| POLYONE CORP ITEM 1A RISK FACTORS The following are certain risk factors that could affect our business, results of operations and financial condition |
| These risk factors should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our actual results or financial condition to differ materially from those projected in forward-looking statements |
| Before you invest in us, you should know that making such an investment involves some risks, including the risks we describe below |
| If any of the following risks occur, our business, results of operations or financial condition could be negatively affected |
| Demand for and supply of our products and services may be adversely affected by several factors, some of which we cannot predict or control, that could adversely affect our results of operations |
| Several factors may affect the demand for and supply of our products and services, including: • end of application life-cycle, model change-over or obsolescence issues due to more cost effective alternative materials; • changes in the market acceptance of our products and services; • competition from other polymer and chemical companies; • declines in the general level of industrial production; • declines in general economic conditions; _________________________________________________________________ POLYONE CORPORATION _________________________________________________________________ 7 _________________________________________________________________ [47]Table of Contents • changes in world or regional plastic or PVC consumption growth rates; • changes in capacity in the PVC, VCM or chlor-alkali industries; • changes in environmental regulations that would limit our ability to sell our products and services in specific markets; and • inability to obtain raw materials due to factors such as weather, supplier work stoppages, or plant outages |
| If any of these factors occur, the demand for and supply of our products and services could suffer, which would adversely affect our results of operations |
| Increased raw material and energy costs could reduce our income |
| The primary raw material in our Performance Plastics business segment is PVC resin |
| The majority of our PVC resin is purchased from our Resin and Intermediates segment equity affiliate, OxyVinyls, under a long-term supply contract |
| However, the price of PVC resin fluctuates under this contract in tandem with the industry market prices for PVC resin and the prices of raw materials (primarily ethylene, chlorine and natural gas) that are used to manufacture PVC resin |
| In 2005, the price of natural gas rose significantly and the available supply of raw materials was adversely impacted to a lesser degree primarily due to Hurricanes Rita and Katrina |
| Any increases in the costs of energy will increase our production costs and those of our suppliers |
| Although we attempt to pass on higher raw material and energy costs to our customers, given our competitive markets, it is often not possible to pass on all of these increased costs in a timely manner |
| Our sales and operating results are sensitive to global economic conditions and cyclicality, and could be adversely affected during economic downturns |
| General economic conditions and business conditions of our customers’ industries affect demand for our products |
| The business of most of our customers, particularly our industrial, automotive, construction and electronics customers, are cyclical to varying degrees and have historically experienced periodic downturns |
| Political instability, particularly in the Middle East, may lead to financial and economic instability, which could lead to deterioration in general global economic conditions |
| A downturn in economic conditions could adversely affect the demand for our products and services, which could adversely affect our sales and operating results |
| In addition, downturns in our customers’ industries, even during periods of strong general economic conditions, could adversely affect our sales and operating results |
| Our participation in joint ventures may adversely affect our results of operations |
| We participate in joint ventures both in the United States and Colombia |
| In some joint ventures, such as SunBelt, we are equal partners with another corporation, while in others, such as OxyVinyls, we hold a minority interest |
| We may enter into additional joint ventures in the future |
| The nature of a joint venture requires us to share control with unaffiliated third parties |
| If our joint venture partners do not fulfill their obligations, the joint venture may not be able to operate according to its business plan |
| In that case, our results of operations may be adversely affected or we may be required to increase our level of commitment to the joint venture |
| Also, differences in views among joint venture participants may result in delayed decisions, or failures to agree on major issues could have an adverse effect on our business, results of operations or financial condition |
| OxyVinyls and SunBelt are our two largest equity investments |
| OxyVinyls manufactures PVC resins and chlor-alkali, and SunBelt manufactures chlor-alkali |
| The earnings of each of these partnerships may be significantly affected by changes in the commodity cycle for hydrocarbon feedstocks and for chlor-alkali products |
| The principal factors impacting OxyVinyls’ profitability include the PVC resin spread (which is the PVC resin selling price less the material cost of chlorine and ethylene), caustic soda selling prices, natural gas prices and customer product demand |
| The principal factors impacting SunBelt’s profitability are caustic soda prices, chlorine prices and the cost of electricity |
| If the profitability of either OxyVinyls or SunBelt is adversely affected, we may receive less cash dividends from that partnership or we may choose to make additional cash contributions to that partnership, which could adversely affect our results of operations |
| A major failure of our information systems could harm our business |
| We depend upon integrated information systems to process orders, respond to customer inquiries, manage inventory, purchase, sell and ship goods on a timely basis, maintain cost-efficient operations, prepare financial information and reports, and operate our website |
