PolyOne Announces First Quarter 2020 Results

 PolyOne Corporation

Summary of Condensed Consolidated Statements of Income (Unaudited)

(In millions, except per share data)

Three Months Ended March 31,

2020

2019

Sales

$

711.5

$

750.6

Operating income

52.8

47.1

Net income from continuing operations attributable to PolyOne shareholders

33.1

22.4

Basic earnings per share from continuing operations attributable to PolyOne shareholders

$

0.38

$

0.29

Diluted earnings per share from continuing operations attributable to PolyOne shareholders

$

0.38

$

0.29

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

Three Months Ended
March 31, 2020

Three Months Ended
March 31, 2019

Reconciliation to Condensed Consolidated Statements of Income

$

EPS

$

EPS

 Net income from continuing operations attributable to PolyOne
shareholders

$

33.1

$

0.38

$

22.4

$

0.29

Special items, after tax (Attachment 3)

8.6

0.10

11.0

0.14

Adjusted net income / EPS - excluding special items

$

41.7

$

0.48

$

33.4

$

0.43

PolyOne Corporation

Condensed Consolidated Statements of Income (Unaudited)

(In millions, except per share data)

Three Months Ended March 31,

2020

2019

Sales

$

711.5

$

750.6

Cost of sales

540.0

582.5

Gross margin

171.5

168.1

Selling and administrative expense

118.7

121.0

Operating income

52.8

47.1

Interest expense, net

(9.4)

(15.9)

Other income, net

1.6

0.1

Income from continuing operations before income taxes

45.0

31.3

Income taxes

(11.9)

(8.8)

Net income from continuing operations

33.1

22.5

(Loss) income from discontinued operations, net of income taxes

(0.3)

15.8

Net income

32.8

38.3

Net income attributable to noncontrolling interests

—

(0.1)

Net income attributable to PolyOne common shareholders

$

32.8

$

38.2

Earnings per share attributable to PolyOne common shareholders - Basic:

Continuing operations

$

0.38

$

0.29

Discontinued operations

—

0.20

Total

$

0.38

$

0.49

Earnings per share attributable to PolyOne common shareholders - Diluted:

Continuing operations

$

0.38

$

0.29

Discontinued operations

—

0.20

Total

$

0.38

$

0.49

Cash dividends declared per share of common stock

$

0.2025

$

0.1950

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

Basic

86.3

77.8

Diluted

86.7

78.2

PolyOne Corporation

Summary of Special Items (Unaudited)

(In millions, except per share data)

Special items ⁽¹⁾

Three Months Ended March 31,

2020

2019

Cost of sales:

Restructuring costs

$

—

$

0.1

Environmental remediation costs

(0.4)

(2.1)

Reimbursement of previously incurred environmental costs

0.2

—

Acquisition related costs

—

(2.0)

Impact on cost of sales

(0.2)

(4.0)

Selling and administrative expense:

Restructuring, legal and other

(3.7)

(6.0)

Acquisition earn-out adjustments

(1.0)

—

Acquisition related costs

(4.8)

(2.3)

Impact on selling and administrative expense

(9.5)

(8.3)

Impact on operating income

(9.7)

(12.3)

Other income, net

0.1

0.1

Impact on income from continuing operations before income taxes

(9.6)

(12.2)

Income tax benefit on above special items

2.0

3.1

Tax adjustments⁽²⁾

(1.0)

(1.9)

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

$

(8.6)

$

(11.0)

Diluted earnings per common share impact

$

(0.10)

$

(0.14)

Weighted average shares used to compute adjusted earnings per share:

Diluted

86.7

78.2

⁽¹⁾

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

⁽²⁾

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

PolyOne Corporation

Condensed Consolidated Balance Sheets

(In millions)

(Unaudited)
March 31, 2020

December 31,
2019

ASSETS

Current assets:

Cash and cash equivalents

$

1,280.2

$

864.7

Accounts receivable, net

382.4

330.0

Inventories, net

271.1

260.9

Other current assets

56.9

57.7

Total current assets

1,990.6

1,513.3

Property, net

400.8

407.4

Goodwill

684.2

685.7

Intangible assets, net

461.4

469.3

Operating lease assets, net

58.9

63.8

Other non-current assets

146.8

133.8

Total assets

$

3,742.7

$

3,273.3

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Short-term and current portion of long-term debt

$

18.2

$

18.4

Accounts payable

329.6

287.7

Current operating lease obligations

19.6

21.0

Accrued expenses and other current liabilities

320.4

375.4

Total current liabilities

687.8

702.5

Non-current liabilities:

Long-term debt

1,209.7

1,210.9

Pension and other post-retirement benefits

55.9

56.6

Non-current operating lease obligations

39.3

42.8

Other non-current liabilities

211.4

207.8

Total non-current liabilities

1,516.3

1,518.1

SHAREHOLDERS' EQUITY

PolyOne shareholders' equity

1,538.6

1,051.9

Noncontrolling interest

—

0.8

Total equity

1,538.6

1,052.7

Total liabilities and equity

$

3,742.7

$

3,273.3

PolyOne Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)

Three Months Ended March 31,

2020

2019

Operating Activities

Net income

$

32.8

$

38.3

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

Depreciation and amortization

19.9

23.3

Share-based compensation expense

2.1

2.5

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

Increase in accounts receivable

(56.9)

(53.0)

Increase in inventories

(13.0)

(12.0)

Increase in accounts payable

44.6

1.2

Decrease in pension and other post-retirement benefits

(3.2)

(1.9)

Increase in post-acquisition earnout liabilities

1.0

—

Decrease in accrued expenses and other assets and liabilities, net

(19.1)

