POLYONE CORP (Form: 10-Q, Received: 10/22/2019 09:13:04)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________

FORM 10-Q

________________________________________________

(Mark One)


☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2019


☐			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			34-1730488
(State or other jurisdiction			(I.R.S. Employer Identification No.)
of incorporation or organization)

33587 Walker Road,	Avon Lake,	Ohio	44012
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (440) 930-1000

________________________________________________

Former name, former address and former fiscal year, if changed since last report: Not Applicable

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares, par value $.01 per share	POL	New York Stock Exchange

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 to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of the registrant’s outstanding common shares, $0.01 par value, as of September 30, 2019 was 76,915,099.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PolyOne Corporation

Condensed Consolidated Statements of Income (Unaudited)

(In millions, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Sales	$	705.3	$	729.0	$	2,204.1	$	2,203.9
Cost of sales	544.8		571.8		1,700.2		1,720.0
Gross margin	160.5		157.2		503.9		483.9
Selling and administrative expense	117.4		108.5		367.6		335.5
Operating income	43.1		48.7		136.3		148.4
Interest expense, net	(15.5)		(15.6)		(47.6)		(47.2)
Debt extinguishment costs	—		—		—		(0.1)
Other income, net	0.6		0.7		1.4		2.0
Income from continuing operations before income taxes	28.2		33.8		90.1		103.1
Income tax expense	(4.6)		(1.3)		(20.8)		(14.2)
Net income from continuing operations	23.6		32.5		69.3		88.9
Income from discontinued operations, net of income taxes	19.5		17.7		54.2		59.4
Net income	$	43.1	$	50.2	$	123.5	$	148.3
Net (income) loss attributable to noncontrolling interests	(0.1)		—		(0.2)		0.1
Net income attributable to PolyOne common shareholders	$	43.0	$	50.2	$	123.3	$	148.4

Earnings per common share attributable to PolyOne common shareholders - Basic:
Continuing operations	$	0.31	$	0.41	$	0.89	$	1.11
Discontinued operations	0.25		0.22		0.71		0.74
Total	$	0.56	$	0.63	$	1.60	$	1.85
Earnings per common share attributable to PolyOne common shareholders - Diluted:
Continuing operations	$	0.30	$	0.40	$	0.89	$	1.10
Discontinued operations	0.26		0.22		0.69		0.74
Total	$	0.56	$	0.62	$	1.58	$	1.84

Weighted-average shares used to compute earnings per common share:
Basic	76.9		79.8		77.3		80.1
Plus dilutive impact of share-based compensation	0.5		0.9		0.5		0.7
Diluted	77.4		80.7		77.8		80.8

Anti-dilutive shares not included in diluted common shares outstanding	0.6		—		0.8		—

Cash dividends declared per share of common stock	$	0.195	$	0.175	$	0.585	$	0.525

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation

Consolidated Statements of Comprehensive Income (Unaudited)

(In millions)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Net income	$	43.1	$	50.2	$	123.5	$	148.3
Other comprehensive income, net of tax
Translation adjustments and related hedging instruments	(9.8)		(11.5)		(4.0)		(27.7)
Cash flow hedges	(0.4)		0.7		(3.3)		0.7

Total comprehensive income	32.9		39.4		116.2		121.3
Comprehensive (income) loss attributable to noncontrolling interests	(0.1)		—		(0.2)		0.1
Comprehensive income attributable to PolyOne common shareholders	$	32.8	$	39.4	$	116.0	$	121.4

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation

Condensed Consolidated Balance Sheets (Unaudited)

(In millions)


	September 30, 2019		December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	199.6	$	170.9
Accounts receivable, net	368.7		347.2
Inventories, net	281.6		284.6
Current assets held for sale	265.5		129.7
Other current assets	58.4		66.4
Total current assets	1,173.8		998.8
Property, net	386.0		384.5
Goodwill	682.6		639.1
Intangible assets, net	475.8		422.4
Operating lease assets, net	65.0		—
Non-current assets held for sale	—		124.5
Other non-current assets	163.0		154.0
Total assets	$	2,946.2	$	2,723.3

Liabilities and Equity
Current liabilities:
Short-term and current portion of long-term debt	$	18.6	$	19.4
Accounts payable	289.3		305.0
Current operating lease obligations	20.7		—
Current liabilities held for sale	105.2		104.5
Accrued expenses and other current liabilities	191.7		128.7
Total current liabilities	625.5		557.6
Non-current liabilities:
Long-term debt	1,406.3		1,336.2
Pension and other post-retirement benefits	52.7		54.3
Non-current operating lease obligations	44.3		—
Non-current liabilities held for sale	—		3.3
Other non-current liabilities	225.2		231.3
Total non-current liabilities	1,728.5		1,625.1
Equity:
PolyOne shareholders’ equity	591.4		540.0

Noncontrolling interests	0.8		0.6
Total equity	592.2		540.6
Total liabilities and equity	$	2,946.2	$	2,723.3

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)


	Nine Months Ended September 30,
	2019		2018
Operating Activities
Net income	$	123.5	$	148.3
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization	68.4		69.0



Debt extinguishment costs	—		0.1
Share-based compensation expense	8.7		8.3
Change in assets and liabilities, net of the effect of acquisitions:
Increase in accounts receivable	(12.7)		(70.6)
Decrease (increase) in inventories	20.0		(0.1)
Increase (decrease) in accounts payable	(28.3)		28.4
Decrease in pension and other post-retirement benefits	(7.0)		(7.7)
Increase (decrease) in accrued expenses and other assets and liabilities, net	26.0		(4.8)
Net cash provided by operating activities	198.6		170.9
Investing Activities
Capital expenditures	(47.9)		(51.2)
Business acquisitions, net of cash acquired	(119.6)		(98.6)

Sale of and proceeds from other assets	5.3		3.9
Net cash used by investing activities	(162.2)		(145.9)
Financing Activities

Borrowings under credit facilities	882.4		835.3
Repayments under credit facilities	(808.5)		(797.5)
Repayment of other debt	—		(16.4)
Purchase of common shares for treasury	(26.9)		(53.0)
Cash dividends paid	(45.7)		(42.1)
Repayment of long-term debt	(4.9)		(4.9)
Payments of withholding tax on share awards	(2.0)		(3.9)
Debt financing costs	(0.2)		(0.5)

Net cash used by financing activities	(5.8)		(83.0)
Effect of exchange rate changes on cash	(1.9)		(4.8)
Increase (decrease) in cash and cash equivalents	28.7		(62.8)
Cash and cash equivalents at beginning of period	170.9		243.6
Cash and cash equivalents at end of period	$	199.6	$	180.8

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation

Consolidated Statements of Shareholders' Equity (Unaudited)

(In millions)


	Common Shares				Shareholders’ Equity
	Common Shares	Common Shares Held in Treasury	Common Shares		Additional Paid-in Capital		Retained Earnings		Common Shares Held in Treasury		Accumulated Other Comprehensive Loss		Total PolyOne shareholders' equity		Non-controlling Interests		Total equity
Balance at January 1, 2019	122.2	(44.5)	$	1.2	$	1,166.9	$	472.9	$	(1,018.7)	$	(82.3)	$	540.0	$	0.6	$	540.6
Net income							38.2						38.2		0.1		38.3
Other comprehensive gain											3.2		3.2				3.2
Cash dividends declared							(14.8)						(14.8)				(14.8)