| We may experience operating problems with our information systems as a result of system failures, viruses, computer “hackers” or other causes |
| Any significant disruption or slowdown of our systems could cause orders to be lost or delayed and could damage our reputation with our customers or cause our customers to cancel orders, which could adversely affect our results of operations |
| Our manufacturing operations are subject to hazards and other risks associated with polymer production and the related storage and transportation of raw materials, products and wastes |
| Our manufacturing operations are subject to the usual hazards and risks associated with polymer production and the related storage _________________________________________________________________ POLYONE CORPORATION _________________________________________________________________ 8 _________________________________________________________________ [48]Table of Contents and transportation of raw materials, products and wastes, including, but not limited to: • explosions, fires, inclement weather and natural disasters; • mechanical failure; • unscheduled downtime; • labor difficulties; • inability to obtain or maintain any required licenses or permits; • interruptions and environmental hazards such as chemical spills, discharges or releases of toxic or hazardous substances or gases into the environment or workplace; and • storage tank leaks or other issues resulting from remedial activities |
| The occurrence of any of these operating problems at our facilities may have a material adverse effect on the productivity and profitability of a particular manufacturing facility, or on our operations as a whole, during and after the period of these operating difficulties |
| These operating problems may also cause personal injury and loss of life, severe damage to or destruction of property and equipment, and environmental damage |
| In addition, individuals could seek damages for alleged personal injury or property damage due to exposure to chemicals at our facilities or to chemicals owned or controlled by us |
| Furthermore, we are subject to present and future claims with respect to workplace exposure, workers’ compensation and other matters |
| Although we maintain property and casualty insurance of the types and in the amounts that we believe are customary for the industry, we are not fully insured against all potential hazards that are incident to our business |
| Extensive environmental, health and safety laws and regulations impact our operations and assets, and compliance with these regulations could adversely affect our results of operations |
| Our operations on and ownership of real property are subject to extensive environmental, health and safety laws and regulations at the national, state and local governmental levels |
| The nature of our business exposes us to risks of liability under these laws and regulations due to the production, storage, transportation, recycling or disposal and/or sale of materials that can cause contamination or personal injury if they are released into the environment or workplace |
| Environmental laws may have a significant effect on the costs of these activities involving raw materials, finished products and wastes |
| We may incur substantial costs, including fines, damages, criminal or civil sanctions, remediation costs, or experience interruptions in our operations for violations of these laws |
| Also, federal and state environmental statutes impose strict, and under some circumstances, joint and several liability for the cost of investigations and remedial actions on any company that generated the waste, arranged for disposal of the waste, transported the waste to the disposal site or selected the disposal site, as well as on the owners and operators of these sites |
| Any or all of the responsible parties may be required to bear all of the costs of clean up, regardless of fault or legality of the waste disposal or ownership of the site, and may also be subject to liability for natural resource damages |
| We have been notified by federal and state environmental agencies and private parties that we may be a potentially responsible party in connection with several sites |
| It is possible that we will be identified as a potentially responsible party at more sites in the future, which could result in our being assessed substantial investigation or clean up costs |
| We also conduct investigations and remediation at some of our active and inactive facilities, and have assumed responsibility for environmental liabilities based on operations at sites formerly owned or operated by our predecessors or by us |
| We accrue costs for environmental matters that have been identified when it is probable that these costs will be required and when they can be reasonably estimated |
| However, accruals for estimated costs, including, among other things, the ranges associated with our accruals for future environmental compliance and remediation, may be too low or we may not be able to quantify the potential costs |
| We may be subject to additional environmental liabilities or potential liabilities that have not been identified |
| We expect that we will continue to be subject to increasingly stringent environmental, health and safety laws and regulations |
| We anticipate that compliance with these laws and regulations will continue to require significant capital expenditures and operating costs, which could adversely affect our results of operations or financial condition |
| We face competition from other polymer and chemical companies, which could adversely affect our sales and financial condition |
| We actively compete with companies that produce the same or similar products, and in some instances with companies that produce different products that are designed for the same end uses |
| We encounter competition in price, delivery, service, performance, product innovation, product recognition and quality, depending on the product involved |
| Because of the polymer and chemical industry consolidation, our competitors may become larger, which could make them more efficient, thereby reducing their cost of materials and permitting them to be more price competitive |
| Increased size could also permit them to operate in wider geographic areas and enhance their ability to compete in other areas such as research and development and customer service, which could also reduce our profitability |
