectation that a reporting unit or a significant
portion of a reporting unit will be sold or disposed of, would require
us to per form another valuation analysis, as required under FASB
Statement No. 142, for some or all of our reporting units prior to the
next required annual assessment. These types of events and the
resulting analysis could result in additional charges for goodwill,
which could adversely impact our results of operations.
may require us to fund a portion of our pension obligations and
divert funds from other potential uses.
We provide defined benefit pension plans to eligible employees. Our
pension expense and our required contributions to our pension
plans are directly affected by the value of plan assets, the projected
rate of return on plan assets, the actual rate of return on plan
assets and the actuarial assumptions we use to measure our
defined benefit pension plan obligations, including the rate at which
future obligations are discounted to a present value, or the discount
rate. As of December 31, 2008, for pension accounting purposes,
we assumed an 8.5% rate of return on pension assets.
Lower investment per formance of our pension plan assets
resulting from a decline in the stock market could significantly
increase the deficit position of our plans. Should the assets earn
an average return less than 8.5% over time, it is likely that future
pension expenses would increase.
We establish the discount rate used to determine the present
value of the projected and accumulated benefit obligation at the end
of each year based upon the available market rates for high quality,
fixed income investments. An increase in the discount rate would
reduce the future pension expense and, conversely, a lower dis-
count rate would raise the future pension expense.
Based on current guidelines, assumptions and estimates,
including stock market prices and interest rates, we anticipate that
we will be required to make a cash contribution of approximately
$10.6 million to our pension plans in 2009.
We cannot predict whether changing market or economic con-
ditions, regulatory changes or other factors will further increase our
pension expense or funding obligations, diverting funds we would
otherwise apply to other uses.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Low investment performance by our pension plan assets may
require us to increase our pension liability and expense, which
We have no outstanding or unresolved comments from the staff of
the SEC.
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ITEM 2. PROPERTIES
As of February 1, 2009, we operated facilities in the United States and internationally. Our corporate office is located in Avon Lake, Ohio. We
employ approximately 4,400 people and have 46 manufacturing sites and 11 distribution facilities in North America, Europe, and Asia, and
joint ventures in North America and South America. We own substantially all of our manufacturing sites and lease our distribution facilities.
We believe that the quality and production capacity of our facilities is sufficient to maintain our competitive position for the foreseeable
future. The following table identifies the principal facilities of our segments:
Performance Products and
Solutions
International Color and
Engineered Materials
Assesse, Belgium
Pudong (Shanghai), China
Shenzhen, China
Suzhou, China
Tianjin, China(3)
Cergy, France
Tossiat, France
Bendor f, Germany
Gaggenau, Germany
Melle, Germany
Gyor, Hungary
Kutno, Poland
Jurong, Singapore
Barbastro, Spain
Pamplona, Spain
Angered, Sweden
Bangkok, Thailand
Istanbul, Turkey
(17 manufacturing plants)
Long Beach, California
Kennesaw, Georgia
Henry, Illinois
Terre Haute, Indiana
Louisville, Kentucky
Sullivan, Missouri
Pedricktown, New Jersey
Avon Lake, Ohio
North Baltimore, Ohio
Clinton, Tennessee
Dyersburg, Tennessee
Pasadena, Texas
Seabrook, Texas
Niagara Falls, Ontario,
Canada(4)
Orangeville, Ontario, Canada
St. Remi de Napierville,
Quebec, Canada
Dongguan, China
Shenzhen, China(1)
Geon Polimeros joint venture —
Cartagena, Columbia(2)
Widnes, England
(18 manufacturing plants)
Specialty Color, Additives
and Inks
Glendale, Arizona
Kennesaw, Georgia(1)
Suwanee, Georgia(3)
Elk Grove Village, Illinois
St. Louis, Missouri
Massillon, Ohio
Norwalk, Ohio
Lehigh, Pennsylvania
Vonore, Tennessee
Shenzhen, China(1)
Widnes, England(1)
Toluca, Mexico
(8 manufacturing plants)
Specialty
Engineered Materials
McHenry, Illinois
Avon Lake, Ohio
Dyersburg, Tennessee(1)
Seabrook, Texas(1)
Suzhou, China
Gaggenau, Germany(1)
Jurong, Singapore(1)
Barbastro, Spain (1)
(3 manufacturing plants)
PolyOne Distribution
Livermore, California
Rancho Cucamonga, California
Denver, Colorado
Ayer, Massachusetts
Chesterfield Township, Michigan
Eagan, Minnesota
Statesville, North Carolina
Massillon, Ohio
La Porte, Texas
Fife, Washington
Mississauga, Ontario, Canada
(11 distribution facilities)
Resin and Intermediates
SunBelt joint venture —
McIntosh, Alabama(2)
(1) Facility is not included in manufacturing plants total as it is also included as part of another segment.
(2) Facility is shared as part of a joint venture, not included in manufacturing plants total.
(3) Facility is not included in manufacturing plants total as it is a design center/lab.
(4) As part of the restructuring actions announced in January 2009, the Niagara, Ontario facility will be closed during 2009.
ITEM 3. LEGAL PROCEEDINGS
at
our
polyvinyl
inspections
During 2004, the U.S. Environmental Protection Agency (EPA) con-
chloride
ducted multimedia
manufacturing facilities located in Henry, Illinois and Pedricktown,
New Jersey. In December 2007, the EPA met with the Company for
the first time since those inspections to discuss possible violations
of the Clean Air Act, the Clean Water Act and the Resource
Conser vation and Recovery Act at each of the Henry, Illinois and
Pedricktown, New Jersey facilities. Discussions between represen-
tatives for the Company and EPA occurred in 2008, during which we
provided additional information as well as our position regarding the
compliance status of the facilities. In January 2009, we received a
letter from the EPA proposing a resolution of any violations identi-
fied as a result of the 2004 inspection that would include our
payment of a penalty in the amount of $1.3 million. We plan to
continue discussions with the EPA seeking to resolve any possible
violations on a mutually agreed basis.
Safety,” we are involved in various pending or threatened claims,
lawsuits and administrative proceedings, all arising from the ordi-
nary course of business concerning commercial, product liability,
employment and environmental matters that seek remedies or
damages. We believe that the probability is remote that losses in
excess of the amounts we have accrued could be materially adverse
to our financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 2008.
EXECUTIVE OFFICERS OF THE REGISTRANT
(Included pursuant to Instruction 3 to paragraph (b) of Item 401 of
Regulation S-K)
In addition to the matters regarding the environment described
above and in Item 1. under the heading “Environmental, Health and
Executive officers are elected by our Board of Directors to serve one-
year terms. The following table lists the name of each person
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currently serving as an executive officer of our company, his age as of February 23, 2009 and his current position with our company:
Name
Stephen D. Newlin
Robert M. Patterson
Bernard P. Baert
Michael E. Kahler
Thomas J. Kedrowski
Michael L. Rademacher
Robert M. Rosenau
Age
56
36
59
51
50
58
54
Position
Chairman, President and Chief Executive Officer
Senior Vice President and Chief Financial Officer
Senior Vice President and General Manager, Color and Engineered
Materials, Europe and Asia
Senior Vice President, Commercial Development
Senior Vice President, Supply Chain and Operations
Senior Vice President and General Manager, Distribution
Senior Vice President and General Manager, Per formance Products and
Solutions
Kenneth M. Smith
54
Senior Vice President, Chief Information and Human Resources Officer
Stephen D. Newlin: Chairman, President and Chief Executive Offi-
cer, February 2006 to date. President — Industrial Sector of Ecolab
Inc. (a global developer and marketer of cleaning and sanitizing
specialty chemicals, products and services) from 2003 to 2006.
Mr. Newlin served as President and a Director of Nalco Chemical
Company (a manufacturer of specialty chemicals, services and
systems) from 1998 to 2001 and was Chief Operating Officer
and Vice Chairman from 2000 to 2001. Mr. Newlin serves on the
Boards of Directors of Black Hills Corporation and The Valspar
Corporation.
Rober t M. Patterson: Senior Vice President and Chief Financial
Officer, May 2008 to date. Vice President and Treasurer of Novelis,
Inc. (an aluminum rolled products manufacturer) from 2007 to May
2008. Vice President, Controller and Chief Accounting Officer of
Novelis from 2006 to 2007. Mr. Patterson served as Vice President
and Segment Chief Financial Officer, Thermal and Flow Technology
Segments of SPX Corporation (a multi-industry manufacturer and
developer) from 2005 to 2006 and as Vice President and Chief
Financial Officer, Cooling Technologies and Services of SPX from
2004 to 2005. Mr. Patterson served as Vice President and Chief
Financial Officer of Marley Cooling Tower Company, a cooling tower
manufacturer and subsidiary of SPX, from 2002 to 2004.
Bernard P. Baert: Senior Vice President and General Manager, Color
and Engineered Materials, Europe and Asia, May 2006 to date. Vice
President and General Manager, Colors and Engineered Materials,
Europe and Asia, September 2000, upon formation of PolyOne, to
April 2006. General Manager, Color Europe, M.A. Hanna Company,
1997 to August 2000.
Michael E. Kahler: Senior Vice President, Commercial Develop-
ment, May 2006 to date. President, Process Technology Division,
Alfa Laval Inc. (a global provider of heat transfer, separation and
fluid handling products and engineering solutions) from January
2004 to March 2006. Group Vice President, Nalco Chemical
Company (a manufacturer of specialty chemicals, services and
systems) from December 1999 to October 2002.
Thomas J. Kedrowski: Senior Vice President, Supply Chain and
Operations, September 2007 to date. Vice President of Strategy
and Process Improvement, H.B. Fuller Company (a global manufac-
turer and marketer of adhesives and specialty chemical products)
from November 2005 to April 2007. Vice President of Global Oper-
ations, H.B. Fuller Company from February 2002 to November
2005.
Michael L. Rademacher: Senior Vice President and General Man-
ager, Distribution, May 2006 to date. Vice President and General
Manager, PolyOne Distribution, September 2000, upon formation of
PolyOne, to April 2006. Senior Vice President — Plastics Americas,
M.A. Hanna Company, January 2000 to August 2000. Vice Presi-
dent and General Manager, Industrial Chemical and Solvents Divi-
sion, Ashland Chemical Company (chemical manufacturing and
distribution), 1998 to January 2000.
Rober t M. Rosenau: Senior Vice President and General Manager,
Per formance Products and Solutions, June 2008 to date, Senior
Vice President and General Manager, Vinyl Business, May 2006 to
June 2008. Vice President and General Manager, Vinyl Compounds,
January 2003 to April 2006. General Manager, Extrusion Products,
September 2000 to December 2002. General Manager, Custom
Profile Compounds, The Geon Company, April 1998 to August 2000.
Kenneth M. Smith: Senior Vice President, Chief Information and
Human Resources Officer, May 2006 to date. Chief Human
Resources Officer, January 2003 to date, and Vice President and
Chief Information Officer, September 2000, upon formation of
PolyOne, to April 2006. Vice President, Information Technology,
The Geon Company, May 1999 to August 2000, and Chief Informa-
tion Officer, August 1997 to May 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table sets forth the range of the high and low sale prices for our common stock, $0.01 par value per share, as reported by the
New York Stock Exchange, where the shares are traded under the symbol “POL,” for the periods indicated:
Common stock price:
High
Low
2008 Quarters
2007 Quarters
Fourth
Third
Second
First
Fourth
Third
Second
First
$6.39
$2.33
$8.57
$6.26
$8.23
$6.30
$7.15
$5.11
$8.60
$5.93
$9.29
$6.93
$7.59
$6.14
$7.76
$5.99
As of February 19, 2009, there were 2,606 holders of record of our common stock.
Effective with the first quarter of 2003, we suspended payment of our quarterly dividend. Future declarations of dividends on common
stock are at the discretion of the Board of Directors, and the declaration of any dividends will depend on, among other things, earnings,
capital requirements and our financial position, results of operations and cash flows. The Board of Directors has not declared any dividends
on common stock since 2003. Additionally, the agreements that govern our receivables sale facility contain restrictions that could limit our
ability to pay future dividends.
The table below sets forth information regarding repurchases of our common shares during the fourth quarter of 2008:
Period
October 1 to October 31
November 1 to November 30
December 1 to December 31
Total
Total Number of
Maximum Number of
Shares Purchased as
Shares that May Yet
Total Number of
Average Price Paid
Part of Publicly
Shares Purchased
Per Share
Announced Program
be Purchased Under
the Program(1)
—
250,000
—
250,000
$ —
3.86
—
$3.86
—
250,000
—
250,000
9,000,000
8,750,000
8,750,000
(1) On August 18, 2008, our Board of Directors approved a stock repurchase program authorizing us, depending upon market conditions and other
factors, to repurchase up to 10.0 million shares of our common stock, in the open market or in privately negotiated transactions.
ITEM 6. SELECTED FINANCIAL DATA
You should refer to Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Part II of this Annual
Report on Form 10-K and the notes to our accompanying consolidated financial statements for additional information regarding the financial
data presented below, including matters that might cause this data not to be indicative of our future financial condition, results of operations
or cash flows.
(In millions, except per share data)
2008
2007
2006
2005
2004
Sales
Operating (loss) income
(Loss) income before discontinued operations
Discontinued operations
$2,738.7
$2,642.7
$2,622.4
$2,450.6
$2,267.7
$ (129.3)
$ (272.9)
—
$
$
33.9
11.4
—
$ 190.6
$ 141.3
$ 129.1
$ 125.6
(2.7)
$
63.2
(15.3)
$
28.3
(4.1)
Net income (loss)
$ (272.9)
$
11.4
$ 122.9
$
47.9
$
24.2
Basic and diluted (loss) earnings per common share:
Before discontinued operations
Discontinued operations
Basic and diluted (loss) earnings per common share
Dividends per common share
Total assets
Long-term debt, net of current portion
$
(2.94)
$
0.12
$
1.36
$
0.69
$
0.31
—
—
(0.03)
(0.17)
(0.05)
$
$
(2.94)
$
0.12
$
1.33
$
0.52
$
0.26
— $
— $
— $
— $
—
$1,277.7
$1,583.0
$1,780.8
$1,695.3
$1,753.1
$ 408.3
$ 308.0
$ 567.7
$ 638.7
$ 640.5
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In February 2006, we sold 82% of our Engineered Films busi-
ness. This business was previously reported as discontinued oper-
ations and is recognized as such in our historical results. The
retained ownership of 18% is reported on the cost method of
accounting and is recognized in our accompanying consolidated
financial statements as such.
In August 2004, we sold our Elastomers and Per formance
Additives business. This business was previously reported as a
discontinued operation and is recognized as such in our historical
results.
(cid:129) New Accounting Pronouncements — a summary and discus-
sion of our plans for the adoption of new accounting stan-
dards relevant to us
The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs. Our actual results
could differ materially from those discussed in these forward-look-
ing statements. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below
and elsewhere in this Annual Report on Form 10-K particularly in
“Special Note Regarding Forward-Looking Statements” and Item 1A.
“Risk Factors.”
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Business
Overview
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) is designed to provide information
that is supplemental to, and should be read together with, our
consolidated financial statements and the accompanying notes
contained in this Annual Repor t on Form 10-K. Information in this
Item 7 is intended to assist the reader in obtaining an understand-
ing of our consolidated financial statements, the changes in certain
key items in those financial statements from year to year, the
primary factors that accounted for those changes, and any known
trends or uncertainties that we are aware of that may have a
material effect on our future per formance, as well as how certain
accounting principles affect our consolidated financial statements.
MD&A includes the following sections:
(cid:129) Our Business
(cid:129) Business Model and Key Concepts
(cid:129) Key Challenges
(cid:129) Strategy and Key Trends
(cid:129) Recent Developments
(cid:129) Highlights and Executive Summar y
(cid:129) Outlook Update
(cid:129) Results of Operations — an analysis of our consolidated
results of operations for the three years presented in our
consolidated financial statements
(cid:129) Liquidity and Capital Resources — an analysis of the effect
of our operating, financing and investing activities on our
liquidity and capital resources
(cid:129) Off-Balance Sheet Arrangements — a discussion of such
commitments and arrangements
(cid:129) Contractual Obligations — a summary of our aggregate con-
tractual obligations
(cid:129) Critical Accounting Policies and Estimates — a discussion of
accounting policies that require significant judgments and
estimates
We are a premier provider of specialized polymer materials, ser-
vices and solutions with operations in thermoplastic compounds,
specialty polymer formulations, color and additive systems, ther-
moplastic resin distribution and specialty vinyl resins. We also have
three equity investments: one in a manufacturer of caustic soda and
chlorine; one in a manufacturer of PVC compound products; and one
in a formulator of polyurethane compounds. Headquartered in Avon
Lake, Ohio, with 2008 sales of $2.7 billion, we have manufacturing
sites and distribution facilities in North America, Europe and Asia
and joint ventures in North America and South America. We cur-
rently employ approximately 4,400 people and offer more than
35,000 polymer solutions to over 10,000 customers across the
globe. We provide value to our customers through our ability to link
our knowledge of polymers and formulation technology with our
manufacturing and supply chain to provide an essential
link
between large chemical producers (our raw material suppliers)
and designers, assemblers and processors of plastics (our
customers).
Business Model and Key Concepts
The central focus of our business model is to provide specialized
material and service solutions to our customers by leveraging our
global footprint, product and technology breadth, manufacturing
expertise, fully integrated information technology network, broad
reach and raw material procurement strength. These
market
resources enable us to capitalize on dynamic changes in the end
markets we serve, which include appliances, building and construc-
tion materials, electrical and electronics, healthcare, industrial,
packaging, transpor tation, and wire and cable markets.
Key Challenges
Overall, our business faces a number of issues resulting from the
continued economic downturn, especially as it relates to critically
affected markets such as building and construction and transpor-
tation. Improving profitability during periods of raw material price
volatility is another critical challenge. Further, we need to capitalize
on the opportunity to accelerate development of products that meet
a growing body of environmental laws and regulations such as lead
and phthalate restrictions inherent in the Restrictions on the use of
Certain Hazardous Substances (RoHS) and the Consumer Product
Safety Information Act of 2008.
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Strategy and Key Trends
To address these challenges and achieve our vision, we have
implemented a strategy with four core components: specialization,
globalization, operational excellence and commercial excellence.
Specialization differentiates us through products, services, tech-
nology, and solutions that add value. Globalization takes us into
growth markets to service our customers with consistency wherever
their operations might be. Operational excellence empowers us to
respond to the voice of the customer while focusing on continuous
improvement. Commercial excellence enables us to deliver value to
customers by supporting their growth and profitability.
In the short-term, we are increasing our focus on improving
working capital, preserving liquidity and increasing cash flow. In
addition to continuing to drive margin improvement, we have estab-
lished working capital improvement targets for all businesses. In
2009, most of our capital expenditures will be focused on mainte-
nance spending plus implementing the two restructuring initiatives
previously announced and short payback projects of about a year or
less. These actions will ensure that we continue to invest in capa-
bilities that advance the pace of our transformation but do not
adversely impact our liquidity.
Our other areas of focus are cost reductions, capacity reduc-
tions and ensuring we have right sized the business for current
projected demand. The two restructuring initiatives we have
announced underscore this focus. We are also deploying an enter-
prise-wide Lean Six Sigma program directed at improving profitabil-
ity and cash flow by applying proven management techniques and
strategies to key areas of the business, such as pricing, supply
chain and operations management, productivity and quality.
Long term trends that currently provide opportunities to lever-
age our strategy include the drive toward sustainability in polymers
and their processing, the emergence of biodegradable and bio-
based polymers, consumer concern over the use of bisphenol-A
(BPA) in infant-care products and developing legislation that bans
lead and certain phthalates from toys and child-care items.
Recent Developments
Pension plan changes
On January 15, 2009, the Chair of our Compensation and Gover-
nance Committee, pursuant to authority delegated to him by our
Board of Directors, approved and adopted changes to the Geon
Pension Plan (Geon Plan), the Benefit Restoration Plan (BRP), the
voluntary retirement savings plan (RSP) and the Supplemental
Retirement Benefit Plan (SRP). Effective March 20, 2009, the
amendments to the Geon Plan and the BRP permanently freeze
future benefit accruals and provide that participants will not receive
credit under the Geon Plan or the BRP for any eligible earnings paid
on or after that date. All accrued benefits under the Geon Plan and
the BRP will remain intact, and service credits for vesting and
retirement eligibility will continue in accordance with the terms of
the Geon Plan and the BRP. The amendments to the RSP and SRP
provide that transition contributions under the RSP and the SRP will
be eliminated after March 20, 2009. These actions are expected to
reduce our 2009 annual benefit expense by $3.7 million and future
pension fund contribution requirements by $20 million.
Restructuring initiatives and facility closures
In July 2008, we announced the restructuring of certain manufac-
turing assets, primarily in North America. We are closing certain
production facilities, including seven in North America and one in
the United Kingdom, resulting in a net reduction of approximately
150 positions. The production facilities’ closings are part of our
focus on both the operational excellence and specialization com-
ponent of our transformation strategy. This realignment improves
the competitiveness of our operations and supply chain across
many product lines and businesses, consistent with current and
anticipated customer requirements. We expect to incur one-time
pre-tax charges of approximately $28 million related to these
actions, of which $20.0 million has been recorded during 2008.
In total, these one-time charges will include cash costs of approx-
imately $15 million related to severance and site closure costs with
the remaining $13 million of non-cash costs related to asset write-
downs and accelerated depreciation, of which $10.0 million has
been recorded during 2008. We expect these actions will deliver
pre-tax savings of approximately $17 million on an annualized run-
rate basis.
In January 2009, we announced that we will enact further cost
saving measures that include eliminating approximately 370 jobs
worldwide, implementing reduced work schedules for another 100
to 300 employees, closing our Niagara, Ontario facility and idling
certain other capacity. Additionally, we are planning other actions
that include freezing corporate officer salaries throughout 2009. We
expect
to incur one-time pre-tax charges of approximately
$45 million related to these actions, of which $18.3 million has
been recorded during the fourth quarter of 2008. In total, these one-
time charges include cash costs of approximately $35 million
related to severance and site closure costs with the remaining
$10 million of non-cash costs related to asset write-downs and
accelerated depreciation. We expect these actions will deliver pre-
tax savings of approximately $40 million on an annualized run-rate
basis.
See Note 4, Employee Separation and Plant Phaseout, to the
accompanying consolidated financial statements for more detailed
information related to these restructuring actions.
New Banking Relationship
In November 2008, we began transitioning various treasury man-
agement services from Citicorp USA to Bank of America. Implemen-
tation of new services is expected to be completed in March 2009.
Services being transitioned to Bank of America include a corporate
credit card program, foreign exchange hedging, operation of a
European cash pool, and administration of our international finance
subsidiary.
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Share repurchases
Sustainability strategy defined
In August 2008, our Board of Directors approved a stock repur-
chase program authorizing us, depending upon market conditions
and other factors, to repurchase up to 10.0 million shares of our
common stock, in the open market or in privately negotiated
transactions.
During 2008, we repurchased 1.25 million shares of common
stock under this program at an average price of $7.12 per common
share for approximately $8.9 million. There are 8.75 million shares
available for repurchase under the program at December 31, 2008.
During 2008, we issued our Sustainability Promise and No Sur-
prises PledgeSM to assure customers that we are dedicated to
solutions that are environmentally responsible. To further support
this sustainability commitment, we defined a set of standards from
which we established a family of products and services branded
“PolyOne Sustainable Solutions.” These brands meet criteria for
renewability, recyclability, reusability, eco-conscious composition
and resource efficiency. In September 2008, we received the Frost &
Sullivan Green Excellence of the Year Award for our work in
sustainability.
Formation of PolyOne companies in Japan and India
Highlights and Executive Summary
In July 2008, we formed PolyOne Japan Kabushiki Kaisha (PolyOne
Japan Ltd.). The new company, which includes an office in Tokyo
staffed with a business development manager for Japan, is focused
on gaining specification with Japanese original equipment manu-
facturers (OEMs) and importing products for use by Japanese
polymer processors. During the same month, we established Poly-
One Polymers India Pvt. Ltd. to import, manufacture and sell Poly-
One products in India and neighboring markets from new production
and lab facilities located in Mumbai. This company provides us with
strategic regional access to many large OEMs and polymer
processors.
Purchase of GLS business
In January 2008, we acquired 100% of the outstanding capital stock
of GLS, the leading North American provider of TPE compounds for
consumer, packaging and medical applications for a cash purchase
price of $148.9 million including acquisition costs and net of cash
received. The acquisition complements our global Engineered Mate-
rials business portfolio and accelerates our shift to specialization by
combining GLS’s specialty TPE technology, compounding expertise
and brands with our extensive global infrastructure and commercial
presence.
Development agreements signed
Several agreements with technology partners were signed in 2008.
We established a market development agreement with Eastman
Chemical Company designating PolyOne as the exclusive com-
pounder of filled systems with Eastman’s new-generation TritanTM
copolyester in North America. We can now combine Eastman
TritanTM copolyester with per formance-enhancing additives to
develop fully compounded systems that offer a BPA-free alternative
to polycarbonate. We began a formal collaboration agreement with
Archer Daniels Midland to help develop bio-based plasticizers for
use in polymer formulations, which builds on our earlier license
agreement with Battelle concerning bio-plasticizer technology. Our
TPE business completed an agreement with The Dow Chemical
Company to compound thermoplastic elastomer materials based
on Dow’s Infuse OBC Olefin Block Copolymers.
2008 proved to be a volatile year for our company. The year began
with a sense that the U.S. housing market would reach a bottom in
late 2008 or early 2009 with the United States entering a mild
recession, and Europe and Asia experiencing only a moderate
economic slowdown. During the first half of the year, raw material
and energy costs rapidly escalated and in mid-summer oil
approached a high of nearly $150 per barrel. In July 2008, we
announced a manufacturing realignment to reduce capacity and
headcount, primarily in North America. Around the same time, we
saw the first signs of weakness in Europe. In September, credit
markets came to a stand still as the U.S. government searched for a
solution to the banking crisis. The financial markets reacted unfa-
vorably to all of this news and sent equity markets to lows not seen
since 2003. With this global economic backdrop, our customers
immediately reduced demand. In the fourth quarter of 2008, our
year-over-year sales declined $89.5 million, or 14.2%. Volume
declined 24%. Lower raw material costs offered some relief but
were not enough to offset the significant declines in demand. Fourth
quarter 2008 operating income was a loss of $174.7 million which
included a $170 million goodwill impairment charge and a portion of
the pre-tax costs of a second restructuring initiative announced in
January 2009, of which $18.3 million was recorded in the fourth
quarter. In the fourth quarter of 2008, we increased valuation
allowances against our deferred tax assets by $166.7 million.
The non-cash charge to income tax expense consists of $104.5 mil-
lion related to U.S. federal and state and local deferred tax assets
and $1.4 million related to foreign deferred tax assets. $60.8 mil-
lion related to pension and post-retirement health care liabilities
was recorded as a reduction of accumulated other comprehensive
income.
Despite the challenging economic conditions, 2008 was a year
of continuing progress in the transformation of PolyOne. Significant
declines in demand required us to take aggressive actions that we
had not planned at the outset of 2008, however, the benefits of
such actions will be significant in terms of their positive impact on
our future profitability and attainment of our transformation goals.
Selected financial data, a discussion of the aforementioned
impact of these events on PolyOne, and a comparative review of
per formance in 2008 and 2007 versus prior years are provided
below. An outlook update is provided thereafter.
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Selected Financial Data
(In millions)
2008
2007
2006
Sales
Operating income
Net income (loss)
$2,738.7
$ (129.3)
$ (272.9)
Cash and cash equivalents
$
44.3
$2,642.7
33.9
$
$2,622.4
$ 190.6
$
$
11.4
$ 122.9
79.4
$
66.2
Accounts Receivable
Availability
121.4
151.2
111.5
Liquidity
$ 165.7
$ 230.6
$ 177.7
Debt, short- and long-term
$ 434.3
$ 336.7
$ 595.4
2008 vs. 2007
Aggregate sales increased $96.0 million, or 3.6%, in 2008 as
compared to 2007. The acquisition of GLS, favorable impact from
foreign exchange and higher prices driven by an improved sales mix
and the result of offsetting rising raw material and energy costs
helped counterbalance the adverse impact of lower volume driven
by a significant slowing in global economic activity in the late third
quarter and the fourth quarter of 2008. This turndown in economic
activity and the underlying financial credit crisis that precipitated it
had a significant negative impact on our businesses, particularly the
Per formance Products and Solutions segment. The International
Color and Engineered Materials business, while benefiting from
favorable foreign exchange rates, saw demand contract in the third
quarter and then more dramatically in the fourth quarter of 2008 as
the economies in Europe and Asia slowed and declining exports
from Asia offset any sales increase during the prior quarters in
2008.
Operating income declined by $163.2 million driven by a
$170 million goodwill impairment charge taken in the fourth quarter
of 2008, $39.7 million of restructuring charges, and year-over-year
declines in Per formance Products and Solutions and International
Color and Engineered Materials segment operating income. The
acquisition of GLS, margin and mix improvements and the impact
from foreign exchange were favorable items that partially offset the
overall decrease.
The $284.3 million decline in net income was due to the items
described previously and the recording of a $105.9 million tax
valuation allowance. See Note 15, Income Taxes, in the accompa-
nying consolidated financial statements for a more detailed
discussion.
Liquidity declined $64.9 million due to a lower available pool of
receivables to borrow against and a year-over-year decline in cash
and cash equivalents driven by a higher investment in working
capital, pension funding, and lower dividends from our equity affil-
iates. The increase in total debt resulted from the financing activ-
ities necessary to support the acquisition of GLS.
2007 vs. 2006
Aggregate sales increased $20.3 million, or 0.8%, in 2007 com-
pared to 2006. This increase was primarily due to sales growth in
Asia, higher prices necessary to offset increased raw material and
energy costs, and the impact of favorable exchange rates. Offset-
ting these favorable items was an 8.3% and 6.8% decline in sales in
our Specialty Color, Additives and Inks, and Per formance Products
and Solutions segments, respectively. These declines were due
mainly to the pruning of unprofitable business and the slowdown in
the North American building and construction market. Operating
income declined 82.2% as a result of the impact of the slowdown in
the North American building and construction and margin compres-
sion in our Per formance Products and Solutions and Resin and
Intermediates segments. In 2007, we also recorded environmental
remediation and impairment charges and legal settlements of
$68.3 million as compared to a benefit of $20.6 million of similar
items in 2006. The $52.9 million increase in liquidity was driven by
a larger eligible pool of receivables for securitization and an
increase in cash and cash equivalents due to a year-over-year
improvement in working capital of $70.5 million, a favorable foreign
exchange impact of $6.6 million on cash, and the sales of assets.
The year-over-year decline in debt was primarily due to the repur-
chase of $241.4 million aggregate principal amount of our
10.625% senior notes due 2010 at a premium of $12.8 million.
This repurchase transaction was financed by the sale of our 24%
ownership interest in OxyVinyls in the third quarter of 2007.
Outlook Update
It appears that 2009 will be a challenging year as we project sales
will fall below 2008 levels. We expect continued economic weak-
ness in the near term and accordingly we have taken actions to
reduce capacity and costs. In July of 2008 we announced our
manufacturing realignment and the related closure of eight facili-
ties. As the economy has deteriorated further and the downturn
extended internationally, we determined that another phase of cost
reductions would be necessary to ensure that PolyOne remains
competitive.
In January 2009 we announced those additional
actions that included eliminating 370 jobs worldwide; implementing
reduced work schedules for another 100 to 300 employees based
on demand; closing our Niagara, Ontario facility and idling certain
other capacity. Additionally and among other actions, we have
announced that we have frozen corporate officer salaries through-
out 2009 and deferred other salary adjustments. Combined, the
Company expects all of the aforementioned actions will deliver pre-
tax savings of approximately $57 million on an annualized run-rate
basis.
While we are not altering our four-pillar strategy, our pace of
investment in the business has slowed. In 2009, our focus will be
on improving free cash flow and reducing working capital investment
to preserve liquidity. Our capital expenditures will be focused on
maintenance spending plus implementing the two restructuring
initiatives previously described.
We have a very limited amount of immediate or near term debt
payment obligations and our only immediate long-term debt pay-
ment requirements are the medium term notes of which $20 million
is due in both 2009 and 2010. We expect pension plan expense to
increase approximately $27 million over 2008 due to a 30% decline
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in pension asset values during 2008. The required level of funding
in 2009 will be approximately $11 million for pension obligations.
In addition to changes in broader economic conditions, raw
material and energy costs are expected to remain volatile and could
impact the magnitude and direction of our preliminary viewpoint.
Results of Operations
Unless otherwise noted, disclosures contained in this Annual
Repor t on Form 10-K relate to continuing operations. For more
information about our discontinued operations, see Note 2, Dis-
continued Operations, in the accompanying consolidated financial
statements.
