PolyOne Announces Second Quarter 2011 Results

In millions (except per share amounts)

Q2 2011

EPS

Q2 2010

EPS

Net Income

$28.5

$0.30

$48.1

$0.50

SunBelt equity income, after tax

-

-

(4.5)

(0.05)

Special items, after tax

0.9

0.01

(9.0)

(0.09)

Tax adjustments

0.4

-

(13.1)

(0.14)

Adjusted net income / EPS

$29.8

0.31

$21.5

0.22

Attachment 1

Supplemental Information

Summary of Consolidated Operating Results (Unaudited)

Second Quarter 2011

(In millions, except per share data)

Operating results:

Three Months Ended
June 30,

Six Months Ended
June 30,

2011

Adjusted 2010

2011

Adjusted 2010

Sales

$  768.8

$  692.9

$ 1,487.3

$  1,323.3

Operating income

50.5

63.9

230.3

97.6

Net income

28.5

48.1

138.7

69.1

 Basic earnings per share

$    0.31

$  0.52

$      1.48

$  0.75

 Diluted earnings per share

$    0.30

$  0.50

$      1.45

$  0.72

 Total basic per share impact of special items (Attachment 2)

$   (0.01)

$  0.10

$      0.84

$  0.10

 Total diluted per share impact of special items (Attachment 2)

$   (0.01)

$  0.09

$      0.82

$  0.10

Senior management uses comparisons of net income and diluted earnings per share (EPS) before adjustments 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

June 30, 2011

Adjusted Three Months Ended June 30, 2010

$

EPS

$

EPS

Net income

$        28.5

$          0.30

$       48.1

$         0.50

SunBelt equity income, after tax

–

–

(4.5)

(0.05)

Special items, after tax (Attachment 2)

0.9

0.01

(9.0)

(0.09)

Tax adjustments (a)

0.4

–

(13.1)

(0.14)

Adjusted net income / EPS

$        29.8

$          0.31

$       21.5

$         0.22

Reconciliation to Consolidated Statements of Operations

Six Months Ended

June 30, 2011

Adjusted Six Months Ended June 30, 2010

$

EPS

$

EPS

Net income

$     138.7

$         1.45

$       69.1

$         0.72

SunBelt equity income, after tax

(3.7)

(0.04)

(5.0)

(0.05)

Special items, after-tax (Attachment 2)

(78.9)

(0.83)

(9.3)

(0.10)

Tax adjustments (a)

(1.1)

(0.01)

(16.6)

(0.17)

Adjusted net income / EPS

$        55.0

$         0.57

$       38.2

$         0.40

(a)  Tax adjustments include the net tax loss (benefit) from one-time foreign and domestic income tax items and deferred income tax valuation allowance adjustments on deferred tax assets.

Attachment 2

PolyOne Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(In millions, except per share data)

Special items (1):

Three Months Ended
June 30,

Six Months Ended
June 30,

2011

2010

2011

2010

Cost of sales

Employee separation and plant phaseout costs

$  (0.3)

$  (0.3)

$    (0.5)

$  (0.2)

Insurance reimbursements

–

15.9

1.9

19.1

Environmental remediation costs

(1.6)

(3.2)

(3.1)

(6.3)

Acquisition related costs

–

–

(0.1)

–

Impact on cost of sales

(1.9)

12.4

(1.8)

12.6

Selling and administrative

Employee separation and plant phaseout costs

(0.1)

(0.3)

(0.2)

(0.3)

Legal

–

2.4

–

2.2

Acquisition related costs

(0.7)

–

(1.7)

–

Impact on selling and administrative

(0.8)

2.1

(1.9)

1.9

Gain on sale of investment in SunBelt

–

–

128.2

–

     Impact on operating income

(2.7)

14.5

124.5

14.5

Other income (expense), net

     Gain on sale of investment in O'Sullivan

–

–

0.5

0.4

     Royalty income

1.3

–

1.3

–

     Impact on other income

1.3

–

1.8

0.4

     Impact on income before income taxes

(1.4)

14.5

126.3

14.9

Income tax benefit (expense) on special items

0.5

(5.5)

(47.4)

(5.6)

Impact of special items on net income

$  (0.9)