Share-based compensation and exercise of awards		0.1			0.5				1.1				1.6				1.6

Balance at March 31, 2019	122.2	(44.4)	$	1.2	$	1,167.4	$	496.3	$	(1,017.6)	$	(79.1)	$	568.2	$	0.7	$	568.9
Net income							42.1						42.1				42.1
Other comprehensive gain											(0.3)		(0.3)				(0.3)
Cash dividends declared							(15.2)						(15.2)				(15.2)
Repurchase of common shares		(1.0)							(26.9)				(26.9)				(26.9)
Share-based compensation and exercise of awards		0.1			1.8				0.7				2.5				2.5

Balance at June 30, 2019	122.2	(45.3)	$	1.2	$	1,169.2	$	523.2	$	(1,043.8)	$	(79.4)	$	570.4	$	0.7	$	571.1
Net income							43.0						43.0		0.1		43.1
Other comprehensive loss											(10.2)		(10.2)				(10.2)

Cash dividends declared							(14.7)						(14.7)				(14.7)

Share-based compensation and exercise of awards					2.4				0.5				2.9				2.9

Balance at September 30, 2019	122.2	(45.3)	$	1.2	$	1,171.6	$	551.5	$	(1,043.3)	$	(89.6)	$	591.4	$	0.8	$	592.2


	Common Shares				Shareholders’ Equity
	Common Shares	Common Shares Held in Treasury	Common Shares		Additional Paid-in Capital		Retained Earnings		Common Shares Held in Treasury		Accumulated Other Comprehensive Loss		Total PolyOne shareholders' equity		Non-controlling Interests		Total equity
Balance at January 1, 2018	122.2	(41.3)	$	1.2	$	1,161.5	$	387.1	$	(898.3)	$	(53.0)	$	598.5	$	0.9	$	599.4
Net income							46.9						46.9				46.9
Other comprehensive gain											10.6		10.6				10.6
Cash dividends declared							(14.0)						(14.0)				(14.0)
Repurchase of common shares		(1.0)							(42.2)				(42.2)				(42.2)
Share-based compensation and exercise of awards		0.1			0.2				1.2				1.4				1.4
Other							(16.6)				(0.4)		(17.0)				(17.0)
Balance at March 31, 2018	122.2	(42.2)	$	1.2	$	1,161.7	$	403.4	$	(939.3)	$	(42.8)	$	584.2	$	0.9	$	585.1
Net income							51.3						51.3		(0.1)		51.2
Other comprehensive loss											(26.8)		(26.8)				(26.8)
Cash dividends declared							(13.9)						(13.9)				(13.9)
Repurchase of common shares		(0.1)							(3.1)				(3.1)				(3.1)
Share-based compensation and exercise of awards					1.8				0.4				2.2				2.2

Balance at June 30, 2018	122.2	(42.3)	$	1.2	$	1,163.5	$	440.8	$	(942.0)	$	(69.6)	$	593.9	$	0.8	$	594.7
Net income							50.2						50.2		—		50.2
Other comprehensive loss											(10.8)		(10.8)				(10.8)

Cash dividends declared							(14.0)						(14.0)				(14.0)
Repurchase of common shares		(0.2)							(7.7)				(7.7)				(7.7)
Share-based compensation and exercise of awards		0.1			1.1				0.6				1.7				1.7

Balance at September 30, 2018	122.2	(42.4)	$	1.2	$	1,164.6	$	477.0	$	(949.1)	$	(80.4)	$	613.3	$	0.8	$	614.1

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Form 10-Q instructions and in the opinion of management contain all adjustments, including those that are normal, recurring and necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2018 of PolyOne Corporation. When used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “PolyOne” and the “Company” mean PolyOne Corporation and its consolidated subsidiaries.

Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be attained in subsequent periods or for the year ending December 31, 2019. Historical information has been retrospectively adjusted to reflect the classification of discontinued operations. Discontinued operations are further discussed in Note 3, Discontinued Operations.

Accounting Standards Adopted

On January 1, 2019, the Company adopted Accounting Standards Codification (ASC) 842, Leases (ASC 842). ASC 842 was issued to increase transparency and comparability among entities by recognizing right-of-use assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements.

We elected to transition to ASC 842 using the option to apply the standard on its effective date, January 1, 2019. The comparative periods presented reflect the former lease accounting guidance and the required comparative disclosures are included in Note 5, Leasing Arrangements. There was not a material cumulative-effect adjustment to our beginning retained earnings as a result of adopting ASC 842. We have recognized additional operating lease assets and obligations of $72.3 million and $65.0 million as of January 1, 2019 and September 30, 2019, respectively. We elected to not reassess prior conclusions related to the identification, classification and accounting for initial direct costs for leases that commenced prior to January 1, 2019. Additionally, we elected to not use hindsight to determine lease terms and to not separate non-lease components within our lease portfolio. For additional disclosure and detail, see Note 5, Leasing Arrangements.

Accounting Standards Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 changes the impairment model for most financial instruments. Current guidance requires the recognition of credit losses based on an incurred loss impairment methodology that reflects losses once the losses are probable. Under ASU 2016-13, the Company will be required to use a current expected credit loss (CECL) model that will immediately recognize an estimate of credit losses that are expected to occur over the life of the financial instruments that are in the scope of this update, including trade receivables. The CECL model uses a broader range of reasonable and supportable information in the development of credit loss estimates. This guidance becomes effective for the Company on January 1, 2020, including the interim periods in the year. The Company is currently evaluating the impact that the adoption of ASU 2016-13 will have on the consolidated financial statements and related disclosures.

Note 2 — BUSINESS COMBINATIONS

On January 2, 2019, the Company acquired Fiber-Line, LLC (Fiber-Line), a global leader in polymer coated engineered fibers and composite materials, for total consideration of $152.7 million, net of cash acquired and inclusive of contingent consideration. Fiber-Line's results are reported in the Specialty Engineered Materials segment. The preliminary purchase price allocation resulted in intangible assets of $77.1 million, goodwill of $46.3 million, and net working capital of $26.0 million. A portion of the goodwill is deductible for U.S. federal income tax purposes. The definite-lived intangible assets that have been acquired are being amortized over a period of five to 19 years. Fiber-Line's sales included in the Company's results for the three and nine months ended September 30, 2019 were $29.4 million and $85.3 million, respectively.

Our acquisitions of PlastiComp, Inc. (PlastiComp) on May 31, 2018 and Fiber-Line involve contingent consideration that includes earnouts payable over periods of up to two years in the event that certain operating results are achieved. The PlastiComp earnout has a ceiling of $35 million. The Fiber-Line earnout is based on two annual earnout periods, with the second earnout period target based on year-one results. We estimate the total earnout payment for Fiber-Line to be in the range of $40 to $60 million. The earnouts are considered Level 3 under the fair value hierarchy as the fair value is based on unobservable inputs, which require PolyOne to develop its own assumptions. The earnouts are valued each quarter using Monte Carlo simulation analyses in a risk-neutral framework with assumptions for volatility, risk-free rate and dividend yield. As of September 30, 2019, we had recorded a total of $72.2 million of contingent liabilities for both acquisitions, of which $64.2 million was reflected within Accrued expenses and other current liabilities and $8.0 million was reflected within Other non-current liabilities on the Condensed Consolidated Balance Sheets. During the three and nine months ended September 30, 2019, the Company recorded charges of $10.0 million and $20.7 million, respectively, associated with the earnouts within Selling and administrative expense on the Condensed Consolidated Statements of Income that was primarily attributable to improved earnings from the acquisitions.