(Dollars in millions, except per share data)
2008
2007
2006
Change
Change
Change
Change
Variances—Favorable (Unfavorable)
2008 versus 2007
2007 versus 2006
%
%
Sales
Cost of sales
Gross margin
Selling and administrative
Impairment of goodwill
Income from equity affiliates and minority interest
Operating income (loss)
Interest expense, net
Premium on early extinguishment of long-term debt
Other expense, net
(Loss) income before income taxes and discontinued
operations
Income tax (expense) benefit
(Loss) income before discontinued operations
Loss from discontinued operations and loss on sale, net of
income taxes
Net (loss) income
Basic and diluted (loss) earnings per common share:
Before discontinued operations
Discontinued operations
Basic and diluted (loss) earnings per common share
NM — Not meaningful
Sales
296.6
287.1
170.0
31.2
(129.3)
(37.2)
—
(4.6)
(171.1)
(101.8)
(272.9)
$2,738.7
2,442.1
$2,642.7
2,381.7
$2,622.4
2,321.9
$ 96.0
(60.4)
3.6% $ 20.3
(59.8)
(2.5)%
261.0
254.8
—
27.7
33.9
(46.9)
(12.8)
(6.6)
300.5
221.9
—
112.0
190.6
(63.1)
(4.4)
(2.8)
0.8%
(2.6)%
(13.1)%
(14.8)%
—
(75.3)%
(82.2)%
35.6
(32.3)
(170.0)
3.5
13.6%
(12.7)%
NM
12.6%
(39.5)
(32.9)
—
(84.3)
(163.2)
(481.4)% (156.7)
9.7
12.8
2.0
20.7%
100.0%
30.3%
16.2
(8.4)
25.7%
(190.9)%
(3.8)
(135.7)%
(32.4)
120.3
(138.7)
(428.1)% (152.7)
(126.9)%
43.8
11.4
5.3
(145.6)
(332.4)%
38.5
726.4%
125.6
(284.3)
NM
(114.2)
(90.9)%
—
—
(2.7)
—
—
2.7
100.0%
$ (272.9)
$
$
(2.94)
—
(2.94)
$
$
$
11.4
$ 122.9
$(284.3)
NM $(111.5)
(90.7)%
0.12
—
0.12
$
$
1.36
(0.03)
1.33
Cost of Sales
Aggregate sales increased $96.0 million, or 3.6%, in 2008 as
compared to 2007. The components of this increase include
6.3% from acquisitions and other, 1.7% due to the favorable impact
of foreign exchange, a 9.7% favorable impact from price and mix,
which offset an unfavorable impact of 14.1% due to the decline in
volume. The impact of the decline in volume was evident across all
of our operating segments but of greatest magnitude in our busi-
nesses tied to the North American building and construction and
transpor tation end markets.
Aggregate sales increased $20.3 million, or 0.8%, in 2007
compared to 2006. The components of this increase include a 2.3%
favorable impact from foreign exchange and a 1.4% favorable
impact from price and mix. These components offset a 2.8% unfa-
vorable impact from the decline in volume. The most significant
impact of the decline in volume was evident in the Per formance
Product and Solutions segment, which was due mainly to the
slowdown in demand in the North American building and construc-
tion market, and the pruning of unprofitable business in the Spe-
cialty Color, Additives and Inks operating segment.
These costs include raw materials, plant conversion, distribution,
environmental remediation and plant related restructuring charges.
As a percentage of sales, these costs declined to 89.2% of sales in
2008 as compared to 90.1% in 2007. GLS contributed 0.5 percent-
age points of the improvement reflecting the margin impact of its
specialty sales mix. Charges related to environmental remediation
and plant related restructurings were $44.9 million in 2008 as
compared to $50.1 million in 2007. These decreased charges
contributed 0.2 percentage points of the decline. The remaining
0.2 percentage points of the decline in cost of sales as a percent of
sales is due to the realization of pricing initiatives and sales mix
improvements partially offset by higher raw material costs.
As a percentage of sales, these costs increased to 90.1% of
sales in 2007 as compared to 88.5% in 2006. This increase was
primarily due to higher remediation and plant related restructuring
costs of $50.2 million recorded in 2007 versus $2.9 million of
similar costs recorded in 2006. Higher raw material costs not yet
fully offset by price increases largely associated with Per formance
Products and Solutions were more than counterbalanced by the
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improvements in margins from the implementation of our special-
ization strategy. strategy.
Selling and Administrative
Income from Equity Affiliates and Minority Interest
Income from equity affiliates and minority interest for 2008, 2007
and 2006 is summarized as follows:
Selling and administrative year-over-year variances for 2008, 2007
and 2006 are summarized as follows:
(In millions)
SunBelt
Variances—Favorable (Unfavorable)
(In millions)
2008 v. 2007
2007 v. 2006
Selling and administrative
Employee separation and executive
severance
$ (9.6)
$ (1.0)
Settlement of legal issues and
related reserves
Impairment of intangibles and other
investments
GLS selling and administrative costs
Other corporate costs
Impact of foreign exchange
(0.3)
2.5
(17.5)
(2.6)
(4.8)
(24.4)
(2.5)
—
0.3
(5.3)
Total
$(32.3)
$(32.9)
These costs include selling, technology, administrative func-
tions and corporate and general expenses. Selling and administra-
tive costs increased $32.3 million, or 12.7%, in 2008 as compared
to 2007. During 2007, selling and administrative costs increased
$32.9 million, or 14.8%, as compared to 2006. In 2006, we
recorded $23.3 million of benefits from insurance, legal settle-
ments and related reserves.
Impairment of Goodwill
During the fourth quarter of 2008, indicators of potential impair-
ment caused us to conduct an interim impairment test. Those
indicators included the following: a significant decrease in market
capitalization; a decline in recent operating results; and a decline in
our business outlook primarily due to the macroeconomic environ-
ment. In accordance with FASB Statement No. 142, we completed
step one of the impairment analysis and concluded that, as of
December 31, 2008, the fair value of two of our reporting units was
below their respective carrying values, including goodwill. The two
reporting units that showed potential impairment were Geon Com-
pounds and Specialty Coatings (reporting units within Per formance
Products and Solutions). As such, step two of the impairment test
was initiated in accordance with FASB Statement No. 142. Due to
its time consuming nature, the step-two analysis has not been
completed as of the date of this filing. In accordance with para-
graph 22 of Statement No. 142, we have recorded an estimate in
the amount of $170.0 million as a non-cash goodwill impairment
charge as of December 31, 2008. Management expects to revise
the charge during the first quarter of 2009 after completing a formal
step-two test.
OxyVinyls
Other equity affiliates
Impairment of OxyVinyls investment
Charges related to sale of OxyVinyls
investment
Write-down of certain assets of and
investment in Geon Polimeros
Andinos
Minority interest
2008
2007
2006
$32.5
$ 41.0
$ 47.3
—
3.3
—
(0.2)
3.9
(14.8)
—
(0.4)
59.7
5.8
—
—
(4.7)
0.1
(1.6)
(0.2)
—
(0.8)
$31.2
$ 27.7
$112.0
During 2008, income from equity affiliates and minority inter-
est increased $3.5 million, or 12.6%, versus 2007. The increase
was due to $11.7 million lower impairment charges recorded in
2008 as compared to 2007 partially offset by lower SunBelt earn-
ings. The $8.5 million lower SunBelt earnings were mainly due to
lower demand for chlorine in the downstream PVC resin markets as
a result of the significant deterioration of the North American
building and construction and basic infrastructure markets.
During 2007, income from equity affiliates and minority inter-
est decreased $84.3 million, or 75.3%, as compared to 2006
mainly due to the slowdown in demand in the North American
building and construction and basic infrastructure materials end
markets, and margin compression due to the inability to pass higher
raw materials costs through pricing. Impairment charges were
recorded for the other than temporar y decline of our 24% interest
in our equity investment in OxyVinyls of which we subsequently
divested our 24% interest in July 2007.
Interest Expense, Net
The following table presents the quarterly average of short- and
long-term debt for the past three years and the related interest
expense:
(In millions)
Short-term debt
Current portion of long-term debt
Long-term debt
2008
2007
2006
$ 53.8
$
9.2
$
5.6
16.2
360.4
20.5
441.7
12.5
610.8
Quarterly average
$430.4
$471.4
$628.9
Interest expense
$ 40.6
$ 51.4
$ 66.5
The decrease in interest expense from year to year is largely
the result of 8.7% lower average borrowing levels. Payment of
maturing debt and voluntary repurchases of debt are the main
reasons for the continued decline in debt. Included in interest
expense in 2007 and 2006 were charges of $2.8 million and
$0.8 million, respectively, to write off deferred debt issuance costs
related to the early extinguishment of long-term debt.
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$28.8 million which will expire at various dates from 2010 through
2018.
During the third quarter of 2007, as part of the sale of our 24%
interest in OxyVinyls, we recognized a deferred tax benefit of
$31.5 million that was related to the temporar y difference between
the tax basis and book basis of the investment.
In 2006, in accordance with FASB Statement No. 109, Account-
ing for Income Taxes, the valuation allowance that was established
during 2002 through 2004 was reduced $74.9 million. This amount
is comprised of $44.3 million for the utilization of the net operating
loss carryforward, $15.4 million associated with changes in AOCI
related to pension and post-retirement health care liabilities, and
the remaining $15.2 million of the valuation allowance on the basis
that it is more likely than not that the deferred tax asset will be
realized.
Income taxes for the years ended December 31, 2008, 2007
and 2006 include foreign, state and federal alternative minimum
tax. Income taxes are discussed in detail in Note 15, Income Taxes,
in the accompanying consolidated financial statements.
Loss from Discontinued Operations, Net of Income Taxes
Discontinued operations are discussed in detail in Note 2 in the
accompanying consolidated financial statements.
Segment Information
Operating income is the primary financial measure that is reported
to the chief operating decision maker for purposes of making
decisions about allocating resources to the segment and assessing
its per formance. Operating income at the segment level does not
include: corporate general and administrative costs that are not
allocated to segments; intersegment sales and profit eliminations;
charges related to specific strategic initiatives, such as the consol-
idation of operations; restructuring activities, including employee
separation costs resulting from personnel reduction programs,
plant closure and phaseout costs; executive separation agree-
ments; share-based compensation costs; asset and goodwill
facilities no
impairments; environmental remediation costs for
longer owned or closed in prior years; gains and losses on the
divestiture of joint ventures and equity investments; and certain
other items that are not included in the measure of segment profit or
loss that is reported to and reviewed by the chief operating decision
maker. These costs are included in Corporate and eliminations.
In April 2008, we issued an additional $80.0 million in a-
ggregate principal amount of our 8.875% senior notes due 2012.
We repurchased $100.0 million of our 10.625% senior notes in
June 2007 and repurchased the remaining $141.4 million of such
senior notes in August 2007. In the second and fourth quarters of
2006, we repurchased $15.0 million and $43.6 million,
respectively, of our 10.625% senior notes.
Included in Interest expense, net
the years ended
December 31, 2008, 2007 and 2006 is interest income of $3.4 mil-
lion, $4.5 million and $3.4 million.
for
Premium on Early Extinguishment of Long-term Debt
Cash expense from the premium on our repurchase of $241.4 mil-
lion of our 10.625% senior notes in 2007 was $12.8 million. Cash
expense from the premium on our repurchase of $58.6 million of
our 10.625% senior notes in 2006 was $4.4 million.
Other Expense, Net
Financing costs associated with our receivables sale facility, foreign
currency gains and losses, retained post-employment benefit costs
from previously discontinued operations and other miscellaneous
items are as follows:
(In millions)
2008
2007
2006
Currency exchange gain (loss)
$ 1.2
$(5.0)
$(1.3)
Foreign exchange contracts (loss) gain
Discount on sale of trade receivables
Impairment of available for sale security
Other expense, net
(1.3)
(3.6)
(0.6)
(0.3)
0.7
(2.0)
—
1.1
(1.9)
—
(0.3)
(0.7)
Other expense, net
$(4.6)
$(6.6)
$(2.8)
Income Tax (Expense) Benefit
In the fourth quarter of 2008, we recorded a valuation allowance of
$166.7 million to increase valuation allowances against deferred
tax assets. The charge to income tax expense consists of
$104.5 million related to U.S. federal and state and local deferred
tax assets and $1.4 million related to foreign deferred tax assets.
$60.8 million, related to pension and post-retirement health care
liabilities, is recorded as a component of accumulated other com-
prehensive income.
We created a new valuation allowance of $104.5 million that is
related to U.S. federal and state and local deferred tax assets. This
valuation allowance was recorded based on our U.S. pre-tax losses
over 2007 and 2008 as well as our current estimates for near term
U.S. results. Taking this charge will have no impact on our ability to
utilize these U.S. net operating losses to offset future U.S. taxable
profits. We review all valuation allowances related to deferred tax
assets and will reverse these charges, partially or totally, when
appropriate under FAS 109.
We have U.S. net operating loss carryforwards of $97.9 million
which expire at various dates from 2024 through 2028. Certain
foreign subsidiaries had tax loss carryforwards aggregating
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During the second quarter of 2008, we announced that Pro-
ducer Services, formerly included in All Other, was combined with
Geon Per formance Polymers to form the Per formance Products and
Solutions operating segment. In addition, North American Color and
Additives and Specialty Inks and Polymer Systems, both formerly
included in All Other, were combined to form a new operating
segment named Specialty Color, Additives and Inks.
On March 20, 2008, we announced the formation of the
Specialty Engineered Materials segment. This segment includes
PolyOne’s TPE compounds product
line in Europe and Asia
(historically included in International Color and Engineered Materi-
als), North American Engineered Materials (historically included in
All Other) and GLS. On April 15, 2008, the Vinyl Business segment
was re-branded to be called Geon Per formance Polymers.
As a result of these changes to PolyOne’s segment structure,
prior period segment information was reclassified to conform to the
impact on
2008 presentation. These changes had no material
segment results.
Sales and Operating Income (Loss) — 2008 compared with
2007:
(Dollars in millions)
2008
2007
Change
% Change
Sales:
International Color and
Engineered Materials
Specialty Engineered
Materials
Specialty Color,
$ 587.4 $ 588.6 $
(1.2)
(0.2)%
252.3
124.3
128.0
103.0%
Additives and Inks
228.6
232.0
(3.4)
(1.5)%
Per formance Products
and Solutions
1,001.4
1,086.8
(85.4)
(7.9)%
PolyOne Distribution
796.7
744.3
52.4
7.0%
Corporate and
eliminations
Operating income
(loss):
International Color and
Engineered Materials
Specialty Engineered
Materials
Specialty Color,
(127.7)
(133.3)
5.6
$2,738.7 $2,642.7 $ 96.0
4.2%
3.6%
$
20.4 $
25.1 $
(4.7)
(18.7)%
12.9
(2.2)
15.1
686.4%
Additives and Inks
13.5
7.0
6.5
92.9%
Per formance Products
and Solutions
PolyOne Distribution
Resin and
Intermediates
Corporate and
eliminations
34.9
28.1
57.5
22.1
(22.6)
(39.3)%
6.0
27.1%
28.6
34.8
(6.2)
(17.8)%
(267.7)
(110.4)
(157.3)
(142.5)%
$ (129.3) $
33.9 $(163.2)
(481.4)%
2008
2007
Change
Operating income (loss) as a
percentage of sales:
International Color and Engineered
Materials
3.5% 4.3% (0.8)% points
Specialty Engineered Materials
5.1% (1.8)% 6.9% points
Specialty Color, Additives and Inks
5.9% 3.0% 2.9% points
Per formance Products and Solutions
3.5% 5.3% (1.8)% points
PolyOne Distribution
Total
3.5% 3.0% 0.5% points
(4.7)% 1.3% (6.0)% points
International Color and Engineered Materials
Sales declined $1.2 million, or 0.2%, in 2008 as weakening
demand in the second half of 2008 in both Europe and Asia offset
higher pricing and a $42.6 million favorable impact from foreign
exchange. Volume declined 11.1%. Operating income declined
$4.7 million, or 18.7%, in 2008 despite the favorable impact of
foreign exchange of $2.2 million. Continued progress in improving
the sales mix through the penetration of specialty applications in
the packaging, electrical and electronics, specialty wire and cable
and transpor tation end markets did not offset the adverse impact of
the substantial weakening of demand in the fourth quarter of 2008.
Specialty Engineered Materials
Sales increased $128.0 million, or 103.0%, in 2008 compared to
2007 primarily due to the acquisition of GLS. GLS continued to
demonstrate its ability to grow its specialty mix of applications in the
health care, consumer products and medical end markets. Partially
offsetting the favorable benefit to sales from the acquisition of GLS
was lower demand for wire and cable and general purpose products
that go into the North American building and construction and
transpor tation
increased
$15.1 million in 2008 driven primarily by the GLS acquisition and
the elimination of unprofitable accounts.
end markets. Operating
income
Specialty Color, Additives and Inks
Sales declined $3.4 million, or 1.5%, in 2008 as volume declined
10.7%. Partially mitigating the impact of lower volume was a higher
value sales mix driven by a greater focus on capturing specialty type
applications and higher pricing to offset increased raw material
costs. Operating income improved $6.5 million in 2008 driven by
the combined effect of a more profitable sales mix, cost reduction
initiatives in operations, and a focused effort on culling unprofitable
business.
Performance Products and Solutions
Sales declined $85.4 million, or 7.9%, in 2008 due primarily to
significantly lower demand in the North American building and
construction and transpor tation markets. Volume declined
19.9%. Favorable items impacting sales were higher prices due
to rising raw material costs and an improved sales mix. Operating
income declined $22.6 million, or 39.3%, in 2008 as compared to
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2007 due to lower demand and because selling price increases did
not offset higher raw material costs. Falling raw material costs and
reduced inventory resulted in a favorable LIFO reserve adjustment
of $3.2 million for the year.
PolyOne Distribution
PolyOne Distribution sales increased $52.4 million, or 7.0%, in
2008 despite lower volumes. The combined impact of price
increases to offset increasing raw material costs, continued growth
in higher value end markets, such as healthcare and consumer
products, and the success of a national accounts program offset
the impact of declining volume. Operating income increased
$6.0 million, or 27.1%, in 2008 driven by a more profitable sales
mix, margin benefits realized as a result of increased market prices,
cost containment programs to mitigate rising transpor tation and
distribution costs, and the cumulative impact of various margin
improvement programs.
Resin and Intermediates
Operating income declined $6.2 million, or 17.8%, in 2008 driven by
a 20.8% volume decline driven partially by force majeure claims
from SunBelt’s sole chlorine customer, OxyVinyls. In December,
OxyVinyls declared force majeure due to a plant shutdown. In the
third quarter of 2008, OxyVinyls declared force majeure due to the
combined effect of Hurricanes Gustav and Ike.
Corporate and Eliminations
Operating loss from Corporate and eliminations was $157.3 million
higher in 2008 due mainly to a $170 million impairment of goodwill,
higher year-over-year restructuring charges offset partially by lower
environmental remediation charges. In 2008, we recorded environ-
mental
restructuring and impairment charges of
$229.0 million as compared to $69.9 million of similar charges
remediation,
recorded in 2007. The following table breaks down Corporate and
eliminations into its various components:
(In millions)
Impairment of goodwill(a)
Future environmental remediation costs(b)
Impairment of OxyVinyls equity
investment(c)
Settlement of environmental costs related
to Calvert City(d)
Impairment of intangibles and other
investments(e)
Employee separation and plant
phaseout(f)
Write-down of certain assets of and
investment in equity affiliate(g)
Cost related to sale of OxyVinyls equity
investment
Settlement of legal issues and related
reserves(h)
Gain on sale of assets(i)
Share-based compensation
All other and eliminations(j)
Year Ended
Year Ended
December 31,
December 31,
2008
2007
$(170.0)
$
—
(14.6)
(33.2)
—
—
—
(39.7)
(4.7)
—
(1.2)
—
(3.0)
(34.5)
(14.8)
(15.6)
(2.5)
(2.2)
(1.6)
(0.4)
(0.6)
2.5
(4.3)
(37.7)
Total Corporate and eliminations
$(267.7)
$(110.4)
(a) In the fourth quarter of 2008, we recognized a non-cash goodwill
impairment charge of $170.0 million related to our Geon Com-
pounds and Specialty Coatings reporting units within the Perfor-
mance Products and Solutions segment. See Note 3, Goodwill and
Other Intangibles, to the accompanying consolidated financial
statements for further information.
(b) In the third quarter of 2007, our accrual for costs related to future
remediation at inactive or formerly owned sites was adjusted based
on a U.S. District Court’s rulings on several motions in the case of
Westlake Vinyls, Inc. v. Goodrich Corporation et al. and a settlement
agreement entered into in connection with the case, which requires
us to pay remediation costs related to the Calvert City facility.
(c) Our 24% equity investment in OxyVinyls was adjusted at June 30,
2007 as the carrying value was higher than the fair value and the
decrease was determined to be an other than temporary decline in
value.
(d) In the third quarter of 2007, we accrued $15.6 million to reimburse
Goodrich Corporation for remediation costs paid on our behalf and
certain legal costs related to the Calvert City facility.
(e) An impairment of the carrying value of certain patents and tech-
nology agreements and investments of $2.5 million was recorded
during 2007.
(f) During the third quarter of 2008, we announced the restructuring of
certain manufacturing assets, primarily in North America. During
January 2009, we announced the initiation of further cost saving
measures that include eliminating approximately 370 jobs, imple-
menting reduced work schedules, closing a facility and idling cer-
tain other capacity. See Note 4, Employee Separation and Plant
Phaseout, to the accompanying consolidated financial statements
for further information.
(g) In the third quarter of 2008 and 2007, we recorded $2.6 million
and $1.6 million, respectively, related to our proportionate share of
the write-down of certain assets by Geon Polimeros Andinos, our
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equity affiliate in Columbia. Also, in the third quarter of 2008, we
recorded a $2.1 million charge related to our proportionate share of
an impairment of our investment in the equity affiliate.
(h) In 2008, we recognized $1.0 million for the estimated cost of
settlement of a civil penalty settlement demand related to EPA claim
at PolyOne facilities.
(i) The gains on sale of assets in 2007 relates to the sale of previously
closed facilities and other assets.
(j) All other and eliminations is comprised of intersegment elimina-
tions and corporate general and administrative costs that are not
allocated to segments.
Sales and Operating Income (Loss) — 2007 compared with
2006:
International Color and Engineered Materials
International Color and Engineered Materials 2007 sales increased
$77.9 million, or 15.3%, to $588.6 million due primarily to favorable
foreign exchange rates, which increased sales by $49.9 million, or
9.8%, coupled with growth in the Color product lines in Asia and
Europe and engineered materials in Europe.
Operating income increased $4.5 million in 2007 as compared
to 2006. This 21.8% increase was driven by improved margins due
to greater penetration of specialty applications in the Asian and
European Color and Additive businesses, higher margins due to
product mix improvements, value selling and price management
and lower conversion costs. Foreign exchange had a favorable
impact on operating income of $1.9 million.
(Dollars in millions)
2007
2006
Change
% Change
Specialty Engineered Materials
Sales:
International Color and
Engineered Materials
Specialty Engineered
Materials
Specialty Color, Additives
$ 588.6 $ 510.7 $ 77.9
15.3%
124.3
113.3
11.0
9.7%
and Inks
232.0
253.1
(21.1)
(8.3)%
Per formance Products
and Solutions
1,086.8
1,166.2
(79.4)
(6.8)%
PolyOne Distribution
744.3
732.8
11.5
1.6%
Corporate and
eliminations
Operating income (loss):
International Color and
Engineered Materials
Specialty Engineered
Materials
Specialty Color, Additives
and Inks
Per formance Products
and Solutions
PolyOne Distribution
Resin and Intermediates
Corporate and
eliminations
(133.3)
(153.7)
20.4
13.3%
$2,642.7 $2,622.4 $ 20.3
0.8%
$
25.1 $
20.6 $
4.5
21.8%
(2.2)
(2.4)
0.2
8.3%
7.0
(4.1)
11.1
270.7%
57.5
22.1
34.8
73.4
19.2
(15.9)
(21.7)%
2.9
15.1%
102.9
(68.1)
(66.2)%
(110.4)
(19.0)
(91.4)
(481.1)%
$
33.9 $ 190.6 $(156.7)
(82.2)%
Specialty Engineered Materials sales grew 9.7% due to continued
progress in capturing specialized applications in the electrical / elec-
tronics and medical end markets, as well as growth in wire and cable
application markets. Thermoplastic elastomer sales grew 39.4%
due to strengthening demand at existing customers and the capture
of a new large customer.
Operating income improved $0.2 million, or 8.3%, over 2006.
This increase was due mainly to the improvement in earnings of our
thermoplastic elastomer product lines driven by higher sales and
improved margins resulting from the recapture of raw material
costs.
Specialty Color, Additives and Inks
Specialty Color, Additives and Inks includes the North American
Color and Additives and Specialty Inks and Polymer Systems report-
ing units. Sales were down 8.3% from 2006 due mainly to the
pruning of unprofitable business and withdrawing from certain
general purpose oriented applications. Lower sales resulting from
these pruning efforts were offset partially by growth in the inks
product lines.
Operating income was $7.0 million in 2007 compared to a
$4.1 million loss in 2006, an increase of $11.1 million. North
American Color and Additives operating income increased
$9.2 million due to a stronger product mix driven by the benefits
of improved commercial disciplines, the pruning of unprofitable
business and lower operating costs. The remaining increase was
due to sales and mix improvements within the inks product lines.
2007
2006
Change
Performance Products and Solutions
Operating income (loss) as a
percentage of sales:
International Color and Engineered
Materials
4.3% 4.0%
0.3% points
Specialty Engineered Materials
(1.8)% (2.1)% 0.3% points
Specialty Color, Additives and Inks
3.0% (1.6)% 4.6% points
Per formance Products and Solutions
5.3% 6.3% (1.0)% points
PolyOne Distribution
Total
3.0% 2.6% 0.4% points
1.3% 7.3% (6.0)% points
Per formance Products and Solutions sales were $1,086.8 million
in 2007, $79.4 million or 6.8% lower than 2006, primarily due to
the slowdown in the building and construction market, which
affected demand for vinyl windows, pipe and fittings products,
PVC flooring and appliances. Also, negatively affecting 2007 results
was a growing presence of imported products in the end markets
that use or that compete directly with our specialty resin product.
The decline in volume drove sales down 6.2%.
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Operating income in 2007 decreased $15.9 million, or 21.7%,
compared to 2006, primarily due to weak building and construction
demand and margin compression due to the combination of
downward pricing pressure in building and construction end mar-
kets and higher raw material and energy costs.
PolyOne Distribution
PolyOne Distribution sales increased $11.5 million, or 1.6%, com-
pared to 2006 due to an improved mix of sales on relatively flat
volume. Increased sales into the healthcare and transportation end
markets offset declines in the appliance and building and construc-
tion sectors.
Operating income was $22.1 million, up 15.1% from 2006.
This increase was due to higher sales, expanded gross margins
resulting from a favorable sales mix and lower unit delivery costs.
Selling and general administrative costs were slightly lower due to
lower bad debt costs that offset higher investment in commercial
resources.
Resin and Intermediates
2007 operating income declined 66.2%, or $68.1 million, versus
2006 as the slowdown in building and construction markets and
downward margin pressure from rising feedstock costs negatively
impacted the results of OxyVinyls. In July 2007, we divested our 24%
interest in OxyVinyls, which in the second half of 2006 contributed
$18.4 million to segment earnings. SunBelt earnings were $6.3 mil-
lion lower in 2007 compared to 2006 due to a 3.3% decline in sales
that offset higher year-over-year ECU netbacks, which were up 1.0%.
Corporate and Eliminations
Operating loss from Corporate and eliminations was $91.4 million
higher in 2007 versus 2006 mainly due to higher environmental
remediation charges and impairment charges and lower benefits
from legal settlements. In 2007, we recorded environmental reme-
diation and impairment charges and legal settlements of $68.3 mil-
lion as compared to a benefit of $20.6 million of similar items
recorded in 2006. A summary of Corporate and eliminations
follows:
(In millions)
Future environmental remediation costs(a)
Impairment of OxyVinyls equity
investment(b)
Settlement of environmental costs
related to Calvert City(c)
Impairment of intangibles and other
investments(d)
Employee separation and plant
phaseout(e)
Write-down of certain assets of equity
affiliate(f)
Cost related to sale of OxyVinyls equity
investment
Settlement of legal issues and related
reserves(g)
Gain on sale of assets(h)
Share-based compensation
All other and eliminations(i)
Year Ended
Year Ended
December 31,
December 31,
2007
2006
$ (33.2)
$ (2.5)
(14.8)
(15.6)
(2.5)
(2.2)
(1.6)
(0.4)
(0.6)
2.5
(4.3)
(37.7)
—
—
(0.2)
—
—
—
23.3
3.1
(4.5)
(38.2)
Total Corporate and eliminations
$(110.4)
$(19.0)
(a) In 2007, our accrual for costs related to future remediation at
inactive or formerly owned sites was adjusted based on a U.S.
District Court’s ruling on several motions in the case of Westlake
Vinyls, Inc. v. Goodrich Corporation et al. and a settlement agreement
entered into in connection with the case, which require us to pay
remediation costs at the Calvert City, Kentucky facility.
(b) Our 24% equity investment in OxyVinyls was adjusted at June 30,
2007 as the carrying value was higher than the fair value and the
decrease was determined to be an other than temporary decline in
value.
(c) In the third quarter of 2007, we recorded $15.6 million for reme-
diation costs and certain legal costs related to the Calvert City
facility.
(d) An impairment of the carrying value of certain patents and technol-
ogy agreements and investments of $2.5 million was recorded during
2007.
(e) Severance, employee outplacement, external outplacement consult-
ing, lease termination, facility closing costs and the write-down of the
carrying value of plant and equipment resulting from restructuring
initiatives and executive separation agreements.
(f) Our share of an asset write-down was recorded in the third quarter of
2007 against the carrying value of certain inventory, accounts receiv-
able and intangible assets at our equity affiliate in Colombia.
(g) The benefit of insurance, legal settlements and adjustments to
related reserves was a charge of $0.6 million for 2007 as compared
to a net benefit of $23.3 million during the same period of 2006.
(h) The gains on sale of assets in 2007 and 2006 relate to the sale of
previously closed facilities and other assets.
(i) All other and eliminations is comprised of intersegment eliminations
and corporate general and administrative costs that are not allocated
to segments.
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Liquidity and Capital Resources
Operating Activities
As of December 31,
(In millions)
2008
2007
2006
(In millions)
2008
2007
2006
Cash and cash equivalents
$ 44.3
$ 79.4
$ 66.2
Accounts Receivable Availability
121.4
151.2
111.5
Cash Flows from Operating
Activities
Net (loss) income
$(272.9)
$ 11.4
$ 122.9
Liquidity
$165.7
$230.6
$177.7
Depreciation and amortization
68.0
57.4
57.1
Liquidity is defined as an enterprise’s ability to generate adequate
amounts of cash to meet both current and future needs. These
needs include paying obligations as they mature, maintaining pro-
duction capacity and providing for planned growth. Capital
resources are sources of funds other than those generated by
operations.
Liquidity decreased $64.9 million in 2008 versus 2007 due to
investment in the business, specifically the acquisition of GLS,
which was partially offset by cash provided by operating and financ-
ing activities. Accounts Receivable Availability declined from 2007
to 2008 by $29.8 million based on $15.3 million of lower eligible
receivables, and as of December 31, 2008, $14.2 million of our
undivided interests in accounts receivable were sold as compared
to $0.0 million at December 31, 2007.
In 2007, liquidity increased $52.9 million driven by a larger
eligible pool of receivables as the facility was expanded to include
Canadian receivables and an increase in cash and cash equivalents
due to a year-over-year improvement in working capital of $70.5 mil-
lion, a favorable impact of foreign exchange on cash of $6.6 million,
and the sales of assets.
Cash Flows
The following discussion focuses on the material components of
cash flows from operating, investing and financing activities.
(In millions)
Cash flow summary
2008
2007
2006
Cash provided by operating activities $ 72.5
$ 67.2
$111.7
Cash (used) provided by investing
activities
(193.5)
215.3
(16.8)
Cash provided (used) in financing
activities
Effect of exchange rates on cash
(Decrease) increase in cash and
88.0
(275.9)
(63.4)
(33.0)
(2.1)
6.6
6.6
31.5
1.9
equivalents
$ (35.1)
$ 13.2
$ 33.4
Loss on disposition of discontinued
businesses and related plant
phaseout charge
Deferred income tax provision
—
—
3.1
(benefit)
89.4
(57.1)
(12.9)
Premium on early extinguishment of
long-term debt
Provision for doubtful accounts
Stock compensation expense
Impairment of goodwill
Asset write-downs and impairment
charges, net of (gain) on sale of
closed facilities
Companies carried at equity and
minority interest:
Income from equity affiliates and
—
6.0
3.0
170.0
12.8
1.9
4.3
—
4.4
3.0
4.5
—
3.6
3.3
(0.9)
minority interest
(31.2)
(27.7)
(112.0)
Distributions and distributions
received
Change in assets and liabilities:
Increase (decrease) from working
32.9
37.6
97.7
capital
(0.3)
33.7
(36.8)
Increase (decrease) in sale of
accounts receivable
(Decrease) increase in accrued
14.2
—
(7.9)
expenses and other
(10.2)
(10.4)
(10.4)
Net cash used by discontinued
operations
Net cash provided by operating
—
—
(0.1)
activities
$ 72.5
$ 67.2
$ 111.7
In 2008, cash provided by operating activities increased
$5.3 million as compared to 2007 due to higher earnings before
giving effect to non-cash restructuring and tax valuation allowance
charges, lower debt extinguishment premiums, lower cash pay-
ments for environmental remediation, and an increase in the sale
of accounts receivable, all of which offset the unfavorable impacts
related to working capital changes, year-over-year, and higher pen-
sion funding.
Cash provided by operations decreased in 2007 by $44.5 mil-
lion compared to 2006 due to lower operating earnings, lower
earnings and distributions from equity affiliates, an increase in
environmental remediation payments, and a $57.1 million benefit
in deferred income taxes principally related to the OxyVinyls sale.
Additionally, the impact of the change in working capital was a
$70.5 million improvement comparing 2007 versus 2006. A more
comprehensive discussion of working capital is provided below.
