PolyOne Announces First Quarter 2011 Results

In millions (except per share amounts)

Q1 2011

EPS

Q1 2010

EPS

Net Income

$ 110.2

$ 1.14

$ 21.0

$ 0.22

Special items and non-recurring items, after tax

( 79.8)

( 0.83)

( 0.3)

( 0.00)

Tax adjustments

( 1.5)

( 0.01)

( 3.5)

( 0.04)

$ 28.9

$ 0.30

$ 17.2

$ 0.18

Attachment 1

Supplemental Information

Summary of Consolidated Operating Results (Unaudited)

First Quarter 2011

(In millions, except per share data)

Operating results:

Three Months Ended
March 31,

2011

Adjusted

2010

Sales

$    718.5

$    630.4

Operating income

179.8

33.7

Net income

110.2

21.0

Basic earnings per share

$    1.17

$    0.23

Diluted earnings per share

$    1.14

$    0.22

Total basic per share impact of special items (1)

$    0.85

$    (0.02)

Total diluted per share impact of special items (1)

$    0.83

$    (0.02)

Special items (1):

Three Months Ended
March 31,

2011

2010

Cost of sales

Employee separation and plant phaseout costs

$    (0.2)

$    –

Reimbursement of previously incurred environmental costs

1.9

–

Environmental remediation costs

(1.5)

(3.0)

Acquisition related adjustments

(0.1)

–

Impact on cost of sales

0.1

(3.0)

Selling and administrative

Employee separation and plant phaseout costs

(0.1)

–

Acquisition related costs

(1.0)

(0.2)

Impact on selling and administrative

(1.1)

(0.2)

Gain on sale of investment in SunBelt

128.2

–

     Impact on operating income

127.2

(3.2)

Gain on sale of investment in O'Sullivan

0.5

0.4

     Impact on income before income taxes

127.7

(2.8)

Income tax benefit (expense) on special items

(47.9)

1.1

Impact of special items on net income

$    79.8

$    (1.7)

Basic impact per common share

$    0.85

$    (0.02)

Diluted impact per common share

$    0.83

$    (0.02)

Weighted average shares used to compute earnings per share:

  Basic

93.9

92.5

  Diluted

96.4

95.3

(1) Special items is 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 phaseout costs, executive separation agreements; asset impairments; environmental remediation costs, fines or penalties for 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; and the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results or the effect of adverse determinations by regulatory agencies relating to accounting principles or treatment.

Attachment 2

PolyOne Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(In millions, except per share data)

Three Months Ended
March 31,

2011

Adjusted

2010

Sales

$    718.5

$    630.4

Cost of sales

595.8

526.7

Gross margin

122.7

103.7

Selling and administrative

76.8

71.5

Income related to equity affiliates

133.9

1.5

Operating income

179.8

33.7

Interest expense, net

(8.5)

(8.0)

Other expense, net

(0.2)

(0.7)

Income before income taxes

171.1

25.0

Income tax expense

(60.9)

(4.0)

Net income

$    110.2

$    21.0

Earnings per common share:

   Basic earnings

$    1.17

$    0.23

   Diluted earnings

$    1.14

$    0.22

Cash dividends per common share

$    0.04

$    –

Weighted-average shares used to compute earnings per share:

   Basic

93.9

92.5

   Diluted

96.4

95.3

Equity affiliates earnings recorded by PolyOne:

   SunBelt

$    133.9

$    0.8

   Other equity affiliates

–

0.7

Income related to equity affiliates

$    133.9

$    1.5

Attachment 3

PolyOne Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(In millions)

(Unaudited)

March 31,

December 31,

2011

2010

Assets

Current assets:

 Cash and cash equivalents

$    412.4

$    378.1

 Accounts receivable, net

382.5

294.5

 Inventories

237.9

211.3

 Other current assets

58.3

55.1

  Total current assets

1,091.1

939.0

Property, net

379.6

374.4

Investment in equity affiliates and nonconsolidated subsidiary

–

2.7

Goodwill

170.6

164.1

Other intangible assets, net

69.8

67.8

Deferred income tax assets

42.2

59.7

Other non-current assets

75.2

64.2

  Total assets

$    1,828.5

$    1,671.9

Liabilities and Shareholders' Equity

Current liabilities:

 Current portion of long-term debt

$    –

$    20.0

 Accounts payable

342.2

269.0

 Accrued expenses and other liabilities

153.1

145.8

  Total current liabilities

495.3

434.8

Long-term debt

432.9

432.9

Postretirement benefits other than pensions

19.3

19.4

Pension benefits

154.0

154.5

Other non-current liabilities

111.8

114.3

Shareholders' equity

615.2

516.0

  Total liabilities and shareholders' equity

$    1,828.5

$    1,671.9

Attachment 4

PolyOne Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In millions)

Three Months Ended

March 31,

2011

Adjusted 2010

Operating Activities

Net income

$    110.2

$    21.0

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

      Depreciation and amortization

14.1

14.0

      Deferred income tax provision

26.7

–

      Provision for doubtful accounts

0.9

1.2

      Stock compensation expense

1.2

0.9

      Companies carried at equity:

         Income related to equity affiliates

(133.9)

(1.5)

         Dividends and distributions received

–

0.6

Change in assets and liabilities, net of acquisition:

      Increase in accounts receivable

(78.1)

(71.3)

      Increase in inventories

(17.4)

(24.3)

      Increase in accounts payable

66.8

75.2

      Decrease in accrued expenses and other

(29.9)

(13.0)

Net cash (used) provided by operating activities

(39.4)

2.8

Investing Activities

   Capital expenditures

(7.7)

(4.3)

   Business acquisitions and related deposits, net of cash acquired

(20.0)

–

   Proceeds from sale of equity affiliate and other assets

132.8

7.8

Net cash provided by investing activities

105.1

3.5

Financing Activities

   Change in short-term debt

–

0.2

   Repayment of long-term debt

(20.0)

(20.0)

   Purchase of common shares for treasury

(13.6)

–

   Proceeds from exercise of stock options

1.1

0.7

Net cash used by financing activities

(32.5)

(19.1)

Effect of exchange rate changes on cash

1.1

(0.4)

Increase (decrease) in cash and cash equivalents

34.3

(13.2)

Cash and cash equivalents at beginning of period

378.1

222.7

Cash and cash equivalents at end of period

$    412.4

$    209.5

Attachment 5

Business Segment and Platform Operations (Unaudited)

(In millions)

Operating income at the segment level does not include: special items as defined on attachment 1; 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,

2011

Adjusted 2010

Sales:

 Global Specialty Engineered Materials

$    151.9

$    126.3

 Global Color, Additives and Inks

140.4

130.9

  Specialty Platform

292.3

257.2

 Performance Products and Solutions

208.7

183.7

 PolyOne Distribution

247.0

215.9

 Corporate and eliminations

(29.5)

(26.4)

  Sales

$    718.5

$    630.4

Gross margin:

 Global Specialty Engineered Materials

$    34.7

$    30.2

 Global Color, Additives and Inks

35.4

30.9

  Specialty Platform

70.1

61.1

 Performance Products and Solutions

27.2

24.8

 PolyOne Distribution

26.2

20.5

 Corporate and eliminations

(0.8)

(2.7)

  Gross margin

$    122.7

$    103.7

Selling and administrative:

 Global Specialty Engineered Materials

$    (20.3)

$    (18.1)

 Global Color, Additives and Inks

(24.1)

(22.7)

  Specialty Platform

(44.4)

(40.8)

 Performance Products and Solutions

(12.9)

(12.7)

 PolyOne Distribution

(11.5)

(11.9)

 SunBelt Joint Venture

(0.7)

(1.1)

 Corporate and eliminations

(7.3)

(5.0)

  Selling and administrative

$    (76.8)

$    (71.5)

Operating income:

 Global Specialty Engineered Materials

$    14.4

$    12.1

 Global Color, Additives and Inks

11.3

8.9

  Specialty Platform

25.7

21.0

 Performance Products and Solutions

14.3

12.1

 PolyOne Distribution

14.7

8.6

 SunBelt Joint Venture

5.0

(0.3)

 Corporate and eliminations

120.1

(7.7)

  Operating income

$    179.8

$    33.7

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

Attachment 6

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.  Senior management uses free cash flow to assess our ability to service our debt. Below is a reconciliation of non-GAAP financial measures to the most directly comparable measures calculated and presented in accordance with GAAP. See attachment 1 for a definition of special items.

Reconciliation to Consolidated Statements of Operations

Three Months Ended
March 31,

2011

Adjusted 2010

Sales

$    718.5

$    630.4

Gross margin before special items

$    122.6

$    106.7

Special items in gross margin

0.1

(3.0)

  Gross margin

$    122.7

$    103.7

Gross margin before special items as a percent of sales

17.1%

16.9%

Operating income before special items and non-recurring items

$    52.6

$    33.7

Special items and non-recurring items in operating income

127.2

–

  Operating income

$    179.8

$    33.7

Senior management uses comparisons of net income (loss) and diluted earnings (loss) per share (EPS) before special items, non-recurring items, tax gain and tax valuation allowance to assess performance and facilitate comparability of results with prior periods. Below is a reconciliation of these non-GAAP financial measures to their most directly comparable measure calculated and presented in accordance with GAAP.

Reconciliation to Consolidated Statements of Operations

Three Months Ended

March 31, 2011

Adjusted Three Months

Ended March 31, 2010

$

EPS

$

EPS

Net income

$    110.2

$    1.14

$    21.0

$    0.22

Special items and non-recurring items, after-tax (attachment 1)

(79.8)

(0.83)

(0.3)

–

Tax (a)

(1.5)

(0.01)

(3.5)

(0.04)

$    28.9

$    0.30

$    17.2

$    0.18

(a) Net tax (benefit) loss from one-time foreign and domestic income tax items and deferred income tax valuation allowance adjustments on deferred tax assets

Senior management uses free cash flow to assess our ability to service our debt. Below is a reconciliation of this non-GAAP financial measure to the most directly comparable measure calculated and presented in accordance with GAAP.

Reconciliation to Consolidated Statements of Cash Flows

Three Months Ended
March 31,

2011

2010

Net cash (used) provided by operating activities

$    (39.4)

$    2.8

Net cash provided by investing activities

105.1

3.5

Free cash flow

$    65.7

$    6.3

Senior management uses net debt as a measure of our financial position. Below is a reconciliation of this non-GAAP financial measure to the most directly comparable measure calculated and presented in accordance with GAAP.

(Unaudited)

March 31,

December 31,

Reconciliation to Condensed Consolidated Balance Sheets

2011

2010

Current portion of long-term debt

$    –

$    20.0

Long-term debt

432.9

432.9

SunBelt guarantee

–

42.7

Less cash and cash equivalents

(412.4)

(378.1)

Net debt

$    20.5

$    117.5

Reconciliation to operating income % of sales excluding equity income and special items

2006

2007

2008

2009

2010

1Q11

Sales

$    2,622.4

$    2,642.7

$    2,738.7

$    2,060.7

$    2,621.9

$    718.5

Operating income (loss)

$    233.6

$    80.0

$    (291.4)

$    137.1

$    174.6

$    179.8

Equity income from SunBelt and OxyVinyls

(107.0)

(40.8)

(32.5)

(29.7)

(23.1)

(5.7)

Special items and non-recurring items in operating income

(39.1)

47.8

396.2

(48.7)

(4.8)

(127.2)

Operating income before special items and equity income

$    87.5

$    87.0

$    72.3

$    58.7

$    146.7

$    46.9

Operating income before special items and equity income as a percent of sales

3.3%

3.3%

2.6%

2.8%

5.6%

6.5%