Note 3 — DISCONTINUED OPERATIONS

PolyOne has classified the PP&S assets and liabilities as held-for-sale for all periods presented in the accompanying Condensed Consolidated Balance Sheets and has classified the PP&S operating results as discontinued operations in the accompanying Condensed Consolidated Statement of Income for all periods presented. Previously, PP&S was included as a separate operating segment.

The following table summarizes the major line items constituting pretax income of discontinued operations associated with PP&S for the three and nine months ended September 30, 2019 and 2018:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
Sales	$	143.1	$	154.0	$	448.0	$	495.5
Cost of sales	114.0		126.3		358.4		399.5
Selling and administrative expense	8.2		5.9		21.7		17.5
Pretax income of discontinued operations	20.9		21.8		67.9		78.5
Income tax expense	(1.4)		(4.1)		(13.7)		(18.0)
Income from discontinued operations, net of taxes	$	19.5	$	17.7	$	54.2	$	60.5

The following table summarizes the major classes of assets and liabilities of PP&S that were classified as held for sale in the consolidated balance sheets as of September 30, 2019 and December 31, 2018:


(In millions)	(Unaudited) September 30, 2019		(Unaudited) December 31, 2018
Assets:
Current assets:
Accounts receivable, net	$	67.2	$	66.2
Inventories, net	57.6		60.1
Other current assets	3.0		3.4
Total current assets	127.8		129.7
Non-current assets:
Property, net	111.9		110.9
Goodwill	11.2		11.2
Other non-current assets	14.6		2.4
Total non-current assets	137.7		124.5

Total assets held-for-sale	$	265.5	$	254.2

Liabilities
Current liabilities:
Accounts payable	$	84.5	$	94.0
Other current liabilities	11.3		10.5
Total current liabilities	95.8		104.5
Total non-current liabilities	9.4		3.3

Total liabilities held for sale	$	105.2	$	107.8

The following table presents the depreciation, amortization, and capital expenditures of our discontinued operations for the nine months ended September 30, 2019 and 2018. There were no other significant operating or investing non-cash items for the nine months ended September 30, 2019 and 2018.


	Nine Months Ended September 30,
(In millions)	2019		2018
Depreciation and amortization	$	9.4	$	11.9
Capital Expenditures	11.1		13.2

Note 4 — GOODWILL AND INTANGIBLE ASSETS

Goodwill as of September 30, 2019 and December 31, 2018 and changes in the carrying amount of goodwill by segment were as follows:


(In millions)	Specialty Engineered Materials		Color, Additives and Inks		PolyOne Distribution		Total



Balance December 31, 2018	$	188.9	$	448.6	$	1.6	$	639.1
Acquisition of businesses	47.2		—		—		47.2
Currency translation	(2.2)		(1.5)		—		(3.7)
Balance September 30, 2019	$	233.9	$	447.1	$	1.6	$	682.6

Indefinite and finite-lived intangible assets consisted of the following:


	As of September 30, 2019
(In millions)	Acquisition Cost		Accumulated Amortization		Currency Translation		Net
Customer relationships	$	286.8	$	(85.5)	$	(1.5)	$	199.8
Patents, technology and other	244.0		(75.8)		(1.7)		166.5
Indefinite-lived trade names	109.5		—		—		109.5
Total	$	640.3	$	(161.3)	$	(3.2)	$	475.8


	As of December 31, 2018
(In millions)	Acquisition Cost		Accumulated Amortization		Currency Translation		Net
Customer relationships	$	277.8	$	(74.8)	$	(0.7)	$	202.3
Patents, technology and other	185.1		(64.4)		(0.9)		119.8
Indefinite-lived trade names	100.3		—		—		100.3

Total	$	563.2	$	(139.2)	$	(1.6)	$	422.4

Note 5 — LEASING ARRANGEMENTS

We lease certain manufacturing facilities, warehouse space, machinery and equipment, vehicles and information technology equipment under operating leases. The majority of our leases are operating leases. Finance leases are immaterial to our condensed consolidated financial statements. Operating lease assets and obligations are reflected within Operating lease assets, net, Current operating lease obligations, and Non-current operating lease obligations, respectively, on the Condensed Consolidated Balance Sheets.

Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. The components of lease cost from continued operations recognized within our Condensed Consolidated Statements of Income were as follows:


(In millions)	Condensed Consolidated Statements of Income Location	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Lease cost:
Operating lease cost	Cost of sales	$	2.6	$	7.8
Operating lease cost	Selling and administrative expense	2.7		8.4



Other⁽¹⁾	Selling and administrative expense	0.0		1.2


Total operating lease cost		$	5.3	$	17.4

(1) Other lease costs include short-term lease costs and variable lease costs

We often have options to renew lease terms for buildings and other assets. The exercise of lease renewal options are generally at our sole discretion. In addition, certain lease arrangements may be terminated prior to their original expiration date at our discretion. We evaluate renewal and termination options at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors. The weighted average remaining lease term for our operating leases as of September 30, 2019 was 4.1 years.

The discount rate implicit within our leases is generally not determinable and, therefore, the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for our leases is determined based on lease term and currency in which lease payments are made, adjusted for impacts of collateral. The weighted average discount rate used to measure our operating lease liabilities as of September 30, 2019 was 6.7%.

Maturity Analysis of Lease Liabilities:


	As of September 30, 2019
(In millions)	Operating Leases
2019	$	6.2
2020	22.6
2021	14.8
2022	10.4
2023	7.5
Thereafter	11.8
Total lease payments	$	73.3
Less amount of lease payment representing interest	(8.3)
Total present value of lease payments	$	65.0


	As of December 31, 2018
(In millions)	Operating Leases
2019	$	24.5
2020	20.4
2021	12.4
2022	8.5
2023	5.8
Thereafter	9.0
Total	$	80.6

Note 6 — INVENTORIES, NET

Components of Inventories, net are as follows:


(In millions)	As of September 30, 2019		As of December 31, 2018
Finished products	$	169.3	$	174.6
Work in process	8.9		6.4
Raw materials and supplies	103.4		103.6
Inventories, net	$	281.6	$	284.6

Note 7 — PROPERTY, NET

Components of Property, net are as follows:


(In millions)	As of September 30, 2019		As of December 31, 2018
Land and land improvements	$	32.3	$	32.6
Buildings	227.8		226.4
Machinery and equipment	717.0		705.0
Property, gross	977.1		964.0
Less accumulated depreciation and amortization	(591.1)		(579.5)
Property, net	$	386.0	$	384.5

Note 8 — INCOME TAXES

During the three months ended September 30, 2019, the Company’s effective tax rate of 16.3% was below the U.S. federal statutory rate of 21.0% primarily due to lower statutory tax rate differences on foreign earnings, reversal of uncertain tax positions due to tax audit settlements and U.S. research and development tax credits which were partially offset by state taxes, GILTI tax, unfavorable tax effects of foreign valuation allowances and certain other non-deductible items.