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Our working capital management focus is on three metrics that
we believe are the most critical to maximizing cash provided by
operating activities. These metrics measure the number of days of
sales in receivables (DSO), the days of cost of goods sold in
inventories (DSI) and the days of cost of goods sold in accounts
payable (DSP).
The following table presents a comparison of our average
working capital metrics for 2008, 2007 and 2006:
Investing Activities
(In millions)
2008
2007
2006
Cash Flows from Investing Activities
Capital expenditures
$ (42.5)
$ (43.4)
$(41.1)
Investment in affiliated company
(1.1)
—
—
Business acquisitions and related
deposits, net of cash acquired
(150.2)
(11.2)
Proceeds from sale of assets
0.3
9.4
(1.5)
8.7
(In days)
Accounts receivable DSO
Inventories DSI
Accounts payable DSP
Average net days
2008
2007
2006
Proceeds from sale of investment
52.8
50.6
51.6
45.2
50.8
44.3
(53.3)
(55.5)
(51.5)
50.1
41.3
43.6
in equity affiliate
Proceeds from sale of discontinued
business
Net cash used by discontinued
operations
—
—
—
260.5
—
—
—
17.3
(0.2)
Change in net days from prior year average
(8.8)
2.3
(4.9)
Average working capital as a percentage of
sales
15.4% 14.4% 14.4%
In 2008, average net days increased 8.8 days primarily due to a
higher investment in inventories particularly in the fourth quarter of
2008 when the rapid decline in the level of business activity out-
paced inventory reduction programs. Overall, working capital as a
percentage of sales increased one percentage point based on
dynamics described above.
The 2007 average working capital metrics netted to a 2.3 day
improvement compared to 2006 driven by management’s actions to
improve DSP by initiating vendor terms management programs
which offset higher inventories due to a slower demand outlook
and a DSO increase of 0.8 days as customers slowed payments in
light of a softening outlook for the economy. The 2006 year-end
working capital metrics netted to an unfavorable increase of
4.9 days compared to 2005 due to slower collections and higher
inventories as compared to year-end 2005 when weather issues in
the U.S. Gulf Coast created an unusually favorable impact on col-
lections and inventory levels due to material shortages.
The net impact on cash flow from the change in working capital
metrics described above is presented below:
(In millions)
Cash provided (used) by:
Accounts receivable
Inventories
Accounts payable
2008
2007
$ 60.8
$(10.8)
33.6
(94.7)
26.7
17.8
$ (0.3)
$ 33.7
Net cash (used) provided by
investing activities
$(193.5)
$215.3
$(16.8)
In 2008, net cash used by investing activities was driven by the
acquisition of GLS. Capital spending as a percentage of deprecia-
tion and amortization was 63%. Included in the $42.5 million of
capital expenditures were strategic investments to upgrade our
Enterprise Resource Planning system, expand our global footprint
in China and India through investment in manufacturing and cus-
tomer specific projects, product line investments to support our
specialization strategy, and the enablement of the manufacturing
restructuring initiative we announced in July 2008. Spending on
strategic projects constituted approximately 48% of total spending.
The remainder of spending was related to productivity improvement,
on-going maintenance of the asset base and critical environmental,
health and safety (EH&S) projects.
In 2007, we generated $215.3 million from investing activities,
primarily from the proceeds of the sale of our 24% interest in
OxyVinyls. In a transaction related to the sale of our interest in
OxyVinyls, we purchased the remaining 10% minority interest in
Powder Blends, LP. Capital spending as a percentage of deprecia-
tion and amortization was 76%. Included in the $43.4 million of
capital expenditures were strategic investments to expand our
footprint in Eastern Europe through the building of our Poland
facility, and increase our capabilities to compete in more specialized
end-markets related to additives and liquid color applications.
Spending on strategic projects constituted approximately 42% of
total spending. The remainder of spending was related to produc-
tivity improvement, on-going maintenance of the asset base and
critical EH&S projects.
In 2006, we used $16.8 million for investing activities, prima-
rily for capital spending in support of manufacturing operations. This
use of cash was partially offset by the proceeds from the sale of our
Engineered Films business. Capital spending in 2006 as a percent-
age of depreciation and amortization was 72%. Included in the
$41.1 million of capital expenditures were strategic investments to
upgrade our capabilities to compete in more specialized end-mar-
kets, such as the construction of our Avon Lake Engineered Mate-
rials manufacturing plant in Ohio and the investment in specialty
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product manufacturing assets in Europe and the expansion of
capacity in China. Spending on strategic projects constituted
approximately 48% of total spending. The remainder of spending
was related to productivity improvement, on-going maintenance of
the asset base and critical EH&S projects.
Capital expenditures are currently estimated to be between
$40 million and $50 million in 2009, primarily to support and
maintain manufacturing operations and restructuring actions.
Financing Activities
(In millions)
2008
2007
2006
2007. This decrease is primarily due to reduced purchases near
year-end.
Liquidity and Capital Resources
As of December 31, 2008, we had existing facilities to access
available capital resources (receivables sale facility, and senior
unsecured notes and debentures) totaling $569.9 million. As of
December 31, 2008, we had used $448.5 million of these facilities,
and $121.4 million was available to be drawn. As of December 31,
2008, we also had a $44.3 million cash and cash equivalents
balance adding to our available liquidity.
Cash Flows from Financing Activities
The following table summarizes our available and outstanding
Change in short-term debt
$ 43.3
$
(0.2)
$ (2.1)
facilities at December 31, 2008:
Issuance of long-term debt, net of
debt issuance costs
77.8
—
—
Repayment of long-term debt
(25.3)
(264.1)
(60.0)
Purchase of common stock for
treasury
Premium paid on early
(8.9)
—
—
extinguishment of long-term debt
—
(12.8)
(4.4)
Proceeds from exercise of stock
options
1.1
1.2
3.1
Net cash provided (used) by
financing activities
$ 88.0
$(275.9)
$(63.4)
Cash provided by financing activities in 2008 was primarily
used for the acquisition of GLS and the funding necessary to
extinguish maturing debt. On January 9, 2008, we borrowed
In April
$40.0 million under
2008, we sold an additional $80.0 million in aggregate principal
amount of 8.875% senior notes due 2012.
the new revolving credit facility.
Cash used by financing activities in 2007 and 2006 was pri-
marily for the extinguishment of debt.
Discontinued Operations
Cash flows from discontinued operations are presented separately
on a single line in each section of the accompanying consolidated
statements of cash flows. The absence of future cash flows from
discontinued operations is not expected to materially affect future
liquidity and capital resources.
Balance Sheets
The following discussion focuses on material changes in balance
sheet line items from December 31, 2007 to December 31, 2008
that are not discussed in the preceding “Cash Flows” section.
Pension benefits — Our liability for pension benefits increased
$142.4 million during 2008, due mainly to a decline in the values of
pension assets as a result of volatility in the equity markets during
2008.
Accounts payable — Accounts payable as of December 31,
2008 decreased $90.5 million as compared to December 31,
(In millions)
Outstanding
Available
Long-term debt, including current maturities
$428.1
$ —
Receivables sale facility
Short-term debt
14.2
6.2
121.4
—
$448.5
$121.4
Long-Term Debt — At December 31, 2008, long-term debt
totaled $428.1 million, with maturities ranging from 2009 to
2015. Current maturities of
long-term debt at December 31,
2008 were $19.8 million. During 2007, we repurchased
$241.4 million aggregate principal amount of our 10.625% senior
notes due 2010 at a premium of $12.8 million. This premium is
shown as a separate line item in the accompanying consolidated
statements of operations. Unamortized deferred note issuance
costs of $2.8 million were expensed due to this repurchase and
are included in interest expense in the accompanying consolidated
statements of operations. We also made payments of $20.0 million
in 2008 and 2007 of aggregate principal amount of our medium-
term notes that matured during 2008 and 2007. As part of our
purchase of DH Compounding Company during the fourth quarter of
2006, we issued a promissory note in the principal amount of
$8.7 million, payable in 36 equal
installments at a rate of 6%
per annum. During 2007, we made principal payments totaling
$2.8 million on this promissory note. During 2008, we paid the
remaining $5.3 million of aggregate principal on this note. For more
information about our debt, see Note 6, Financing Arrangements, to
the accompanying consolidated financial statements.
Guarantee and Agreement — We entered into a definitive
Guarantee and Agreement with Citicorp USA, Inc., KeyBank National
Association and National City Bank on June 6, 2006. Under this
Guarantee and Agreement, we guarantee some treasury manage-
ment and banking services provided to us and our subsidiaries,
such as foreign currency forwards, letters of credit and bank over-
drafts. This guarantee is secured by our inventories located in the
United States.
Credit Facility — On January 3, 2008, we entered into a credit
agreement with Citicorp USA, Inc., as administrative agent and as
issuing bank, and The Bank of New York, as paying agent. The credit
agreement provides for an unsecured revolving and letter of credit
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facility with total commitments of up to $40 million. The credit
agreement expires on March 20, 2011.
Borrowings under the revolving credit facility are based on the
applicable LIBOR rate plus a fixed facility fee of 4.77%. On January 9,
2008, we borrowed $40 million under the agreement and entered
into a floating to fixed interest rate swap to January 9, 2009
resulting in an effective interest rate of 8.4%. On December 30,
2008, we terminated this interest rate swap. At December 31,
2008, we had outstanding borrowings under the revolving credit
facility of $40.0 million that is included in Long-term debt on the
accompanying consolidated balance sheets. The credit agreement
contains covenants that, among other things, restrict our ability to
incur liens, and various other customar y provisions, including affir-
mative and negative covenants, and representations and
warranties.
Receivables Sale Facility — The receivables sale facility was
amended in June 2007 to extend the maturity to June 2012 and to
among other things, modify certain financial covenants and reduce
the cost of utilizing the facility. In July 2007, the receivable sale
facility was amended to include up to $25.0 million of Canadian
receivables, which increased the facility size to $200.0 million. The
maximum proceeds that we may receive are limited to the lesser of
$200.0 million or 85% of the eligible domestic and Canadian
accounts receivable sold. This facility also makes up to
$40.0 million available for issuing standby letters of credit as a
sub-limit within the $200.0 million facility, of which $11.0 million
was used at December 31, 2008.
The facility requires us to maintain a minimum fixed charge
coverage ratio (defined as Adjusted EBITDA less capital expendi-
tures, divided by interest expense and scheduled debt repayments
for the next four quarters) of at least 1 to 1 when average excess
availability under the facility is $40.0 million or less.
Notes Receivable — As of December 31, 2008, included in
Other non-current assets is $20.5 million outstanding on a seller
note receivable due from Excel Polymers LLC who purchased our
elastomers and per formance additives business in February 2006.
This note accrues interest at 10% and is due in full with accrued
interest at maturity in July 2010. Also included in Other non-current
assets as of December 31, 2008 is $7.5 million outstanding on a
seller note receivable due to us from O’Sullivan Films who pur-
chased our engineered films business in August 2004. This note
accrues interest at 7% and is due in full with accrued interest at
maturity in December 2010.
Concentrations of Credit Risk — Financial
instruments,
including foreign exchange contracts and interest rate swap agree-
ments, along with trade accounts receivable and notes receivable,
subject us to potential credit risk. Concentration of credit risk for
trade accounts receivable is limited due to the large number of
customers constituting our customer base and their distribution
among many industries and geographic locations. We are exposed
to credit risk with respect to notes receivable but we believe col-
lection of the outstanding amounts is probable. We are exposed to
credit risk with respect to forward foreign exchange contracts and
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interest rate swap agreements in the event of non-per formance by
the counter-par ties to these financial instruments. We believe that
the risk of incurring material losses related to this credit risk is
remote. We do not require collateral to support the financial posi-
tion of our credit risks.
Of
the capital
resource facilities available to us as of
December 31, 2008, the portion of the receivables sale facility
that was actually sold provided security for the transfer of ownership
of these receivables. Each indenture governing our senior unse-
cured notes and debentures and our guarantee of the SunBelt notes
allows a specific level of secured debt, above which security must be
provided on each indenture and our guarantee of the SunBelt notes.
The receivables sale facility and our guarantee of the SunBelt notes
are not considered debt under the covenants associated with our
senior unsecured notes and debentures. As of December 31, 2008,
we had sold $14.2 million of accounts receivable and had guaran-
teed $54.8 million of our SunBelt equity affiliate’s debt.
We expect that operations in 2009 will enable us to maintain
existing levels of available capital resources and meet our cash
requirements. Expected sources of cash in 2009 include cash from
operations, additional borrowings under existing loan agreements
that are not fully drawn, cash distributions from equity affiliates and
proceeds from the sale of previously closed facilities and redundant
assets. Expected uses of cash in 2009 include interest expense
and discounts on the sale of accounts receivable, cash taxes, a
contribution to a defined benefit pension plan, debt retirements,
environmental remediation at inactive and formerly owned sites and
capital expenditures. Capital expenditures are currently estimated
to be between $40 million and $50 million in 2009, primarily to
support and maintain manufacturing operations and restructuring
actions. We may from time to time seek to retire or purchase our
outstanding debt through cash purchases and/or exchanges for
equity securities, in open market purchases, privately negotiated
transactions or otherwise. Such repurchases or exchanges, if any,
will depend on prevailing market conditions, our liquidity require-
ments, contractual restrictions and other factors. The amounts
involved may be material.
Disruptions, uncertainty or volatility in the credit markets may
adversely impact the availability of credit already arranged and the
availability and cost of credit in the future. These market conditions
may limit our ability to replace, in a timely manner, maturing liabil-
ities and access the capital necessary to grow and maintain our
business. Accordingly, we may be forced to delay raising capital,
issue shorter tenors than we prefer or pay unattractive interest
rates, which could increase our interest expense, decrease our
profitability and significantly reduce our financial flexibility. There
can be no assurances that government responses to the disrup-
tions in the financial markets will stabilize the markets or increase
liquidity and the availability of credit.
Based on current projections, we believe that we should be
able to continue to manage and control working capital, discretion-
ary spending and capital expenditures and that cash provided by
operating activities, along with available borrowing capacity under
our receivables sale facility, should allow us to maintain adequate
levels of available capital resources to fund our operations and
meet debt service and minimum pension funding requirements for
both the short and long term.
Off-Balance Sheet Arrangements
Receivables sale facility — We sell a portion of our domestic
accounts receivable to PolyOne Funding Corporation (PFC) and a
portion of our Canadian accounts receivable to PolyOne Funding
Canada Corporation (PFCC), both wholly-owned, bankruptcy-remote
subsidiaries. At December 31, 2008, accounts receivable totaling
$141.4 million were sold to PFC and PFCC and, as a result, they are
reflected as a reduction of accounts receivable in the accompanying
consolidated balance sheets. PFC and PFCC, in turn, sell an undi-
vided interest in these accounts receivable to certain investors and
realize proceeds of up to $200 million. The maximum proceeds that
PFC and PFCC may receive under the facility is limited to the lesser
of $200.0 million or 85% of the eligible domestic and Canadian
accounts receivable sold. At December 31, 2008, PFC and PFCC
had sold $14.2 million of their undivided interests in accounts
receivable. We retained an interest in the $127.2 million difference
between the amount of trade receivables sold by us to PFC and
PFCC and the undivided interests sold by PFC and PFCC. As a result,
this retained interest is included in accounts receivable on our
accompanying consolidated balance sheet at December 31,
2008. We believe that available funding under our receivables sale
facility provides us increased flexibility to manage working capital
requirements and is an important source of liquidity. For more
information about our receivables sale facility, see Note 8, Accounts
Receivable,
financial
accompanying
statements.
consolidated
the
to
obligations, pension and post-retirement obligations, guarantees
and purchase obligations as of December 31, 2008:
(In millions)
Total
1 Year
1-3 Years 4-5 Years
5 Years
Payment Due by Period
Less than
More than
Contractual Obligations
Long-term debt
Operating leases
Standby letters of credit
Interest on long-term debt
obligations(1)
Pension and post-
$ 428.1 $ 19.8 $ 79.1 $279.2 $ 50.0
68.9
11.0
19.5
11.0
26.6
12.5
10.3
—
—
—
120.4
33.1
59.9
19.9
7.5
retirement obligations(2)
350.3
20.7
129.9 117.7
Guarantees
Purchase obligations
54.8
26.2
6.1
12.2
12.2
24.4
1.5
0.3
82.0
24.3
—
Total
$1,059.7 $134.6 $309.2 $441.8 $174.1
(1) Interest obligations are stated at the rate of interest that is defined
by the debt instrument, assuming that the debt is paid at maturity.
(2) Pension and post-retirement obligations relate to our U.S. and inter-
national pension and other post-retirement plans. Based upon our
interpretation of the new pension regulations, there will be minimum
funding requirements in 2009 of approximately $5.5 million for our
U.S. qualified defined benefit pension plans. Obligations are based
on the plans’ current funded status and actuarial assumptions, and
include funding requirements projected to be made to our qualified
pension plans, projected benefit payments to participants in our
other post-employment benefit plans, and projected benefit pay-
ments to participants in our non-qualified pension plans through
2019.
Guarantee of
indebtedness of others — As discussed in
Note 13, Commitments and Related-Par ty Information, to the
accompanying consolidated financial statements, we guarantee
$54.8 million of unconsolidated equity affiliate debt of SunBelt in
connection with the construction of a chlor-alkali facility in McIntosh,
Alabama. This debt guarantee matures in 2017.
Letters of credit — The receivables sales facility makes up to
$40.0 million available for the issuance of standby letters of credit
of which $11.0 million was used at December 31, 2008. These
letters of credit are issued by the bank in favor of third parties and
are mainly related to insurance claims and interest rate swap
agreements.
Critical Accounting Policies and Estimates
Significant accounting policies are described more fully in Note 1,
Summar y of Significant Accounting Policies, to the accompanying
consolidated financial statements. The preparation of
financial
statements in conformity with U.S. generally accepted accounting
principles (U.S. GAAP) requires us to make estimates and assump-
tions about future events that affect the amounts reported in our
financial statements and accompanying notes. We base our esti-
mates on historical experience and assumptions that we believe are
reasonable under the related facts and circumstances. The appli-
cation of these critical accounting policies involves the exercise of
judgment and use of assumptions for future uncertainties. Accord-
We have no other off-balance sheet arrangements as defined in
ingly, actual results could differ significantly from these estimates.
Item 303(a)(4)(ii) of Regulation S-K.
Contractual Obligations
The following table summarizes our obligations under long-term
interest
debt, operating leases, standby
letters of credit,
We believe that the following discussion addresses our most critical
accounting policies, which are those that are the most important to
the portrayal of our financial condition and results of operations and
require our most difficult, subjective and complex judgments. We
have reviewed these critical accounting policies and related disclo-
sures with the Audit Committee of our Board of Directors.
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Description
Judgments and Uncertainties
Effect if Actual Results
Differ from Assumptions
Pension and Other Postretirement Plans
(cid:129) We account for our defined benefit pension
plans and other postretirement plans in
accordance with FASB Statement No. 158,
Employer’s Accounting for Defined Benefit
Pension and Other Postretirement Plans --
an Amendment of FASB Statements No.
87, 88, 106 and 132 (R).
(cid:129) As of December 31, 2008, an
increase/decrease in the discount rate of
0.5%, holding all other assumptions
constant, would have increased or
decreased accumulated other
comprehensive income and the related
pension and post-retirement liability by
approximately $27.5 million.
(cid:129) The weighted-average expected return on
assets was 8.50% for 2008, 2007 and
2006. The expected return on assets is a
long-term assumption whose accuracy can
only be measured over a long period based
on past experience. A variation in the
expected return on assets by 0.5% as of
December 31, 2008 would result in a
variation of approximately $1.4 million in
the net periodic benefit cost.
(cid:129) Holding all other assumptions constant, a
0.5% increase or decrease in the health
care cost trend rate would have increased
or decreased our 2008 net periodic benefit
cost by $0.2 million and our accumulated
other comprehensive income and the
related post-retirement liability by
approximately $2.3 million as of December
31, 2008.
(cid:129) Included in our results of operations are
significant pension and post-retirement
benefit costs that we measure using
actuarial valuations. Inherent in these
valuations are key assumptions, including
assumptions about discount rates and
expected returns on plan assets. These
assumptions are updated at the beginning
of each fiscal year. We consider current
market conditions, including changes in
interest rates, when making these
assumptions. Changes in pension and
post-retirement benefit costs may occur in
the future due to changes in these
assumptions.
(cid:129) Market conditions and interest rates
significantly affect the value of future
assets and liabilities of our pension and
post-retirement plans. It is difficult to
predict these factors due to the volatility of
market conditions.
(cid:129) To develop our discount rate, we consider
the yields of high-quality, fixed-income
investments with maturities that
correspond to the timing of our benefit
obligations.
(cid:129) To develop our expected return on plan
assets, we consider our historical long-
term asset return experience, the expected
investment portfolio mix of plan assets and
an estimate of long-term investment
returns. To develop our expected portfolio
mix of plan assets, we consider the
duration of the plan liabilities and give
more weight to equity investments than to
fixed-income securities.
(cid:129) The rate of increase in health care costs
that we assume for the next five years was
held constant with prior years to reflect
both our actual experience and projected
expectations.
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Description
Judgments and Uncertainties
Effect if Actual Results
Differ from Assumptions
Goodwill and Intangible Assets
(cid:129) Goodwill represents the excess of the
(cid:129) We determine the fair value of our
(cid:129) We per formed our annual testing for
reporting units using the income approach,
which requires us to make assumptions
and estimates regarding projected
economic and market conditions, growth
rates, operating margins and cash
expenditures.
purchase price over the fair value of the
net assets of acquired companies. We
follow the guidance in FASB Statement No.
142, Goodwill and Intangible Assets, and
test goodwill for impairment at least
annually, absent some triggering event that
would accelerate an impairment
assessment. On an ongoing basis, absent
any impairment indicators, we perform our
goodwill impairment testing as of the first
day of October of each year. The carrying
value of goodwill at December 31, 2008
was $163.9 million.
(cid:129) At December 31, 2008, we have $33.2
million of indefinite-lived intangibles
consisting of a trade name acquired as
part of the January 2008 acquisition of
GLS.
(cid:129) We have estimated the fair value of the
tradename using a “relief from royalty
payments” approach. This approach
involves two steps (1) estimating
reasonable royalty rate for the tradename
and (2) applying this royalty rate to a net
sales stream and discounting the resulting
cash flows to determine fair value. Fair
value is then compared with the carrying
value of the tradename.
goodwill impairment as of the first day of
July 2008 and we recorded a non-cash
impairment charge of $2.6 million related
to our share of a write-down of goodwill of
an equity affiliate. See Note 3, Goodwill
and Intangible Assets, to the accompanying
consolidated financial statements for
further discussion. As a result of our
change in timing of the annual impairment
testing to be as of the first day of October
prospectively, we reper formed the goodwill
impairment test as of October 1 and
determined that no additional goodwill
impairment existed.
(cid:129) During the fourth quarter of 2008,
indicators of potential impairment caused
us to conduct an interim impairment test.
Those indicators included the following: a
significant decrease in market
capitalization; a decline in recent operating
results; and a decline in our business
outlook primarily due to the
macroeconomic environment. In
accordance with FASB Statement No. 142,
we completed step one of the impairment
analysis and concluded that, as of
December 31, 2008, the fair value of two
of our reporting units was below their
respective carrying values, including
goodwill. The two reporting units that
showed potential impairment were Geon
Compounds and Specialty Coatings
(reporting units within Per formance
Products and Solutions). As such, step two
of the impairment test was initiated in
accordance with FASB Statement No. 142.
Due to its time consuming nature, the
step-two analysis has not been completed
as of the date of this filing. In accordance
with paragraph 22 of Statement No. 142,
we have recorded an estimate in the
amount of $170.0 million as a non-cash
goodwill impairment charge as of
December 31, 2008. We expect to
complete the step-two analysis during the
first quarter of 2009.
(cid:129) If actual results are not consistent with our
assumptions and estimates, we may be
exposed to additional goodwill impairment
charges.
(cid:129) If actual results are not consistent with our
assumptions and estimates, we may be
exposed to intangible impairment charges
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Description
Judgments and Uncertainties
Effect if Actual Results
Differ from Assumptions
Income Taxes
(cid:129) We account for income taxes using the
(cid:129) The ultimate recovery of certain of our
(cid:129) Although management believes that the
asset and liability method. Under the asset
and liability method, deferred tax assets
and liabilities are recognized for the
estimated future tax consequences
attributable to differences between the
financial statement carrying amounts of
existing assets and liabilities and their
respective tax bases. In addition, deferred
tax assets are also recorded with respect
to net operating losses and other tax
attribute carryforwards. Deferred tax
assets and liabilities are measured using
enacted tax rates in effect for the year in
which those temporary differences are
expected to be recovered or settled.
Valuation allowances are established when
realization of the benefit of deferred tax
assets is not deemed to be more likely
than not. The effect on deferred tax assets
and liabilities of a change in tax rates is
recognized in income in the period that
includes the enactment date.
(cid:129) We recognize net tax benefits under the
recognition and measurement criteria of
FIN 48, which prescribes requirements and
other guidance for financial statement
recognition and measurement of positions
taken or expected to be taken on tax
returns. We record interest and penalties
related to uncertain tax positions as a
component of income tax expense.
Environmental Liabilities
(cid:129) Based upon estimates prepared by our
environmental engineers and consultants,
we have $84.6 million accrued at
December 31, 2008 to cover probable
future environmental remediation
expenditures.
estimates and judgments discussed herein
are reasonable, actual results could differ,
which could result in gains or losses that
could be material.
deferred tax assets is dependent on the
amount and timing of taxable income that
we will ultimately generate in the future
and other factors such as the
interpretation of tax laws. This means that
significant estimates and judgments are
required to determine the extent that
valuation allowances should be provided
against deferred tax assets. We have
provided valuation allowances as of
December 31, 2008 aggregating $166.7
million against such assets based on our
current assessment of future operating
results and these other factors.
(cid:129) If further developments or resolution of
these matters are not consistent with our
assumptions and judgments, we may need
to recognize a significant charge in a future
period.
(cid:129) This accrual represents our best estimate
of the remaining probable remediation
costs based upon information and
technology currently available and our view
of the most likely remedy. Depending upon
the results of future testing, the ultimate
remediation alternatives undertaken,
changes in regulations, new information,
newly discovered conditions and other
factors, it is reasonably possible that we
could incur additional costs in excess of
the amount accrued. However, such
additional costs, if any, cannot currently be
estimated. Our estimate of this liability
may be revised as new regulations or
technologies are developed or additional
information is obtained. Changes during
the past five years have primarily resulted
from an increase in the estimate of future
remediation costs at existing sites and
payments made each year for remediation
costs that were already accrued.
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Description
Judgments and Uncertainties
Effect if Actual Results
Differ from Assumptions
(cid:129) Option-pricing models and generally
(cid:129) We do not believe there is a reasonable
accepted valuation techniques require
management to make assumptions and to
apply judgment to determine the fair value
of our awards. These assumptions and
judgments include estimating the future
volatility of our stock price, future
employee turnover rates and risk-free rate
of return.
likelihood there will be a material change in
the future estimates or assumptions we
use to determine share-based
compensation expense. However, if actual
results are not consistent with our
estimates or assumptions, we may be
exposed to changes in share-based
compensation expense that could be
material.
Share-Based Compensation
(cid:129) We have share-based compensation plans
that include non-qualified stock options,
incentive stock options, restricted stock,
restricted stock units, per formance shares,
per formance units and stock appreciation
rights (SARs). See Note 16, Share-Based
Compensation, to the accompanying
consolidated financial statements for a
complete discussion of our stock-based
compensation programs.
(cid:129) We determine the fair value of our SARs
granted in 2008 based on the Black-
Scholes method. For SARs granted during
2007 and 2006, the option pricing model
used was a Monte Carlo simulation method.
(cid:129) We determine the fair value of our market-
based and per formance-based nonvested
share awards at the date of grant using
generally accepted valuation techniques
and the average of the high and low grant
date market price of our stock.
(cid:129) Management reviews its assumptions and
the valuations provided by independent third-
party valuation advisors to determine the fair
value of share-based compensation awards.
New Accounting Pronouncements —
FASB Statement No. 157 — In September 2006, the FASB issued
FASB Statement No. 157, Fair Value Measurement, which defines
fair value, establishes the framework for measuring fair value under
U.S. GAAP and expands disclosures about fair value measure-
ments. FASB Statement No. 157 is effective for fiscal years begin-
ning after November 15, 2007. In December 2007, the FASB issued
a proposed FASB Staff Position (FSP FAS 157-b) that would delay
the effective date of FASB Statement No. 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized
or disclosed at fair value in the financial statements on a recurring
basis to fiscal years beginning after November 15, 2008. We
adopted the non-deferred portion of FASB Statement No. 157 on
January 1, 2008 and it did not have a material
impact on our
financial statements. We are evaluating the effect that adoption
of the deferred portion of FASB Statement No. 157 will have on our
financial statements in 2009, specifically in the areas of measuring
fair value in business combinations and goodwill impairment tests.
FASB Statement No. 159 — In February 2007, the FASB
issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which allows entities to voluntarily
choose, at specified election dates, to measure many financial
assets and liabilities at fair value. The election is made on an
instrument-by-instrument basis and is irrevocable. FASB Statement
No. 159 is effective for fiscal years beginning after November 15,
2007. The adoption of FASB Statement No. 159 had no impact on
our financial statements.
FASB Statement No. 141 (revised) — In December 2007, the
FASB issued FASB Statement No. 141 (revised 2007), Business
Combinations, which establishes principles over
the method
entities use to recognize and measure assets acquired and liabil-
ities assumed in a business combination and enhances disclosures
on business combinations. FASB Statement No. 141(R) is effective
for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on
or after December 15, 2008. We are evaluating the effect that
adoption will have on our 2009 financial statements.
FASB Statement No. 161 — In March 2008, the FASB issued
FASB Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities — an amendment of FASB Statement
No. 133. FASB Statement No. 161 requires qualitative disclosures
about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. FASB Statement
No. 161 is effective for fiscal years beginning after November 15,
2008. We are evaluating the effect that adoption will have on our
2009 financial statements.
FASB Staff Position No. FAS 132(R)-1 — In December 2008,
the FASB issued FASB Staff Position No. 132(R)-1, which amends
FASB Statement 132(R), Employers’ Disclosures About Postretire-
ment Benefit Plan Assets, to require more detailed disclosures
about employers’ plan assets, including employers’ investment
strategies, major categories of plan assets, concentrations of risk
within plan assets and valuation techniques used to measure the
fair value of plan assets. FASB Staff Position No. 132(R)-1 is
effective for disclosures in financial statement for fiscal years
ending after December 15, 2009. We are evaluating the effect that
adoption will have on our 2009 financial statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
currency exposure, see Note 19, Financial Instruments, to the
accompanying consolidated financial statements.
We face translation risks related to the changes in foreign
currency exchange rates. Amounts invested in our foreign opera-
tions are translated into U.S. dollars at the exchange rates in effect
at the balance sheet date. The resulting translation adjustments are
recorded as a component of Accumulated other comprehensive
income (loss) in the Shareholders’ equity section of the accompa-
nying consolidated balance sheets. Net sales and expenses in our
foreign operations’ foreign currencies are translated into varying
amounts of U.S. dollars depending upon whether the U.S. dollar
weakens or strengthens against other currencies. Therefore,
changes in exchange rates may either positively or negatively affect
our net sales and expenses from foreign operations as expressed in
U.S. dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Management’s Report
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders’ Equity
Notes to Consolidated Financial Statements
Page
37
38
39
40
41
42
43-72
We are exposed to certain market risks as part of our ongoing
business operations, including risks from changes in interest rates
on debt obligations and foreign currency exchange rates that could
impact our financial condition, results of operations and cash flows.
We manage our exposure to these and other market risks through
regular operating and financing activities, including the use of
derivative financial instruments. We intend to use these derivative
financial instruments as risk management tools and not for spec-
ulative investment purposes.
Interest rate exposure — We are subject to interest rate risk
related to our floating rate debt. As of December 31, 2008, approx-
imately 89% of our debt obligations were at fixed rates. There would
be no significant impact on our interest expense or cash flows from
either a 10% increase or decrease in market rates of interest on our
outstanding variable rate debt as of December 31, 2008.
To help manage borrowing costs, we may enter into interest
rate swap agreements. Under these arrangements, we agree to
exchange, at specified intervals, the difference between fixed and
floating interest amounts on agreed-upon notional principal
amounts. On December 30, 2008, we terminated an interest rate
swap that fixed the floating rate on $40.0 million of borrowings
under our revolving credit facility at an effective rate of 8.4%. This
swap was originally scheduled to expire on January 9, 2009. At
December 31, 2008, there were no outstanding interest rate swap
agreements. At December 31, 2007, we maintained interest rate
swap agreements on five of our fixed-rate obligations in the aggre-
gate amount of $80.0 million with a net fair value liability of
$1.7 million. At December 31, 2006, we maintained interest rate
swap agreements on six of our fixed-rate obligations in the aggre-
gate amount of $100.0 million with a net fair value liability of
$5.1 million. The weighted-average interest rate for these agree-
ments was 8.8% at December 31, 2007. During January 2008, four
of these interest rate swap agreements in the aggregate amount of
$70.0 million were terminated.