$  9.0

$   78.9

$  9.3

Basic impact per common share

$  (0.01)

$  0.10

$   0.84

$  0.10

Diluted impact per common share

$  (0.01)

$  0.09

$   0.82

$  0.10

Weighted average shares used to compute earnings per share:

  Basic

93.1

92.8

93.5

92.7

  Diluted

95.5

96.3

95.8

95.6

(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; mark-to-market adjustments associated with actuarial gains and losses on pension and other postretirement benefit plans; 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; one-time, non-recurring items; 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 3

PolyOne Corporation and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(In millions, except per share data)

Three Months Ended
June 30,

Six Months Ended
June 30,

2011

Adjusted
2010

2011

Adjusted
2010

Sales

$  768.8

$  692.9

$  1,487.3

$  1,323.3

Cost of sales

639.6

566.1

1,235.4

1,092.8

Gross margin

129.2

126.8

251.9

230.5

Selling and administrative

78.7

70.7

155.5

142.2

Income related to equity affiliates

–

7.8

133.9

9.3

Operating income

50.5

63.9

230.3

97.6

Interest expense, net

(8.4)

(7.7)

(16.9)

(15.7)

Other income (expense), net

1.6

(1.2)

1.4

(1.9)

Income before income taxes

43.7

55.0

214.8

80.0

Income tax expense

(15.2)

(6.9)

(76.1)

(10.9)

Net income

$  28.5

$  48.1

$     138.7

$  69.1

Earnings per common share:

 Basic earnings

$  0.31

$  0.52

$       1.48

$  0.75

 Diluted earnings

$  0.30

$  0.50

$       1.45

$  0.72

Cash dividends declared per common share

$  0.04

$        –

$      0.08

$  –

Weighted-average shares used to compute earnings per share:

   Basic

93.1

92.8

93.5

92.7

   Diluted

95.5

96.3

95.8

95.6

Equity affiliates earnings recorded by PolyOne:

   SunBelt

$  –

$$  7.1

$  133.9

$  7.9

   Other equity affiliates

–

0.7

–

1.4

Income related to equity affiliates

$  –

$  7.8

$  133.9

$  9.3

Attachment 4

PolyOne Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(In millions)

(Unaudited)

Adjusted

June 30,

December 31,

2011

2010

Assets

Current assets:

 Cash and cash equivalents

$        416.8

$        378.1

 Accounts receivable, net

397.1

294.5

 Inventories

255.5

211.3

 Other current assets

41.7

55.1

  Total current assets

1,111.1

939.0

Property, net

379.4

374.4

Investment in equity affiliates

–

2.7

Goodwill

171.7

164.1

Other intangible assets, net

69.0

67.8

Deferred income tax assets

47.6

59.7

Other non-current assets

85.9

64.2

  Total assets

$      1,864.7

$    1,671.9

Liabilities and Shareholders' Equity

Current liabilities:

 Current portion of long-term debt

$           22.9

$    20.0

 Accounts payable

365.2

269.0

 Accrued expenses

161.2

145.8

  Total current liabilities

549.3

434.8

Long-term debt

410.0

432.9

Post-retirement benefits other than pensions

19.1

19.4

Pension benefits

146.3

154.5

Other non-current liabilities

110.4

114.3

Shareholders' equity

629.6

516.0

  Total liabilities and shareholders' equity

$      1,864.7

$    1,671.9

Attachment 5

PolyOne Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

(In millions)

Three Months Ended

Six Months Ended

June 30,

June 30,

2011

Adjusted
2010

2011

Adjusted
2010

Operating Activities

Net income

$     28.5

$      48.1

$     138.7

$    69.1

Adjustments to reconcile net income to net cash provided (used) by

      operating activities:

      Depreciation and amortization

14.3

13.8

28.4

27.8

      Deferred income tax provision

10.1

1.9

36.8

1.9

      Provision for doubtful accounts

0.3

1.2

1.2

2.4

      Stock compensation expense

1.4

1.2

2.6

2.1

      Companies carried at equity:

         Income related to equity affiliates

–

(7.8)

(133.9)

(9.3)

         Dividends and distributions received

6.0

0.9

6.0

1.5

Change in assets and liabilities, net of acquisition:

      Increase in accounts receivable

(12.9)

(28.9)

(91.0)

(100.2)

      Increase in inventories

(16.3)

(24.7)

(33.7)

(49.0)

      Increase in accounts payable

21.8

25.1

88.6

100.3

      Decrease in pensions and other post-retirement benefits

(12.6)

(10.6)

(18.5)

(16.1)

      (Decrease) increase in accrued expenses and other

(10.1)

18.2

(34.1)

10.7

Net cash provided (used) by operating activities

30.5

38.4

(8.9)

41.2

Investing Activities

   Capital expenditures

(12.8)

(6.6)

(20.5)

(10.9)

   Business acquisitions and related deposits, net of cash acquired

(1.8)

–

(21.8)

–

   Proceeds from sale of equity affiliate and other assets

3.0

–

135.8

7.8

Net cash (used) provided by investing activities

(11.6)

(6.6)

93.5

(3.1)

Financing Activities

   Change in short-term debt

–

(0.2)

–

–

   Repayment of long-term debt

–

–

(20.0)

(20.0)

   Purchase of common stock for treasury

(14.4)

–

(28.0)

–

   Exercise of stock awards

2.8

0.9

3.9

1.6

   Cash dividends paid

(3.8)

–

(3.8)

–

Net cash (used) provided by financing activities

(15.4)

0.7

(47.9)

(18.4)

Effect of exchange rate changes on cash

0.9

(0.9)

2.0

(1.3)

Increase in cash and cash equivalents

4.4

31.6

38.7

18.4

Cash and cash equivalents at beginning of period

412.4

209.5

378.1

222.7

Cash and cash equivalents at end of period

$   416.8

$   241.1

$   416.8

$   241.1

Attachment 6

Business Segment and Platform Operations (Unaudited)

(In millions)

Operating income at the segment level does not include: special items as defined on Attachment 2; 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

Six Months Ended

June 30,

June 30,

2011

Adjusted
2010

2011

Adjusted
2010

Sales:

 Global Specialty Engineered Materials

$     147.5

$      127.5

$     299.4

$      253.8

 Global Color, Additives and Inks

146.2

137.1

286.6

268.0

  Specialty Platform

293.7

264.6

586.0

521.8

 Performance Products and Solutions

241.4

218.5

450.1

402.2

 PolyOne Distribution

265.5

241.4

512.5

457.3

 Corporate and eliminations

(31.8)

(31.6)

(61.3)

(58.0)

  Sales

$     768.8

$      692.9

$  1,487.3

$   1,323.3

Gross margin:

 Global Specialty Engineered Materials

$       33.4

$        30.4

$        68.1

$        60.6

 Global Color, Additives and Inks

37.5

32.4

72.9

63.3

  Specialty Platform

70.9

62.8

141.0

123.9

 Performance Products and Solutions

34.0

30.5

61.2

55.3

 PolyOne Distribution

27.5

22.9

53.7

43.4

 Corporate and eliminations

(3.2)

10.6

(4.0)

7.9

  Gross margin

$     129.2

$      126.8

$      251.9

$      230.5

Selling and administrative:

 Global Specialty Engineered Materials

$      (20.7)

$       (18.3)

$      (41.4)

$       (36.4)

 Global Color, Additives and Inks

(24.9)

(21.5)

(49.1)

(44.2)

  Specialty Platform

(45.6)

(39.8)

(90.5)

(80.6)

 Performance Products and Solutions

(12.7)

(12.9)

(25.6)

(25.6)

 PolyOne Distribution

(12.2)

(11.3)

(23.7)

(23.2)

 SunBelt Joint Venture

–

(1.0)

(0.7)

(2.1)

 Corporate and eliminations

(8.2)

(5.7)

(15.0)

(10.7)

  Selling and administrative

$      (78.7)

$       (70.7)

$    (155.5)

$     (142.2)

Operating income:

 Global Specialty Engineered Materials

$       12.7

$       12.1

$        26.7

$        24.2

 Global Color, Additives and Inks

12.6

11.6

23.8

20.5

  Specialty Platform

25.3

23.7

50.5

44.7

 Performance Products and Solutions

21.3

17.6

35.6

29.7

 PolyOne Distribution

15.3

11.6

30.0

20.2

 SunBelt Joint Venture

–

6.1

5.0

5.8

 Corporate and eliminations

(11.4)

4.9

109.2

(2.8)

  Operating income

$       50.5

$        63.9

$      230.3

$      97.6

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 7

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 2 for a definition of special items.