During the nine months ended September 30, 2019, the Company’s effective tax rate of 23.1% was above the U.S. federal statutory rate of 21.0% primarily due to state taxes, GILTI tax, unfavorable tax effects of foreign valuation allowances, and certain other non-deductible items, which were partially offset by lower statutory tax rate differences on foreign earnings, reversal of uncertain tax positions due to tax audit settlements, and U.S. research and development tax credits.

During the three and nine months ended September 30, 2018, the Company’s effective tax rate of 3.8% and 13.8%, respectively, was below the U.S. federal statutory rate of 21.0% primarily due to foreign permanent items, impact from lower statutory tax rate differences on foreign earnings, foreign derived-intangible income (FDII) deduction and a favorable impact resulting from the Staff Accounting Bulletin 118 (SAB118) measurement period adjustment associated with the Tax Cuts and Jobs Act (TCJA), which were partially offset by the repatriation of 2018 earnings, state taxes and GILTI tax.

Note 9 — FINANCING ARRANGEMENTS

Debt consists of the following instruments:


As of September 30, 2019 (In millions)	Principal Amount		Unamortized discount and debt issuance cost		Net Debt		Weighted average interest rate
Senior secured revolving credit facility due 2022	$	194.4	$	—	$	194.4	3.82	%
Senior secured term loan due 2026	626.1		10.1		616.0		3.99	%
5.25% senior notes due 2023	600.0		3.9		596.1		5.25	%
Other debt	18.4		—		18.4
Total debt	$	1,438.9	$	14.0	$	1,424.9
Less short-term and current portion of long-term debt	18.6		—		18.6
Total long-term debt, net of current portion	$	1,420.3	$	14.0	$	1,406.3


As of December 31, 2018 (In millions)	Principal Amount		Unamortized discount and debt issuance cost		Net Debt		Weighted average interest rate

Senior secured revolving credit facility due 2022	$	120.1	$	—	$	120.1	3.35	%

Senior secured term loan due 2026	631.0		11.2		619.8		3.80	%
5.25% senior notes due 2023	600.0		5.0		595.0		5.25	%
Other debt	20.7		—		20.7
Total debt	$	1,371.8	$	16.2	$	1,355.6
Less short-term and current portion of long-term debt	19.4		—		19.4
Total long-term debt, net of current portion	$	1,352.4	$	16.2	$	1,336.2

On June 28, 2019, the Company amended and restated its senior secured revolving credit facility to, among other things, add a European line of credit, up to the euro equivalent of $50.0 million, subject to a borrowing base with advances against certain European accounts receivable.

The agreements governing our senior secured revolving credit facility, our senior secured term loan, and the indentures and credit agreements governing other debt, contain a number of customary financial and restrictive covenants that, among other things, limit our ability to: consummate asset sales, incur additional debt or liens, consolidate or merge with any entity or transfer or sell all or substantially all of our assets, pay dividends or make certain other restricted payments, make investments, enter into transactions with affiliates, create dividend or other payment restrictions with respect to subsidiaries, make capital investments and alter the business we conduct. As of September 30, 2019, we were in compliance with all covenants.

The estimated fair value of PolyOne’s debt instruments at September 30, 2019 and December 31, 2018 was $1,468.1 million and $1,316.8 million, respectively. The fair value of PolyOne’s debt instruments was estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities and represent Level 2 measurements within the fair value hierarchy.

Note 10 — SEGMENT INFORMATION

Operating income is the primary measure that is reported to our chief operating decision maker (CODM) for purposes of allocating resources to the segments and assessing their performance. Operating income at the segment level does not include: corporate general and administrative expenses that are not allocated to segments; intersegment sales and profit eliminations; charges related to specific strategic initiatives such as the consolidation of operations; restructuring activities, including employee separation costs resulting from personnel reduction programs, plant closure and phase-in costs; executive separation agreements; share-based compensation costs; asset impairments; environmental remediation costs, along with related gains from insurance recoveries, and other liabilities for facilities no longer owned or closed in prior years; gains and losses on the divestiture of joint ventures and equity investments; actuarial gains and losses associated with our pension and other post-retirement benefit plans; and certain other items that are not included in the measure of segment profit or loss that is reported to and reviewed by our CODM. These costs are included in Corporate and eliminations.

PolyOne has three reportable segments: (1) Color, Additives and Inks; (2) Specialty Engineered Materials; and (3) Distribution. Previously, PolyOne had four reportable segments; however, as a result of the agreement to divest PP&S, we have removed PP&S as a separate operating segment and its results are presented as a discontinued

operation. Historical information has been retrospectively adjusted to reflect these changes. Please see Note 3, Discontinued Operations for additional information.

Segment information for the three and nine months ended September 30, 2019 and 2018 is as follows:


	Three Months Ended September 30, 2019										Three Months Ended September 30, 2018
(In millions)	Sales to External Customers		Total Sales		Operating Income		Sales to External Customers		Total Sales		Operating Income
Color, Additives and Inks	$	244.7	$	246.3	$	38.4	$	259.1	$	261.0	$	41.1
Specialty Engineered Materials	169.6		183.0		20.3		152.6		166.7		18.9
Distribution	291.0		295.9		18.8		317.3		321.8		17.6
Corporate and eliminations	—		(19.9)		(34.4)		—		(20.5)		(28.9)
Total	$	705.3	$	705.3	$	43.1	$	729.0	$	729.0	$	48.7


	Nine Months Ended September 30, 2019										Nine Months Ended September 30, 2018
(In millions)	Sales to External Customers		Total Sales		Operating Income		Sales to External Customers		Total Sales		Operating Income
Color, Additives and Inks	$	772.8	$	777.1	$	120.2	$	800.9	$	805.6	$	128.5
Specialty Engineered Materials	525.7		568.2		67.3		455.9		495.3		60.1
Distribution	905.6		919.8		58.4		947.1		960.6		54.5
Corporate and eliminations	—		(61.0)		(109.6)		—		(57.6)		(94.7)
Total	$	2,204.1	$	2,204.1	$	136.3	$	2,203.9	$	2,203.9	$	148.4


	Total Assets
(In millions)	As of September 30, 2019		As of December 31, 2018
Color, Additives and Inks	$	1,230.7	$	1,243.5
Specialty Engineered Materials	769.0		599.0
Distribution	260.2		249.0
Corporate and eliminations	420.8		377.6
Assets held for sale	$	265.5	$	254.2
Total assets	$	2,946.2	$	2,723.3

Note 11 — COMMITMENTS AND CONTINGENCIES

We have been notified by federal and state environmental agencies and by private parties that we may be a potentially responsible party (PRP) in connection with the environmental investigation and remediation of certain sites. While government agencies frequently assert that PRPs are jointly and severally liable at these sites, in our experience, the interim and final allocations of liability costs are generally made based on the relative contribution of waste. We may also 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 material adverse effect on our financial position, results of operations or cash flows.