Foreign currency exposure — We enter into intercompany
lending transactions that are denominated in various foreign cur-
rencies and are subject to financial exposure from foreign exchange
rate movement from the date a loan is recorded to the date it is
settled or revalued. To mitigate this risk, we enter into foreign
exchange contracts. These contracts are not treated as hedges
and, as a result, are marked to market, with the resulting gains and
losses recognized as other income or expense in the accompanying
consolidated statements of operations. Gains and losses on these
contracts generally offset gains or losses on the assets and liabil-
ities being hedged. At December 31, 2008 and 2007, these agree-
ments had a fair value of $(0.3) million and $(2.3) million,
respectively. The estimated potential effect on the fair values of
these foreign exchange contracts, outstanding as of December 31,
2008, given a 10% change in exchange rates would be a $2.5 million
impact to pre-tax income. We do not hold or issue financial instru-
ments for trading purposes. For more information about our foreign
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MANAGEMENT’S REPORT
The management of PolyOne Corporation is responsible for prepar-
ing the consolidated financial statements and disclosures included
in this Annual Report on Form 10-K. The financial statements and
disclosures included in this Annual Report fairly present in all
material respects the financial position, results of operations,
shareholders’ equity and cash flows of PolyOne Corporation as of
and for the year ended December 31, 2008.
Management is responsible for establishing and maintaining
disclosure controls and procedures designed to ensure that the
information required to be disclosed by the company is captured
and reported in a timely manner. Management has evaluated the
design and operation of the company’s disclosure controls and
procedures at December 31, 2008 and found them to be effective.
financial
Internal control over
Management is also responsible for establishing and main-
taining a system of internal control over financial reporting that is
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles.
reporting
includes policies and procedures that provide reasonable assur-
ance that: PolyOne Corporation’s accounting records accurately and
fairly reflect the transactions and dispositions of the assets of the
company; unauthorized or improper acquisition, use or disposal of
company assets will be prevented or timely detected; the compa-
ny’s transactions are properly recorded and reported to permit the
preparation of the company’s financial statements in conformity
with generally accepted accounting principles; and the company’s
receipts and expenditures are made only in accordance with autho-
rizations of management and the board of directors of the company.
financial
Management has assessed the effectiveness of PolyOne’s
internal control over
reporting as of December 31,
2008 and has prepared Management’s Annual Report On Internal
Control Over Financial Reporting contained on page 73 of this
Annual Repor t. This report concludes that internal control over
financial reporting is effective and that no material weaknesses
were identified.
/s/ STEPHEN D. NEWLIN
/s/ ROBERT M. PATTERSON
Stephen D. Newlin
Chairman, President and
Chief Executive Officer
Robert M. Patterson
Senior Vice President
and Chief Financial Officer
February 23, 2009
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
PolyOne Corporation
To the Board of Directors and Shareholders
PolyOne Corporation
We have audited the accompanying consolidated balance sheets of
PolyOne Corporation and subsidiaries as of December 31, 2008 and
2007, and the related consolidated statements of operations, share-
holders’ equity, and cash flows for each of the three years in the period
ended December 31, 2008. These financial statements are the
responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements based on our
audits. The financial statements of Oxy Vinyls, LP (a limited partnership
in which the Company had a 24% interest) have been audited by other
auditors whose report has been furnished to us, and our opinion on the
consolidated financial statements,
insofar as it relates to 2006
amounts included for Oxy Vinyls, LP, is based solely on the report of
the other auditors.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and per form the audit to obtain rea-
sonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other audi-
tors, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PolyOne Cor-
poration and subsidiaries at December 31, 2008 and 2007, and the
consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
the Company adopted the provisions of SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106 and
132(R)” effective December 31, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), PolyOne
Corporation’s internal control over financial reporting as of Decem-
ber 31, 2008, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organi-
zations of the Treadway Commission and our report dated February 20,
2009 expressed an unqualified opinion thereon.
/s/
ERNST & YOUNG LLP
Cleveland, Ohio
February 20, 2009
We have audited PolyOne Corporation’s internal control over financial
reporting as of December 31, 2008, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO crite-
ria). PolyOne Corporation’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying “Management’s Annual Report on Internal Control over
Financial Reporting” which is included in Item 9A. Our responsibility is to
express an opinion on the company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and per form the audit to obtain rea-
sonable assurance about whether effective internal control over finan-
cial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and per forming such other pro-
cedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
financial
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company’s internal control over
reporting
includes those policies and procedures that: (1) pertain to the main-
tenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detec-
tion of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, PolyOne Corporation maintained, in all material
financial reporting as of
respects, effective internal control over
December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the con-
solidated balance sheets of PolyOne Corporation and subsidiaries as of
December 31, 2008, and 2007, and the related consolidated state-
ments of operations, shareholders’ equity, and cash flows for each of
the three years in the period ended December 31, 2008 of PolyOne
Corporation and our report dated February 20, 2009 expressed an
unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
February 20, 2009
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Consolidated Statements of Operations
(In millions, except per share data)
Sales
Cost of sales
Gross margin
Selling and administrative
Impairment of goodwill
Income from equity affiliates and minority interest
Operating (loss) income
Interest expense, net
Premium on early extinguishment of long-term debt
Other expense, net
Income (loss) before income taxes and discontinued operations
Income tax (expense) benefit
Income (loss) before discontinued operations
Loss from discontinued operations and loss on sale, net of income taxes
Year Ended December 31,
2008
2007
2006
$2,738.7
$2,642.7
$2,622.4
2,442.1
2,381.7
2,321.9
296.6
287.1
170.0
31.2
(129.3)
(37.2)
—
(4.6)
(171.1)
(101.8)
(272.9)
—
261.0
254.8
—
27.7
33.9
(46.9)
(12.8)
(6.6)
(32.4)
43.8
11.4
—
300.5
221.9
—
112.0
190.6
(63.1)
(4.4)
(2.8)
120.3
5.3
125.6
(2.7)
Net income (loss)
$ (272.9)
$
11.4
$ 122.9
Basic and diluted earnings (loss) per common share:
Before discontinued operations
Discontinued operations
Basic and diluted earnings (loss) per common share
Weighted-average shares used to compute earnings (loss) per common share:
Basic
Diluted
$
(2.94)
$
0.12
$
1.36
—
—
(0.03)
$
(2.94)
$
0.12
$
1.33
92.7
92.7
92.8
93.1
92.4
92.8
Dividends declared per share of common stock
$
— $
— $
—
The accompanying notes to consolidated financial statements are an integral part of these statements.
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Consolidated Balance Sheets
(In millions, except per share data)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable (less allowance of $6.7 in 2008 and $4.8 in 2007)
Inventories
Deferred income tax assets
Other current assets
Total current assets
Property, net
Investment in equity affiliates and nonconsolidated subsidiary
Goodwill
Other intangible assets, net
Deferred income tax assets
Other non-current assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt
Short-term debt
Accounts payable, including amounts payable to related party
Accrued expenses
Total current liabilities
Long-term debt
Post-retirement benefits other than pensions
Pension benefits
Other non-current liabilities
Commitments and contingencies (See Note 13)
Shareholders’ equity
Preferred stock, 40.0 shares authorized, no shares issued
Common stock, $0.01 par, 400.0 shares authorized, 122.2 shares issued in 2008 and 2007
Additional paid-in capital
Accumulated deficit
Common stock held in treasury, at cost, 29.9 shares in 2008 and 29.1 shares in 2007
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
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December 31,
2008
2007
$
44.3
$
79.4
262.1
197.8
1.0
19.9
525.1
432.0
20.5
163.9
69.1
0.5
66.6
340.8
223.4
20.4
19.8
683.8
449.7
19.9
288.8
6.7
69.9
64.2
$1,277.7
$1,583.0
$
19.8
$
22.6
6.2
160.0
118.2
304.2
408.3
80.9
225.0
83.4
6.1
250.5
94.4
373.6
308.0
81.6
82.6
87.8
—
1.2
—
1.2
1,065.0
1,065.0
(321.4)
(323.8)
(245.1)
(48.5)
(319.7)
(48.6)
175.9
649.4
$1,277.7
$1,583.0
Consolidated Statements of Cash Flows
(In millions)
Operating activities
Net (loss) income
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Loss on disposition of discontinued businesses and related plant phaseout charge
Deferred income tax provision (benefit)
Premium on early extinguishment of long-term debt
Provision for doubtful accounts
Stock compensation expense
Impairment of goodwill
Asset write-downs and impairment charges, net of (gain) on sale of closed facilities
Companies carried at equity and minority interest:
Income from equity affiliates and minority interest
Dividends and distributions received
Changes in assets and liabilities, net of acquisition:
Decrease (increase) in accounts receivable
Decrease (increase) in inventories
(Decrease) increase in accounts payable
Increase (decrease) in sale of accounts receivable
Decrease in accrued expenses and other
Net cash used by discontinued operations
Net cash provided by operating activities
Investing activities
Capital expenditures
Investment in affiliated company
Business acquisitions and related deposits, net of cash acquired
Proceeds from sale of discontinued business
Proceeds from sale of assets
Proceeds from sale of investment in equity affiliate
Net cash used by discontinued operations
Net cash (used) provided by investing activities
Financing activities
Change in short-term debt
Issuance of long-term debt, net of debt issuance costs
Repayment of long-term debt
Purchase of common stock for treasury
Premium on early extinguishment of long-term debt
Proceeds from the exercise of stock options
Net cash provided (used) in financing activities
Effect of exchange rate changes on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The accompanying notes to consolidated financial statements are an integral part of these statements.
Year Ended December 31,
2008
2007
2006
$(272.9)
$ 11.4
$ 122.9
68.0
—
89.4
—
6.0
3.0
170.0
3.6
(31.2)
32.9
60.8
33.6
(94.7)
14.2
(10.2)
—
57.4
—
(57.1)
12.8
1.9
4.3
—
3.3
57.1
3.1
(12.9)
4.4
3.0
4.5
—
(0.9)
(27.7)
37.6
(112.0)
97.7
(10.8)
26.7
17.8
—
(10.4)
—
20.0
(39.6)
(17.2)
(7.9)
(10.4)
(0.1)
72.5
67.2
111.7
(42.5)
(1.1)
(150.2)
—
0.3
—
—
(43.4)
—
(11.2)
—
9.4
260.5
—
(193.5)
215.3
43.3
77.8
(25.3)
(8.9)
—
1.1
88.0
(2.1)
(35.1)
79.4
(0.2)
—
(264.1)
—
(12.8)
1.2
(275.9)
6.6
13.2
66.2
(41.1)
—
(1.5)
17.3
8.7
—
(0.2)
(16.8)
(2.1)
—
(60.0)
—
(4.4)
3.1
(63.4)
1.9
33.4
32.8
$ 44.3
$ 79.4
$ 66.2
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Consolidated Statements of Shareholders’ Equity
(In millions, except per share data;
shares in thousands)
Balance January 1, 2006
Comprehensive income:
Net income
Translation adjustment
Adjustment of minimum pension liability, net of tax
expense of $0.3
Total comprehensive income
Adjustment to initially apply FASB Statement No. 158,
net of tax benefit of $6.8
Stock-based compensation and benefits and exercise of
options
Balance December 31, 2006
Comprehensive income:
Net income
Translation adjustment
Adjustments related to FASB Statement No. 158:
Prior service credit recognized during year, net of tax
of $1.9
Net actuarial gain occurring during year, net of tax
benefit of $12.2
Total comprehensive income
Stock-based compensation and benefits and exercise of
options
Balance December 31, 2007
Comprehensive income (loss):
Net loss
Translation adjustment
Adjustments related to FASB Statement No. 158:
Prior service credit recognized during year, net of tax
of $0.0
Net actuarial loss occurring during year, net of tax of
$0.2
Adjustment for plan amendment, net of tax of $0.0
Adjustment for supplemental executive retirement
plan, net of tax of $0.0
Total comprehensive loss
Repurchase of common stock
Stock-based compensation and benefits and exercise of
options
Common Shares
Common
Common
Shares Held
Common
Shares
in Treasury
Total
Stock
Shareholders’ Equity
Additional
Paid-in
Capital
Accumulated
Common
Other
Accumulated
Stock Held
Comprehensive
Deficit
in Treasury
Income (Loss)
122,192 (30,255) $ 394.9 $1.2 $1,066.4 $(182.8) $(337.1)
$(152.8)
122.9
122.9
12.1
44.6
179.6
(2.3)
871
9.5
(0.7)
10.9
12.1
44.6
(2.3)
(0.7)
122,192 (29,384) $ 581.7 $1.2 $1,065.7 $ (59.9) $(326.2)
$ (99.1)
11.4
28.3
(4.0)
26.2
61.9
11.4
28.3
(4.0)
26.2
325
5.8
(0.7)
6.5
—
122,192 (29,059) $ 649.4 $1.2 $1,065.0 $ (48.5) $(319.7)
$ (48.6)
(272.9)
(25.3)
(5.4)
(157.8)
(6.1)
(1.9)
(469.4)
(8.9)
(1,250)
391
4.8
(272.9)
(25.3)
(5.4)
(157.8)
(6.1)
(1.9)
(8.9)
4.8
Balance December 31, 2008
122,192 (29,918) $ 175.9 $1.2 $1,065.0 $(321.4) $(323.8)
$(245.1)
The accompanying notes to financial statements are an integral part of these statements.
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Note 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Note 2 — DISCONTINUED OPERATIONS
Note 3 — GOODWILL AND INTANGIBLE ASSETS
Note 4 — EMPLOYEE SEPARATION AND PLANT PHASEOUT
Note 5 — FINANCIAL INFORMATION OF EQUITY AFFILIATES
Note 6 — FINANCING ARRANGEMENTS
Note 7 — LEASING ARRANGEMENTS
Note 8 — ACCOUNTS RECEIVABLE
Note 9 — INVENTORIES
Note 10 — PROPERTY
Note 11 — OTHER BALANCE SHEET LIABILITIES
Note 12 — EMPLOYEE BENEFIT PLANS
Note 13 — COMMITMENTS AND RELATED-PARTY INFORMATION
Note 14 — OTHER EXPENSE, NET
Note 15 — INCOME TAXES
Note 16 — SHARE-BASED COMPENSATION
Note 17 — SEGMENT INFORMATION
Note 18 — WEIGHTED-AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE
Note 19 — FINANCIAL INSTRUMENTS
Note 20 — FAIR VALUE
Note 21 — BUSINESS COMBINATION
Note 22 — SHAREHOLDERS’ EQUITY
Note 23 — SUBSEQUENT EVENTS
Note 24 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Note 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
PolyOne Corporation (PolyOne, Company, we, us or our) is a premier
provider of specialized polymer materials, services and solutions
with operations in thermoplastic compounds, specialty polymer
formulations, color and additive systems, thermoplastic resin dis-
tribution and specialty polyvinyl chloride (PVC) resins. We also have
three equity investments: one in a manufacturer of caustic soda and
chlorine; one in a manufacturer of PVC compound products; and one
in a formulator of polyurethane compounds. PolyOne was incorpo-
rated in the state of Ohio on August 31, 2000.
Our operations are located primarily in the United States,
Europe, Canada, Asia and Mexico. Our operations are reported in
six reportable segments: International Color and Engineered Mate-
rials; Specialty Engineered Materials; Specialty Color, Additives and
Inks; Per formance Products and Solutions; PolyOne Distribution;
and Resin and Intermediates. See Note 17, Segment Information,
for more information.
On July 1, 2008, we announced that, in June 2008, Producer
Services, formerly included in All Other, was combined with Geon
Per formance Polymers to form the Per formance Products and Solu-
tions operating segment. In addition, North American Color and
Additives and Specialty Inks and Polymer Systems, both formerly
included in All Other, were combined to form a new operating
segment named Specialty Color, Additives and Inks. Prior period
segment information has been reclassified to conform to the 2008
presentation.
On March 20, 2008, we announced the formation of the Spe-
cialty Engineered Materials segment. This segment includes Poly-
One’s specialty thermoplastic elastomer (TPE) compounds product
line in Europe and Asia (historically included in International Color
and Engineered Materials), North American Engineered Materials
(historically included in All Other) and GLS Corporation (GLS). Prior
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period segment information has been reclassified to conform to the
2008 presentation.
In January 2008, we acquired 100% of the outstanding capital
stock of GLS, a global provider of specialty TPE compounds for
consumer, packaging and medical applications, for $148.9 million,
including acquisition costs net of cash received. See Note 21,
Business Combination, for more information.
In December 2007, we completed the acquisition of the vinyl
compounding business and assets of Ngai Hing PlastChem Com-
pany Ltd. (NHPC), a subsidiary of Ngai Hing Hong Company Limited,
a publicly-held company listed on the Hong Kong stock exchange, for
$3.3 million, net of cash received.
In July 2007, we sold our 24% interest in Oxy Vinyls LP (Oxy-
Vinyls) for $261 million in cash. In a related transaction, PolyOne
purchased the remaining 10% minority interest in Powder Blends,
LP for $11 million in cash.
In October 2006, we purchased the remaining 50% of our
equity investment in DH Compounding Company (DH Compounding)
from a wholly-owned subsidiary of The Dow Chemical Company for
$10.2 million. DH Compounding is consolidated in the accompa-
nying consolidated balance sheets, and the results of operations
are included in the accompanying consolidated statements of oper-
ations beginning October 1, 2006. DH Compounding is included in
the Per formance Products and Solutions reporting segment.
In February 2006, we sold 82% of our Engineered Films busi-
ness for $26.7 million. This business is presented in discontinued
operations in the 2006 consolidated financial statements. We
maintain an 18% ownership interest in this business, which is
reflected in the consolidated financial statements on the cost basis
of accounting.
Unless otherwise noted, disclosures contained in these con-
solidated financial statements relate to continuing operations.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of
PolyOne and its subsidiaries. All majority-owned affiliates over
which we have control are consolidated. Investments in affiliates
and joint ventures in which our ownership is 50% or less, or in which
we do not have control but have the ability to exercise significant
influence over operating and financial policies, are accounted for
under the equity method. Intercompany transactions are elimi-
nated. Transactions with related parties, including joint ventures,
are in the ordinary course of business.
Reclassifications
products sold during each reporting period is now included in Cost
of sales. Depreciation expense not associated with the manufac-
ture of our products and amortization expense are now included in
Selling and administrative. Depreciation and amortization were
previously combined and reported in the caption Depreciation
and amortization. In connection with these reclassifications, we
added the caption Gross margin to the accompanying consolidated
statements of operations. We believe this change in presentation
provides a more meaningful measure of cost of sales and selling
and administrative expenses and that gross margin is a widely
accepted measure of per formance. The following table provides
the amounts reclassified for the years ended December 31, 2007
and 2006:
(In millions)
Amounts reclassified:
Cost of sales
Selling and administrative expenses
Depreciation and amortization
Total costs and expenses
2007
2006
$ 44.4
$ 37.8
13.0
19.3
(57.4)
(57.1)
$ — $ —
Also, during 2008, we netted Interest income into Interest
expense resulting in one line on the consolidated statement of
operations, Interest expense, net. See Note 6, Financing Arrange-
ments, for more information on interest expense, net.
These reclassifications have no effect on total assets, total
shareholders’ equity, net income (loss) or cash flows as previously
presented.
Use of Estimates
The preparation of consolidated financial statements in conformity
with U.S. generally accepted accounting principles (U.S. GAAP)
requires management to make extensive use of estimates and
assumptions that affect the reported amounts of assets and lia-
bilities, disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of
revenues and expenses during these periods. Significant estimates
in these consolidated financial statements include sales discounts
and rebates,
restructuring charges, allowances for doubtful
accounts, estimates of future cash flows associated with assets,
asset impairments, useful lives for depreciation and amortization,
loss contingencies, net realizable value of inventories, environmen-
tal and asbestos-related liabilities, income taxes and tax valuation
reserves, goodwill and related impairment testing, goodwill impair-
ments, and the determination of discount and other rate assump-
tions used to determine pension and post-retirement employee
benefit expenses. Actual results could differ from these estimates.
Certain reclassifications of the prior period amounts and presen-
tation have been made to conform to the presentation for the
current period.
Cash and Cash Equivalents
Our presentation of certain expenses within the accompanying
consolidated statements of operations was changed. Depreciation
expense recorded in connection with the manufacture of our
We consider all highly liquid investments purchased with a maturity
of less than three months to be cash equivalents. Cash equivalents
are stated at cost, which approximates fair value.
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Allowance for Doubtful Accounts
We evaluate the collectability of trade receivables based on a
combination of factors. We regularly analyze significant customer
accounts and, when we become aware of a specific customer’s
inability to meet its financial obligations to us, such as in the case of
a bankruptcy filing or deterioration in the customer’s operating
results or financial position, we record a specific reserve for bad
debt to reduce the related receivable to the amount we reasonably
believe is collectible. We also record bad debt reserves for all other
customers based on a variety of factors including the length of time
the receivables are past due, the financial health of the customer,
economic conditions and historical experience. In estimating the
reserves, we also take into consideration the existence of credit
insurance. If circumstances related to specific customers change,
our estimates of the recoverability of receivables could be adjusted
further.
Concentrations of Credit Risk
Financial instruments, including foreign exchange contracts and
interest rate swap agreements, along with trade accounts receiv-
able and notes receivable, subject us to potential credit risk. Con-
centration of credit risk for trade accounts receivable is limited due
to the large number of customers constituting our customer base
and their distribution among many industries and geographic loca-
tions. We are exposed to credit risk with respect to notes receivable
but we believe collection of the outstanding amounts is probable.
We are exposed to credit risk with respect to forward foreign
exchange contracts and interest rate swap agreements in the event
of non-per formance by the counter-par ties to these financial instru-
ments. We believe that the risk of incurring material losses related
to this credit risk is remote. We do not require collateral to support
the financial position of our credit risks.
Sale of Accounts Receivable
We remove trade accounts receivable that are sold from the balance
sheet at the time of sale.
Inventories
Inventories are stated at the lower of cost or market. Approximately
34% and 38% of our inventories as of December 31, 2008 and
2007, respectively, are valued using the last-in, first-out (LIFO) cost
method. Inventories not valued by the LIFO method are valued using
the first-in, first-out (FIFO) or average cost method.
Property and Depreciation
maintenance. We expense repair and maintenance costs as
incurred. We capitalize replacements and betterments that
increase the estimated useful life of an asset. We capitalize interest
expense on major construction and development projects while in
progress.
We retain fully depreciated assets in property and accumulated
depreciation accounts until we remove them from service. In the
case of sale, retirement or disposal, the asset cost and related
accumulated depreciation balance is removed from the respective
account, and the resulting net amount, less any proceeds, is
included as a component of income (loss) from continuing opera-
tions in the accompanying consolidated statements of operations.
We account for operating leases under the provisions of Finan-
cial Accounting Standards Board (FASB) Statement No. 13,
Accounting for Leases, and FASB Technical Bulletin No. 85-3,
Accounting for Operating Leases with Scheduled Rent Increases.
These pronouncements require us to recognize escalated rents,
including any rent holidays, on a straight-line basis over the term of
the lease for those lease agreements where we receive the right to
control the use of the entire leased property at the beginning of the
lease term.
Impairment of Long-Lived Assets
We assess the recoverability of long-lived assets (excluding good-
will) and identifiable acquired intangible assets with finite useful
lives, whenever events or changes in circumstances indicate that
we may not be able to recover the assets’ carrying amount. We
measure the recoverability of assets to be held and used by a
comparison of the carrying amount of the asset to the expected net
future undiscounted cash flows to be generated by that asset, or, for
identifiable intangibles with finite useful
lives, by determining
whether the amortization of the intangible asset balance over its
remaining life can be recovered through undiscounted future cash
flows. The amount of impairment of identifiable intangible assets
with finite useful lives, if any, to be recognized is measured based on
projected discounted future cash flows. We measure the amount of
impairment of other long-lived assets (excluding goodwill) as the
amount by which the carrying value of the asset exceeds the fair
market value of the asset, which is generally determined, based on
projected discounted future cash flows or appraised values. We
classify long-lived assets to be disposed of other than by sale as
held and used until they are disposed. We report long-lived assets to
be disposed of by sale as held for sale and recognize those assets
in the balance sheet at the lower of carrying amount or fair value
less cost to sell, and cease depreciation.
We record property, plant and equipment at cost, net of depreciation
and amortization that is computed using the straight-line method
over the estimated useful life of the assets, which ranges from
three to 15 years for machinery and equipment and up to 40 years
for buildings. Computer software is amortized over periods not
exceeding ten years. Property, plant and equipment is generally
depreciated on accelerated methods for income tax purposes. We
use the deferral method of accounting for planned major
Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price paid over the fair value
of the net assets of the acquired business. FASB Statement
No. 142 requires that goodwill and intangible assets with indefinite
lives be tested for impairment at least once a year. Carrying values
are compared with fair values of the related reporting unit, and
when the carrying value exceeds the fair value, the carrying value of
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the impaired goodwill or indefinite-lived intangible assets is reduced
to its fair value.
We use an income approach to estimate the fair value of our
reporting units. Absent an indication of fair value from a potential
buyer or similar specific transactions, we believe that the use of this
method provides reasonable estimates of a reporting unit’s fair
value. The income approach is based on projected future debt-free
cash flow that is discounted to present value using factors that
consider the timing and risk of the future cash flows. We believe that
this approach is appropriate because it provides a fair value esti-
mate based upon the reporting unit’s expected long-term operating
and cash flow per formance. This approach also mitigates most of
the impact of cyclical downturns that occur in the reporting unit’s
industry. The income approach is based on a reporting unit’s eight-
year projection of operating results and cash flows that is dis-
counted using a weighted-average cost of capital. The projection
is based upon our best estimates of projected economic and market
conditions over the related period including growth rates, estimates
of future expected changes in operating margins and cash expen-
ditures. Other significant estimates and assumptions include ter-
minal value growth rates, terminal value margin rates, future capital
expenditures and changes in future working capital requirements
based on management projections. There are inherent uncertain-
ties, however, related to these factors and to our judgment in
applying them to this analysis. Nonetheless, we believe that this
method provides a reasonable approach to estimate the fair value
of our reporting units.
After completing our impairment testing as of July 1, 2008, we
changed the timing of the annual impairment testing to be as of
October 1 of each year. We adopted this change to assess the
recorded values of goodwill and indefinite-lived intangible assets for
potential impairment at a time more coincident with the strategic
business planning process and closer to the fiscal year-end report-
ing date. This change had no effect on reported earnings for any
period presented.
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, unantic-
ipated competition, a material negative change in relationships with
significant customers, strategic decisions made in response to
economic or competitive conditions, loss of key personnel or a
more-likely-than-not expectation that a reporting unit or a significant
portion of a reporting unit will be sold or disposed of, would require
an interim assessment for some or all of the reporting units prior to
the next required annual assessment on October 1, 2009. During
impairment
the fourth quarter of 2008, indicators of potential
caused us to conduct an interim impairment test as of Decem-
ber 31, 2008 which resulted in a non-cash goodwill impairment
charge of $170.0 million. See Note 3, Goodwill and Intangible
Assets, for further discussion of this impairment charge.
Indefinite-lived intangible assets consist of a tradename,
acquired as part of the January 2008 acquisition of GLS, which
is tested annually for impairment. The fair value of the trade name is
calculated using a “relief from royalty payments” methodology. This
approach involves two steps (1) estimating reasonable royalty rates
for the tradename and (2) applying this royalty rate to a net sales
stream and discounting the resulting cash flows to determine fair
value. This fair value is then compared with the carrying value of the
tradename. Other finite-lived intangible assets, which consist pri-
marily of non-contractual customer relationships, sales contracts,
patents and technology, are amortized over their estimated useful
lives. The remaining lives range up to 14 years.
Notes Receivable
As of December 31, 2008, included in Other non-current assets is
$20.5 million outstanding on a seller note receivable due from Excel
Polymers LLC who purchased our elastomers and per formance
additives business in February 2006. This note accrues interest
at 10% and is due in full with accrued interest at maturity in July
2010. Also included in Other non-current assets as of December 31,
2008 is $7.5 million outstanding on a seller note receivable due to
us from O’Sullivan Films who purchased our engineered films busi-
ness in August 2004. This note accrues interest at 7% and is due in
full with accrued interest at maturity in December 2010.
Litigation Reserves
FASB Statement No. 5, Accounting for Contingencies, requires that
we accrue for loss contingencies associated with outstanding liti-
gation, claims and assessments for which management has deter-
mined it is probable that a loss contingency exists and the amount
of loss can be reasonably estimated. We expense professional fees
associated with litigation claims and assessments as incurred.
Derivative Financial Instruments
FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, requires that all derivative financial instru-
ments, such as foreign exchange contracts and interest rate swap
agreements, be recognized in the financial statements and mea-
sured at fair value, regardless of the purpose or intent in holding
them.
We are exposed to foreign currency changes and interest rate
fluctuations in the normal course of business. We have established
policies and procedures that manage these exposures through the
use of financial instruments. By policy, we do not enter into these
instruments for trading purposes or speculation.
We enter into intercompany lending transactions denominated
in various foreign currencies and are subject to financial exposure
from foreign exchange rate movement from the date a loan is
recorded to the date it is settled or revalued. To mitigate this risk,
we enter into foreign exchange contracts with major financial insti-
tutions. These contracts are not treated as hedges and, as a result,
are marked to market, with the resulting gains and losses recog-
nized as other income or expense in the accompanying consolidated
statements of operations. Realized gains and losses on these
contracts offset the foreign exchange gains and losses on the
forward contracts have original
underlying transactions. Our
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maturities of one year or less. See Note 19, Financial Instruments,
for more information.
During 2008, 2007 and 2006, we used interest rate swap
agreements that modified the exposure to interest risk by convert-
ing fixed-rate debt to a floating rate. Changes in the fair value of
derivative financial instruments were recognized in the period when
the change occurred in either net income or shareholders’ equity (as
a component of accumulated other comprehensive income or loss),
depending on whether the derivative was being used to hedge
changes in fair value or cash flows. These interest rate swaps
qualified as fair value hedges in accordance with FASB Statement
No. 133. The interest rate swap and instrument being hedged were
marked to market in the balance sheet. The net effect on our
operating results was that interest expense on the portion of
fixed-rate debt being hedged was recorded based on the variable
rate that was stated within the swap agreement. No other cash
payments were made unless the contract was terminated prior to its
maturity. In this case, the amount paid or received at settlement
was established by agreement at the time of termination and
usually represents the net present value, at current rates of inter-
est, of the remaining obligations to exchange payments under the
terms of the contract. Any gains or losses incurred upon the early
termination of interest rate swap contracts are deferred within the
hedged item and recognized over the remaining life of the contract.
As of December 31, 2008, there were no open interest rate swaps
that are designated for hedge accounting treatment in accordance
with FASB Statement No. 133. See Note 7, Financing Arrange-
ments, for more information.
In January 2008, we entered into a floating to fixed interest rate
swap. This derivative was not designated as a hedge and, as a
result, was marked to market with the resulting gain and loss
recognized as interest expense in the accompanying consolidated
statements of operations. This agreement was terminated on
December 30, 2008.
Pension and Other Postretirement Plans
We account for our pensions and other postretirement benefits in
accordance with FASB Statements No. 158, Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans,
No. 87, Employers’ Accounting for Pensions and No. 106, Employ-
ers’ Accounting for Postretirement Benefits Other than Pensions.
We adopted FASB Statement No. 158 on December 31, 2006. FASB
Statement No. 158 requires an employer that is a business entity
and sponsors one or more single employer benefit plans to (1) rec-
ognize the funded status of the benefit plans in its statement of
financial position, (2) recognize as a component of other compre-
hensive income, net of tax, the gains or losses and prior service
costs or credits that arise during the period but are not recognized
as components of net periodic benefit cost, (3) measure defined
benefit plan assets and obligations as of the date of the employer’s
fiscal year end statement of financial position and (4) disclose
additional information in the notes to financial statements about
certain effects on net periodic benefit costs for the next fiscal year
that arise from delayed recognition of gains or losses, prior service
costs or credits, and transition assets or obligations. The adoption
of FASB Statement No. 158 resulted in an increase of $6.4 million
on a pre-tax basis and a $0.4 million decrease on an after-tax basis
of our accumulated other comprehensive loss. We also recorded an
adjustment of $2.7 million to increase accumulated other compre-
hensive loss to record our proportionate share of OxyVinyls’ adop-
tion of FASB Statement No. 158. The adoption of FASB Statement
No. 158 had no effect on our compliance with the financial cove-
nants contained in the agreements governing our debt and our
receivables sales facility, and is not expected to affect our financial
position, operating results or cash flows in future periods.
Comprehensive Income
Accumulated other comprehensive loss at December 31, 2008 and
2007 are as follows:
(In millions)
2008
2007
Foreign currency translation adjustments
$
(5.0)
$ 20.3
Amortization of unrecognized losses, transition
obligation and prior service costs
(240.1)
(68.9)
$(245.1)
$(48.6)
Marketable Securities
Marketable securities are classified as available for sale and are
presented at current market value. Net unrealized gains and losses,
that are deemed to be temporar y, on available for sale securities
are reflected in accumulated other comprehensive income or loss in
shareholders’ equity in the accompanying consolidated balance
sheets. An impairment loss on available for sale securities is
recognized in Other expense when a decline in value is deemed
to be other-than-temporar y.
Fair Value of Financial Instruments
FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments, requires disclosures of the fair value of financial
instruments include: cash and cash
instruments. Our financial
equivalents; short and long-term debt; foreign exchange contracts;
interest rate swaps; and available for sale securities.
The carrying amount of cash and cash equivalents approxi-
mates fair value. The carrying amounts of our short-term borrow-
ings approximate fair value. The fair value of our senior notes,
debentures and medium-term notes is based on quoted market
prices. The carrying amount of our borrowings under variable-inter-
est rate revolving credit agreements and other long-term borrowings
approximates fair value. The fair value of short-term foreign
exchange contracts is based on exchange rates at December 31,
2008. The fair value of interest rate swap agreements, obtained
from the respective financial institutions, is based on current rates
of interest and is computed as the net present value of the remain-
ing exchange obligations under the terms of the contract. The fair
value of available for sale securities is based on quoted market
prices. See Note 19, Financial Instruments, for further discussion.