(23.1)

Payment of post-acquisition date earnout liability

(21.0)

—

Net cash used by operating activities

(12.8)

(24.7)

Investing Activities

Capital expenditures

(11.1)

(9.9)

Business acquisitions, net of cash acquired

—

(119.6)

Net proceeds from divestiture

7.1

—

Net proceeds from other assets

5.2

1.6

Net cash provided (used) by investing activities

1.2

(127.9)

Financing Activities

Borrowings under credit facilities

—

374.7

Repayments under credit facilities

—

(269.2)

Purchase of common shares for treasury

(13.6)

—

Cash dividends paid

(15.6)

(15.6)

Repayment of long-term debt

(2.0)

(1.6)

Payments of withholding tax on share awards

(1.3)

(1.3)

Proceeds from equity offering, net of underwriting discount and issuance costs

496.3

—

Payment of acquisition date earnout liability

(32.9)

—

Net cash provided by financing activities

430.9

87.0

Effect of exchange rate changes on cash

(3.8)

3.0

Increase (decrease) in cash and cash equivalents

415.5

(62.6)

Cash and cash equivalents at beginning of year

864.7

170.9

Cash and cash equivalents at end of period

$

1,280.2

$

108.3

PolyOne Corporation

Business Segment Operations (Unaudited)

(In millions)

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

Three Months Ended
March 31,

2020

2019

Sales:

   Color, Additives and Inks

$

256.5

$

263.3

   Specialty Engineered Materials

185.3

189.9

   Distribution

289.5

317.3

   Corporate and eliminations

(19.8)

(19.9)

      Sales

$

711.5

$

750.6

Gross margin:

   Color, Additives and Inks

$

89.4

$

89.5

   Specialty Engineered Materials

52.6

50.4

   Distribution

33.6

34.2

   Corporate and eliminations

(4.1)

(6.0)

      Gross margin

$

171.5

$

168.1

Selling and administrative expense:

   Color, Additives and Inks

$

48.9

$

50.0

   Specialty Engineered Materials

30.3

29.9

   Distribution

14.2

14.7

   Corporate and eliminations

25.3

26.4

      Selling and administrative expense

$

118.7

$

121.0

Operating income:

   Color, Additives and Inks

$

40.5

$

39.5

   Specialty Engineered Materials

22.3

20.5

   Distribution

19.4

19.5

   Corporate and eliminations

(29.4)

(32.4)

      Operating income

$

52.8

$

47.1

PolyOne Corporation

Reconciliation of Non-GAAP Financial Measures (Unaudited)

(In millions, except per share data)

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

Three Months Ended
March 31,

Reconciliation to Consolidated Statements of Income

2020

2019

Sales

$

711.5

$

750.6

Gross margin - GAAP

171.5

168.1

Special items in gross margin (Attachment 3)

0.2

4.0

Adjusted Gross margin

$

171.7

$

172.1

Adjusted Gross margin as a percent of sales

24.1

%

22.9

%

Operating income - GAAP

52.8

47.1

Special items in operating income (Attachment 3)

9.7

12.3

   Adjusted Operating income

$

62.5

$

59.4

Adjusted Operating income as a percent of sales

8.8

%

7.9

%

The table below reconciles pre-special income tax expense and the pre-special effective tax rate to their most comparable US GAAP figures.

Three Months Ended
March 31, 2020

Three Months Ended
March 31, 2019

GAAP Results

Special Items

Adjusted Results

GAAP Results

Special Items

Adjusted Results

Income from continuing operations before
income taxes

$

45.0

$

9.6

$

54.6

$

31.3

$

12.2

$

43.5

Income tax expense - GAAP

(11.9)

—

(11.9)

(8.8)

—

(8.8)

Income tax impact of special items (Attachment 3)

—

(2.0)

(2.0)

—

(3.1)

(3.1)

Tax adjustments (Attachment 3)

—

1.0

1.0

—

1.9

1.9

Income tax expense

$

(11.9)

$

(1.0)

$

(12.9)

$

(8.8)

$

(1.2)

$

(10.0)

Effective Tax Rate⁽¹⁾

26.5

%

23.7

%

28.1

%

23.0

%

⁽¹⁾ Rates may not recalculate from figures presented herein due to rounding.

Senior management has referenced adjusted EPS excluding the impact of additional shares issued in February 2020. On January 28, 2020, prior to the issuance of the additional shares, the Company provided guidance for adjusted EPS for the first quarter of 2020.  This guidance excluded the impact of the additional shares subsequently issued in February. Accordingly, for purposes of comparability to the January 28, 2020 guidance, and prior year, management has referenced adjusted EPS excluding the impact of the additional shares issued in February. In addition, and again for comparability, adjusted EPS also excludes the benefit of interest income earned on cash raised in connection with the February share issuance.

Below is a reconciliation of this non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP.

Reconciliation to Adjusted EPS Excluding Special Items and Impacts of February 2020 Equity Offering

Three Months Ended
March 31, 2020

Net income from continuing operations – GAAP

$

33.1

Special items, after tax (Attachment 3)

8.6

After tax interest income earned on equity proceeds, included in Interest expense, net

(0.7)

Adjusted net income excluding special items and impact of interest income on equity proceeds

$

41.0

Diluted weighted-average shares used to compute earnings per common share

86.7

Weighted-average impact of 15.3 million shares issued in February 2020 equity offering

(9.3)

Diluted weighted-average shares excluding impact of shares issued in February 2020 equity offering

77.4

Adjusted EPS - excluding special items and the net impact of equity offering

$

0.53