Reconciliation to Consolidated Statements of Operations

Three Months Ended
June 30,

Six Months Ended
June 30,

2011

Adjusted
2010

2011

Adjusted
2010

Sales

$     768.8

$       692.9

$   1,487.3

$   1,323.3

Gross margin before special items

$     131.1

$      114.4

$      253.7

$      217.9

Special items in gross margin (Attachment 2)

(1.9)

12.4

(1.8)

12.6

  Gross margin

$     129.2

$      126.8

$      251.9

$      230.5

Gross margin adjusted as a percent of sales

17.1%

16.5%

17.1%

16.5%

Operating income before special items

$       53.2

$        49.4

$      105.8

$        83.1

Special items in operating income (Attachment 2)

(2.7)

14.5

124.5

14.5

  Operating income

$       50.5

$        63.9

$      230.3

$        97.6

Calculation of adjusted EPS

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

Net income

$    50.8

$    21.0

$    48.1

$    3.6

$  89.9

$  110.2

SunBelt equity income, after tax

(2.0)

(0.5)

(4.5)

(6.2)

(3.5)

(3.7)

Special items, after tax (1)

(15.7)

(0.3)

(9.0)

21.8

3.3

(79.8)

Tax adjustments

(22.3)

(3.5)

(13.1)

3.6

(75.3)

(1.5)

Adjusted net income

$      10.8

$      16.7

$      21.5

$      22.8

$  14.4

$  25.2

Diluted shares used to calculate EPS

94.4

95.3

96.3

96.3

97.4

96.4

Adjusted EPS

$      0.11

$      0.18

$      0.22

$      0.24

$  0.15

$  0.26

Calculation of operating income (loss) adjusted as a percent of sales

2006

2007

2008

2009

2010

Q2 TTM

2Q11

Sales

$    2,622.4

$    2,642.7

$    2,738.7

$    2,060.7

$  2,621.9

$    2,785.9

$    768.8

Operating income (loss)

$    233.6

$    80.0

$    (291.4)

$    137.1

$  174.6

$    307.3

$    50.5

SunBelt and OxyVinyls equity income

(107.0)

(40.8)

(32.5)

(29.7)

(23.1)

(20.9)

–

Special items in operating income

(39.1)

47.8

396.2

(48.7)

(4.8)

(114.8)

2.7

Operating income adjusted

$    87.5

$    87.0

$    72.3

$    58.7

$  146.7

$     171.6

$    53.2

Operating income adjusted as a percent of sales

3.3%

3.3%

2.6%

2.8%

5.6%

6.2%

6.9%

Calculation of Q2 TTM sales, operating income, equity income from SunBelt and OxyVinyl, special items in operating income, and operating income adjusted

3Q10

4Q10

1Q11

2Q11

Q2TTM

Sales

$    680.8

$    617.8

$    718.5

$    768.8

$    2,785.9

Operating income

$    47.2

$    29.8

$    179.8

$    50.5

$    307.3

Equity income from SunBelt

(9.7)

(5.5)

(5.7)

–

(20.9)

Special items in operating income

5.5

4.2

(127.2)

2.7

(114.8)

Operating income adjusted

$    43.0

$    28.5

$    46.9

$    53.2

$    171.6

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
June 30,

Six Months Ended
June 30,

2011

2010

2011

2010

Net cash provided (used) by operating activities

$       30.5

$      38.4

$        (8.9)

$     41.2

Net cash (used) provided by investing activities

(11.6)

(6.6)

93.5

(3.1)

Free cash flow

$       18.9

$      31.8

$       84.6

$     38.1

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)

June 30,

December 31,

Reconciliation to Condensed Consolidated Balance Sheets

2011

2010

Current portion of long-term debt

$    22.9

$    20.0

Long-term debt

410.0

432.9

SunBelt guarantee

–

42.7

Less cash and cash equivalents

(416.8)

(378.1)

Net debt

$    16.1

$    117.5