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Foreign Currency Translation
Share-Based Compensation
Revenues and expenses are translated at average currency
exchange rates during the related period. Assets and liabilities of
foreign subsidiaries and equity investees are translated using the
exchange rate at the end of the period. PolyOne’s share of the
resulting translation adjustment is recorded as accumulated other
comprehensive income or loss in shareholders’ equity. Gains and
losses resulting from foreign currency transactions, including inter-
company transactions that are not considered permanent invest-
ments, are included in other income, net in the accompanying
consolidated statements of operations.
Revenue Recognition
We recognize revenue when the revenue is realized or realizable,
and has been earned. We record sales when a firm sales agreement
is in place, shipment has occurred and collectability of the fixed or
determinable sales price is reasonably assured.
Shipping and Handling Costs
Shipping and handling costs are included in cost of sales.
Research and Development Expense
Research and development costs, which were $26.5 million in
2008, $21.6 million in 2007 and $20.3 million in 2006, are
charged to expense as incurred.
Environmental Costs
We expense costs that are associated with managing hazardous
substances and pollution in ongoing operations on a current basis.
Costs associated with the remediation of environmental contami-
nation are accrued when it becomes probable that a liability has
been incurred and our proportionate share of the cost can be
reasonably estimated.
Equity Affiliates
We account for our investments in equity affiliates under Accounting
Principles Board (APB) Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock. We recognize our
proportionate share of the income of equity affiliates. Losses of
equity affiliates are recognized to the extent of our investment,
advances, financial guarantees and other commitments to provide
financial support to the investee. Any losses in excess of this
amount are deferred and reduce the amount of future earnings
of the equity investee recognized by PolyOne. As of December 31,
2008 and 2007, there were no deferred losses related to equity
investees.
We recognize impairment losses in the value of investments
that we judge to be other than temporar y. See Note 5, Financial
Information of Equity Affiliates, for more information.
As of December 31, 2008, we had one active share-based
employee compensation plan, which is described more fully in
Note 16, Share-Based Compensation.
PolyOne accounts for share-based compensation under the
provisions of FASB Statement No. 123 (revised 2004), Share-
Based Payment. FASB Statement No. 123(R) requires us to esti-
mate the fair value of share-based awards on the date of grant using
an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the
requisite service periods in the accompanying consolidated state-
ments of operations. Under the modified prospective transition
method, compensation cost recognized during the year ended
December 31, 2006 includes (a) compensation cost
for all
share-based payments granted prior to, but not yet vested as of,
January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of FASB Statement No. 123,
plus (b) compensation cost for all share-based payments granted on
or subsequent to January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of FASB State-
ment No. 123(R). Total share-based compensation cost for the
years ended December 31, 2008, 2007 and 2006, respectively,
was $3.0 million, $4.3 million and $4.5 million pre-tax.
Income Taxes
Deferred tax liabilities and assets are determined based upon the
differences between the financial reporting and tax basis of assets
and liabilities and are measured using the tax rate and laws cur-
rently in effect. In accordance with FASB Statement No. 109,
Accounting for Income Taxes (SFAS No. 109), we evaluate our
deferred income taxes to determine if a valuation allowance should
be established against the deferred tax assets or if the valuation
allowance should be reduced based on consideration of all available
evidence, both positive and negative, using a “more likely than not”
standard.
New Accounting Pronouncements
FASB Statement No. 157 — In September 2006, the FASB issued
FASB Statement No. 157, Fair Value Measurements, which defines
fair value, establishes the framework for measuring fair value under
U.S. GAAP and expands disclosures about fair value measure-
ments. In February 2008, the FASB issued FASB Staff Position
157-2, Effective Date of FASB Statement No. 157, that delayed the
effective date of FASB Statement No. 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized
or disclosed at fair value in the financial statements on a recurring
basis, to fiscal years beginning after November 15, 2008. We
adopted the non-deferred portion of FASB Statement No. 157 on
January 1, 2008, and such adoption did not have a material impact
on our financial statements. We are evaluating the effect that
adoption of the deferred portion of FASB Statement No. 157 will
have on our financial statements in 2009, specifically in the areas
of measuring fair value in business combinations and goodwill
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impairment tests. See Note 20, Fair Value, for information on our
fair value assets and liabilities.
FASB Statement No. 159 — In February 2007, the FASB
issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, which allows entities to voluntarily
choose, at specified election dates, to measure many financial
assets and liabilities at fair value. The election is made on an
instrument-by-instrument basis and is irrevocable. FASB Statement
No. 159 was effective January 1, 2008. The adoption of FASB
Statement No. 159 had no impact on our financial statements.
FASB Statement No. 141 (revised 2007) — In December
2007, the FASB issued FASB Statement No. 141 (revised 2007),
Business Combinations, which establishes principles over
the
method entities use to recognize and measure assets acquired
and liabilities assumed in a business combination and enhances
disclosures on business combinations. FASB Statement No. 141(R)
is effective for business combinations for which the acquisition
date is on or after January 1, 2009. We are evaluating the effect that
adoption will have on our 2009 financial statements.
FASB Statement No. 161 — In March 2008, the FASB issued
FASB Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities — an amendment of FASB Statement
No. 133. FASB Statement No. 161 requires qualitative disclosures
about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. FASB Statement
No. 161 is effective for fiscal years beginning after November 15,
2008. We are evaluating the effect that adoption will have on our
2009 financial statements.
FASB Staff Position No. FAS 132(R)-1 — In December 2008,
the FASB issued FASB Staff Position No. 132(R)-1, which amends
FASB Statement 132(R), Employers’ Disclosures About Postretire-
ment Benefit Plan Assets, to require more detailed disclosures
about employers’ plan assets, including employers’ investment
strategies, major categories of plan assets, concentrations of risk
within plan assets and valuation techniques used to measure the
fair value of plan assets. FASB Staff Position No. 132(R)-1 is
effective for disclosures in financial statements for fiscal years
ending after December 15, 2009. We are evaluating the effect that
adoption will have on our 2009 financial statements.
business is sold with a retained interest, the cost method of
accounting is appropriate if the disposal group qualifies as a com-
ponent of an entity, the selling entity has no significant influence or
continuing involvement in the new entity, and the operations and
cash flows of the business being sold will be eliminated from the
ongoing operations of the company selling it. The Engineered Films
business qualified as a component of an entity and PolyOne will
have no significant influence or continuing involvement in the new
entity. Activities that would be considered continuing cash flows
(consisting of warehousing services and short-term transitional
services) amount to less than one percent of the new entity’s
corresponding costs, and for that reason are not considered sig-
nificant. The operations and cash flows of the business being sold
will be eliminated from the ongoing operations of PolyOne. PolyOne
also considered the provisions of FASB Interpretation No. 46
(revised), Consolidation of Variable Interest Entities, and deter-
mined that the new entity is not a variable interest entity subject
to consolidation. As a result, the retained minority interest invest-
ment in the Engineered Films business is reported on the cost
method of accounting.
During 2006, we recognized charges of $3.1 million to adjust
the carrying value of the net assets of the Engineered Films Busi-
ness to the net proceeds received to recognize costs that were not
able to be recognized until the business was sold due to the
contingent nature of the costs and for costs related to the pension
benefits of the business.
The following table summarizes the results of discontinued
operations. As required by U.S. GAAP, the results of discontinued
operations, as presented below, do not include any depreciation or
amortization expense.
(In millions)
Sales
Pre-tax income from operations
Pre-tax loss on disposition of businesses
Income tax expense, net of valuation allowance
Loss from discontinued operations
2006
$ 9.6
$ 0.4
(3.1)
(2.7)
—
$(2.7)
Note 2 — DISCONTINUED OPERATIONS
Note 3 — GOODWILL AND INTANGIBLE ASSETS
In February 2006, we sold 82% of the Engineered Films business to
an investor group consisting of members of the operating seg-
ment’s management team and Matrix Films, LLC for gross proceeds
of $26.7 million before associated fees and costs. A cash payment
of $20.5 million was received on the closing date and the remaining
$6.2 million was in the form of a five-year note from the buyer. We
retained an 18% ownership interest in the company. Under EITF
Issue No. 03-13, Applying the Conditions in Paragraph 42 of Finan-
cial Accounting Standards Board (FASB) Statement No. 144 in
Determining Whether to Repor t Discontinued Operations, when a
In accordance with FASB Statement No. 141, Business Combina-
tions, purchase accounting requires that the total purchase price of
acquisitions be allocated to the fair value of assets acquired and
liabilities assumed based on their fair values at the acquisition
date, with amounts exceeding the fair values being recorded as
goodwill. As such, the acquisition of GLS resulted in the addition of
$44.1 million of goodwill and $65.7 million in identifiable intangi-
bles during the year ended December 31, 2008. See Note 21,
Business Combination,
for more information on the GLS
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acquisition. The following table details the changes in the carrying
amount of goodwill:
(In millions)
Balance at beginning of the year
Acquisition of businesses
Impairment
Translation and other adjustments
2008
2007
$ 288.8
$287.0
45.2
(170.0)
(0.1)
1.8
—
—
Balance at end of year
$ 163.9
$288.8
Goodwill as of December 31, 2008 and 2007, by operating
Polimeros Andinos (GPA), our equity affiliate (owned 50%) and part
of the Per formance Products and Solutions operating segment. This
impairment charge, included in Income from equity affiliates and
minority interest on the accompanying consolidated statements of
operations and reflected on the line Corporate and eliminations in
Note 17, Segment Information, mainly resulted from declines in
current and projected operating results and cash flows of the equity
affiliate. See Note 5, Financial Information of Equity Affiliates, for a
discussion of the related impairment of the investment in GPA
during 2008.
segment, was as follows:
Information regarding PolyOne’s finite-lived other intangible
December 31,
December 31,
2008
2007
assets follows:
$ 72.0
$ 72.0
(In millions)
As of December 31, 2008
Acquisition
Accumulated
Currency
Cost
Amortization
Translation
Net
—
Non-contractual customer
(In millions)
International Color and Engineered
Materials
Specialty Engineered Materials
Specialty Color, Additives and Inks
Per formance Products and Solutions
PolyOne Distribution
Total
44.1
33.8
12.4
1.6
33.8
181.4
1.6
$163.9
$288.8
FASB Statement No. 142, Goodwill and Other Intangibles,
requires that our annual, and any interim, impairment assessment
be per formed at the “reporting unit” level. At October 1, 2008,
PolyOne had five reporting units that had a significant amount of
goodwill: Geon Compounds; International Color and Engineered
Materials; GLS; Specialty Inks and Polymer Systems; and Specialty
Coatings. Under the provisions of FASB Statement No. 142, these
five reporting units were tested for impairment as of October 1,
2008 and the fair values of the income approach exceeded the
carrying value of each reporting unit. During the fourth quarter of
2008, indicators of potential impairment caused us to conduct an
interim impairment test. Those indicators included the following: a
significant decrease in market capitalization; a decline in recent
operating results; and a decline in our business outlook primarily
due to the macroeconomic environment. In accordance with FASB
Statement No. 142, we completed step one of the impairment
analysis and concluded that, as of December 31, 2008, the fair
value of two of our reporting units was below their respective
carrying values, including goodwill. The two reporting units that
showed potential impairment were Geon Compounds and Specialty
Coatings (reporting units within Per formance Products and Solu-
tions). As such, step two of the impairment test was initiated in
accordance with FASB Statement No. 142. Due to its time consum-
ing nature, the step-two analysis has not been completed as of the
date of this filing. In accordance with paragraph 22 of Statement
No. 142, we have recorded an estimate in the amount of $170.0 mil-
lion as a non-cash goodwill impairment charge as of December 31,
2008. We expect to complete the step-two analysis during the first
quarter of 2009.
In addition, during the third quarter of 2008, we assessed
goodwill of our equity affiliates and as a result of this review,
recorded a non-cash impairment charge of $2.6 million related to
our proportionate share of a write-down of goodwill of Geon
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relationships
Sales contract
Patents, technology and
other
Total
$37.0
$ (9.2)
$ — $27.8
11.4
(10.2)
—
8.8
(3.2)
1.3
1.2
6.9
$57.2
$(22.6)
$1.3
$35.9
As of December 31, 2007
Acquisition
Accumulated
Currency
Cost
Amortization
Translation
Net
(In millions)
Non-contractual
customer relationships
$ 8.6
Sales contract
11.4
$ (6.7)
(10.0)
Patents, technology and
other
Total
4.7
(2.7)
$24.7
$(19.4)
$ —
—
1.4
$1.4
$1.9
1.4
3.4
$6.7
At December 31, 2008, PolyOne had $33.2 million of indefi-
nite-lived other intangible assets that are not subject to amortiza-
tion, consisting of a trade name acquired as part of the January 2,
2008 GLS acquisition. This indefinite-lived intangible asset was
tested for impairment as of October 1, 2008. The fair value of the
tradename is calculated using a “relief from royalty payments”
methodology. This approach involves two steps (1) estimating a
reasonable royalty rate for the tradename and (2) applying this
royalty rate to a net sales stream and discounting the resulting cash
flows to determine fair value. This fair value is then compared with
the carrying value of the tradename. During 2008, no impairment
adjustments relating to indefinite-lived other intangible assets were
determined to be required.
Amortization of other
finite-lived intangible assets was
$3.3 million for the year ended December 31, 2008, $2.1 million
for the year ended December 31, 2007 and $2.1 million for the year
ended December 31, 2006.
We expect amortization expense on other finite-lived intangi-
closing costs and lease termination costs. Assets transferred to
bles for the next five years to be as follows:
our other facilities are transferred at net book value.
Year
(In millions)
2009
2010
2011
2012
2013
Amount
$3.3
3.3
3.0
2.7
2.7
Employee separation and plant phaseout costs associated
with continuing operations are reflected on the line Corporate
and eliminations in Note 17, Segment Information.
A summary of total employee separation and plant phaseout
costs, including where the charges are recorded in the accompa-
nying consolidated statements of operations, follows:
The carrying values of intangible assets and other investments
are adjusted to fair value based on estimated net future cash flows
as a result of an evaluation done each year end, or more often when
indicators of impairment exist. During 2007, an impairment charge
of $2.5 million was recorded against the carrying value of certain
patents and technology agreements and is included in Selling and
administrative in the accompanying consolidated statements of
operations. No impairment charges were recorded in 2008 or 2006.
Note 4 — EMPLOYEE SEPARATION AND PLANT PHASEOUT
Management has undertaken certain restructuring initiatives to
reduce costs and, as a result, we have incurred employee separa-
tion and plant phaseout costs.
Employee separation costs include one-time termination ben-
efits including salary continuation benefits, medical coverage and
outplacement assistance and are based on a formula that takes
into account each individual employee’s base compensation and
length of service. We maintain a severance plan that provides
specific benefits to all employees (except those who are employed
under collective bargaining agreements) who lose their jobs due to
reduction in workforce, job elimination initiatives or from closing
manufacturing facilities. Collective bargaining employees are cov-
ered under the terms of each specific agreement. The amount is
determined separately for each employee and is recognized at the
date the employee is notified if the expected termination date will be
within 60 days of notification or is accrued on a straight-line basis
over the period from the notification date to the expected termina-
tion date if the termination date is more than 60 days after the
notification date. Employee separation costs also include on-going
postemployment benefits accounted for under FASB Statement
No. 112, Postemployment Benefits, which are accrued when it is
probable that a liability has been incurred and the amount can be
reasonably estimated. Employee separation costs are recorded in
the accompanying consolidated statements of operations on the
lines Cost of sales and Selling and administrative.
Plant phaseout costs include the impairment of property, plant
and equipment at manufacturing facilities and the resulting write-
down of the carrying value of these assets to fair value, which
represents management’s best estimate of the net proceeds to be
received for the assets to be sold or scrapped, less any costs to
sell. These costs are recorded in the accompanying consolidated
statements of operations on the lines Cost of sales and Selling and
administrative. Plant phaseout costs also include cash facility
(In millions)
Cost of sales
Selling and administrative
Total employee separation and plant
2008
2007
2006
$29.3
$1.4
$ 0.2
10.4
0.8
(0.2)
phaseout
$39.7
$2.2
$ —
Included in employee separation and plant phaseout costs
shown in the preceding table were charges of $6.6 million, included
in Cost of sales, and $0.3 million, included in Selling and admin-
istrative, for accelerated depreciation on assets related to the 2008
restructuring initiatives discussed below. Cash payments for
employee separation and plant phaseout costs during 2008,
2007 and 2006 were $5.5 million, $1.5 million and $1.8 million,
respectively.
2008 Activity — In July 2008, we announced the restructuring
of certain manufacturing assets, primarily in North America. We are
closing certain production facilities, including seven in North Amer-
ica and one in the United Kingdom, resulting in a net reduction of
approximately 150 positions. We expect to incur one-time pre-tax
charges of approximately $28 million related to these actions, of
which $20.0 million has been recorded during 2008. In total, these
one-time charges will include cash costs of approximately $15 mil-
lion related to severance and site closure costs with the remaining
$13 million of non-cash costs related to asset write-downs and
accelerated depreciation, of which $10.0 million has been recorded
during 2008.
In January 2009, we announced that we will enact further cost
saving measures that include eliminating approximately 370 jobs
worldwide, implementing reduced work schedules for another 100
to 300 employees, closing our Niagara, Ontario facility and idling
certain other capacity. Additionally, we are planning other actions
that include freezing corporate officer salaries throughout 2009. We
expect to incur one-time pre-tax charges of approximately $45 mil-
lion related to these actions, of which $18.3 million has been
recorded during the fourth quarter of 2008, which represents ben-
efits to be provided under ongoing benefit arrangements or required
by statutor y law. In total, these one-time charges will include cash
costs of approximately $35 million related to severance and site
closure costs with the remaining $10 million of non-cash costs
related to asset write-downs and accelerated depreciation.
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The following table details the charges and changes to the
the year ended
reserves associated with these initiatives for
December 31, 2008:
(Dollars in
millions, except
employee
numbers)
Balance at
January 1,
2008
Charge
Utilized
Balance at
Decem-
ber 31,
2008
Employee Separation
Plant Phaseout Costs
Number of
Asset
Employees
Costs
Cash Closure
Write-downs
Total
—
699
(173)
$ —
$ —
$ —
$ —
26.1
(2.4)
2.2
(1.5)
10.0
(10.0)
38.3
(13.9)
526
$23.7
$ 0.7
$ —
$ 24.4
In addition to the above, during 2008, we incurred $1.1 million
related to executive severance agreements, which was included in
Selling and administrative in the accompanying consolidated state-
ments of operations. We paid $1.0 million related to executive
severance agreements. Our liability for unpaid executive severance
costs was $1.0 million at December 31, 2008 and will be paid over
the next 20 months.
2007 Activity — During 2007, we recognized and paid
$0.4 million in employee separation charges related to 33 employ-
ees involved in the restructuring of our manufacturing facility in St.
Peters, Missouri, part of the Specialty Color, Additives and Inks
operating segment.
The closure and exit from our Commerce, California facility was
completed in the first quarter of 2007, during which we paid
$0.1 million in employee separation charges and $0.1 million in
plant phase-out costs.
During 2007, charges related to three executive severance
agreements in the amount of $0.6 million were recognized. During
2007, we paid $0.9 million for executive severance. Accrued exec-
utive severance costs at December 31, 2007 were $1.0 million.
In September 2007, we announced the closure of two manu-
facturing lines at our Avon Lake, Ohio facility. Non-cash charges of
$0.5 million were recorded to adjust the carrying value of certain
assets to their net realizable value. In addition, during the third
quarter of 2007, severance costs of $0.4 million for seven employ-
ees at the Avon Lake and other facilities were recorded of which
$0.1 million were paid in 2007 and the remaining $0.3 million of
costs were accrued at December 31, 2007.
In addition, during 2007, $0.3 million of other non-cash
charges were incurred as we adjusted previous carrying values of
assets held for sale.
2006 Activity — Cost of sales includes a $0.5 million charge
related to the November 2006 announcement to move the latex
product manufacturing business located at our Commerce, Califor-
nia facility to our Massillon, Ohio location to better serve customers.
The six employees affected by this relocation were terminated by
February 28, 2007.
Cost of sales also includes an additional $0.6 million charge to
complete the separation of the 22 remaining employees from the
November 2005 announcement to close the Manchester, England
color additives facility.
Fully offsetting these charges was a net gain of $1.1 million,
$0.9 million of which was included in Cost of sales and $0.2 million
in Selling and administrative, from the sale of facilities that were
previously identified as part of our plant phaseout activities.
During 2006, we paid $1.2 million under an executive sepa-
ration agreement between PolyOne and Thomas A. Waltermire, our
former President, Chief Executive Officer and a Director.
Note 5 — FINANCIAL INFORMATION OF EQUITY AFFILIATES
SunBelt Chlor-Alkali Partnership (SunBelt) is the most significant of
our equity investments and is reported within the Resin and Inter-
mediates segment. PolyOne owns 50% of SunBelt. The remaining
50% of SunBelt is owned by Olin SunBelt Inc., a wholly owned
subsidiary of the Olin Corporation.
Summarized financial information for SunBelt follows:
(In millions)
SunBelt:
Net sales
Operating income
Partnership income as reported by
2008
2007
2006
$173.0
$180.6
$186.7
$ 73.6
$ 91.3
$104.3
SunBelt
$ 65.1
$ 82.0
$ 94.6
PolyOne’s ownership of SunBelt
50%
50%
50%
Earnings of equity affiliate recorded
by PolyOne
$ 32.5
$ 41.0
$ 47.3
Summarized balance sheet as of December 31:
2008
2007
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Partnership interest
$ 22.4
$ 27.8
107.7
130.1
19.7
97.5
117.2
109.6
137.4
21.0
109.7
130.7
$ 12.9
$
6.7
OxyVinyls, a former 24% owned affiliate, purchases chlorine
from SunBelt under an agreement that expires in 2094. The agree-
ment requires OxyVinyls to purchase all of the chlorine that is
produced by SunBelt up to a maximum of 250,000 tons per year
at market price, less a discount. OxyVinyls’ chlorine purchases from
SunBelt were $33.9 million in 2007 through its disposition date of
July 6, 2007 and $72.2 million for the year ended December 31,
2006.
On July 6, 2007, we sold our 24% interest in OxyVinyls, a
manufacturer and marketer of PVC resins, for cash proceeds of
$261 million.
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The following table presents OxyVinyls’ summarized financial
results for the periods indicated:
Summarized balance sheet as of December 31:
(In millions)
OxyVinyls:
Net sales
Operating income
Partnership income (loss) as reported
by OxyVinyls
PolyOne’s ownership of OxyVinyls
PolyOne’s proportionate share of
OxyVinyls’ earnings (loss)
Amortization of the difference
between PolyOne’s investment and
its underlying share of OxyVinyls’
equity
Earnings (loss) of equity affiliate
recorded by PolyOne
Six Months Ended
June 30,
2007
2006
$1,107.4
$2,476.0
$
$
11.6
$ 274.8
(2.0)
$ 246.2
24%
24%
(0.5)
59.1
0.3
0.6
$
(0.2)
$
59.7
We recorded an impairment of $14.8 million on our OxyVinyls
investment during 2007 due to an other than temporar y decline in
value. It is included in Income from equity affiliates and minority
interest in the accompanying consolidated statements of opera-
tions. The impairment is not reflected in the equity affiliate earnings
above because it is excluded as a measure of segment operating
income or loss that is reported to and reviewed by the chief oper-
ating decision maker (See Note 17, Segment Information).
On October 1, 2006, we purchased the remaining 50% interest
in DH Compounding from a subsidiary of The Dow Chemical Com-
pany. DH Compounding is now fully consolidated in the financial
statements of PolyOne. Prior to the acquisition of DH Compounding,
it was accounted for as an equity affiliate and was reflected in
Specialty Color, Additives and Inks operating segment together with
BayOne Urethane Systems, L.L.C. (BayOne) equity affiliate (owned
50%). The Per formance Products and Solutions operating segment
includes the GPA equity affiliate (owned 50%). The Altona Properties
equity affiliate (owned 37.4%) is included in the Resin and Inter-
mediates operating segment.
Combined summarized financial information for these equity
affiliates follows:
(In millions)
Net sales
Operating income
Partnership income as reported by other equity
affiliates
Equity affiliate earnings recorded by PolyOne
2008
2007
$112.2
$116.8
7.7
6.6
3.3
8.1
6.5
3.9
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
2008
2007
$31.4
$37.0
12.3
14.6
$43.7
$51.6
$24.6
$32.2
1.6
3.1
$26.2
$35.3
During the third quarter of 2008, we recorded a non-cash
impairment charge of $2.6 million related to our proportionate
share of a write-down of goodwill of GPA mainly resulting from
declines in current and projected operating results and cash flows
of the equity affiliate. In addition, during the third quarter of 2008,
as a result of these declined projections, we recorded a $2.1 million
charge related to an impairment in our investment in GPA. Our
proportionate share of an asset write-down of $1.6 million was
recorded in the third quarter of 2007 against the carrying value of
certain inventory, accounts receivable and intangible assets of GPA.
These impairments are not reflected in the above equity affiliate
earnings because they are excluded as a measure of segment
operating income or loss that is reported to and reviewed by the
chief operating decision maker and are reflected on the line Cor-
porate and eliminations in Note 17, Segment Information. These
impairments are recorded in Income from equity affiliates and
minority interest in the accompanying consolidated statements of
operations.
Note 6 — FINANCING ARRANGEMENTS
Short-term debt — At December 31, 2008, $6.2 million of short-
term notes issued by certain of our European subsidiaries were
outstanding. This short-term debt has maturities of less than one
year,
is renewable with the consent of both parties and is
prepayable.
The weighted-average interest rate on total short-term borrow-
ings was 4.4% at December 31, 2008 and 6.0% at December 31,
2007.
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consolidated statements of operations. Unamortized deferred note
issuance costs of $2.8 million and $0.8 million were expensed due
to this repurchase and are included in Interest expense, net in the
accompanying consolidated statements of operations in 2007 and
2006, respectively. Also, during 2008, 2007 and 2006, $20.0 mil-
lion, $20.0 million and $0.7 million of aggregate principal amount of
our medium-term notes became due and were paid, respectively.
During 2006, we issued a promissory note in the principal
amount of $8.7 million, payable in 36 equal installments at a rate of
6% per annum. This promissory note resulted from the purchase of
the remaining 50% interest in DH Compounding. For further dis-
cussion of this purchase, see Note 1, Summar y of Significant
Accounting Policies. During 2008, we paid the remaining $5.3 mil-
lion of aggregate principal on this note.
Included in Interest expense, net for the years ended Decem-
ber 31, 2008, 2007 and 2006 is interest income of $3.4 million,
$4.5 million and $3.4 million. Total interest paid on long-term and
short-term borrowings was $37.1 million in 2008, $45.7 million in
2007 and $62.2 million in 2006.
As of December 31, 2008, our secured borrowings were not at
levels that would trigger the security provisions of the indentures
governing our senior notes and debentures and our guarantee of the
SunBelt notes. See Note 13, Commitments and Related-Par ty
Information.
Guarantee Agreement — We entered into a definitive Guaran-
tee and Agreement with Citicorp USA, Inc., KeyBank National Asso-
ciation and National City Bank on June 6, 2006. Under
this
Guarantee and Agreement, we guarantee some treasury manage-
ment and banking services provided to us and our subsidiaries,
such as foreign currency forwards, letters of credit and bank over-
drafts. This guarantee is secured by our inventories located in the
United States.
We are exposed to market risk from changes in interest rates
on debt obligations. We periodically enter into interest rate swap
agreements that modify our exposure to interest rate risk by con-
verting fixed-rate obligations to floating rates or floating rate obli-
gations to fixed rates. As of December 31, 2008, there were no
open interest rate swap agreements. As of December 31, 2007, we
maintained interest rate swap agreements on five of our fixed-rate
obligations in the aggregate amount of $80.0 million with a net fair
value liability of $1.7 million. The weighted-average interest rate for
these agreements was 8.8% as of December 31, 2007.
Long-term debt — Long-term debt as of December 31 con-
sisted of the following:
(Dollars in millions)
December 31,
2008(1)
December 31,
2007(1)
8.875% senior notes due 2012
$279.2
$199.2
7.500% debentures due 2015
50.0
50.0
Medium-term notes:
7.16% medium-term notes due 2008
6.89% medium-term notes due 2008
6.91% medium-term notes due 2009
6.52% medium-term notes due 2010
6.58% medium-term notes due 2011
Revolving credit facility borrowings, facility
expires 2011
6.0% promissory note due in equal
monthly installments through 2009
—
—
19.8
19.6
19.5
40.0
—
9.8
9.8
19.2
18.8
18.5
—
5.3
Total long-term debt
Less current portion
Total long-term debt, net of current
portion
$428.1
$330.6
19.8
22.6
$408.3
$308.0
(1) Book values include unamortized discounts and adjustments
related to hedging instruments, as applicable.
Aggregate maturities of long-term debt for the next five years
are: 2009 — $19.8 million; 2010 — $19.6 million; 2011 —
$59.5 million; 2012 — $279.2 million; 2013 — $0.0 million;
and thereafter — $50.0 million.
During April 2008, we sold an additional $80.0 million in
aggregate principal amount of 8.875% senior notes due 2012.
Net proceeds from the offering were used to reduce the amount
of receivables previously sold under the receivables sale facility.
On January 3, 2008, we entered into a revolving credit facility
with Citicorp USA, Inc., as administrative agent and as issuing bank,
and The Bank of New York, as paying agent. The credit agreement
provides for an unsecured revolving and letter of credit facility with
total commitments of up to $40.0 million. The credit agreement
expires on March 20, 2011. Borrowings under the revolving credit
facility are based on the applicable LIBOR rate plus a fixed facility
fee of 4.77%. On January 9, 2008, we borrowed $40.0 million under
the agreement, which is included in Long-term debt in the accom-
panying consolidated balance sheet at December 31, 2008.
In connection with the $40.0 million borrowed under the revolv-
ing credit facility, we entered into a $40.0 million floating to fixed
interest rate swap expiring on January 9, 2009, resulting in an
effective interest rate of 8.4%. This derivative is not treated as a
hedge and, as a result, is marked to market, with the resulting gain
and loss recognized as interest expense in the accompanying con-
solidated statements of operations. On December 30, 2008, this
agreement was terminated.
During 2007 and 2006, we repurchased $241.4 million and
$58.6 million aggregate principal amounts of our 10.625% senior
notes at premiums of $12.8 million and $4.4 million, respectively.
The premium is shown as a separate line item in the accompanying
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in turn, may sell an undivided interest in up to $175.0 million and
$25.0 million of these accounts receivable, respectively, to certain
investors. As of December 31, 2008, $121.4 million was available
for sale. The receivables sale facility was amended in June 2007 to
extend the maturity of the facility to June 2012 and to, among other
things, modify certain financial covenants and reduce the cost of
utilizing the facility.
As of December 31, 2008 and 2007, accounts receivable
totaling $141.4 million and $175.8 million, respectively, were sold
by us to PFC and PFCC. The maximum proceeds that PFC and PFCC
may receive under the facility is limited to the lesser of $200.0 mil-
lion or 85% of the eligible domestic and Canadian accounts receiv-
able sold. As of December 31, 2008, PFC and PFCC had sold
$14.2 million of their undivided interests in accounts receivable.
As of December 31, 2007, neither PFC nor PFCC had sold any of
their undivided interests in accounts receivable.
We retain an interest in the difference between the amount of
trade receivables sold by us to PFC and PFCC and the undivided
interest sold by PFC and PFCC as of December 31, 2008 and 2007.
As a result, the interest retained by us is $127.2 million and
$175.8 million and is included in accounts receivable on the
accompanying consolidated balance sheets as of December 31,
2008 and 2007, respectively.
The receivables sale facility also makes up to $40.0 million
available for the issuance of standby letters of credit as a sub-limit
within the $200.0 million limit under the facility, of which $11.0 mil-
lion was used at December 31, 2008. The level of availability of the
receivables sale facility depends upon compliance with a fixed
related primarily to operating
charge coverage ratio covenant
per formance that is set forth in the related agreements. As of
December 31, 2008, we were in compliance with these covenants.
We receive the remaining proceeds from collection of the
receivables after a deduction for the aggregate yield payable on
the undivided interests in the receivables sold by PFC and PFCC, a
servicer’s fee, an unused commitment fee (between 0.25% and
0.50%, depending upon the amount of the unused portion of the
facility), fees for any outstanding letters of credit, and an adminis-
tration and monitoring fee ($150,000 per annum).
We also service the underlying accounts receivable and receive
a service fee of 1% per annum on the average daily amount of the
outstanding interests in our receivables. The net discount and other
costs of the receivables sale facility are included in Other expense,
net in the accompanying consolidated statements of operations.
The following table shows the interest rate impact of the swap
agreements during 2008, 2007 and 2006:
Effective
Effective
Effective
Interest Rate
Interest Rate
Interest Rate
during 2008
during 2007
during 2006
$40.0 million of borrowings
under revolving credit
facility with an interest rate
of 6.65%
$60.0 million of medium-term
notes with a weighted-
average interest rate of
6.67%
$80.0 million of medium-term
notes with a weighted-
average interest rate of
6.76%
$100.0 million of medium-
term notes with a weighted-
average interest rate of
6.83%
8.4%
—
7.1%
—
—
—
—
—
9.5%
—
—
8.8%
Note 7 — LEASING ARRANGEMENTS
We lease certain manufacturing facilities, warehouse space,
machinery and equipment, automobiles and railcars under operat-
ing leases. Rent expense was $24.0 million in 2008, $22.4 million
in 2007 and $20.7 million in 2006.