In September 2007, the United States District Court for the Western District of Kentucky (Court) in the case of Westlake Vinyls, Inc. v. Goodrich Corporation, et al., held that PolyOne must pay the remediation costs at the former Goodrich Corporation Calvert City facility (now largely owned and operated by Westlake Vinyls, Inc. (Westlake Vinyls)), together with certain defense costs of Goodrich Corporation.

Following the Court rulings, the parties to the litigation agreed to settle all claims regarding past environmental costs incurred at the site. The settlement agreement provides a mechanism to pursue allocation of future remediation costs at the Calvert City site to Westlake Vinyls. We will adjust our accrual, in the future, consistent with any such

future allocation of costs. Additionally, we continue to pursue available insurance coverage related to this matter and recognize gains as we receive reimbursement.

The environmental obligation at the site arose as a result of an agreement between The B.F. Goodrich Company (n/k/a Goodrich Corporation) and our predecessor, The Geon Company, at the time of the initial public offering in 1993. Under the agreement, The Geon Company agreed to indemnify Goodrich Corporation for certain environmental costs at the site. Neither PolyOne nor The Geon Company ever operated the facility.

PolyOne, along with respondents Westlake Vinyls, and Goodrich Corporation, has worked with the United States Environmental Protection Agency (USEPA) to address site contamination. The USEPA issued its Record of Decision (ROD) in September 2018, selecting a remedy consistent with our accrual assumptions, and in April 2019, the USEPA and respondents executed an Administrative Settlement Agreement and Order on Consent to conduct the remedial design. That design is ongoing. Our current reserve of $101.8 million is consistent with the USEPA's estimates contained in the ROD.

On March 13, 2013, PolyOne acquired Spartech Corporation (Spartech). One of Spartech's subsidiaries, Franklin-Burlington Plastics, Inc. (Franklin-Burlington), operated a plastic resin compounding facility in Kearny, New Jersey, located adjacent to the Passaic River. The USEPA requested that companies located in the area of the lower Passaic River, including Franklin-Burlington, cooperate in an investigation of contamination of approximately 17 miles of the lower Passaic River Study Area (LPRSA). In response, Franklin-Burlington and approximately 70 other companies (collectively, the Cooperating Parties) agreed, pursuant to an Administrative Order on Consent (AOC) with the USEPA, to assume responsibility for development of a Remedial Investigation and Feasibility Study of the LPRSA. Franklin-Burlington has not admitted to any liability or agreed to bear any other costs for remediation or natural resource damage.

In 2015, the Cooperating Parties submitted to the USEPA a remedial investigation report and feasibility study for the LPRSA and are currently engaged in technical discussions with the USEPA regarding those documents. Neither of those documents contemplates who is responsible for remediation or how such costs might be allocated to PRPs. In March 2016, the USEPA issued a ROD selecting a remedy for an eight-mile portion of the LPRSA at an estimated and discounted cost of $1.4 billion. On March 31, 2016, the USEPA sent a Notice of Potential Liability to over 100 companies, including Franklin-Burlington, and several municipalities for this eight-mile portion. In September 2016, the USEPA reached an agreement with Occidental Chemical Corporation (OCC), which orders OCC to conduct the remedial design for the lower eight-mile portion of the Passaic River. In September 2017, the USEPA sent a letter to over 80 companies, including Franklin-Burlington, indicating that the USEPA would engage the recipients in an allocation process for the lower eight miles of the LPRSA and has engaged a third-party allocator as part of that process. Along with other parties, Franklin-Burlington is participating in the development of this allocation process with the allocator retained by the USEPA, and this process is expected to continue into at least 2020. On June 30, 2018, OCC, independent of the USEPA, filed suit against 100 named entities, including Franklin-Burlington, seeking contribution for past and future costs associated with the remediation of the lower eight-mile portion of the LPRSA.

Based on the currently available information, we have not identified evidence that Franklin-Burlington contributed any of the primary contaminants of concern to the lower Passaic River. A timeline as to when an allocation of the remedial costs may be determined is not yet known and any allocation to Franklin-Burlington has not been determined. As a result of these uncertainties, we are unable to estimate a liability related to this matter and, as of September 30, 2019, we have not accrued for costs of remediation related to the lower Passaic River.

During the three and nine months ended September 30, 2019, PolyOne recognized $2.4 million and $6.4 million, respectively, of expense related to environmental remediation costs, compared to $3.6 million and $15.4 million recognized during the three and nine months ended September 30, 2018, respectively. During the three and nine months ended September 30, 2019, PolyOne received $4.0 million of insurance recoveries for previously incurred environmental costs, compared to $1.5 million and $3.8 million during the three and nine months ended September 30, 2018, respectively. These expenses and insurance recoveries are included within Cost of sales within our Condensed Consolidated Statements of Income. Insurance recoveries are recognized as a gain when received.

Our Condensed Consolidated Balance Sheets include accruals totaling $113.6 million and $111.9 million as of September 30, 2019 and December 31, 2018, respectively, based on our estimates of probable future environmental expenditures relating to previously contaminated sites. These undiscounted amounts are included in Accrued expenses and other current liabilities and Other non-current liabilities on the accompanying Condensed Consolidated Balance Sheets. The accruals represent our best estimate of probable future costs that we can reasonably estimate, based upon currently available information and technology and our view of the most likely

remedy. Depending upon the results of future testing, completion and results of remedial investigation and feasibility studies, the ultimate remediation alternatives undertaken, changes in regulations, technology development, 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 September 30, 2019. However, such additional costs, if any, cannot be currently estimated.

Note 12 — DERIVATIVES AND HEDGING

We are exposed to market risks, such as changes in foreign currency exchange rates and interest rates. To manage the volatility related to these exposures we may enter into various derivative transactions. We formally assess, designate and document, as a hedge of an underlying exposure, the qualifying derivative instrument that will be accounted for as an accounting hedge at inception. Additionally, we assess both at inception and at least quarterly thereafter, whether the financial instruments used in the hedging transaction are effective at offsetting changes in either the fair values or cash flows of the underlying exposures. In accordance with ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12), that ongoing assessment will be done qualitatively for highly effective relationships.

Net Investment Hedge

During October and December 2018, as a means of mitigating the impact of currency fluctuations on our euro investments in foreign entities, we executed a total of six cross currency swaps, in which we will pay fixed-rate interest in euros and receive fixed-rate interest in U.S. dollars with a combined notional amount of 250.0 million euros and which mature in March 2023. This effectively converts a portion of our U.S. dollar denominated fixed-rate debt to euro denominated fixed-rate debt. That conversion resulted in gains of $2.1 million and $6.2 million for the three and nine months ended September 30, 2019, respectively. These gains were recognized within Interest expense, net within the Condensed Consolidated Statements of Income.

We designated the swaps as net investment hedges of our net investment in our European operations under ASU 2017-12 and applied the spot method to these hedges. The changes in fair value of the derivative instruments that are designated and qualify as hedges of net investments in foreign operations are recognized within Accumulated Other Comprehensive Income (AOCI) to offset the changes in the values of the net investment being hedged. For the three and nine months ended September 30, 2019, gains of $8.1 million and $13.0 million, respectively, were recognized within translation adjustments in AOCI, net of tax.

