PolyOne Announces Second Quarter 2014 Results

Attachment 1

PolyOne Corporation

Summary of Condensed Consolidated Statements of Income (Unaudited)

(In millions, except per share data)

Three Months Ended

June 30,

Six Months Ended

June 30,

2014

2013

2014

2013

Sales

$

1,005.5

$

1,037.6

$

2,007.8

$

1,838.7

Operating income

49.4

80.7

105.8

121.2

Net income from continuing operations attributable to PolyOne shareholders

30.9

38.6

60.3

49.8

Basic earnings per share from continuing operations attributable to PolyOne shareholders

$

0.33

$

0.39

$

0.64

$

0.52

Diluted earnings per share from continuing operations attributable to PolyOne shareholders

$

0.33

$

0.39

$

0.63

$

0.52

Senior management uses comparisons of adjusted net income from continuing operations attributable to PolyOne shareholders and diluted earnings per share (EPS) from continuing operations attributable to PolyOne shareholders excluding special items to assess performance and facilitate comparability of results. Below is a reconciliation of these non-GAAP financial measures to their most directly comparable measures calculated and presented in accordance with U.S. GAAP (GAAP).

Three Months Ended

June 30, 2014

Three Months Ended

June 30, 2013

Reconciliation to Condensed Consolidated Statements of Income

$

EPS

$

EPS

Net income from continuing operations attributable to PolyOne shareholders

$

30.9

$

0.33

$

38.6

$

0.39

Special items, after tax (Attachment 3)

22.6

0.24

(2.2)

(0.02)

Tax adjustments (a)

(5.2)

(0.06)

0.2

—

Adjusted net income / EPS

$

48.3

$

0.51

$

36.6

$

0.37

Six Months Ended

June 30, 2014

Six Months Ended

June 30, 2013

Reconciliation to Condensed Consolidated Statements of Income

$

EPS

$

EPS

Net income from continuing operations attributable to PolyOne shareholders

$

60.3

$

0.63

$

49.8

$

0.52

Special items, after tax (Attachment 3)

36.7

0.39

15.0

0.16

Tax adjustments (a)

(6.8)

(0.07)

0.7

—

Adjusted net income / EPS

$

90.2

$

0.95

$

65.5

$

0.68

(a) Tax adjustments include the net tax expense (benefit) from one-time income tax items and deferred income tax valuation allowance adjustments.

Attachment 2

PolyOne Corporation

Condensed Consolidated Statements of Income (Unaudited)

(In millions, except per share data)

Three Months Ended

June 30,

Six Months Ended

June 30,

2014

2013

2014

2013

Sales

$

1,005.5

$

1,037.6

$

2,007.8

$

1,838.7

Cost of sales

821.0

833.9

1,635.1

1,472.7

Gross margin

184.5

203.7

372.7

366.0

Selling and administrative expense

135.1

123.0

266.9

244.9

Income related to previously owned equity affiliates

—

—

—

0.1

Operating income

49.4

80.7

105.8

121.2

Interest expense, net

(15.7)

(16.6)

(31.2)

(32.2)

Debt extinguishment costs

—

—

—

(10.6)

Other (expense) income, net

(0.4)

(1.2)

(1.4)

0.2

Income from continuing operations before income taxes

33.3

62.9

73.2

78.6

Income tax expense

(2.6)

(24.6)

(13.3)

(29.3)

Net income from continuing operations

30.7

38.3

59.9

49.3

Income from discontinued operations, net of income taxes

0.8

142.3

0.8

146.4

Net income

31.5

180.6

60.7

195.7

Net loss attributable to noncontrolling interests

0.2

0.3

0.4

0.5

Net income attributable to PolyOne common shareholders

$

31.7

$

180.9

$

61.1

$

196.2

Earnings per common share attributable to PolyOne common shareholders - Basic:

Continuing operations

$

0.33

$

0.39

$

0.64

$

0.52

Discontinued operations

0.01

1.46

0.01

1.55

Total

$

0.34

$

1.85

$

0.65

$

2.07

Earnings per common share attributable to PolyOne common shareholders - Diluted:

Continuing operations

$

0.33

$

0.39

$

0.63

$

0.52

Discontinued operations

0.01

1.44

0.01

1.53

Total

$

0.34

$

1.83

$

0.64

$

2.05

Cash dividends declared per share of common stock

$

0.08

$

0.06

$

0.16

$

0.12

Weighted-average shares used to compute earnings per share:

Basic

93.0

97.7

93.7

94.7

Diluted

94.3

99.1

94.9

95.8

Attachment 3

PolyOne Corporation

Summary of Special Items (Unaudited)

(In millions, except per share data)

Special items ⁽¹⁾

Three Months Ended

June 30,

Six Months Ended

June 30,

2014

2013

2014

2013

Cost of sales:

Plant phase-out costs

$

(22.1)

$

—

$

(33.1)

$

—

Reimbursement of previously incurred environmental costs

—

14.9

—

20.1

Environmental remediation costs

(0.9)

(1.3)

(1.8)

(3.3)

Acquisition related costs

—

(3.5)

—

(7.6)

Impact on cost of sales

(23.0)

10.1

(34.9)

9.2

Selling and administrative expense:

Employee separation and plant phase-out costs

(19.6)

(3.1)

(29.7)

(14.8)

Unrealized gain on foreign currency option contracts

—

0.2

—

0.6

Acquisition/divestiture related costs

(0.5)

(1.4)

(0.7)

(6.0)

Legal related and other

3.3

(0.6)

2.6

(0.5)

Impact on selling and administrative expense

(16.8)

(4.9)

(27.8)

(20.7)

Gain on sale of investment in equity affiliates

—

—

—

0.1

Impact on operating income

(39.8)

5.2

(62.7)

(11.4)

Debt extinguishment costs

—

–

–

(10.6)

Bridge loan commitment fees – interest expense

—

–

–

(1.9)

Other income, net

0.5

–

0.5

1.4

Impact on income from continuing operations before income taxes

(39.3)

5.2

(62.2)

(22.5)

Income tax benefit (expense) on special items

16.7

(3.0)

25.5

7.5

Impact of special items on net income attributable to PolyOne Shareholders

$

(22.6)

$

2.2

$

(36.7)

$

(15.0)

Basic earnings per common share impact

$

(0.24)

$

0.02

$

(0.39)

$

(0.16)

Diluted earnings per common share impact

$

(0.24)

$

0.02

$

(0.39)

$

(0.16)

Weighted average shares used to compute earnings per share:

Basic

93.0

97.7

93.7

94.7

Diluted

94.3

99.1

94.9

95.8

⁽¹⁾ Special items are a non-GAAP financial measure. Special items include charges related to specific strategic initiatives or financial restructurings such as: consolidation of operations; debt extinguishment costs; employee separation costs resulting from personnel reduction programs, plant phase-out costs, executive separation agreements; asset impairments; mark-to-market adjustments associated with actuarial gains and losses on pension and other postretirement benefit plans; environmental remediation costs, fines, penalties, remediation costs and related insurance recoveries related to facilities no longer owned or closed in prior years; gains and losses on the divestiture of operating businesses, joint ventures and equity investments; gains and losses on facility or property sales or disposals; results of litigation, fines or penalties, where such litigation (or action relating to the fines or penalties) arose prior to the commencement of the performance period; unrealized gains and losses from foreign currency option contracts; one-time, non-recurring items; and the effect of changes in accounting principles or other such laws or provisions affecting reported results.

Attachment 4

PolyOne Corporation

Condensed Consolidated Balance Sheets

(In millions)

(Unaudited)
June 30, 2014

December 31,
2013

Assets

Current assets:

Cash and cash equivalents

$

261.5

$

365.2

Accounts receivable, net

501.3

428.0

Inventories, net

315.7

342.5

Other current assets

100.5

117.9

Total current assets

1,179.0

1,253.6

Property, net

612.3

646.2

Goodwill

568.9

559.0

Intangible assets, net

354.5

365.8

Other non-current assets

132.0

119.5

Total assets

$

2,846.7

$

2,944.1

Liabilities and Shareholders' Equity

Current liabilities:

Short-term and current portion of long-term debt

$

12.7

$

12.7

Accounts payable

422.5

386.9

Accrued expenses and other liabilities

170.8

209.3

Total current liabilities

606.0

608.9

Non-current liabilities:

Long-term debt

967.9

976.2

Pension and other post-retirement benefits

63.7

77.3

Deferred income taxes

113.7

133.8

Other non-current liabilities

182.4

169.4

Total non-current liabilities

1,327.7

1,356.7

Shareholders' equity:

PolyOne shareholders' equity

911.7

976.8

Noncontrolling interests

1.3

1.7

Total equity

913.0

978.5

Total liabilities and shareholders' equity

$

2,846.7

$

2,944.1

Attachment 5

PolyOne Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)

Six Months Ended

June 30,

2014

2013

Operating Activities

Net income

$

60.7

$

195.7

Adjustments to reconcile net income to net cash provided (used) by operating activities:

Depreciation and amortization

72.2

45.8

Debt extinguishment costs

—

10.6

Provision for doubtful accounts

0.3

—

Stock based compensation expense

10.1

10.1

Gain on sale of business

(0.8)

(223.6)

Change in assets and liabilities, net of effect of acquisitions and divestitures:

Increase in accounts receivable

(74.0)

(70.6)

Decrease (increase) in inventories

23.4

(3.9)

Increase in accounts payable

35.9

15.5

Decrease in pension and other post-retirement benefits

(21.1)

(65.7)

(Decrease) increase in accrued expenses and other assets and liabilities - net

(62.9)

60.9

Net cash provided (used) by operating activities

43.8

(25.2)

Investing Activities

Capital expenditures

(38.0)

(26.7)

Business acquisitions, net of cash acquired

—

(259.4)

Proceeds from sale of equity affiliate and other assets

27.3

274.1

Net cash used by investing activities

(10.7)

(12.0)

Financing Activities

Repayment of long-term debt

(8.0)

(297.0)

Proceeds from long-term debt

—

600.0

Debt financing costs

—

(13.0)

Borrowings under credit facilities

20.9

125.0

Repayments under credit facilities

(20.9)

(117.5)

Purchase of common shares

(119.9)

(71.2)

Exercise of stock awards

6.3

3.3

Cash dividends paid

(15.1)

(9.9)

Net cash (used) provided by financing activities

(136.7)

219.7

Effect of exchange rate changes on cash

(0.1)

(0.1)

(Decrease) increase in cash and cash equivalents

(103.7)

182.4

Cash and cash equivalents at beginning of period

365.2

210.0

Cash and cash equivalents at end of period

$

261.5

$

392.4

Attachment 6

PolyOne Corporation

Business Segment and Platform Operations (Unaudited)

(In millions)

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

Three Months Ended

June 30,

Six Months Ended

June 30,

2014

2013

2014

2013

Sales:

Global Color, Additives and Inks

$

228.7

$

229.4

$

448.3

$

434.7

Global Specialty Engineered Materials

157.8

158.8

315.2

311.7

Designed Structures and Solutions

164.0

198.9

337.6

240.4

Specialty Platform

550.5

587.1

1,101.1

986.8

Performance Products and Solutions

211.2

210.3

418.8

376.9

PolyOne Distribution

287.0

275.1

571.1

543.1

Corporate and eliminations

(43.2)

(34.9)

(83.2)

(68.1)

Sales

$

1,005.5

$

1,037.6

$

2,007.8

$

1,838.7

Gross margin:

Global Color, Additives and Inks

$

81.7

$

75.2

$

156.6

$

142.9

Global Specialty Engineered Materials

43.5

39.0

86.1

78.2

Designed Structures and Solutions

26.3

25.5

52.5

30.7

Specialty Platform

151.5

139.7

295.2

251.8

Performance Products and Solutions

29.0

26.9

57.0

50.9

PolyOne Distribution

28.8

28.1

58.6

56.3

Corporate and eliminations

(24.8)

9.0

(38.1)

7.0

Gross margin

$

184.5

$

203.7

$

372.7

$

366.0

Selling and administrative expense:

Global Color, Additives and Inks

$

44.0

$

44.3

$

88.5

$

87.8

Global Specialty Engineered Materials

24.6

24.0

48.9

47.4

Designed Structures and Solutions

13.4

16.5

28.4

20.2

Specialty Platform

82.0

84.8

165.8

155.4

Performance Products and Solutions

11.4

11.6

23.4

22.0

PolyOne Distribution

11.5

11.2

24.1

23.2

Corporate and eliminations

30.2

15.4

53.6

44.3

Selling and administrative expense

$

135.1

$

123.0

$

266.9

$

244.9

Operating income:

Global Color, Additives and Inks

$

37.7

$

30.9

$

68.1

$

55.1

Global Specialty Engineered Materials

18.9

15.0

37.2

30.8

Designed Structures and Solutions

12.9

9.0

24.1

10.5

Specialty Platform

69.5

54.9

129.4

96.4

Performance Products and Solutions

17.6

15.3

33.6

28.9

PolyOne Distribution

17.3

16.9

34.5

33.1

Corporate and eliminations

(55.0)

(6.4)

(91.7)

(37.2)

Operating income

$

49.4

$

80.7

$

105.8

$

121.2

Specialty Platform consists of our three specialty segments: Global Specialty Engineered Materials; Global Color, Additives and Inks; and Designed Structures and Solutions. We present Specialty Platform sales, gross margin, selling and administration, and operating income because management believes that this is useful information to investors by highlighting our collective progress in advancing our specialization strategy.

Attachment 7

PolyOne Corporation

Reconciliation of Non-GAAP Financial Measures (Unaudited)

(In millions, except per share data)

Senior management uses gross margin before special items and operating income before special items to assess performance and allocate resources because senior management believes that these measures are useful in understanding current profitability levels and that current levels may serve as a base for future performance. In addition, operating income before the effect of special items is a component of various PolyOne annual and long-term employee incentive plans and is used in debt covenant computations. Below is a reconciliation of non-GAAP financial measures to the most directly comparable measures calculated and presented in accordance with GAAP. See Attachment 3 for a definition of special items.

Three Months Ended

June 30,

Six Months Ended

June 30,

Reconciliation to Consolidated Statements of Income

2014

2013

2014

2013

Sales

$

1,005.5

$

1,037.6

$

2,007.8

$

1,838.7

Gross margin before special items

207.5

193.6

407.6

356.8

Special items in gross margin (Attachment 3)

(23.0)

10.1

(34.9)

9.2

Gross margin - GAAP

$

184.5

$

203.7

$

372.7

$

366.0

Gross margin before special items as a percent of sales

20.6

%

18.7

%

20.3

%

19.4

%

Operating income adjusted

89.2

75.5

168.5

132.6

Special items in operating income (Attachment 3)

(39.8)

5.2

(62.7)

(11.4)

Operating income - GAAP

$

49.4

$

80.7

$

105.8

$

121.2

Operating income before special items as a percent of sales

8.9

%

7.3

%

8.4

%

7.2

%

Senior management uses the "Mix Shift Highlights Specialty Transformation" graph to show PolyOne's progression toward its specialty targets.

Specialty Platform % of Operating Income

2005Y*

2008Y*

2010Y*

2013Y

Q2 2014Y

Global Color, Additives and Inks

$

4.3

$

28.1

$

37.7

$

104.0

$

68.1

Global Specialty Engineered Materials

0.4

17.6

49.7

57.2

37.2

Designed Structures and Solutions

—

—

—

33.4

24.1

Specialty Platform

$

4.7

$

45.7

$

87.4

$

194.6

$

129.4

Performance Products and Solutions

75.7

31.3

54.0

56.0

33.6

Distribution

19.5

28.1

42.0

63.3

34.5

Joint ventures

91.9

28.6

18.9

—

—

Corporate and eliminations

(51.5)

(425.1)

(27.7)

(82.4)

(91.7)

Operating income (loss)

$

140.3

$

(291.4)

$

174.6

$

231.5

$

105.8

Less: Corporate and special items

51.5

425.1

27.7

82.4

91.7

Operating income excluding Corporate and special items

$

191.8

$

133.7

$

202.3

$

313.9

$

197.5

Specialty platform operating mix percentage

2

%

34

%

43

%

62

%

66

%

* Historical results are shown as presented in prior filings and have not been updated to reflect subsequent changes in accounting principal or discontinued operations.