Future minimum lease payments under non-cancelable oper-
ating leases with initial lease terms longer than one year as of
December 31, 2008 were as follows: 2009 — $19.5 million;
2010 — $15.4 million; 2011 — $11.2 million; 2012 — $7.5 mil-
lion; 2013 — $5.0 million; and thereafter — $10.3 million.
Note 8 — ACCOUNTS RECEIVABLE
Accounts receivable as of December 31 consist of the following:
(In millions)
Trade accounts receivable
Retained interest in securitized accounts
receivable
Allowance for doubtful accounts
2008
2007
$141.6
$169.8
127.2
175.8
(6.7)
$262.1
(4.8)
$340.8
The following table details the changes in allowance for doubt-
ful accounts:
(In millions)
2008
2007
2006
Balance at beginning of the year
$(4.8)
$(5.9)
$(6.4)
Provision for doubtful accounts
Accounts written off
Translation and other adjustments
Balance at end of year
(6.0)
(1.9)
(3.3)
4.2
3.3
(0.1)
(0.3)
3.8
—
$(6.7)
$(4.8)
$(5.9)
Sale of Accounts Receivable — Under the terms of our receiv-
ables sale facility, we sell accounts receivable to PolyOne Funding
Corporation (PFC) and PolyOne Funding Canada Corporation (PFCC),
both wholly owned, bankruptcy-remote subsidiaries. PFC and PFCC,
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Note 9 — INVENTORIES
Note 11 — OTHER BALANCE SHEET LIABILITIES
Components of inventories are as follows:
December 31,
December 31,
Accrued Expenses
Non-current Liabilities
December 31,
December 31,
2008
2007
(In millions)
2008
2007
2008
2007
Employment costs
$ 48.1
$46.4
$10.2
$13.1
(In millions)
At FIFO or average cost, which
approximates current cost:
Finished products
Work in process
Raw materials and supplies
Reserve to reduce certain inventories
to LIFO cost basis
$127.4
$166.9
2.1
109.9
239.4
2.6
100.1
269.6
(41.6)
(46.2)
$197.8
$223.4
During 2008 and 2007, reductions in LIFO inventory layers
resulted in liquidations of LIFO inventory layers carried at lower
costs prevailing in prior years as compared with the cost of current-
year purchases. The effect of LIFO liquidations on Cost of sales in
2008 and 2007 was a decrease of $7.5 million and an increase of
$1.3 million, respectively.
Note 10 — PROPERTY
(In millions)
December 31,
December 31,
2008
2007
Land and land improvements
$
40.7
$
40.3
Buildings
Machinery and equipment
Less accumulated depreciation and
amortization
278.6
912.0
271.8
903.6
1,231.3
1,215.7
(799.3)
(766.0)
$ 432.0
$ 449.7
Depreciation expense was $64.7 million in 2008, $55.3 million
in 2007 and $55.0 million in 2006. During 2008, we recorded
$6.9 million of accelerated depreciation related to the restructuring
of certain manufacturing assets. See Note 4, Employee Separation
and Plant Phaseout, for further discussion.
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13.5
70.5
70.3
Environmental
Taxes
Post-retirement benefits
Interest
Pension
Employee separation and
plant phaseout
Insurance accruals
Minority interest in
consolidated subsidiaries
Other
14.2
5.0
10.1
4.8
4.6
25.5
0.3
2.8
9.9
3.6
4.7
1.3
0.3
—
5.6
—
11.9
—
—
—
—
—
1.2
0.2
1.3
—
—
—
—
—
2.1
0.3
2.0
$118.2
$94.4
$83.4
$87.8
Note 12 — EMPLOYEE BENEFIT PLANS
As of December 31, 2008, we had several pension plans only two of
which accrued benefits in 2008. These two plans (for certain
U.S. employees) generally provide benefit payments using a formula
that is based upon employee compensation and length of service.
Length of service for determining benefit payments was frozen as of
December 31, 2002. All U.S. defined-benefit pension plans were
closed to new participants as of December 31, 1999.
Subsequent Event — On January 15, 2009, the Chair of our
Compensation and Governance Committee, pursuant to authority
delegated to him by our Board of Directors, approved and adopted
changes to the Geon Pension Plan (Geon Plan), the Benefit Resto-
ration Plan (BRP), the voluntary retirement savings plan (RSP) and
the Supplemental Retirement Benefit Plan (SRP). Effective
March 20, 2009, the amendments permanently freeze future ben-
efit accruals and provide that participants will not receive credit
under the Geon Plan or the BRP for any eligible earnings paid on or
after that date. All accrued benefits under the Geon Plan and the
BRP will remain intact, and service credits for vesting and retire-
ment eligibility will continue in accordance with the terms of the
Geon Plan and the BRP. The amendments to the RSP and SRP
provide that transition contributions under the RSP and the SRP will
be eliminated after March 20, 2009. These actions are expected to
reduce our 2009 annual benefit expense by $3.7 million and future
pension fund contribution requirements by $20 million.
We also sponsor several unfunded defined-benefit post-retire-
ment plans that provide subsidized health care and life insurance
benefits to certain retirees and a closed group of eligible employ-
ees. As of April 1, 2006, all post-retirement health care plans are
contributor y. Retiree contributions are adjusted periodically, and
these plans contain other cost-sharing features such as a maximum
cap on our cost, deductibles and cost sharing. Life insurance plans
are generally non-contributor y. Only certain employees hired prior to
December 31, 1999 are eligible to participate in our subsidized
post-retirement health care and life insurance plans.
We use December 31 as the measurement date for all of our
plans. Effective December 31, 2007, we adopted the RP-2000
projected by scale AA to 2009 mortality table to better estimate
the future liabilities under our defined-benefit pension plans.
As discussed in Note 1, Summary of Significant Accounting
Policies, we adopted the provisions of FASB Statement No. 158 as
of December 31, 2006 and, accordingly, recognized an increase of
$6.4 million on a pre-tax basis and a decrease of $0.4 million on an
after-tax basis to our accumulated other comprehensive loss for the
unfunded status of our pension and post-retirement health care
benefit plans. In addition, we recorded an adjustment of $2.7 million
to increase accumulated other comprehensive loss to record our
proportionate share of OxyVinyls’ adoption of FASB Statement
No. 158. We also recognized the prior service cost and net actuarial
gains and losses of these plans in accumulated other comprehen-
sive income. Future changes to the funded status of these plans will
be recognized through accumulated other comprehensive income
(AOCI) in the year the change occurs.
The following table illustrates the impact of the adoption of FASB Statement No. 158 on a pre-tax basis at December 31, 2006:
(In millions)
Before application of FASB Statement No. 158:
Assets
Prepaid cost
Intangible assets
Deferred income taxes
Liabilities and shareholders’ equity
Liability for pension benefits
AOCI
Total shareholders’ equity
Adjustments:
Assets
Prepaid cost
Intangible assets
Deferred income taxes
Liabilities and shareholders’ equity
Liability for pension benefits
AOCI
Change in AOCI related to adoption of FASB Statement No. 158 of equity affiliate
Total shareholders’ equity
After application of FASB Statement No. 158:
Assets
Prepaid cost
Deferred income taxes
Liabilities and shareholders’ equity
Liability for pension benefits
AOCI
Change in AOCI related to adoption of FASB Statement No. 158 of equity affiliate
Total shareholders’ equity
Pension
Benefits
Health Care
Benefits
$ 61.6
$ —
0.1
35.2
—
32.3
167.5
109.6
(124.4)
(124.4)
—
—
$ (60.9)
$ —
(0.1)
0.6
—
6.2
(37.9)
(23.1)
—
(23.1)
(16.7)
16.7
(2.7)
14.0
$
0.7
$ —
35.8
38.5
129.6
(147.5)
—
(147.5)
92.9
16.7
(2.7)
14.0
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The following tables present the change in benefit obligation, change in plan assets and components of funded status for defined-benefit
pension and post-retirement health care benefit plans. Actuarial assumptions that were used are also included.
(In millions)
Change in benefit obligation:
Projected benefit obligation — beginning of year
Service cost
Interest cost
Participant contributions
Benefits paid
Plan amendments/settlements
Change in discount rate and other
Projected benefit obligation — end of year
Projected salary increases
Accumulated benefit obligation
Change in plan assets:
Plan assets — beginning of year
Actual return on plan assets
Company contributions
Plan participants’ contributions
Benefits paid
Other
Plan assets — end of year
Under-funded status at end of year
Pension Benefits
Health Care Benefits
2008
2007
2008
2007
$ 487.1
$514.9
$ 91.5
$ 92.9
1.3
32.4
—
1.1
30.1
—
0.3
5.5
6.0
0.4
5.2
5.6
(37.0)
(36.8)
(12.1)
(12.1)
2.2
15.2
0.1
(22.3)
6.1
(6.3)
—
(0.5)
$ 501.2
$487.1
$ 91.0
$ 91.5
19.9
18.0
—
—
$ 481.3
$469.1
$ 91.0
$ 91.5
$ 401.3
$386.0
$ — $ —
(120.8)
29.8
—
30.9
20.4
—
—
6.1
6.0
—
6.5
5.6
(37.0)
(36.8)
(12.1)
(12.1)
(1.4)
0.8
—
$ 271.9
$401.3
$ — $ —
$(229.3)
$ (85.8)
$(91.0)
$(91.5)
Plan assets of $271.9 million and $401.3 million as of December 31, 2008 and 2007, respectively, relate to our funded pension plans
that have a projected benefit obligation of $458.1 million and $445.8 million as of December 31, 2008 and 2007, respectively. As of
December 31, 2008 and 2007, we are 59% and 90% funded, respectively, in regards to these plans and their respective projected benefit
obligation.
Amounts included in the accompanying consolidated balance sheets are as follows:
Pension Benefits
Health Care Benefits
2008
$
0.3
4.6
225.0
2007
$ 1.5
4.7
82.6
2008
$ —
10.1
80.9
2007
$ —
9.9
81.6
Pension Benefits
Health Care Benefits
2008
$279.4
1.2
2007
$115.3
(0.5)
$280.6
$114.8
2008
$ 15.7
(24.4)
$ (8.7)
2007
$ 22.2
(36.0)
$(13.8)
(In millions)
Other non-current assets
Current liabilities
Long-term liabilities
Amounts recognized in AOCI:
(In millions)
Net loss
Prior service loss (credit)
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Change in AOCI under FASB Statement No. 158:
(In millions)
AOCI in prior year
Prior service (cost) credit recognized during year
Prior service cost occurring in the year
Net loss recognized during the year
Net loss (gain) occurring in the year
Decrease related to sale of equity affiliate
Other adjustments
AOCI in current year
Pension Benefits
Health Care Benefits
2008
$114.8
(0.2)
1.9
(7.7)
172.1
—
(0.3)
2007
$147.5
2008
2007
$(13.8)
$(14.0)
0.1
—
(9.9)
(22.9)
—
—
5.5
6.1
(1.1)
(4.8)
—
(0.6)
5.8
—
(1.7)
(1.5)
(2.7)
0.3
$280.6
$114.8
$ (8.7)
$(13.8)
As of December 31, 2008 and 2007, we had plans with a projected benefit obligation and an accumulated benefit obligation in excess of
the related plan assets. Information for these plans follows:
(In millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Weighted-average assumptions used to determine benefit obligation at December 31:
Discount rate
Rate of compensation increase
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
Pension Benefits
Health Care Benefits
2008
2007
2008
2007
$499.6
$471.1
$91.0
$91.5
480.2
270.4
453.2
383.8
91.0
91.5
—
—
Pension Benefits
Health Care Benefits
2008
2007
2006
2008
2007
2006
6.62% 6.78% 6.07% 6.65%
6.61%
6.02%
3.5%
3.5%
3.5%
—
—
—
—
—
—
—
—
—
— 9.25% 10.00% 11.00%
— 5.00%
5.00%
5.25%
— 2015
2015
2013
Assumed health care cost trend rates have an effect on the amounts reported for the health care plans. A one percentage point change
in assumed health care cost trend rates would have the following impact:
(In millions)
Effect on total of service and interest cost
Effect on post-retirement benefit obligation
One Percentage
One Percentage
Point Increase
Point Decrease
$0.3
4.8
$(0.3)
(4.4)
An expected return on plan assets of 8.5% will be used to calculate the 2009 pension expense. The expected long-term return rate on
pension assets was determined after considering the historical experience of long-term asset returns by asset category, the expected
investment portfolio mix by category of asset and estimated future long-term investment returns.
The following table summarizes the components of net period benefit cost that was recognized during each of the years in the three-year
period ended December 31, 2008. Actuarial assumptions that were used are also included.
(In millions)
Components of net periodic benefit costs:
Service cost
Interest cost
Expected return on plan assets
Amortization of net loss
Curtailment and settlement charges
Amortization of prior service credit (cost)
Pension Benefits
Health Care Benefits
2008
2007
2006
2008
2007
2006
$ 1.3
$ 1.1
$ 1.1
$ 0.3
$ 0.4
$ 0.4
32.4
30.1
29.4
(33.4)
(31.8)
(30.2)
7.5
0.5
0.2
9.6
0.3
(0.1)
13.3
—
—
5.5
—
1.2
—
5.2
—
1.7
—
5.1
—
1.6
—
(5.6)
(5.8)
(5.8)
$ 8.5
$ 9.2
$ 13.6
$ 1.4
$ 1.5
$ 1.3
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Weighted-average assumptions used to determine net periodic benefit cost for the years
ended December 31:
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
Pension Benefits
Health Care Benefits
2008
2007
2006
2008
2007
2006
6.78% 6.07% 5.66% 6.61% 6.02% 5.56%
8.50% 8.50% 8.50%
3.5%
3.5%
3.5%
—
—
—
—
—
—
—
—
—
—
—
—
— 9.25% 10.0% 10.0%
— 5.00% 5.25% 5.25%
— 2015
2013
2012
The amounts in accumulated other comprehensive income that
are expected to be amortized as net expense (income) during fiscal
year 2009 are as follows:
We currently estimate that 2009 employer contributions will be
$10.6 million to all qualified and nonqualified pension plans and
$10.1 million to all health care benefit plans.
(In millions)
Pension Benefits
Health Care Benefits
Amount of net prior service credit
Amount of net loss
$ 0.7
23.5
$(4.9)
1.4
Our pension asset investment strategy is to diversify the asset
portfolio among and within asset categories to enhance the portfo-
lio’s risk-adjusted return. Our expected portfolio asset mix also
considers the duration of plan liabilities and historical and expected
returns of the asset investments. Our pension asset investment
allocation guidelines are to invest 40% to 75% in equity securities,
15% to 40% in debt securities (including cash equivalents) and 8%
to 22% in alternative investments. These alternative investments
include funds of multiple asset investment strategies and funds of
hedge funds. We adjust our investment allocations during the year
through re-balancing the portfolio as we make contributions to the
pension assets and determine which investment classes should be
liquidated to fund pension obligations.
Our weighted-average asset allocations as of December 31,
2008 and 2007 were as follows:
Asset Category
Equity securities
Debt securities
Other
Plan Assets at
December 31,
2008
2007
55%
64%
19
26
15
21
100% 100%
The estimated future benefit payments for our pension and
health care plans are as follows:
Medicare
Pension
Health Care
Part D
Benefits
Benefits
Subsidy
$ 36.7
$10.1
$1.6
36.5
37.3
37.5
37.9
198.8
10.2
10.3
10.3
10.1
46.5
1.7
1.8
1.8
1.9
6.1
(In millions)
2009
2010
2011
2012
2013
2014 through 2018
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We sponsor a voluntary retirement savings plan (RSP). Under
the provisions of this plan, eligible employees receive defined
Company contributions of 2% of their eligible earnings plus they
are eligible for Company matching contributions based on the first
6% of their eligible earnings contributed to the plan. In addition, we
may make discretionary contributions to this plan for eligible
employees based on a specific percentage of each employee’s
compensation.
Following are our contributions to the RSP:
(In millions)
Retirement savings match
Defined retirement benefit
2008
2007
2006
$ 6.0
$ 5.7
$ 5.4
4.8
4.9
4.7
$10.8
$10.6
$10.1
Note 13 — COMMITMENTS AND RELATED-PARTY INFORMATION
Environmental — We have been notified by federal and state envi-
ronmental agencies and by private parties that we may be a poten-
tially responsible party (PRP) in connection with the investigation
and remediation of a number of environmental waste disposal sites.
While government agencies frequently assert that PRPs are jointly
and severally liable at these sites, in our experience, interim and
final allocations of liability costs are generally made based on the
relative contribution of waste. We believe that our potential con-
tinuing liability with respect to these sites will not have a material
adverse effect on our consolidated financial position, results of
operations or cash flows. In addition, we initiate corrective and
preventive environmental projects of our own to ensure safe and
lawful activities at our operations. We believe that compliance with
current governmental regulations at all levels will not have a mate-
rial adverse effect on our financial condition.
In September 2007, we were informed of rulings by the United
States District Court for the Western District of Kentucky on several
pending motions in the case of Westlake Vinyls, Inc. v. Goodrich
Corporation, et al., which has been pending since 2003. The Court
held that third-party defendant PolyOne must pay the remediation
costs at the former Goodrich Corporation (now Westlake Vinyls, Inc.)
Calvert City facility, together with certain defense costs of Goodrich
Corporation. The rulings also provided that PolyOne can seek indem-
nification for contamination attributable to Westlake Vinyls.
The following table details the changes in the environmental
accrued liabilities:
The environmental obligation at the site arose as a result of an
agreement by our predecessor, The Geon Company, at the time of
its spin-off from Goodrich Corporation in 1993, to indemnify Goo-
drich Corporation for environmental costs at the site. Neither Poly-
One nor The Geon Company ever owned or operated the facility.
Following the Court rulings, the parties to the litigation entered into
settlement negotiations and agreed to settle all claims regarding
past environmental costs incurred at the site. Subject to applicable
insurance recoveries, we recorded a charge of $15.6 million and
made payments, net of related receipts of $18.8 million, in 2007 for
past remediation activities related to these Court rulings.
Based on these same Court rulings and the settlement agree-
ment, we adjusted our environmental reserve for future remediation
costs, a portion of which already related to the Calvert City site,
resulting in a charge of $28.8 million in 2007. The confidential
settlement agreement provides a mechanism to allocate future
remediation costs at the Calvert City facility to Westlake Vinyls,
Inc. We will adjust our environmental reserve in the future, consis-
tent with any such future allocation of costs.
Based on estimates prepared by our environmental engineers
and consultants, we had accruals, totaling $84.6 million as of
December 31, 2008 and $83.8 million as of December 31,
2007 to cover probable future environmental expenditures relating
to previously contaminated sites. These accruals are included in
Accrued expenses and Other non-current liabilities on the accom-
panying consolidated balance sheets. The accrual represents our
best estimate of the remaining probable remediation costs, based
upon information and technology that is currently available and our
view of the most likely remedy. Depending upon the results of future
testing, the ultimate remediation alternatives undertaken, changes
in regulations, new information, newly discovered conditions and
other factors, it is reasonably possible that we could incur addi-
tional costs in excess of the accrued amount at December 31,
2008. However, such additional costs, if any, cannot be currently
estimated. Our estimate of this liability may be revised as new
regulations or technologies are developed or additional information
is obtained. These remediation costs are expected to be paid over
the next 30 years. In 2008, 2007 and 2006, we incurred environ-
mental expense of $14.6 million, $48.8 million and $2.5 million,
respectively, all of which related to inactive or formerly owned sites.
The 2007 environmental expense included the $15.6 million charge
related to the settlement agreement and the $28.8 million reserve
adjustment discussed above. Environmental expense is presented
net of insurance recoveries of $1.5 million in 2008 and $8.1 million
in 2006 and is included in Cost of sales in the accompanying
consolidated statements of operations. There were no insurance
recoveries during 2007. The insurance recoveries all relate to
inactive or formerly owned sites.
(In millions)
2008
2007
2006
Balance at beginning of the year
$ 83.8
$ 59.5
$55.2
Environmental remediation expenses,
net of insurance recoveries
14.6
48.8
2.5
Cash payments, net of insurance
recoveries
(12.6)
(25.5)
Translation and other adjustments
(1.2)
1.0
1.8
—
Balance at end of year
$ 84.6
$ 83.8
$59.5
Guarantees — We guarantee $54.8 million of SunBelt’s out-
standing senior secured notes in connection with the construction
of a chlor-alkali facility in McIntosh, Alabama. This debt matures in
equal installments annually until 2017.
Related-Party Transactions — We purchase a substantial por-
tion of our PVC resin and all of our vinyl chloride monomer (VCM) raw
materials under supply agreements with OxyVinyls. We have also
entered into various service agreements with OxyVinyls. We sold our
24% equity interest in OxyVinyls on July 6, 2007. Net amounts owed
to OxyVinyls, primarily for raw material purchases, totaled $17.3 mil-
lion as of December 31, 2006. Purchases of raw materials from
OxyVinyls were $369 million during 2006 and $152 million for the
six months ended June 30, 2007.
Note 14 — OTHER EXPENSE, NET
(In millions)
2008
2007
2006
Currency exchange gain (loss)
$ 1.2
$(5.0)
$(1.3)
Foreign exchange contracts (loss) gain
Discount on sale of trade receivables
Impairment of available for sale security
Other expense, net
(1.3)
(3.6)
(0.6)
(0.3)
0.7
1.1
(2.0)
(1.9)
—
—
(0.3)
(0.7)
$(4.6)
$(6.6)
$(2.8)
Note 15 — INCOME TAXES
For financial statement reporting purposes, income before income
taxes is summarized below based on the geographic location of the
operation to which such earnings are attributable. Certain foreign
operations are branches of PolyOne and are, therefore, subject to
United States (U.S.) as well as foreign income tax regulations. As a
result, pre-tax income by location and the components of income tax
expense by taxing jurisdiction are not directly related.
Income (loss) before income taxes and discontinued opera-
tions for the periods ended December 31, 2008, 2007 and 2006
consists of the following:
(In millions)
Domestic
Foreign
2008
2007
2006
$(138.8)
$(57.7)
$101.9
(32.3)
25.3
18.4
$(171.1)
$(32.4)
$120.3
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State tax, net of federal benefit
(2.5)
(0.4)
(1.4)
Intangibles
$ 59.9
$11.3
$(42.1)
Tax over book depreciation
$ 36.6
$ 40.8
A summary of income tax (expense) benefit for the periods
ended December 31, 2008, 2007 and 2006 is as follows:
(In millions)
Current:
Federal
State
Foreign
2008
2007
2006
$
— $ (3.3)
$ (2.5)
(3.9)
(8.5)
(3.2)
(6.8)
(2.2)
(2.9)
Total current
$ (12.4)
$(13.3)
$ (7.6)
Deferred:
Federal
State
Foreign
$ (88.6)
$ 55.3
$13.5
(3.3)
2.5
2.6
(0.8)
1.6
(2.2)
Total deferred
$ (89.4)
$ 57.1
$12.9
Total tax (expense) benefit
$(101.8)
$ 43.8
$ 5.3
The principal items accounting for the difference in income
taxes computed at the U.S. statutor y rate for the periods ended
December 31, 2008, 2007 and 2006 are as follows:
(In millions)
2008
2007
2006
Computed tax (expense) benefit at
35% of income (loss) from
continuing operations before taxes
Provision for repatriation of foreign
earnings
Differences in rates of foreign
operations
Other, net
Impact from sale of interest in
OxyVinyls
—
—
(10.5)
1.2
(0.3)
2.6
(0.2)
1.4
(1.6)
—
31.5
—
Impact of goodwill impairment charge
(54.2)
Valuation allowance
(105.9)
(1.0)
59.5
Income tax (expense) benefit
$(101.8)
$43.8
$ 5.3
In the fourth quarter of 2008, we increased valuation allow-
ances against our deferred tax assets by $166.7 million in accor-
dance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (FAS 109). The non-cash charge to
income tax expense consists of $104.5 million related to U.S. fed-
eral and state and local deferred tax assets and $1.4 million related
to foreign deferred tax assets. $60.8 million related to pension and
post-retirement health care liabilities was recorded as a reduction
of AOCI.
We established a new valuation allowance of $104.5 million
that is related to U.S. federal and state and local deferred tax
assets. This valuation allowance was recorded based on our
U.S. pre-tax losses over 2007 and 2008 as well as our current
estimates for near term U.S. results. Taking this charge will have no
impact on our ability to utilize these U.S. net operating losses to
offset future U.S. taxable profits. We review all valuation allowances
related to deferred tax assets and will reverse these charges,
partially or totally, when appropriate under FAS 109.
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We have U.S. net operating loss carryforwards of $97.9 million
which expire at various dates from 2024 through 2028. Certain
foreign subsidiaries had tax loss carryforwards aggregating
$28.8 million which will expire at various dates from 2010 through
2018.
During the third quarter of 2007, as part of the sale of our 24%
interest in OxyVinyls, we recognized a deferred tax benefit of
$31.5 million that was related to the temporar y difference between
the tax basis and book basis of the investment.
In 2006, in accordance with FAS 109, the valuation allowance
that was established during 2002 through 2004 was reduced
$74.9 million. This amount is comprised of $44.3 million for the
utilization of the net operating loss carryforward, $15.4 million
associated with changes in AOCI related to pension and post-retire-
ment health care liabilities, and the remaining $15.2 million of the
valuation allowance on the basis that it is more likely than not that
the deferred tax asset will be realized.
Components of our deferred tax liabilities and assets as of
December 31, 2008 and 2007 were as follows:
(In millions)
Deferred tax liabilities:
2008
2007
Equity investments
Other, net
2.9
1.7
7.5
5.6
1.9
8.9
Total deferred tax liabilities
$ 48.7
$ 57.2
Deferred tax assets:
Post-retirement benefits other than pensions
$ 36.1
$ 36.5
Employment cost and pension
Environmental
Net operating loss carryforward
State taxes
Alternative minimum tax credit carryforward
Other, net
Total deferred tax assets
Tax valuation allowance
Net deferred tax assets
77.7
29.4
41.9
5.2
12.5
16.5
26.8
28.9
25.6
3.3
12.2
16.6
$ 219.3
$149.9
(169.1)
(2.4)
$
1.5
$ 90.3
No provision has been made for income taxes on undistributed
earnings of consolidated non-United States subsidiaries of
$149 million at December 31, 2008 since it is our intention to
indefinitely reinvest undistributed earnings of our foreign subsid-
iaries. It is not practicable to estimate the additional income taxes
and applicable foreign withholding taxes that would be payable on
the remittance of such undistributed earnings.
Worldwide income tax payments were $9.6 million in 2008,
$18.3 million in 2007 and $9.0 million in 2006.
We adopted the provisions of Statement of Financial Account-
ing Standards Interpretation (FIN) No. 48, Accounting for Uncer-
tainty in Income Taxes — an interpretation of FASB Statement 109,
on January 1, 2007. The net income tax assets recognized under
FIN 48 did not differ from the net assets recognized before adoption
and, therefore, we did not record a cumulative effect adjustment
related to the adoption of FIN 48.
and administrative in the accompanying consolidated statements of
operations. A summary of compensation expense by type of award
follows:
As of December 31, 2008, we have a $6.3 million liability for
uncertain tax positions all of which, if recognized, would impact the
effective tax rate. We expect that the amount of unrecognized tax
benefits will change in the next twelve months due to the resolution
of an income tax audit in a foreign jurisdiction.
We recognize interest and penalties related to unrecognized
income tax benefits in the provision for income taxes. As of Decem-
ber 31, 2008 and December 31, 2007, we have accrued $2.5 mil-
lion of interest and penalties.
A reconciliation of the beginning and ending amount of unrec-
ognized tax benefits is as follows:
(In millions)
Balance as of January 1
Additions based on tax positions related to the
current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Unrecognized Tax
Benefits
2008
2007
$6.0
$ 6.0
—
0.3
—
—
0.5
(0.2)
(0.3)
Balance as of December 31
$6.3
$ 6.0
We are no longer subject to U.S. income tax examinations for
periods preceding 2005, and with limited exceptions, for periods
preceding 2002 for both foreign and state and local
tax
examinations.
Note 16 — SHARE-BASED COMPENSATION
Share-based compensation cost is based on the value of the por-
tion of share-based payment awards that are ultimately expected to
vest during the period. Share-based compensation cost recognized
in the accompanying consolidated statements of operations for the
years ended December 31, 2008, 2007 and 2006 includes (a) com-
pensation cost for share-based payment awards granted prior to,
but not yet vested, as of January 1, 2006 based on the grant date
fair value estimated in accordance with the pro forma provisions of
FASB Statement No. 123, plus (b) compensation cost for share-
based payment awards granted on or subsequent to January 1,
2006 based on the grant date fair value estimated in accordance
with the provision of FASB Statement No. 123(R). Because share-
based compensation expense recognized in the accompanying
consolidated statements of operations for the years ended Decem-
ber 31, 2008, 2007 and 2006 is based on awards ultimately
expected to vest, it has been reduced for estimated for feitures.
FASB Statement No. 123(R) requires that for feitures be estimated
at the time of grant and revised, if necessary, in subsequent periods
if actual for feitures differ from those estimates.
We have one active share-based compensation plan, which is
described below. Share-based compensation is included in Selling
(In millions)
Stock appreciation rights
Restricted stock units
Restricted stock awards
Per formance shares
Stock options
2008
2007
2006
$1.5
$ 4.1
$2.9
0.8
0.7
—
—
—
0.7
(0.5)
—
—
0.5
1.0
0.1
Total share-based compensation
$3.0
$ 4.3
$4.5
2008 Equity and Performance Incentive Plan
In May 2008, our shareholders approved the PolyOne Corporation
2008 Equity and Per formance Incentive Plan (2008 EPIP). This plan
replaces the 2005 Equity and Per formance Incentive Plan (2005
EPIP). The 2005 EPIP was frozen upon the approval of the 2008
EPIP in May 2008. The 2008 EPIP provides for the award of a variety
of share-based compensation alternatives, including non-qualified
stock options, incentive stock options, restricted stock, restricted
stock units (RSUs), performance shares, per formance units and
stock appreciation rights (SARs). A total of five million shares of
common stock have been reserved for grants and awards under the
2008 EPIP. It is anticipated that all share-based grants and awards
that are earned and exercised will be issued from shares of PolyOne
common stock that are held in treasury.
2005 Equity and Performance Incentive Plan
In May 2005, our shareholders approved the 2005 EPIP. All previ-
ous equity-based plans were frozen upon the approval of the 2005
EPIP in May 2005. The 2005 EPIP provides for the award of a variety
of share-based compensation alternatives, including non-qualified
stock options, incentive stock options, restricted stock, RSUs,
per formance shares, per formance units and stock appreciation
rights. A total of five million shares of common stock were reserved
for grants and awards under the 2005 EPIP. It is anticipated that all
share-based grants and awards that are earned and exercised will
be issued from shares of PolyOne common stock that are held in
treasury. The 2005 EPIP was replaced by the 2008 EPIP.
Stock Appreciation Rights
During 2008, the Compensation and Governance Committee of our
Board of Directors authorized the issuance of 1,094,400 SARs.
These awards vest in one-third increments annually over a three-
year service period. These SARs have a seven-year exercise period
that expires on March 6, 2015.
For SARs granted in 2007 and 2006, vesting is based on a
service period of one year and the achievement of certain stock
price targets. This condition is considered a market-based measure
under FASB Statement No. 123(R) and is considered in determining
the award’s fair value. This fair value is not subsequently revised for
actual market price achievement, but rather is a fixed expense
subject only to service-related for feitures. The awards granted in
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2007 vest in one-third increments based on stock price achieve-
ment (for a minimum of three consecutive trading days) of $7.24,
$7.90 and $8.56 per share, but may not be exercised earlier than
one year from the date of the grant. At December 31, 2008, these
awards had reached the $8.56 stock price achievement target. The
awards granted in 2006 vest in one-third increments based on stock
price achievement (for a minimum of three consecutive trading
days) of $7.50, $8.50 and $10.00 per share, but may not be
exercised earlier than one year from the date of the grant. As of
December 31, 2008, these awards had reached the $8.50 stock
price achievement target. These SARs have a seven-year exercise
period.
We utilized an option pricing model based on the Black-Scholes
method to value the SARs granted in 2008. Under this method, the
fair value of awards on the date of grant is an estimate and is
affected by our stock price, as well as assumptions regarding a
number of highly complex and subjective variables as noted in the
following table. Expected volatility was set at 37% based upon the
historical weekly volatility of our common stock during the 4.5 years
preceding the date of grant. The expected term of SARs granted was
determined based on the Securities and Exchange Commission’s
“simplified method” described in Staff Accounting Bulletin (SAB)
No. 107. This method results in an expected term of 4.5 years,
equal to halfway between the average vesting of two years and the
expiration of seven years. SAB No. 110 allows companies lacking
sufficient historical exercise experience to continue use of this
method. Dividends were omitted in this calculation because we
do not currently pay dividends. The risk-free rate of return was based
on available yields on U.S. Treasury bills of the same duration as the
expected option term. For feitures were estimated at 3% per year
and were based on our historical experience.
Due to the fact that the SARs granted during 2007 and 2006
vest in one-third increments based on certain stock price achieve-
ment, the option pricing model used by us to value the SARs granted
during 2007 and 2006 was a Monte Carlo simulation method.
Under this method, the fair value of awards on the date of grant
is an estimate and is affected by our stock price, as well as by
assumptions regarding a volatility was determined by the average of
the six-year historical weekly volatility for our common stock and the
implied volatility rates for exchange-traded options. The expected
term of options granted was set equal to the midpoint between the
vesting and expiration dates for each grant. Dividends were not
included in this calculation because we do not currently pay divi-
dends. The risk-free rate of return for periods within the contractual
life of the option is based on U.S. Treasury rates that were in effect
at the time of the grant. Forfeitures were estimated at 3% per year
based on our historical experience.