Derivatives Designated as Cash Flow Hedging Instruments

In August 2018, we entered into two interest rate swaps with a combined notional amount of $150.0 million to manage the variability of cash flows in the interest rate payments associated with our existing LIBOR-based interest payments, effectively converting $150.0 million of our floating rate debt to a fixed rate. We began to receive floating rate interest payments based upon one-month U.S. dollar LIBOR and in return are obligated to pay interest at a fixed rate of 2.732% until November 2022. We have designated these swap contracts as cash flow hedges pursuant to ASC 815, Derivatives and Hedging. The net interest payments accrued each month for these highly effective hedges are reflected in net income as adjustments of interest expense and the remaining change in the fair value of the derivatives is recorded as a component of AOCI. The amount of expense recognized within Interest expense, net in our Condensed Consolidated Statements of Income was $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively. For the three and nine months ended September 30, 2019, losses of $0.4 million and $3.3 million, respectively, were recognized in AOCI, net of tax.

All of our derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy. We determine the fair value of our derivatives based on valuation methods, which project future cash flows and discount the future amounts present value using market based observable inputs, including interest rate curves and foreign currency rates. The fair value of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets is as follows:



(In millions)	Balance Sheet Location	As of September 30, 2019		As of December 31, 2018
Assets
Cross Currency Swaps (Net Investment Hedge)	Other non-current assets	$	19.4	$	2.6
Liabilities
Interest Rate Swap (Cash Flow Hedge)	Other non-current liabilities	$	6.2	$	1.7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Business

We are a premier provider of specialized polymer materials, services and solutions with operations in specialty engineered materials, advanced composites, color and additive systems and polymer distribution. We are also a highly specialized developer and manufacturer of performance enhancing additives, liquid colorants, and fluoropolymer and silicone colorants. Headquartered in Avon Lake, Ohio, we have employees at manufacturing sites and distribution facilities in North America, South America, Europe and Asia. We provide value to our customers through our ability to link our knowledge of polymers and formulation technology with our manufacturing and supply chain capabilities to provide value-added solutions to designers, assemblers and processors of plastics (our customers). When used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our”, “PolyOne” and the “Company” mean PolyOne Corporation and its consolidated subsidiaries.

Highlights and Executive Summary

A summary of PolyOne’s sales, operating income, net income and net income attributable to PolyOne common shareholders follows:


	Three Months Ended September 30,						Nine Months Ended September 30,

(In millions)	2019		2018		2019		2018
Sales	$	705.3	$	729.0	$	2,204.1	$	2,203.9

Operating income	$	43.1	$	48.7	$	136.3	$	148.4

Net income from continuing operations	$	23.6	$	32.5	$	69.3	$	88.9
Income from discontinued operations, net of income taxes	19.5		17.7		54.2		59.4
Net income	$	43.1	$	50.2	$	123.5	$	148.3

Net income attributable to PolyOne common shareholders	$	43.0	$	50.2	$	123.3	$	148.4

Recent Developments

On August 16, 2019, PolyOne entered into a definitive asset purchase agreement with SK Echo Group S.à r.l. (Purchaser). Pursuant to the terms of the purchase agreement, the Purchaser has agreed to acquire the Company’s Performance Products and Solutions business segment (PP&S) for $775 million in cash, subject to a working capital adjustment. The closing of the transaction is expected to occur in the fourth quarter of 2019, subject to the receipt of regulatory approvals and the satisfaction or waiver of customary closing conditions. Previously, Performance Products and Solutions was included as a separate operating segment. As a result of the sale, the Performance Products and Solutions operating segment results are now reported as discontinued operations. Historical information has been retrospectively adjusted to reflect these changes.

Results of Operations — The three and nine months ended September 30, 2019 compared to three and nine months ended September 30, 2018:


	Three Months Ended September 30,						Variances — Favorable (Unfavorable)						Nine Months Ended September 30,				Variances — Favorable (Unfavorable)
(Dollars in millions, except per share data)	2019		2018		Change		% Change		2019		2018		Change		% Change
Sales	$	705.3	$	729.0	$	(23.7)	(3.3)	%	$	2,204.1	$	2,203.9	$	0.2	—	%
Cost of sales	544.8		571.8		27.0		4.7	%	1,700.2		1,720.0		19.8		1.2	%
Gross margin	160.5		157.2		3.3		2.1	%	503.9		483.9		20.0		4.1	%
Selling and administrative expense	117.4		108.5		(8.9)		(8.2)	%	367.6		335.5		(32.1)		(9.6)	%
Operating income	43.1		48.7		(5.6)		(11.5)	%	136.3		148.4		(12.1)		(8.2)	%
Interest expense, net	(15.5)		(15.6)		0.1		0.6	%	(47.6)		(47.2)		(0.4)		(0.8)	%
Debt extinguishment costs	—		—		—		nm		—		(0.1)		0.1		nm
Other income, net	0.6		0.7		(0.1)		(14.3)	%	1.4		2.0		(0.6)		(30.0)	%
Income from continuing operations before income taxes	28.2		33.8		(5.6)		(16.6)	%	90.1		103.1		(13.0)		(12.6)	%
Income tax expense	(4.6)		(1.3)		(3.3)		nm		(20.8)		(14.2)		(6.6)		(46.5)	%
Net income from continuing operations	23.6		32.5		(8.9)		—		69.3		88.9		(19.6)		(22.0)	%
Income from discontinued operations, net of income taxes	19.5		17.7		1.8		10.2	%	54.2		59.4		(5.2)		(8.8)	%
Net income	43.1		50.2		(7.1)		(14.1)	%	123.5		148.3		(24.8)		16.7	%
Net (income) loss attributable to noncontrolling interests	(0.1)		—		(0.1)		nm		(0.2)		0.1		(0.3)		nm
Net income attributable to PolyOne common shareholders	$	43.0	$	50.2	$	(7.2)	(14.3)	%	$	123.3	$	148.4	$	(25.1)	16.9	%

Earnings per common share attributable to PolyOne common shareholders - Basic:
Continuing operations	$	0.31	$	0.41					$	0.89	$	1.11
Discontinued operations	0.25		0.22						0.71		0.74
Total	$	0.56	$	0.63					$	1.60	$	1.85
Earnings per common share attributable to PolyOne common shareholders - Diluted:
Continuing operations	$	0.30	$	0.40					$	0.89	$	1.10
Discontinued operations	0.26		0.22						0.69		0.74
Total	$	0.56	$	0.62					$	1.58	$	1.84

nm - not meaningful

Sales

Sales decreased $23.7 million, or 3.3%, in the three months ended September 30, 2019 compared to the three months ended September 30, 2018 and $0.2 million in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. In the three months ended September 30, 2019, growth from acquisitions of 4% partially offset a 6% decline in organic sales and a 1% reduction due to unfavorable foreign exchange.

Cost of sales

As a percentage of sales, cost of sales decreased from 78.4% in the three months ended September 30, 2018 to 77.2% in the three months ended September 30, 2019 and from 78.0% in the nine months ended September 30, 2018 to 77.1% in the nine months ended September 30, 2019, respectively, primarily as a result of lower environmental remediation costs.

