PolyOne 2009 Annual Report

POLYONE CORPORATION
buyer or similar specific transactions, we believe that the use of
these two methods provides reasonable estimates of the reporting
units’ fair value and that these estimates are consistent with how
we believe a market participant would view the fair value of each of
the reporting units. Estimates of fair value using these methods
reflects a number of factors, including projected future operating
results and business plans, economic projections, anticipated
future cash flows, comparable marketplace data within a consistent
industry grouping and the cost of capital. There are inherent uncertainties,
however, related to these factors and to management’s
judgment in applying them to this analysis. Nonetheless, management
believes that the combination of these two methods provides
a reasonable approach to estimate the fair value of our reporting
units.
The market approach is used to estimate fair value by applying
sales and earnings multiples (derived from comparable publiclytraded
companies with similar investment characteristics of the
reporting unit) to the reporting unit’s operating performance
adjusted for non-recurring items. Management believes that this
approach is appropriate as it provides an estimate of fair value
reflecting multiples associated with entities with operations and
economic characteristics comparable to our reporting units. The key
estimates and assumptions that are used to determine fair value
under this approach include trailing twelve-month earnings before
interest, taxes, depreciation and amortization (EBITDA) and projected
EBITDA based on consensus estimates as reported by a
third-party resource, which would approximate a market participant’s
view, to determine the market multiples to calculate the
enterprise value.
The income approach is based on projected future debt-free
cash flows discounted to present value using factors that consider
the timing and risk of the future cash flows. Management believes
that this approach is appropriate because it provides a fair value
estimate based upon the reporting unit’s expected long-term operating
and cash flow performance. This approach also mitigates the
impact of cyclical downturns that occur in the reporting unit’s
industry. The income approach is based on a reporting unit’s projection
of operating results and cash flows discounted to present
value using a weighted-average cost of capital. The projection is
based upon management’s best estimates of projected economic
and market conditions over the related period including growth
rates, estimates of future expected changes in operating margins
and cash expenditures. Other significant estimates and assumptions
include terminal value growth rates, terminal value margin
rates, future capital expenditures and changes in future working
capital requirements based on management projections.
Indefinite-lived intangible assets consist of a tradename,
acquired as part of the January 2008 acquisition of GLS, which
is tested annually for impairment. The fair value of the trade name is
calculated using a “relief from royalty payments” methodology. This
approach involves two steps (1) estimating reasonable royalty rates
for the tradename and (2) applying this royalty rate to a net sales
stream and discounting the resulting cash flows to determine fair
value. This fair value is then compared with the carrying value of the
tradename. Other finite-lived intangible assets, which consist primarily
of non-contractual customer relationships, sales contracts,
patents and technology, are amortized over their estimated useful
lives. The remaining lives range up to 15 years.
In accordance with the provisions of FASB ASC Topic 360,
Property, Plant, and Equipment, we assess the fair value of our longlived
assets on a non-recurring basis. In 2009, we recorded impairment
charges totaling approximately $8.6 million for certain of the
facilities that were closed as a result of the previously mentioned
plant phaseout activities. Our estimates of fair value are based
primarily on estimates from broker opinions of value and appraisals
of the assets. As these fair value measurements are based on
significant unobservable inputs, such as recent sales of comparable
properties, they are classified within Level 3 of the fair value
hierarchy.
Note 20 — BUSINESS COMBINATIONS
Acquisition
On December 23, 2009 we acquired substantially all of the
assets of NEU, a specialty healthcare engineered materials provider,
for a cash purchase price of $11.5 million paid at close and an
earnout of up to $0.5 million payable in 2011, resulting in goodwill
of $4.5 million and $5.9 million of identifiable intangible assets.
NEU had sales of $7.7 million for the year ended December 31,
2008. Our purchase price allocation is preliminary and may require
subsequent adjustment.
On January 2, 2008, we acquired 100% of the outstanding
capital stock of GLS, a global provider of specialty TPE compounds
for consumer, packaging and medical applications, for a cash purchase
price of $148.9 million including acquisition costs, net of
cash received. GLS, with sales of $128.8 million for the year ended
December 31, 2007, has been fully integrated into the Specialty
Engineered Materials segment. This acquisition complements our
global engineered materials business portfolio and accelerates our
shift to specialization. The combination of GLS’s specialized TPE
offerings, compounding expertise and brand, along with our extensive
global infrastructure and commercial presence offers customers:
enhanced technologies; a broader range of products, services
and solutions; and expanded access to specialized, high-growth
markets around the globe. The combinations of these factors are
the drivers behind the excess of the purchase price over the fair
value of the tangible assets and liabilities acquired.
Note 21 — SHAREHOLDERS’ EQUITY
In August 2008, our Board of Directors approved a stock repurchase
program authorizing us, depending upon market conditions
and other factors, to repurchase up to 10.0 million shares of our
common stock, in the open market or in privately negotiated
transactions.
During 2009, no shares were repurchased under this program.
During 2008, we repurchased 1.25 million shares of common stock
under this program at an average price of $7.12 per common share
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