The following is a summary of the assumptions related to the
grants issued during 2008, 2007 and 2006:
Expected volatility (weighted-average)
Expected dividends
Expected term (in years)
Risk-free rate
Value of SARs granted
2008
36.9%
—
4.5
2007
44.1%
—
2006
44.0%
—
4.0 — 4.4
3.7 — 4.3
2.48% — 3.08%
3.88% — 4.30%
4.26% — 4.91%
$2.26 --$2.68
$2.68 — $3.05
$2.63 — $3.82
A summary of SAR activity under the 2008 EPIP as of December 31, 2008 and during 2008 is presented below:
(Shares in thousands, dollars in millions, except per share data)
Stock Appreciation Rights
Outstanding as of January 1, 2008
Granted
Exercised
Forfeited or expired
Outstanding as of December 31, 2008
Vested and exercisable as of December 31, 2008
Weighted-Average
Weighted-Average
Aggregate
Exercise Price
Remaining
Intrinsic
Per Share
Contractual Term
Value
$7.30
6.82
6.56
6.79
7.18
7.16
4.71 years
4.35 years
$—
$—
Shares
2,991
1,094
(7)
(63)
4,015
2,461
The weighted-average grant date fair value of SARs granted
during 2008, 2007 and 2006 was $2.28, $2.74 and $2.99,
respectively. The total intrinsic value of SARs that were exercised
during 2008, 2007 and 2006 was less than $0.1 million, $0.1 mil-
lion and $1.5 million, respectively. As of December 31, 2008, there
was $1.7 million of total unrecognized compensation cost related to
SARs, which is expected to be recognized over the next 29 months.
Restricted Stock Units
During 2008, 497,600 RSUs have been granted to select
executives and other key employees. A RSU represents a contingent
right to receive one share of our common stock at a future date
provided a continuous three-year service period is attained. Com-
pensation expense is measured on the grant date using the quoted
market price of our common stock and is recognized on a straight-
line basis over the requisite service period.
As of December 31, 2008, 477,142 RSUs remain unvested
with a weighted-average grant date fair value of $6.69 and a
weighted-average remaining contractual term of 27 months. Unrec-
ognized compensation cost for RSUs at December 31, 2008 was
$2.4 million.
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Restricted Stock Awards
In 2007 and 2006, we issued restricted stock as part of the
compensation package for select executives and other key employ-
ees. The value of the restricted shares was established using the
market price of our common stock on the date of grant. Compen-
sation expense is being recorded on a straight-line basis over the
three-year cliff vesting period of the restricted stock. As of Decem-
ber 31, 2008, 239,600 shares of restricted stock remain unvested
with a weighted-average grant date fair value of $8.66 and a
weighted-average remaining contractual
four months.
Unrecognized compensation cost for restricted stock awards as
of December 31, 2008 was $0.2 million.
term of
Performance Shares
In January 2005, the Compensation and Governance Commit-
tee authorized the issuance of per formance shares to select exec-
utives and other key employees. The per formance shares vested
only to the extent that management goals for cash flow, return on
invested capital, and the level of earnings before interest, taxes,
depreciation and amortization in relation to debt were achieved for
the period commencing January 1, 2005 and ending December 31,
2007. Of the 388,500 per formance share awards outstanding at
December 31, 2007, 33% vested and were paid out in shares
issued from treasury, net of tax.
Stock Options
Our incentive stock plans previously provided for the award or
grant of options to purchase our common stock. Options were
granted in 2004 and prior years. Options granted generally became
exercisable at the rate of 35% after one year, 70% after two years
and 100% after three years. The term of each option does not
extend beyond 10 years from the date of grant. All options were
granted at 100% or greater of market value (as defined) on the date
of the grant.
A summary of option activity as of December 31, 2008 and changes during 2008 follows:
(Shares in thousands, dollars in millions, except per share data)
Options
Outstanding as of January 1, 2008
Exercised
Forfeited or expired
Outstanding, vested and exercisable as of December 31, 2008
Weighted-Average
Weighted-Average
Aggregate
Exercise Price
Remaining
Intrinsic
Per Share
Contractual Term
Value
$11.17
5.98
11.21
11.43
1.55 years
$—
Shares
6,153
(190)
(2,586)
3,377
The total intrinsic value of stock options that were exercised during 2008, 2007 and 2006 was $0.4 million, $0.2 million and
$0.9 million, respectively. Cash received during 2008, 2007 and 2006 from the exercise of stock options was $1.1 million, $1.2 million and
$3.1 million, respectively.
Note 17 — SEGMENT INFORMATION
A segment is a component of an enterprise whose operating results
are regularly reviewed by the enterprise’s chief operating decision
maker to make decisions about resources to be allocated to the
segment and assess its per formance, and for which discrete finan-
cial information is available. We determine and disclose our seg-
ments in accordance with FASB Statement No. 131, Disclosures
about Segments of an Enterprise and Related Information, which
defines how to determine segments.
Effective December 31, 2008, we have six reportable seg-
ments: International Color and Engineered Materials; Specialty
Engineered Materials; Specialty Color, Additives and Inks; Per for-
mance Products and Solutions; PolyOne Distribution; and Resin and
Intermediates. Segment information for prior periods has been
restated to conform to the 2008 presentation.
During the second quarter of 2008, we announced that Pro-
ducer Services, formerly included in All Other, was combined with
Geon Per formance Polymers to form the Per formance Products and
Solutions operating segment. In addition, North American Color and
Additives and Specialty Inks and Polymer Systems, both formerly
included in All Other, were combined to form a new operating
segment named Specialty Color, Additives and Inks.
In March 2008, we announced the Specialty Engineered Mate-
rials segment. This segment includes our TPE compounds product
line in Europe and Asia (historically included in International Color
and Engineered Materials), North American Engineered Materials
(historically included in All Other) and GLS. On April 15, 2008, the
Vinyl Business segment was re-branded to be called Geon Per for-
mance Polymers.
Effective with the fourth quarter of 2007, the former Polymer
Coating Systems operating segment was split into two units. The
50% interest in BayOne Urethane Systems, L.L.C., along with the
inks and specialty colorants businesses formed a new operating
segment, Specialty Inks and Polymer Systems, which was included
in All Other. The remaining plastisols and coated fabrics businesses
were subsumed into the Vinyl Business reportable segment. Seg-
ment information for prior periods has been reclassified.
As of January 1, 2007, our vinyl operations located in Sin-
gapore are managed and reported within the Vinyl Business oper-
ating segment. Historically, the results of this operation were
included in the International Color and Engineered Materials oper-
ating segment. Prior period results of operations have been
reclassified.
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Prior to the fourth quarter of 2007, our historical presentation
of segment information consisted of six reportable segments: Vinyl
Compounds, Specialty Resins, North American Color and Additives,
International Color and Engineered Materials, PolyOne Distribution,
Resin and Intermediates, and “All Other” operating segments (All
Other). All Other consisted of the North American Engineered Mate-
rials and Polymer Coating Systems operating segments. Effective
with the first quarter of 2006, Producer Services, a new operating
segment, was formed from portions of the North American Color
and Additives and the North American Engineered Materials oper-
ating segments. As a result, North American Color and Additives no
longer met the quantitative thresholds that would require separate
disclosure as a reportable segment and was included in All Other.
Producer Services also did not meet the quantitative thresholds as
defined in FASB Statement No. 131 and was also included in All
Other. During the fourth quarter of 2006, we changed our manage-
ment structure, which resulted in the Specialty Resins reportable
segment being subsumed into the Vinyl Compounds reportable
segment to create a new operating and reportable segment, Vinyl
Business.
Operating income is the primary measure that is reported to
the chief operating decision maker for purposes of making deci-
sions about allocating resources to the segment and assessing its
per formance. Operating income at the segment level does not
include: corporate general and administrative costs that are not
allocated to segments; intersegment sales and profit eliminations;
charges related to specific strategic initiatives such as the consol-
idation of operations; restructuring activities, including employee
separation costs resulting from personnel reduction programs,
plant closure and phaseout costs; executive separation agree-
ments; share-based compensation costs; asset impairments; envi-
ronmental remediation costs for facilities no longer owned or closed
in prior years; gains and losses on the divestiture of joint ventures
and equity investments; and certain other items that are not
included in the measure of segment profit or loss that is reported
to and reviewed by the chief operating decision maker. These costs
are included in Corporate and eliminations.
Segment assets are primarily customer receivables, invento-
ries, net property, plant and equipment, and goodwill. Intersegment
sales are generally accounted for at prices that approximate those
for similar transactions with unaffiliated customers. Corporate and
eliminations includes cash, sales of accounts receivable, retained
assets and liabilities of discontinued operations, and other unallo-
cated corporate assets and liabilities. The accounting policies of
each segment are consistent with those described in Note 1, Sum-
mary of Significant Accounting Policies. Following is a description of
each of our six reportable segments.
International Color and Engineered Materials
The International Color and Engineered Materials operating seg-
ment combines the strong regional heritage of our color and additive
masterbatches and engineered materials operations to create glo-
bal capabilities with plants, sales and service facilities located
throughout Europe and Asia.
We operate 12 facilities in Europe (Belgium, France, Germany,
Hungary, Poland, Spain, Sweden and Turkey) and six facilities in
Asia (China, Singapore and Thailand).
Working in conjunction with our Specialty Color, Additives and
Inks and North American Engineered Materials operating segments,
we provide solutions that meet our
international customers’
demands for both global and local manufacturing, service and
technical support.
Specialty Engineered Materials
The Specialty Engineered Materials operating segment is a leading
provider of custom plastic compounding services and solutions for
processors of thermoplastic materials across a wide variety of
markets and end-use applications including those that currently
employ traditional materials such as metal. Specialty Engineered
Materials’ product portfolio, one of the broadest in our industry,
includes standard and custom formulated high-per formance poly-
mer compounds that are manufactured using a full range of ther-
moplastic compounds and elastomers, which are then combined
with advanced polymer additive, reinforcement, filler, colorant and
biomaterial technologies.
With a depth of compounding expertise, we are able to expand
the per formance range and structural properties of traditional
engineering-grade thermoplastic resins that meet our customers’
unique per formance requirements. Our product development and
application reach is further enhanced by the capabilities of our
North American Engineered Materials Solutions Center, which pro-
duces and evaluates prototype and sample parts to help assess
end-use per formance and guide product development. Our manu-
facturing capabilities, which include a facility located in Avon Lake,
Ohio, are targeted at meeting our customers’ demand for speed,
flexibility and critical quality.
This segment also includes the business of GLS, which we
acquired in January 2008. GLS, which is headquar tered in McHenry,
Illinois, is a global developer of innovative TPE with facilities in North
America, Europe and China, and offers the broadest range of soft-
touch TPE materials in the industry.
Specialty Color, Additives and Inks
The Specialty Color, Additives and Inks operating segment is a
leading provider of specialized color and additive concentrates as
well as inks and latexes.
Color and additive products include an innovative array of
colors, special effects and per formance-enhancing and eco-friendly
solutions. Our color masterbatches contain a high concentration of
color pigments and/or additives that are dispersed in a polymer
carrier medium and are sold in pellet, liquid, flake or powder form.
When combined with non pre-colored base resins, our colorants
help our customers achieve a wide array of specialized colors and
effects that are targeted at the demands of today’s highly design-
oriented consumer and industrial end markets. Our additive master-
batches encompass a wide variety of per formance enhancing
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processors that design and develop their own compound and
masterbatch recipes. Customers often require high quality, cost
effective and confidential services. As a strategic and integrated
supply chain partner, Producer Services offers resin producers a
way to develop custom products for niche markets by using our
compounding expertise and multiple manufacturing platforms.
PolyOne Distribution
The PolyOne Distribution operating segment distributes more than
3,500 grades of engineering and commodity grade resins, including
PolyOne-produced compounds, to the North American market.
These products are sold to over 5,000 custom injection molders
and extruders who, in turn, convert them into plastic parts that are
sold to end-users in a wide range of industries. Representing over
20 major suppliers, we offer our customers a broad product port-
folio, just-in-time delivery from multiple stocking locations and local
technical support.
characteristics and are commonly categorized by the function that
they per form, such as UV stabilization, anti-static, chemical blow-
ing, antioxidant and lubricant, and processing enhancement.
Our colorant and additives masterbatches are used in most
including injection molding,
plastics manufacturing processes,
extrusion, sheet, film, rotational molding and blow molding through-
out the plastics industry, particularly in the packaging, transporta-
tion, consumer, outdoor decking, pipe and wire and cable markets.
They are also incorporated into such end-use products as stadium
seating, toys, housewares, vinyl siding, pipe, food packaging and
medical packaging.
This segment also provides custom-formulated liquid systems
that meet a variety of customer needs and chemistries, including
vinyl, natural rubber and latex, polyurethane and silicone. Products
include proprietary fabric screen-printing inks and latexes for diver-
sified markets that range from recreational and athletic apparel,
construction and filtration to outdoor furniture and healthcare. In
addition, we have a 50% interest in BayOne, a joint venture between
PolyOne and Bayer Corporation, which sells liquid polyurethane
systems into many of the same markets.
Performance Products and Solutions
The Per formance Products and Solutions operating segment is a
global leader offering an array of products and services for vinyl
coating, molding and extrusion processors. Our product offerings
include: rigid, flexible and dry blend vinyl compounds; industry-
leading dispersion, blending and specialty suspension grade vinyl
resins; and specialty coating materials based largely on vinyl. These
products are sold to a wide variety of manufacturers of plastic parts
and consumer-oriented products. We also offer a wide range of
services to the customer base utilizing these products to meet the
ever changing needs of our multi-market customer base. These
services include materials testing and component analysis, custom
compound development, colorant and additive services, design
assistance, structural analyses, process simulations and extruder
screw design.
Much of the revenue and income for Per formance Products and
Solutions is generated in North America. However, production and
sales in Asia and Europe constitute a minor but growing portion of
this segment. In addition, we own 50% of a joint venture producing
and marketing vinyl compounds in Latin America.
Vinyl is one of the most widely used plastics, utilized in a wide
range of applications in building and construction, wire and cable,
consumer and recreation markets, transportation, packaging and
healthcare. Vinyl resin can be combined with a broad range of
additives, resulting in per formance versatility, particularly when fire
resistance, chemical resistance or weatherability is required. We
believe we are well-positioned to meet the stringent quality, service
and innovation requirements of this diverse and highly competitive
marketplace.
This operating segment also includes Producer Services, which
offers custom compounding services to resin producers and
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Resin and Intermediates
We report the results of our Resin and Intermediates operating
segment on the equity method. This segment consists almost
entirely of our 50% equity interest in SunBelt and our
former
24% equity interest in OxyVinyls, through its disposition date of
July 6, 2007. SunBelt, a producer of chlorine and caustic soda, is a
partnership with Olin Corporation. OxyVinyls, a producer of PVC
resins, VCM and chlorine and caustic soda, was a partnership with
Financial information by reportable segment is as follows:
Occidental Chemical Corporation. In 2008, SunBelt had production
capacity of approximately 320 thousand tons of chlorine and 358
thousand tons of caustic soda. Most of the chlorine manufactured
by SunBelt is consumed by OxyVinyls to produce PVC resin. Caustic
soda is sold on the merchant market to customers in the pulp and
paper, chemical, building and construction and consumer products
industries.
Year Ended December 31, 2008
Sales to External
Operating
Depreciation and
Capital
(In millions)
Customers
Intersegment Sales
Total Sales
Income (Loss)
Amortization
Expenditures
Total
Assets
International Color and Engineered
Materials
$ 587.4
$
—
$ 587.4
$ 20.4
$16.1
$11.7
$ 341.2
Specialty Engineered Materials
Specialty Color, Additives and Inks
Performance Products and Solutions
PolyOne Distribution
Resin and Intermediates
Corporate and eliminations
Total
223.0
225.8
910.9
791.6
—
—
29.3
2.8
90.5
5.1
—
252.3
228.6
1,001.4
796.7
—
12.9
13.5
34.9
28.1
28.6
(127.7)
(127.7)
(267.7)
$2,738.7
$
—
$2,738.7
$(129.3)
6.3
8.0
24.9
1.7
0.2
10.8
$68.0
4.4
3.3
14.7
0.1
—
8.3
215.8
139.7
321.8
149.8
7.3
102.1
$42.5
$1,277.7
Year Ended December 31, 2007
Sales to External
Operating
Depreciation and
Capital
(In millions)
Customers
Intersegment Sales
Total Sales
Income (Loss)
Amortization
Expenditures
Total
Assets
International Color and Engineered
Materials
$ 588.6
$
—
$ 588.6
$ 25.1
$14.4
$20.3
$ 412.5
Specialty Engineered Materials
Specialty Color, Additives and Inks
Performance Products and Solutions
PolyOne Distribution
Resin and Intermediates
Corporate and eliminations
Total
98.1
230.8
985.6
739.6
—
—
26.2
1.2
101.2
4.7
—
124.3
232.0
1,086.8
744.3
—
(2.2)
7.0
57.5
22.1
34.8
(133.3)
(133.3)
(110.4)
3.9
8.8
23.7
1.7
0.2
4.7
1.1
2.6
14.4
0.1
—
4.9
56.6
159.5
559.6
175.2
4.5
215.1
$2,642.7
$
—
$2,642.7
$ 33.9
$57.4
$43.4
$1,583.0
Year Ended December 31, 2006
Sales to External
Operating
Depreciation and
Capital
(In millions)
Customers
Intersegment Sales
Total Sales
Income (Loss)
Amortization
Expenditures
Total
Assets
International Color and Engineered
Materials
$ 510.7
$
—
$ 510.7
$ 20.6
$13.4
$11.4
$ 366.4
Specialty Engineered Materials
Specialty Color, Additives and Inks
Performance Products and Solutions
PolyOne Distribution
Resin and Intermediates
Corporate and eliminations
Total
88.4
251.7
1,047.5
724.1
—
—
24.9
1.4
118.7
8.7
—
113.3
253.1
1,166.2
732.8
—
(153.7)
(153.7)
(2.4)
(4.1)
73.4
19.2
102.9
(19.0)
3.1
10.3
23.5
1.5
0.2
5.1
11.4
3.5
10.2
0.3
—
4.3
56.3
170.7
573.1
164.6
270.9
178.8
$2,622.4
$
—
$2,622.4
$190.6
$57.1
$41.1
$1,780.8
In October 2006, we purchased the remaining 50% of our
equity investment in DH Compounding from a wholly-owned subsid-
iary of The Dow Chemical Company for $10.2 million. DH Com-
pounding is consolidated in the accompanying consolidated
balance sheets as of December 31, 2008 and 2007, and the
results of operations were included in the accompanying consoli-
dated statements of operations beginning October 1, 2006. DH
Compounding is included in our Per formance Products and Solu-
tions operating segment.
Per formance Products and Solutions also includes our GPA
equity affiliate (owned 50%). For 2008, 2007 and 2006, Specialty
Color, Additives and Inks includes earnings of BayOne equity affil-
iate (owned 50% by Specialty Inks and Polymer Systems). For 2006,
Per formance Products and Solutions includes earnings of DH
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Compounding equity affiliate (owned 50% by Producer Services)
through September 30, 2006.
Earnings of equity affiliates are included in the related seg-
ment’s operating income and the investment in equity affiliates is
included in the related segment’s assets. Amounts related to equity
affiliates included in the segment information, excluding amounts
related to losses on divestitures of equity investments, are as
follows:
(In millions)
Earnings of equity affiliates:
Specialty Color, Additives and Inks
Performance Products and Solutions
Resin and Intermediates
Subtotal
Minority interest
Corporate and eliminations
Total
Investment in equity affiliates:
Specialty Color, Additives and Inks
Performance Products and Solutions
Resin and Intermediates
Corporate and eliminations
Total
2008
2007
2006
$ 3.5
$ 3.3
$
(0.1)
32.4
35.8
0.1
0.6
40.8
44.7
(0.2)
(4.7)
(16.8)
3.5
2.4
107.0
112.9
(0.8)
(0.1)
$31.2
$ 27.7
$112.0
$ 2.4
$ 2.2
9.8
7.2
1.1
13.2
4.5
—
$20.5
$ 19.9
Our sales are primarily to customers in the United States, Europe, Canada and Asia, and the majority of our assets are located in these
same geographic areas. Following is a summary of sales and long-lived assets based on the geographic areas where the sales originated and
where the assets are located:
(In millions)
Net sales:
United States
Europe
Canada
Asia
Other
Long-lived assets:
United States
Europe
Canada
Asia
Other
Note 18 — WEIGHTED-AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE
(In millions)
Weighted-average shares — basic:
Weighted-average shares outstanding
Less unearned portion of restricted stock awards included in outstanding shares
Weighted-average shares — diluted:
Weighted-average shares outstanding — basic
Plus dilutive impact of stock options and stock awards
2008
2007
2006
$1,718.4
$1,670.9
$1,743.6
528.8
295.8
182.4
13.3
513.7
291.7
152.5
13.9
442.6
287.6
135.7
12.9
$ 505.6
$ 582.3
$ 563.3
180.1
189.7
169.9
13.0
31.3
2.1
73.0
31.4
2.9
62.1
26.3
2.7
2008
2007
2006
92.9
93.0
92.5
0.2
0.2
0.1
92.7
92.8
92.4
92.7
92.8
92.4
—
0.3
0.4
92.7
93.1
92.8
Basic earnings per common share is computed as net income
available to common shareholders divided by the weighted average
basic shares outstanding. Diluted earnings per common share is
computed as net income available to common shareholders divided
by the weighted average diluted shares outstanding. Pursuant to
FASB Statement No. 128, Earnings Per Share, when a loss is
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reported the denominator of diluted earnings per share cannot be
the dilutive impact of stock options and awards
adjusted for
because doing so will result in anti-dilution. Therefore, for the year
ended December 31, 2008, basic weighted-average shares out-
standing are used in calculating diluted earnings per share.
Outstanding stock options with exercise prices greater that the
average price of the common shares are anti-dilutive and are not
included in the computation of diluted earnings per share. The
number of anti-dilutive options and awards was 4.1 million, 6.4 mil-
lion and 7.4 million at December 31, 2008, 2007 and 2006,
respectively.
Note 19 — FINANCIAL INSTRUMENTS
The following table summarizes the contractual amounts of our
foreign exchange contracts as of December 31, 2008 and 2007.
Foreign currency amounts are translated at exchange rates as of
December 31, 2008 and 2007, respectively. The “Buy” amounts
represent the U.S. dollar equivalent of commitments to purchase
foreign currencies, and the “Sell” amounts represent the U.S. dollar
equivalent of commitments to sell foreign currencies.
Currency (In millions)
U.S. dollar
Euro
Canadian dollar
December 31, 2008
December 31, 2007
Buy
Sell
Buy
Sell
$ 4.6
$29.7
$92.7
$ —
8.9
20.4
4.5
—
—
—
95.0
—
The carrying amounts and fair values of our financial instruments as of December 31, 2008 and 2007 are as follows:
2008
2007
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$ 44.3
$ 44.3
$ 79.4
$ 79.4
0.2
0.2
0.8
0.8
40.0
50.0
40.0
30.0
—
50.0
—
42.5
279.2
139.6
199.2
203.0
58.9
35.4
76.1
76.7
—
(0.3)
—
—
(0.3)
—
5.3
(2.3)
(1.7)
5.3
(2.3)
(1.7)
We assess the inputs used to measure fair value using a three-
tier hierarchy. The hierarchy indicates the extent to which inputs
used in measuring fair value are observable in the market. Level 1
inputs include quoted prices for identical instruments and are the
most observable. Level 2 inputs include quoted prices for similar
assets and observable inputs such as interest rates, foreign cur-
rency exchange rates, commodity rates and yield curves. Level 3
inputs are not observable in the market and include management’s
own judgments about the assumptions market participants would
use in pricing the asset or liability. The use of observable and
unobservable inputs is reflected in the hierarchy assessment dis-
closed in the table below. The following table presents information
about our financial assets and liabilities measured at fair value on a
recurring basis as of December 31, 2008 and indicates the fair
value hierarchy of the valuation techniques utilized by us to deter-
mine such fair value:
(In millions)
Cash and cash equivalents
Available for sale securities
Long-term debt
Revolving credit borrowings
7.500% debentures
8.875% senior notes
Medium-term notes
Other borrowings
Foreign exchange contracts
Interest rate swaps
Note 20 — FAIR VALUE
The fair value of financial assets and liabilities are measured on a
recurring or non-recurring basis. Financial assets and liabilities
measured on a recurring basis are those that are adjusted to fair
value each time a financial statement is prepared. Financial assets
and liabilities measured on a non-recurring basis are those that are
adjusted to fair value when a significant event occurs. In determin-
ing fair value of financial assets and liabilities, we use various
valuation techniques. The availability of inputs observable in the
market varies from instrument to instrument and depends on a
variety of factors including the type of instrument, whether the
instrument is actively traded, and other characteristics particular
to the transaction. For many financial instruments, pricing inputs
are readily observable in the market, the valuation methodology
used is widely accepted by market participants, and the valuation
does not require significant management discretion. For other
financial
instruments, pricing inputs are less observable in the
market and may require management judgment.
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(In millions)
Description
Available for sale securities
Foreign exchange contracts
Fair Value Measurement Used
Quoted Prices in
Recorded Value
Quoted Prices in
Active Markets for
Other
as of
Active Markets for
Similar Instruments
Unobservable
December 31,
Identical Assets
and Observable
Inputs
2008
$ 0.2
(0.3)
(Level 1)
Inputs (Level 2)
(Level 3)
$0.2
—
$ —
(0.3)
$—
—
Foreign exchange contracts are valued based on observable
market spot and forward rates, and are classified within Level 2 of
the fair value hierarchy.
identifiable intangible asset not subject to amortization, totaling
$33.2 million, consists of a trade name.
Note 21 — BUSINESS COMBINATION
Acquisition
On January 2, 2008, we acquired 100% of the outstanding capital
stock of GLS, a global provider of specialty TPE compounds for
consumer, packaging and medical applications, for a cash purchase
price of $148.9 million including acquisition costs, net of cash
received. GLS, with sales of $128.8 million for the year ended
December 31, 2007, has been fully integrated into the Specialty
Engineered Materials segment. This acquisition complements our
global engineered materials business portfolio and accelerates our
shift to specialization. The combination of GLS’s specialized TPE
offerings, compounding expertise and brand, along with our exten-
sive global infrastructure and commercial presence offers custom-
ers: enhanced technologies; a broader range of products, services
and solutions; and expanded access to specialized, high-growth
markets around the globe. The combinations of these factors are
the drivers behind the excess of the purchase price over the fair
value of the tangible assets and liabilities acquired.
Allocation of Purchase Price
The GLS acquisition was accounted for as a purchase business
combination. Assets acquired and liabilities assumed were
recorded in the accompanying consolidated balance sheet at their
estimated fair values as of January 2, 2008. Operating results of
GLS are included in the accompanying consolidated statements of
operations from the date of acquisition. During the quarter ended
December 31, 2008, we finalized our assessment of the valuation
of the acquired tangible and intangible assets and the allocation of
the total consideration to identifiable assets and liabilities. The final
allocation of purchase price to the assets acquired and liabilities
assumed at the date of acquisition is presented in the below table.
This allocation is based upon valuations using our best estimates
and assumptions. The resulting goodwill is anticipated to be fully
deductible for income tax purposes.
The identifiable intangible assets subject to amortization,
totaling $32.5 million, consist primarily of customer relationships
and will be amortized over a remaining life of 14 years. The
(In millions)
Current assets
Property, plant and equipment
Identifiable intangible assets
Goodwill
Liabilities assumed
Net assets acquired
Less cash acquired
Purchase price, net
January 2,
2008
$ 32.8
17.2
65.7
44.1
(9.0)
$150.8
(1.9)
$148.9
Note 22 — SHAREHOLDERS’ EQUITY
In August 2008, our Board of Directors approved a stock repur-
chase program authorizing us, depending upon market conditions
and other factors, to repurchase up to 10.0 million shares of our
common stock, in the open market or in privately negotiated
transactions.
During 2008, we repurchased 1.25 million shares of common
stock under this program at an average price of $7.12 per common
share for approximately $8.9 million. There are 8.75 million shares
available for repurchase under the program at December 31, 2008.
Note 23 — SUBSEQUENT EVENTS
On January 15, 2009, we announced that we will enact further cost
saving measures that include eliminating approximately 370 jobs
worldwide, implementing reduced work schedules for another 100
to 300 employees, closing our Niagara, Ontario facility and idling
certain other capacity. Additionally, we are planning other actions
that include freezing corporate officer salaries throughout 2009.
We expect to incur one-time pre-tax charges of approximately
$45 million related to these actions, of which $18.3 million has
been recorded during the fourth quarter of 2008. In total, these one-
time charges will include cash costs of approximately $35 million
related to severance and site closure costs with the remaining
$10 million of non-cash costs related to asset write-downs and
accelerated depreciation. We expect these actions will deliver pre-
tax savings of approximately $25 to $30 million in 2009.
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Note 24 — SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In millions, except per share data)
Fourth(2)
Third
Second
First
Fourth
Third
Second
First
Sales
$ 541.8
$735.1
$748.1
$713.7
$631.3
$664.8
$688.8
$657.8
Operating costs and expenses, net
716.5
733.8
724.1
693.6
612.7
688.4
676.4
631.3
Operating income (loss)
Net income (loss)
(174.7)
(282.6)
1.3
(5.6)
24.0
8.8
20.1
6.5
18.6
7.1
(23.6)
2.3
12.4
(5.4)
26.5
7.4
2008 Quarters
2007 Quarters
Basic and diluted earnings (loss) per share(1)
$ (3.07)
$ (0.06)
$ 0.09
$ 0.07
$ 0.08
$ 0.02
$ (0.06)
$ 0.08
(1) Per share amounts for the quarter and the full year have been computed separately. The sum of the quarterly amounts may not equal the annual
amounts presented because of differences in the average shares outstanding during each period.
(2) Fourth quarter 2008 results include the following:
(In millions)
Employee separation and plant phaseout
Goodwill impairment
(In millions)
Deferred tax valuation allowance
Impact on
Operating Income (Expense)
$ (26.6)
(170.0)
Impact on
Net Income (Loss)
$(105.9)
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUN-
TANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure controls and procedures
PolyOne’s management, with the participation of the Chief Execu-
tive Officer and the Chief Financial Officer, has evaluated the
effectiveness of the design and operation of PolyOne’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of Decem-
ber 31, 2008. Based on this evaluation, the Chief Executive Officer
and the Chief Financial Officer have concluded that such disclosure
controls and procedures are effective as of December 31, 2008.
Management’s annual report on internal control over financial
reporting
The following report is provided by management in respect of
PolyOne’s internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934):
1. PolyOne’s management is responsible for establishing and
maintaining adequate internal control over financial reporting.
2. PolyOne’s management has used the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) framework to
evaluate the effectiveness of internal control over financial
reporting. Management believes that the COSO framework is
a suitable framework for its evaluation of financial reporting
because it is free from bias, permits reasonably consistent
qualitative and quantitative measurements of PolyOne’s internal
control over financial reporting, is sufficiently complete so that
those relevant factors that would alter a conclusion about the
effectiveness of PolyOne’s internal control over financial report-
ing are not omitted and is relevant to an evaluation of internal
control over financial reporting.
3. Management has assessed the effectiveness of PolyOne’s
internal control over financial reporting as of December 31,
2008 and has concluded that such internal control over financial
reporting is effective. There were no material weaknesses in
internal
by
financial
management.
identified
reporting
control
over
Changes in internal control over financial reporting
There were no changes in the Company’s internal control over
financial reporting that occurred during the quarter ended Decem-
ber 31, 2008 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPO-
RATE GOVERNANCE
The information regarding PolyOne’s directors, including the iden-
tification of the audit committee and the audit committee financial
expert, is incorporated by reference to the information contained in
PolyOne’s Proxy Statement with respect to the 2009 Annual Meet-
ing of Shareholders (2009 Proxy Statement). Information concern-
ing executive officers is contained in Part I of this Annual Report on
Form 10-K under the heading “Executive Officers of the Registrant.”
The information regarding Section 16(a) beneficial ownership
reporting compliance is incorporated by reference to the material
under the heading “Section 16(a) Beneficial Ownership Reporting
Compliance” in PolyOne’s 2009 Proxy Statement.
The information regarding any changes in procedures by which
shareholders may recommend nominees to PolyOne’s Board of
Directors is incorporated by reference to the information contained
in PolyOne’s 2009 Proxy Statement.
PolyOne has adopted a code of ethics that applies to its
principal executive officer, principal financial officer and principal
accounting officer. PolyOne’s code of ethics is posted under the
Investor Relations tab of its website at www.polyone.com. PolyOne
will post any amendments to, or waivers of, its code of ethics that
apply to its principal executive officer, principal financial officer and
principal accounting officer on its website.
ITEM 11. EXECUTIVE COMPENSATION
4. Ernst & Young LLP, who audited the consolidated financial state-
ments of PolyOne for the year ended December 31, 2008, also
issued an attestation report on PolyOne’s internal control over
financial reporting under Auditing Standard No. 5 of the Public
Company Accounting Oversight Board. This attestation report is
set forth on page 37 of this Annual Report on Form 10-K and is
incorporated by reference into this Item 9A.
The information regarding executive officer and director compen-
sation is incorporated by reference to the information contained in
PolyOne’s 2009 Proxy Statement.