Selling and administrative expense

Selling and administrative expense increased $8.9 million during the three months ended September 30, 2019 compared to the three months ended September 30, 2018 and $32.1 million during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. These increases were primarily driven by costs associated with acquired businesses. See Note 2, Business Combinations to the accompanying condensed consolidated financial statements for further details.

Income taxes

During the three and nine months ended September 30, 2019, the Company’s effective tax rate was 16.3% and 23.1%, respectively, compared to 3.8% and 13.8% for the three and nine months ended September 30, 2018, respectively. The income tax rate increased primarily due to the unfavorable tax effects of foreign valuation allowances and certain other non-deductible items for the three and nine months ended September 30, 2019 and the favorable SEC Staff Accounting Bulletin 118 measurement period adjustment associated with the Tax Cuts and Jobs Act for the three and nine months ended September 30, 2018. Partially offsetting these increases in 2019 were higher U.S. research and development tax credits and the reversal of uncertain tax positions due to tax audit settlements in the three months ended September 30, 2019, and the absence of foreign withholding tax on repatriation of certain foreign earnings that the Company incurred in the nine months ended September 30, 2018.

SEGMENT INFORMATION

PolyOne has three reportable segments: (1) Color, Additives and Inks; (2) Specialty Engineered Materials; and (3) Distribution. Our segments are further discussed in Note 10, Segment Information, to the accompanying condensed consolidated financial statements.

As a result of the agreement to divest PP&S, we have removed PP&S as a separate operating segment and its results are presented as a discontinued operation. Historical information has been retrospectively adjusted to reflect these changes. Discontinued operations are further discussed in Note 3, Discontinued Operations, to the accompanying Consolidated Financial Statements.

Sales and Operating Income — The three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018:


	Three Months Ended September 30,								Variances — Favorable (Unfavorable)								Nine Months Ended September 30,				Variances — Favorable (Unfavorable)
(Dollars in millions)	2019			2018			Change		% Change		2019			2018			Change		% Change
Sales:
Color, Additives and Inks	$	246.3		$	261.0		$	(14.7)	(5.6)	%	$	777.1		$	805.6		$	(28.5)	(3.5)	%
Specialty Engineered Materials	183.0			166.7			16.3		9.8	%	568.2			495.3			72.9		14.7	%
Distribution	295.9			321.8			(25.9)		(8.0)	%	919.8			960.6			(40.8)		(4.2)	%
Corporate and eliminations	(19.9)			(20.5)			0.6		2.9	%	(61.0)			(57.6)			(3.4)		(5.9)	%
Total Sales	$	705.3		$	729.0		$	(23.7)	(3.3)	%	$	2,204.1		$	2,203.9		$	0.2	—	%

Operating income:
Color, Additives and Inks	$	38.4		$	41.1		$	(2.7)	(6.6)	%	$	120.2		$	128.5		$	(8.3)	(6.5)	%
Specialty Engineered Materials	20.3			18.9			1.4		7.4	%	67.3			60.1			7.2		12.0	%
Distribution	18.8			17.6			1.2		6.8	%	58.4			54.5			3.9		7.2	%
Corporate and eliminations	(34.4)			(28.9)			(5.5)		(19.0)	%	(109.6)			(94.7)			(14.9)		(15.7)	%
Total Operating Income	$	43.1		$	48.7		$	(5.6)	(11.5)	%	$	136.3		$	148.4		$	(12.1)	(8.2)	%

Operating income as a percentage of sales:
Color, Additives and Inks	15.6		%	15.7		%	(0.1)		% points		15.5		%	16.0		%	(0.5)		% points
Specialty Engineered Materials	11.1		%	11.3		%	(0.2)		% points		11.8		%	12.1		%	(0.3)		% points
Distribution	6.4		%	5.5		%	0.9		% points		6.3		%	5.7		%	0.6		% points
Total	6.1		%	6.7		%	(0.6)		% points		6.2		%	6.7		%	(0.5)		% points

Color, Additives and Inks

Sales decreased by $14.7 million, or 5.6%, in the three months ended September 30, 2019 compared to the three months ended September 30, 2018. Continued gains in packaging and healthcare end markets, as well as improved pricing and mix, were more than offset by continued weakness in the European and Chinese automotive end markets and a decline in the North American consumer market. Unfavorable foreign exchange reduced sales by 1.7%.

Sales decreased by $28.5 million, or 3.5%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. Gains in packaging and healthcare end markets, as well as improved pricing and mix, were more than offset by weakness in the automotive and consumer end markets. Unfavorable foreign exchange reduced sales by 2.9%.

Operating income decreased $2.7 million in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 and $8.3 million in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018. Unfavorable foreign exchange and the continued softness in the automotive and consumer end markets drove the decline.

Specialty Engineered Materials

Sales increased $16.3 million, or 9.8%, in the three months ended September 30, 2019 compared to the three months ended September 30, 2018, driven by the impact from acquisitions of 17.7% and strength in the composites and North American wire and cable end markets. These gains were partially offset by weakness in the transportation and electronics end markets, particularly in Europe and Asia, and unfavorable foreign exchange of 1.8%.

Sales increased $72.9 million, or 14.7%, in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, due to acquisitions of 17.2% and organic growth driven by composites and gains in the healthcare and wire and cable end markets. These gains were partially offset by unfavorable foreign exchange of 2.8% and weakness in transportation and electronic end markets.

Operating income increased $1.4 million in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 and $7.2 million in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 as a result of acquisitions and margin expansion from improved mix, partially offset by unfavorable foreign exchange.

Distribution

Sales decreased $25.9 million, or 8.0%, in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 and $40.8 million, or 4.2%, in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 as a result of lower selling prices and weaker demand in consumer and auto end markets.

Operating income increased $1.2 million in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 and $3.9 million in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 as a result of improved mix and pricing.

Corporate and Eliminations

Corporate and eliminations increased $5.5 million in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 and $14.9 million in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 primarily as a result of adjustments to estimated earnout liabilities due to better than expected results from recent acquisitions. See Note 2, Business Combinations to the accompanying condensed consolidated financial statements for further details.

Liquidity and Capital Resources

Our objective is to finance our business through operating cash flow and an appropriate mix of debt and equity. By laddering the maturity structure, we avoid concentrations of debt maturities, reducing liquidity risk. We may from time to time seek to retire or purchase our outstanding debt with cash and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. We may also seek to repurchase our outstanding common shares. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved have been and may continue to be material.

The following table summarizes our liquidity as of September 30, 2019 and December 31, 2018:


(In millions)	As of September 30, 2019		As of December 31, 2018
Cash and cash equivalents	$	199.6	$	170.9
Revolving credit availability	242.3		280.7
Liquidity	$	441.9	$	451.6

As of September 30, 2019, approximately 93% of the Company’s cash and cash equivalents resided outside the United States.

Cash Flows

The following describes the significant components of cash flows from operating, investing and financing activities for the nine months ended September 30, 2019 and 2018.

Operating Activities — In the nine months ended September 30, 2019, net cash provided by operating activities was $198.6 million as compared to net cash provided by operating activities of $170.9 million for the nine months ended September 30, 2018, primarily driven by improved working capital.

Working capital as a percentage of sales, which we define as the average accounts receivable, plus average inventory, less average accounts payable, divided by sales, for the third quarter of 2019 increased to 13.0% compared to 11.6% for the third quarter of 2018. This working capital percentage increase is primarily due to the impact of recent acquisitions.

