PolyOne 2009 Annual Report

Results of Operations
Variances—Favorable (Unfavorable)
2009 versus 2008 2008 versus 2007
%
Change
%
Change
(Dollars in millions, except per share data) 2009 2008 2007 Change
Change
Sales $2,060.7 $2,738.7 $2,642.7 $(678.0) (24.8)% $ 96.0 3.6%
Cost of sales 1,720.2 2,442.1 2,381.7 721.9 29.6% (60.4) (2.5)%
Gross margin 340.5 296.6 261.0 43.9 14.8% 35.6 13.6%
Selling and administrative 272.3 287.1 254.8 14.8 5.2% (32.3) (12.7)%
Impairment of goodwill 5.0 170.0 — 165.0 NM (170.0) NM
Income from equity affiliates and minority interest 35.2 31.2 27.7 4.0 12.8% 3.5 12.6%
Operating income (loss) 98.4 (129.3) 33.9 227.7 NM (163.2) NM
Interest expense, net (34.3) (37.2) (46.9) 2.9 7.8% 9.7 20.7%
Premium on early extinguishment of long-term debt — — (12.8) — — 12.8 100.0%
Other expense, net (9.6) (4.6) (6.6) (5.0) (108.7)% 2.0 30.3%
Income (loss) before income taxes 54.5 (171.1) (32.4) 225.6 NM (138.7) NM
Income tax benefit (expense) 13.3 (101.8) 43.8 115.1 NM (145.6) NM
Net income (loss) $ 67.8 $ (272.9) $ 11.4 $ 340.7 NM $(284.3) NM
Basic and diluted (loss) earnings per common share: $ 0.73 $ (2.94) $ 0.12
NM — Not meaningful
Sales
Sales decreased in 2009 as compared to 2008 due to a decrease
in volume of 21.6% and the unfavorable impact of foreign exchange
on sales of approximately 3%. All operating segments experienced a
decline in sales in 2009. The end markets most impacted globally
were transportation and building and construction.
The increase in sales in 2008, as compared to 2007, includes
6.3% from acquisitions and other, 1.7% due to the favorable impact
of foreign exchange, and a 9.7% favorable impact from price and
mix, which offset an unfavorable impact of 14.1% due to the decline
in volume. The impact of the decline in volume was evident across
all of our operating segments but of greatest magnitude in our
businesses tied to the North American building and construction
and transportation end markets.
Cost of Sales
These costs include raw materials, plant conversion, distribution,
environmental remediation and plant related restructuring charges.
As a percentage of sales, these costs declined to 83.5% of sales in
2009 as compared to 89.2% in 2008. Cost of sales in 2009
includes a gain of $23.9 million associated with the reimbursement
of previously incurred environmental costs. Charges related to
environmental remediation and plant related restructuring were
$36.1 million in 2009 as compared to $44.9 million in 2008.
The benefit of LIFO, primarily related to inventory reductions in
the United States, favorably impacted cost of sales by $18.3 million,
as compared to $4.6 million in 2008. Additionally, lower raw material
costs and the realization of restructuring savings favorably
impacted cost of goods sold in 2009 as compared to 2008.
As a percentage of sales, these costs declined to 89.2% of
sales in 2008 as compared to 90.1% in 2007. GLS contributed
0.5 percentage points of the improvement reflecting the margin
impact of its specialty sales mix. Charges related to environmental
remediation and plant related restructurings were $44.9 million in
2008 as compared to $50.2 million in 2007. The remaining
decrease in cost of sales is due to the realization of pricing initiatives
and sales mix improvements partially offset by higher raw
material costs.
Selling and Administrative
These costs include selling, technology, administrative functions
and corporate and general expenses. Selling and administrative
costs decreased $14.8 million, or 5.2%, in 2009 as compared to
2008. Favorably impacting selling and administrative costs was
$21.9 million of curtailment gains, $7.6 million less employee
separation and plant phase-out costs, a decrease in insurance
and bad debt expense and savings from our restructuring activities.
These favorable items were partially offset by increased pension
and incentive compensation expenses.
During 2008, selling and administrative costs increased
$32.3 million, or 12.7%, as compared to 2007. Selling and administrative
costs was negatively impacted by an increase of $9.6 million
for employee separation and approximately $17.5 million of
incremental costs associated with GLS, which was acquired in
January of 2008.
Impairment of Goodwill
During the fourth quarter of 2008, we identified indicators of
potential impairment and evaluated the carrying values of goodwill
and other intangible and long-lived assets. Due to the extensive
work involved in performing the related asset appraisals, we initially
recognized a preliminary estimate of the impairment loss of
$170.0 million in 2008. Upon completion of the analysis in the
POLYONE CORPORATION
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