The information regarding compensation committee interlocks
and insider participation and the compensation committee report is
incorporated by reference to the information contained in PolyOne’s
2009 Proxy Statement.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The following table provides information about our equity compensation plans (other than qualified employee benefits plans and plans
available to shareholders on a pro rata basis) as of December 31, 2008:
Plan Category
Equity compensation plans approved by security holders(1)
Equity compensation plans not approved by security holders
Total
Number of Securities
Remaining Available for
Weighted-Average
Future Issuance Under
Number of Securities to be
Exercise
Equity Compensation
Issued Upon Exercise of
Price of Outstanding
Plans
Outstanding Options,
Options, Warrants and
(Excluding Securities
Warrants and Rights
(a)
7,387,924
—
7,387,924
Rights
(b)
$9.12
—
$9.12
Reflected in Column (a))
(c)
4,826,654(1)
—
4,826,654
(1) In addition to options, warrants and rights, the PolyOne Corporation 2008 Equity and Performance Incentive Plan authorizes the issuance of
restricted stock, RSUs and per formance shares. The 2008 Equity and Per formance Incentive Plan limits the total number of shares that may be
issued as one or more of these types of awards to 2,000,000. The number set forth in the table above also includes shares available under our
existing Deferred Compensation Plan for Non-Employee Directors. This plan provides our non-employee Directors with a vehicle to defer their
compensation in the form of shares. This plan provides that the aggregate number of our common shares that may be granted under the Deferred
Compensation Plan for Non-Employee Directors in any fiscal year during the term of the plan will be equal to one-tenth of one percent (0.1%) of the
number of our common shares outstanding as of the first day of that fiscal year. At the end of 2008, 11,921 common shares remained available
under this plan and our current Directors had a total of 596,092 shares deferred as of December 31, 2008. The deferred shares are held in a trust
and are currently part of our outstanding common shares.
The information regarding security ownership of certain bene-
ficial owners and management is incorporated by reference to the
information contained in PolyOne’s 2009 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSAC-
TIONS, AND DIRECTOR INDEPENDENCE
(a)(2) Financial Statement Schedules:
The following financial statements of subsidiaries not consol-
idated and 50% or less owned entities, as required by Item 15(c) are
incorporated by reference to Exhibits 99.1 and 99.2 to this Annual
Repor t on Form 10-K:
The information regarding certain relationships and related trans-
actions and director independence is incorporated by reference to
the information contained in PolyOne’s 2009 Proxy Statement.
Consolidated financial statements of Oxy Vinyls, LP as of
June 30, 2007 and for the six month period ended June 30,
2007 and the year period ended December 31, 2006.
Consolidated financial statements of SunBelt Chlor-Alkali Part-
nership as of December 31, 2008 and for each of the years
in the three year period then ended.
All other schedules for which provision is made in the appli-
cable accounting regulation of the SEC are not required under the
related instructions or are inapplicable and, therefore, omitted.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding fees paid to and services provided by Poly-
One’s independent registered public accounting firm during the
fiscal years ended December 31, 2008 and 2007 and the pre-
approval policies and procedures of the audit committee is incor-
porated by reference to the information contained in PolyOne’s
2009 Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements:
The following consolidated financial statements of PolyOne
Corporation are included in Item 8:
Consolidated Statements of Operations for the years ended
December 31, 2008, 2007 and 2006
Consolidated Balance Sheets at December 31, 2008 and
2007
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007 and 2006
Consolidated Statements of Shareholders’ Equity for the years
ended December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
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(a)(3) Exhibits.
Exhibit No.
Exhibit Description
3.1
3.2
3.3
4.1
4.2
4.3
4.4
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
Articles of Incorporation (incorporated by reference to Exhibit 3.I to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, SEC File No. 1-16091)
Amendment to the Second Article of the Articles of Incorporation, as filed with the Ohio Secretary of State, November 25, 2003
(incorporated by reference to Exhibit 3.1a to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003,
SEC File No. 1-16091)
Regulations (incorporated by reference to Exhibit 3.II to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2000, SEC File No. 1-16091)
Indenture, dated as of December 1, 1995, between the Company and NBD Bank, as trustee (incorporated by reference to Exhibit 4.3 to The
Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)
Form of Indenture between the Company and NBD Bank, as trustee, governing the Company’s Medium Term Notes (incorporated by
reference to Exhibit 4.1 to M.A. Hanna Company’s Registration Statement on Form S-3, Registration Statement No. 333-05763, filed on
June 12, 1996)
Indenture, dated as of April 23, 2002, between the Company and The Bank of New York, as trustee, governing the Company’s
8.875% Senior Notes due May 15, 2012 (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on
Form S-4, Registration Statement No. 333-87472, filed on May 2, 2002)
Supplemental Indenture, dated as of April 10, 2008, between PolyOne Corporation and The Bank of New York Trust Company, N.A., as
successor trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed April 11, 2008, SEC File
No. 1-16091)
Long-Term Incentive Plan, as amended and restated as of March 1, 2000 (incorporated by reference to Exhibit A to M.A. Hanna Company’s
Definitive Proxy Statement filed on March 24, 2000, SEC File No. 1-05222)
Form of Award Agreement for Stock Appreciation Rights (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on January 11, 2005, SEC File No. 1-16091)
1995 Incentive Stock Plan, as amended and restated through August 31, 2000 (incorporated by reference to Exhibit 10.3 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, SEC File No. 1-16091)
1999 Incentive Stock Plan, as amended and restated through August 31, 2000 (incorporated by reference to Exhibit 10.5 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, SEC File No. 1-16091)
2000 Stock Incentive Plan (incorporated by reference to Annex D to Amendment No. 3 to The Geon Company’s Registration Statement on
Form S-4, Registration Statement No. 333-37344, filed on July 28, 2000)
Amended and Restated Benefit Restoration Plan (Section 401(a)(17)) (incorporated by reference to Exhibit 10.8 of the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2007, SEC File No. 1-16091)
Strategic Improvement Incentive Plan (incorporated by reference to Exhibit 10.9b to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, SEC File No. 1-16091)
Senior Executive Annual Incentive Plan, effective January 1, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on May 24, 2005, SEC File No. 1-16091)
2005 Equity and Performance Incentive Plan (amended and restated by the Board as of July 21, 2005) (incorporated by reference to
Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, SEC File No. 1-16091)
Amended and Restated Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, SEC File No. 1-16091)
Form of Management Continuity Agreement (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2007, SEC File No. 1-16091)
10.12+ Schedule of Executives with Management Continuity Agreements
10.13+
10.14+
Amended and Restated PolyOne Supplemental Retirement Benefit Plan (incorporated by reference to Exhibit 10.15 to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2007, SEC File No. 1-16091)
Amended and Restated Letter Agreement, dated as of July 16, 2008, between the Company and Stephen D. Newlin, originally effective as
of February 13, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008, SEC File No. 1-16091)
10.15+
Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on July 5, 2006, SEC File No. 1-16091)
10.16+
Amended and Restated PolyOne Corporation Executive Severance Plan
10.17
10.18
Guarantee and Agreement, dated as of June 6, 2006, between the Company, as guarantor, and the beneficiary banks party thereto
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 8, 2006, SEC File No. 1-16091)
Second Amended and Restated Security Agreement, dated as of June 6, 2006, between the Company, as grantor, and U.S. Bank
Trust National Association, as collateral trustee (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on June 8, 2006, SEC File No. 1-16091)
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Exhibit No.
Exhibit Description
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32+
10.33+
10.34
10.35
10.36
10.37
10.38
10.39
Amended and Restated Collateral Trust Agreement, dated as of June 6, 2006, between the Company, as grantor, and U.S. Bank
Trust National Association, as collateral trustee (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed on June 8, 2006, SEC File No. 1-16091)
Amended and Restated Intercreditor Agreement, dated as of June 6, 2006, between the Company, as grantor; Citicorp USA, Inc., as
receivables and bank agent; U.S. Bank Trust National Association, as collateral trustee; PolyOne Funding Corporation (incorporated by
reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on June 8, 2006, SEC File No. 1-16091)
Amended and Restated Instrument Guaranty, dated as of December 19, 1996 (incorporated by reference to Exhibit 10.12 to The Geon
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)
Amended and Restated Plant Services Agreement, between the Company and the B.F. Goodrich Company (incorporated by reference to
Exhibit 10.13 to The Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)
Assumption of Liabilities and Indemnification Agreement, dated March 1, 1993, amended and restated by Amended and Restated
Assumption of Liabilities and Indemnification Agreement, dated April 27, 1993 (incorporated by reference to Exhibit 10.14 to The Geon
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)
Partnership Agreement, by and between 1997 Chloralkali Venture, Inc. and Olin Sunbelt, Inc. (incorporated by reference to Exhibit 10(A) to
The Geon Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, SEC File No. 1-11804)
Amendment to Partnership Agreement between Olin Sunbelt, Inc. and 1997 Chloralkali Venture, Inc., addition of §5.03 (incorporated by
reference to Exhibit 10.16b to The Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, SEC File
No. 1-11804)
Amendment to Partnership Agreement between Olin Sunbelt, Inc. and 1997 Chloralkali Venture, Inc., addition of §1.12 (incorporated by
reference to Exhibit 10.16c to The Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, SEC File
No. 1-11804)
Chlorine Sales Agreement, between Sunbelt Chlor Alkali Partnership and OxyVinyls, LP (incorporated by reference to Exhibit 10(B) to The
Geon Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, SEC File No. 1-11804)
Unconditional and Continuing Guaranty, between the Company and Olin Corporation and Sunbelt Chlor Alkali Partnership (incorporated by
reference to Exhibit 10(C) to The Geon Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, SEC File
No. 1-11804)
Guarantee by the Company in Favor of Sunbelt Chlor Alkali Partnership of the Guaranteed Secure Senior Notes due 2017, dated
December 22, 1997 (incorporated by reference to Exhibit 10.20 to The Geon Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, SEC File No. 1-11804)
Asset Contribution Agreement — PVC Partnership (Geon) (incorporated by reference to Exhibit 10.3 to The Geon Company’s Current
Report on Form 8-K filed on May 13, 1999, SEC File No. 1-11804)
Stock Purchase Agreement among O’Sullivan Films Holding Corporation, O’Sullivan Management, LLC, and Matrix Films, LLC, dated as of
February 15, 2006 (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2005, SEC File No. 1-16091)
Form of Award Agreement for Stock-Settled Stock Appreciation Rights (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, SEC File No. 1-16091)
Form of Award Agreement for Performance Units (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2007, SEC File No. 1-16091)
Sale and Agreement, by and among PolyOne Corporation, Occidental Chemical Corporation, and their representative affiliates party
thereto, dated as of July 6, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2007, SEC File No. 1-16091)
Second Amended and Restated Receivables Purchase Agreement, dated as of June 26, 2007, among PolyOne Funding Corporation, as
seller; the Company, as servicer; the banks and other financial institutions party thereto, as purchasers; Citicorp USA, Inc., as agent; and
National City Business Credit, Inc., as syndication agent (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007, SEC File No. 1-16091)
Second Amended and Restated Receivables Sale Agreement, dated as of June 26, 2007, among the Company, as seller and as servicer,
and PolyOne Funding Corporation, as buyer (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2007, SEC File No. 1-16091)
Canadian Receivables Purchase Agreement, dated as of July 13, 2007, among PolyOne Funding Canada Corporation, as seller; the
Company, as servicer; the banks and other financial institutions party thereto, as purchasers; Citicorp USA, Inc., as agent; and National
City Business Credit, Inc., as syndication agent (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended June 30, 2007, SEC File No. 1-16091)
Canadian Receivables Sale Agreement, dated as of July 13, 2007, among PolyOne Canada Inc., as seller; PolyOne Funding Canada
Corporation, as buyer; and the Company, as servicer (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007, SEC File No. 1-16091)
Credit Agreement, dated January 3, 2008, by and among PolyOne Corporation, the lenders party thereto, Citicorp USA, Inc., as
administrative agent and as issuing bank, and The Bank of New York, as paying agent (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed on January 3, 2008, SEC File No. 1-16091)
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Exhibit No.
Exhibit Description
10.40+
10.41+
10.42+
10.43+
10.44
18.1
21.1
23.1
23.2
23.3
31.1
31.2
32.1
32.2
99.1
99.2
PolyOne Corporation 2008 Equity and Per formance Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s proxy
statement on Schedule 14A (SEC File No. 1-16091), filed on March 25, 2008)
Form of Award Agreement for Restricted Stock Units (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2008, SEC File No. 1-16091)
Form of Award Agreement for Stock-Settled Stock Appreciation Rights (incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, SEC File No. 1-16091)
Form of Award Agreement for Performance Units (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2008, SEC File No. 1-16091)
Registration Rights Agreement, dated as of April 10, 2008, between PolyOne Corporation and the Initial Purchaser (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 11, 2008, SEC File No. 1-16091)
Letter regarding Change in Accounting Principles (incorporated by reference to Exhibit No. 18.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2008, SEC File No. 1-16091)
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm — Ernst & Young LLP
Consent of Independent Registered Public Accounting Firm — KPMG LLP
Consent of Independent Registered Public Accounting Firm — Ernst & Young LLP
Certification of Stephen D. Newlin, Chairman, President and Chief Executive Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a),
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Robert M. Patterson, Senior Vice President and Chief Financial Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a),
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by Stephen D.
Newlin, Chairman, President and Chief Executive Officer
Certification pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by Robert M.
Patterson, Senior Vice President and Chief Financial Officer
Audited Financial Statements of Oxy Vinyls, LP
Audited Financial Statements of SunBelt Chlor Alkali Partnership
+
Indicates management contract or compensatory plan, contract or arrangement in which one or more directors or executive officers of the
Registrant may be participants
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77
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
February 23, 2009
POLYONE CORPORATION
By: /s/ ROBERT M. PATTERSON
Rober t M. Patterson
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated and on the dates indicated.
Signature
Title
Date
/s/ STEPHEN D. NEWLIN
Stephen D. Newlin
/s/ ROBERT M. PATTERSON
Robert M. Patterson
/s/ J. DOUGLAS CAMPBELL
J. Douglas Campbell
/s/ CAROL A. CARTWRIGHT
Carol A. Cartwright
/s/ GALE DUFF-BLOOM
Gale Duff-Bloom
/s/ RICHARD H. FEARON
Richard H. Fearon
/s/ ROBERT A. GARDA
Robert A. Garda
/s/ GORDON D. HARNETT
Gordon D. Harnett
/s/ RICHARD A. LORRAINE
Richard A. Lorraine
/s/ EDWARD J. MOONEY
Edward J. Mooney
/s/ WILLIAM H. POWELL
William H. Powell
/s/ FARAH M. WALTERS
Farah M. Walters
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Chairman, President, Chief Executive Officer and Director
(Principal Executive Officer)
February 23, 2009
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
February 23, 2009
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 20, 2009
February 20, 2009
February 20, 2009
February 20, 2009
February 20, 2009
February 20, 2009
February 20, 2009
February 20, 2009
February 20, 2009
February 20, 2009
Exhibit No.
Exhibit Description
EXHIBIT INDEX
3.1
3.2
3.3
4.1
4.2
4.3
4.4
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15+
10.16+
10.17
10.18
10.19
10.20
Articles of Incorporation (incorporated by reference to Exhibit 3.I to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, SEC File No. 1-16091)
Amendment to the Second Article of the Articles of Incorporation, as filed with the Ohio Secretary of State, November 25, 2003
(incorporated by reference to Exhibit 3.1a to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003,
SEC File No. 1-16091)
Regulations (incorporated by reference to Exhibit 3.II to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, SEC File No. 1-16091)
Indenture, dated as of December 1, 1995, between the Company and NBD Bank, as trustee (incorporated by reference to Exhibit 4.3 to
The Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)
Form of Indenture between the Company and NBD Bank, as trustee, governing the Company’s Medium Term Notes (incorporated by
reference to Exhibit 4.1 to M.A. Hanna Company’s Registration Statement on Form S-3, Registration Statement No. 333-05763, filed on
June 12, 1996)
Indenture, dated as of April 23, 2002, between the Company and The Bank of New York, as trustee, governing the Company’s
8.875% Senior Notes due May 15, 2012 (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-4,
Registration Statement No. 333-87472, filed on May 2, 2002)
Supplemental Indenture, dated as of April 10, 2008, between PolyOne Corporation and The Bank of New York Trust Company, N.A., as
successor trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed April 11, 2008, SEC File
No. 1-16091)
Long-Term Incentive Plan, as amended and restated as of March 1, 2000 (incorporated by reference to Exhibit A to M.A. Hanna
Company’s Definitive Proxy Statement filed on March 24, 2000, SEC File No. 1-05222)
Form of Award Agreement for Stock Appreciation Rights (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on January 11, 2005, SEC File No. 1-16091)
1995 Incentive Stock Plan, as amended and restated through August 31, 2000 (incorporated by reference to Exhibit 10.3 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, SEC File No. 1-16091)
1999 Incentive Stock Plan, as amended and restated through August 31, 2000 (incorporated by reference to Exhibit 10.5 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, SEC File No. 1-16091)
2000 Stock Incentive Plan (incorporated by reference to Annex D to Amendment No. 3 to The Geon Company’s Registration Statement on
Form S-4, Registration Statement No. 333-37344, filed on July 28, 2000)
Amended and Restated Benefit Restoration Plan (Section 401(a)(17)) (incorporated by reference to Exhibit 10.8 of the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2007, SEC File No. 1-16091)
Strategic Improvement Incentive Plan (incorporated by reference to Exhibit 10.9b to the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, SEC File No. 1-16091)
Senior Executive Annual Incentive Plan, effective January 1, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on May 24, 2005, SEC File No. 1-16091)
2005 Equity and Per formance Incentive Plan (amended and restated by the Board as of July 21, 2005) (incorporated by reference to
Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, SEC File No. 1-16091)
Amended and Restated Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, SEC File No. 1-16091)
Form of Management Continuity Agreement (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2007, SEC File No. 1-16091)
Schedule of Executives with Management Continuity Agreements
Amended and Restated PolyOne Supplemental Retirement Benefit Plan (incorporated by reference to Exhibit 10.15 to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2007, SEC File No. 1-16091)
Amended and Restated Letter Agreement, dated as of July 16, 2008, between the Company and Stephen D. Newlin, originally effective as
of February 13, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2008, SEC File No. 1-16091)
Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on July 5, 2006, SEC File No. 1-16091)
Amended and Restated PolyOne Corporation Executive Severance Plan
Guarantee and Agreement, dated as of June 6, 2006, between the Company, as guarantor, and the beneficiary banks party thereto
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 8, 2006, SEC File No. 1-16091)
Second Amended and Restated Security Agreement, dated as of June 6, 2006, between the Company, as grantor, and U.S. Bank
Trust National Association, as collateral trustee (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on June 8, 2006, SEC File No. 1-16091)
Amended and Restated Collateral Trust Agreement, dated as of June 6, 2006, between the Company, as grantor, and U.S. Bank
Trust National Association, as collateral trustee (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed on June 8, 2006, SEC File No. 1-16091)
Amended and Restated Intercreditor Agreement, dated as of June 6, 2006, between the Company, as grantor; Citicorp USA, Inc., as
receivables and bank agent; U.S. Bank Trust National Association, as collateral trustee; PolyOne Funding Corporation (incorporated by
reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on June 8, 2006, SEC File No. 1-16091)
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Exhibit No.
Exhibit Description
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32+
10.33+
10.34
10.35
10.36
10.37
10.38
10.39
10.40+
10.41+
10.42+
10.43+
10.44
Amended and Restated Instrument Guaranty, dated as of December 19, 1996 (incorporated by reference to Exhibit 10.12 to The Geon
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)
Amended and Restated Plant Services Agreement, between the Company and the B.F. Goodrich Company (incorporated by reference to
Exhibit 10.13 to The Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)
Assumption of Liabilities and Indemnification Agreement, dated March 1, 1993, amended and restated by Amended and Restated
Assumption of Liabilities and Indemnification Agreement, dated April 27, 1993 (incorporated by reference to Exhibit 10.14 to The Geon
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, SEC File No. 1-11804)
Partnership Agreement, by and between 1997 Chloralkali Venture, Inc. and Olin Sunbelt, Inc. (incorporated by reference to Exhibit 10(A)
to The Geon Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, SEC File No. 1-11804)
Amendment to Partnership Agreement between Olin Sunbelt, Inc. and 1997 Chloralkali Venture, Inc., addition of §5.03 (incorporated by
reference to Exhibit 10.16b to The Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, SEC File
No. 1-11804)
Amendment to Partnership Agreement between Olin Sunbelt, Inc. and 1997 Chloralkali Venture, Inc., addition of §1.12 (incorporated by
reference to Exhibit 10.16c to The Geon Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, SEC File
No. 1-11804)
Chlorine Sales Agreement, between Sunbelt Chlor Alkali Partnership and OxyVinyls, LP (incorporated by reference to Exhibit 10(B) to The
Geon Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, SEC File No. 1-11804)
Unconditional and Continuing Guaranty, between the Company and Olin Corporation and Sunbelt Chlor Alkali Partnership (incorporated by
reference to Exhibit 10(C) to The Geon Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, SEC File
No. 1-11804)
Guarantee by the Company in Favor of Sunbelt Chlor Alkali Partnership of the Guaranteed Secure Senior Notes due 2017, dated
December 22, 1997 (incorporated by reference to Exhibit 10.20 to The Geon Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, SEC File No. 1-11804)
Asset Contribution Agreement — PVC Partnership (Geon) (incorporated by reference to Exhibit 10.3 to The Geon Company’s Current
Report on Form 8-K filed on May 13, 1999, SEC File No. 1-11804)
Stock Purchase Agreement among O’Sullivan Films Holding Corporation, O’Sullivan Management, LLC, and Matrix Films, LLC, dated as of
February 15, 2006 (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2005, SEC File No. 1-16091)
Form of Award Agreement for Stock-Settled Stock Appreciation Rights (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, SEC File No. 1-16091)
Form of Award Agreement for Performance Units (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2007, SEC File No. 1-16091)
Sale and Agreement, by and among PolyOne Corporation, Occidental Chemical Corporation, and their representative affiliates party
thereto, dated as of July 6, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2007, SEC File No. 1-16091)
Second Amended and Restated Receivables Purchase Agreement, dated as of June 26, 2007, among PolyOne Funding Corporation, as
seller; the Company, as servicer; the banks and other financial institutions party thereto, as purchasers; Citicorp USA, Inc., as agent; and
National City Business Credit, Inc., as syndication agent (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007, SEC File No. 1-16091)
Second Amended and Restated Receivables Sale Agreement, dated as of June 26, 2007, among the Company, as seller and as servicer,
and PolyOne Funding Corporation, as buyer (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2007, SEC File No. 1-16091)
Canadian Receivables Purchase Agreement, dated as of July 13, 2007, among PolyOne Funding Canada Corporation, as seller; the
Company, as servicer; the banks and other financial institutions party thereto, as purchasers; Citicorp USA, Inc., as agent; and National
City Business Credit, Inc., as syndication agent (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007, SEC File No. 1-16091)
Canadian Receivables Sale Agreement, dated as of July 13, 2007, among PolyOne Canada Inc., as seller; PolyOne Funding Canada
Corporation, as buyer; and the Company, as servicer (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2007, SEC File No. 1-16091)
Credit Agreement, dated January 3, 2008, by and among PolyOne Corporation, the lenders party thereto, Citicorp USA, Inc., as
administrative agent and as issuing bank, and The Bank of New York, as paying agent (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on January 3, 2008, SEC File No. 1-16091)
PolyOne Corporation 2008 Equity and Per formance Incentive Plan (incorporated herein by reference to Appendix A to the Registrant’s
proxy statement on Schedule 14A (SEC File No. 1-16091), filed on March 25, 2008)
Form of Award Agreement for Restricted Stock Units (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2008, SEC File No. 1-16091)
Form of Award Agreement for Stock-Settled Stock Appreciation Rights (incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, SEC File No. 1-16091)
Form of Award Agreement for Performance Units (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2008, SEC File No. 1-16091)
Registration Rights Agreement, dated as of April 10, 2008, between PolyOne Corporation and the Initial Purchaser (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 11, 2008, SEC File No. 1-16091)
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Exhibit No.
Exhibit Description
18.1
21.1
23.1
23.2
23.3
31.1
31.2
32.1
32.2
99.1
99.2
Letter regarding Change in Accounting Principles (incorporated by reference to Exhibit No. 18.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2008, SEC File No. 1-16091)
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm — Ernst & Young LLP
Consent of Independent Registered Public Accounting Firm — KPMG LLP
Consent of Independent Registered Public Accounting Firm — Ernst & Young LLP
Certification of Stephen D. Newlin, Chairman, President and Chief Executive Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a),
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Robert M. Patterson, Senior Vice President and Chief Financial Officer, pursuant to SEC Rules 13a-14(a) and 15d-14(a),
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by Stephen D.
Newlin, Chairman, President and Chief Executive Officer
Certification pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by Robert M.
Patterson, Senior Vice President and Chief Financial Officer
Audited Financial Statements of Oxy Vinyls, LP
Audited Financial Statements of SunBelt Chlor Alkali Partnership
+
Indicates management contract or compensatory plan, contract or arrangement in which one or more directors or executive officers of the
Registrant may be participants
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Exhibit 31.1
I, Stephen D. Newlin, certify that:
1. I have reviewed this Annual Report on Form 10-K of PolyOne Corporation;
CERTIFICATION
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)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) 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
(d) 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 the registrant’s board of directors (or persons per forming the equivalent
functions):
(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.
February 23, 2009
/s/ Stephen D. Newlin
Stephen D. Newlin
Chairman, President and Chief Executive Officer
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Exhibit 31.2
I, Robert M. Patterson, certify that:
1. I have reviewed this Annual Report on Form 10-K of PolyOne Corporation;
CERTIFICATION
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)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) 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
(d) 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 the registrant’s board of directors (or persons per forming the equivalent
functions):
(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.
/s/ Robert M. Patterson
Rober t M. Patterson
Senior Vice President and Chief Financial Officer
February 23, 2009
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Repor t on Form 10-K of PolyOne Corporation (the “Company”) for the year ended December 31, 2008, as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen D. Newlin, Chairman, President and Chief
Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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 Repor t 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/ Stephen D. Newlin
Stephen D. Newlin
Chairman, President and Chief Executive Officer
February 23, 2009
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a
separate disclosure document.
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Repor t on Form 10-K of PolyOne Corporation (the “Company”) for the year ended December 31, 2008, as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert M. Patterson, Senior Vice President and Chief
Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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 Repor t 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/ Robert M. Patterson
Rober t M. Patterson
Senior Vice President and Chief Financial Officer
February 23, 2009
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a
separate disclosure document.
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ThiS PAgE iS nOT PArT OF POlyOnE’S FOrm 10-K Filing
PolyOne Stock Performance
The following is a graph that compares the cumulative total shareholder returns for PolyOne’s common shares, the S&P 500 index and the S&P
Mid Cap Chemicals index with dividends assumed to be reinvested when received. The graph assumes the investing of $100 from December
31, 2003 through December 31, 2008. The S&P Mid Cap Chemicals index includes a broad range of chemical manufacturers. Because of the
relationship of PolyOne’s business within the chemical industry, it is concluded that comparison with this broader index is appropriate.
Comparison of Cumulative Total Return to Shareholders
$250
$200
$150
$100
$50
$0
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
POLYONE CORPORATION
S&P 500 INDEX
S&P MID CAP CHEMICALS
12/31/03
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
PolyOne Corporation
S&P 500
S&P Mid Cap Chemicals
$ 100
$ 100
$ 100
$ 141.78
$ 110.88
$ 130.82
$ 100.63
$ 116.33
$ 128.13
$ 117.37
$ 134.70
$ 150.88
$ 102.97
$ 142.10
$ 191.75
$ 49.30
$ 89.53
$ 120.65
STOCK EXCHANGE LISTING
FINANCIAL INFORMATION
PolyOne Corporation Common Stock is listed on the New York Stock Exchange.
Symbol: POL.
Security analysts and representatives of financial institutions are invited
to contact:
SHAREHOLDER INQUIRIES
If you have any questions concerning your account as a shareholder, name or
address changes, inquiries regarding stock certificates, or if you need tax infor-
mation regarding your account, please contact our transfer agent:
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, Rhode Island 02940-3078
Phone: 877-498-8861
www.computershare.com
Additional information about PolyOne, including current and historic copies of
Form 10-K and other reports filed with the Securities and Exchange Commission,
is available online at www.polyone.com or free of charge from:
Investor Affairs Administrator
PolyOne Corporation
33587 Walker Road
Avon Lake, Ohio 44012
Phone: 440-930-1522
ANNUAL MEETING
The annual meeting of shareholders of PolyOne Corporation will be held
May 14, 2009, at 9:00 a.m. at the Wyndham Cleveland at Playhouse Square,
1260 Euclid Avenue, Cleveland, Ohio, in the Palace Ballroom East on the
2nd floor. The meeting notice and proxy materials were mailed to shareholders
with this annual report. PolyOne Corporation urges all shareholders to vote their
proxies so that they can participate in the decisions at the annual meeting.
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Robert M. Patterson
Senior Vice President and Chief Financial Officer
Phone: 440-930-3302
Fax: 440-930-1002
AUDITORS
Ernst & Young LLP
925 Euclid Avenue, Suite 1300
Cleveland, Ohio 44115-1476
INTERNET ACCESS
Information on PolyOne’s products and services, news releases, corporate
governance, EDGAR filings, Forms 10-K and 10-Q, etc., as well as an electronic
version of this annual report, are available on the Internet at www.polyone.com.
ANNUAL CERTIFICATIONS
PolyOne Corporation included as Exhibits 31.1 and 31.2 to its Annual Report
on Form 10-K for 2008, filed with the Securities and Exchange Commission,
certificates of its Chief Executive Officer and Chief Financial Officer certifying
the quality of PolyOne’s public disclosure. On May 30, 2008, PolyOne Corporation
submitted to the New York Stock Exchange a certificate of the Chief Executive
Officer of PolyOne certifying that he is not aware of any violation by PolyOne of
New York Stock Exchange corporate governance standards.
POLnon10K_lastpage08_3-16.indd 1
3/16/09 2:38:40 PM
Corporate oFFICerS
Stephen D. Newlin
Chairman, President and Chief Executive Officer
David J. Kantor
Vice President and Corporate Controller
John L. Rastetter
Vice President, Finance
Arif N. Ahmed
Vice President and Treasurer
Bernard Baert
Senior Vice President and General Manager,
Color and Engineered Materials – Europe and Asia
Dr. Cecil C. Chappelow
Vice President, Innovation, Sustainability
and Chief Innovation Officer
Dr. Willie Chien
Vice President and General Manager,
Color and Engineered Materials – Asia
Michael E. Kahler
Senior Vice President,
Commercial Development
Thomas J. Kedrowski
Senior Vice President,
Supply Chain and Operations
Lisa K. Kunkle
Vice President, General Counsel and Secretary
Craig M. Nikrant
Vice President and General Manager,
Specialty Engineered Materials
Robert M. Patterson
Senior Vice President and Chief Financial Officer
Michael L. Rademacher
Senior Vice President and General Manager,
Distribution
Robert M. Rosenau
Senior Vice President and General Manager,
Performance Products and Solutions
Kenneth M. Smith
Senior Vice President, Chief Information
and Human Resources Officer
John V. Van Hulle
Vice President and General Manager,
Specialty Color, Additives and Inks
Frank J. Vari
Vice President, Tax
Standing (left to right): William H. Powell, Edward J. Mooney, Gordon D. Harnett, Farah M. Walters, and Richard A. Lorraine
Seated (left to right): Gale Duff-Bloom, Dr. Carol A. Cartwright, Stephen D. Newlin, Richard H. Fearon, J. Douglas Campbell, and Robert A. Garda
BoarD oF DIreCtorS
Stephen D. Newlin
Chairman, President and Chief Executive Officer,
PolyOne Corporation
Committees: 3, 4
J. Douglas Campbell
Retired Chairman and Chief Executive Officer,
ArrMaz Custom Chemicals, Inc. –
specialty mining and asphalt additives and reagents
producer
Committees: 2, 3, 4*
Dr. Carol A. Cartwright
President,
Bowling Green State University –
a public higher education institution
Committees: 1, 2
Gale Duff-Bloom
Retired President,
Company Communications and Corporate Image,
J.C. Penney Company, Inc. –
a major retailer
Committees: 2, 3, 4
Richard H. Fearon
Vice Chairman and Chief Financial
and Planning Officer,
Eaton Corporation –
a global manufacturing company
Committees: 1*, 2
Robert A. Garda
Retired Director,
McKinsey & Company, Inc. –
a management consulting firm
Committees: 1, 2
Gordon D. Harnett
Lead Director
Retired Chairman and Chief Executive Officer,
Brush Engineered Materials, Inc. –
a supplier and producer of engineered materials
Committees: 1, 2*
Richard A. Lorraine
Retired Senior Vice President and Chief Financial
Officer,
Eastman Chemical Company –
a specialty chemicals company
Committees: 1, 2
Edward J. Mooney
Retired Chairman and Chief Executive Officer,
Nalco Chemical Company –
a specialty chemicals company
Committees: 2, 3*, 4
William H. Powell
Retired Chairman and Chief Executive Officer,
National Starch and Chemical Company –
a specialty chemicals company
Committees: 2, 3, 4
Farah M. Walters
President and Chief Executive Officer,
QualHealth, LLC –
a healthcare consulting firm that designs healthcare
delivery models
Committees: 2, 4
C O M M I T T E E S
1 Audit
2 Compensation and Governance
3 Environmental, Health and Safety
4 Financial Policy
* Denotes Chairperson
www.polyone.com