Investing Activities — Net cash used by investing activities during the nine months ended September 30, 2019 of $162.2 million primarily reflects $119.6 million for the acquisition of Fiber-Line and $47.9 million of capital expenditures.

Net cash used by investing activities during the nine months ended September 30, 2018 of $145.9 million reflects $98.6 million for the acquisition of IQAP Masterbatch Group S.L. and $51.2 million of capital expenditures.

Financing Activities — Net cash used by financing activities for the nine months ended September 30, 2019 of $5.8 million primarily reflects $45.7 million of dividends paid and repurchases of our outstanding common shares of $26.9 million offset by net borrowings of $73.9 million under our senior secured revolving credit facility.

Net cash used by financing activities for the nine months ended September 30, 2018 of $83.0 million reflects $53.0 million of repurchases of our outstanding common shares, $42.1 million of dividends paid and repayment of debt of $21.3 million, offset by net borrowings of $37.8 million under our senior secured revolving credit facility.

Debt

As of September 30, 2019, the principal amount of debt totaled $1,438.9 million. Aggregate maturities of the principal amount of debt for the current year, next five years and thereafter, are as follows:


(In millions)
2019	$	12.4
2020	8.1
2021	7.5
2022	201.6
2023	607.0
Thereafter	602.3

Aggregate maturities	$	1,438.9

As of September 30, 2019, we were in compliance with all customary financial and restrictive covenants pertaining to our debt. For additional information regarding our debt, please see Note 9, Financing Arrangements to the accompanying condensed consolidated financial statements.

Contractual Obligations

We have future obligations under various contracts relating to debt and interest payments, operating leases, pension and post-retirement benefit plans and purchase obligations. During the nine months ended September 30, 2019, there were no material changes to these obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2018.

CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

In this Quarterly Report on Form 10-Q, 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. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. They are based on management’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 "will," “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial condition, performance and/or sales. In particular, these include statements relating to future actions; prospective changes in raw material costs, product pricing or product demand; future performance; estimated capital expenditures; results of current and anticipated market conditions and market strategies; sales efforts; expenses; the outcome of contingencies such as legal proceedings and environmental liabilities; and financial results. Factors that could cause actual results to differ materially from those implied by these forward-looking statements include, but are not limited to:

•disruptions, uncertainty or volatility in the credit markets that could adversely impact the availability of credit already arranged and the availability and cost of credit in the future;

•the effect on foreign operations of currency fluctuations, tariffs and other political, economic and regulatory risks;

•changes in polymer consumption growth rates and laws and regulations regarding plastics in jurisdictions where we conduct business;

•changes in global industry capacity or in the rate at which anticipated changes in industry capacity come online;

•fluctuations in raw material prices, quality and supply, and in energy prices and supply;

•production outages or material costs associated with scheduled or unscheduled maintenance programs;

•unanticipated developments that could occur with respect to contingencies such as litigation and environmental matters;

•an inability to raise or sustain prices for products or services;

•an inability to achieve or delays in achieving or achievement of less than anticipated financial benefit from initiatives related to acquisition and integration, working capital reductions, cost reductions and employee productivity goals;

•our ability to pay regular cash dividends and the amounts and timing of any future dividends;

•our ability to identify and evaluate acquisition targets and consummate and integrate acquisitions;

•information systems failures and cyberattacks;

•our ability to successfully complete the sale of PP&S; and

•other factors described in our Annual Report on Form 10-K for the year ended December 31, 2018 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 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 statements, 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 filed with the Securities and Exchange Commission. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to exposures to market risk as reported in our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures

PolyOne’s management, under the supervision of and with the participation of its Chief Executive Officer and its 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 the end of the period covered by this Quarterly Report. Based upon this evaluation, PolyOne’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report, its disclosure controls and procedures were effective.

Changes in internal control over financial reporting

There were no changes in PolyOne’s internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information regarding certain legal proceedings can be found in Note 11, Commitments and Contingencies to the accompanying condensed consolidated financial statements and is incorporated by reference herein.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth information regarding the repurchase of shares of our common shares during the period indicated.


Period	Total Number of Shares Purchased	Weighted Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Number of Shares that May Yet be Purchased Under the Program⁽¹⁾
July 1 to July 31	—	$	—	—	2,107,472
August 1 to August 31	—	—		—	2,107,472
September 1 to September 30	—	—		—	2,107,472
Total	—	$	—	—

⁽¹⁾On August 18, 2008, we announced that our Board of Directors approved a common shares repurchase program authorizing PolyOne to purchase up to 10.0 million of its common shares. On October 11, 2011 and October 23, 2012, we further announced that our Board of Directors had increased the common shares repurchase authorization by an additional 5.3 million common shares and 13.2 million common shares, respectively. On May 16, 2016, we announced that we would increase our common share buyback by 7.3 million to 10.0 million. As of September 30, 2019, approximately 2.1 million common shares remained available for purchase under these authorizations. Purchases of common shares may be made by open market purchases or privately negotiated transactions and may be made pursuant to Rule 10b5-1 plans and accelerated share repurchases. The repurchase program has no time limit and may be suspended or discontinued at any time.

ITEM 6. EXHIBITS

EXHIBIT INDEX


Exhibit No.						Exhibit Description

2.1*						Asset Purchase Agreement, dated August 16, 2019, by and among PolyOne Corporation and SK Echo Group S.à r.l.





31.1						Certification of Robert M. Patterson, 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

31.2						Certification of Bradley C. Richardson, Executive Vice President, 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

32.1						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, Chairman, President and Chief Executive Officer

32.2						Certification pursuant to 18 U.S.C. § 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as signed by Bradley C. Richardson, Executive Vice President, Chief Financial Officer

101.INS						XBRL Instance Document

101.SCH						XBRL Taxonomy Extension Schema Document

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document

101.LAB						XBRL Taxonomy Extension Label Linkbase Document

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Certain exhibits and schedules have been omitted and the Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted exhibits and schedules upon request.

SIGNATURES

Pursuant to the requirements 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.



October 22, 2019			POLYONE CORPORATION

			/s/ Bradley C. Richardson
			Bradley C. Richardson Executive Vice President, Chief Financial Officer


Exhibit A			Transaction Accounting Principles
Exhibit B			Illustrative Calculation of Working Capital
Exhibit C			R&W Binder
Exhibit D			Form of Supply Agreement
Exhibit E			Form of Deed
Exhibit F			Form of Transition Services Agreement
Exhibit G			Form of Local Transfer Agreement
Exhibit H			Form of Contract Manufacturing Agreement
Exhibit I			Form of Intellectual Property Assignment Agreement
Exhibit J			Form of Mexico Lease Agreement
Exhibit K			Form of Long Beach Lease Agreement
Exhibit L			Form of Distribution Agreement
Exhibit M			Form of IP License Agreement
Exhibit N			Form of Avon Lake Lease Agreement
Exhibit O			Form of Employee Lease Agreement



/s/ Robert M. Patterson
Robert M. Patterson
Chairman, President and Chief Executive Officer



/s/ Bradley C. Richardson
Bradley C. Richardson
Executive Vice President, Chief Financial Officer