| We expect that our competitors will continue to develop and introduce new and enhanced products, which could cause a decline in the market acceptance of our products |
| In addition, our competi- _________________________________________________________________ POLYONE CORPORATION _________________________________________________________________ 9 _________________________________________________________________ [49]Table of Contents tors could cause a reduction in the selling prices of some of our products as a result of intensified price competition |
| Competitive pressures can also result in the loss of major customers |
| An inability to compete successfully could have an adverse effect on our results of operations, financial condition and cash flows |
| We may also experience increased competition from companies that offer products based on alternative technologies and processes that may be more competitive or better in price or performance, causing us to lose customers and result in a decline in our sales volume and earnings |
| Additionally, some of our customers may already be or may become large enough to justify developing in-house production capabilities |
| Any significant reduction in customer orders as a result of a shift to in-house production could adversely affect our sales and operating profits |
| Our level of indebtedness may adversely affect our business |
| As of December 31, 2005, our debt totaled dlra646dtta5 million, which is 38prca of our total assets |
| This level of indebtedness could have significant consequences, including: • we may need to use a significant portion of our cash flow to repay principal and pay interest on our debt, which would reduce the amount of funds that would be available to finance our operations and other business activities; • our debt level may make us vulnerable to economic downturns or adverse developments in our businesses and markets; and • our debt level may limit our ability to pursue other business opportunities, implement our business strategies or borrow money for operations or capital expenditures in the future |
| We expect to pay our expenses and pay principal and interest on our debt from cash provided by operating activities |
| Our ability to meet these payment obligations will depend upon our future financial performance, which could be affected by financial, business, economic and other factors |
| We cannot control many of these factors, including economic conditions in the markets in which we operate |
| We cannot be certain that future cash provided by operating activities would be sufficient to allow us to pay principal and interest on our debt and meet our other obligations |
| If it is not sufficient, we may be unable to access our revolving credit facility or receivables sale facility as a result of breaching covenants in the agreements that govern our debt |
| We may also be required to refinance all or part of our existing debt, sell assets, borrow more money or issue additional equity |
| We cannot be sure that we will be able to do so on commercially reasonable terms or interest rates |
| Because our operations are conducted worldwide, they are affected by risks of doing business abroad |
| We generate export sales revenue from our operations conducted outside the United States as well as from our US operations |
| Revenue from foreign operations (principally Canada, Mexico, Europe and Asia) amounted to 33prca in 2005, 34prca in 2004 and 35prca in 2003 of our total revenue during these respective periods |
| Long-lived assets of our foreign operations represented 24prca of our total long-lived assets at December 31, 2005, 2004 and 2003 |
| Our international operations are subject to risks of doing business abroad, including but not limited to the following: • fluctuations in currency from devaluation, exchange rates or high inflation; • transportation delays and interruptions; • political and economic instability and disruptions; • expropriation or nationalization of our property; • risk of loss due to civil strife, acts of war, guerilla activities, insurrection and terrorism; • restrictions on the transfer of funds or the ability to pay dividends offshore; • limitations on our ability to invest in local businesses overseas; • the imposition of duties and tariffs; • import and export controls; • changes in governmental policies and regulatory environments; • labor unrest; • disadvantages of competing against companies from countries that are not subject to US laws and regulations, including the Foreign Corrupt Practices Act; • the uncertainty of product acceptance by different cultures; • the risks of divergent business expectations or cultural incompatibility that is inherent in establishing joint ventures with foreign partners; • difficulties in staffing and managing multi-national operations; • limitations on our ability to enforce legal rights and remedies; • reduced protection of intellectual property rights in some countries; • potentially adverse tax consequences; and • other risks arising out of foreign sovereignty over the areas where our operations are conducted |
| _________________________________________________________________ POLYONE CORPORATION _________________________________________________________________ 10 _________________________________________________________________ [50]Table of Contents Any of these events could have an adverse effect on our future international operations by reducing the demand for our products or decreasing the prices at which we can sell our products, which could result in an adverse effect on our business, financial condition or results of operations |
| We may not be able to continue to operate in compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations that we may be subject to |
| In addition, these laws or regulations may be modified in the future, and we may not be able to operate in compliance with those modifications |
| Other increases in operating costs could affect our profitability |
| Scheduled or unscheduled maintenance programs could cause significant production outages, higher costs and/or reduced production capacity at our equity affiliates and suppliers due to the industry in which they operate |
| The inability to achieve or the delay in achieving the anticipated financial benefits from our cost reduction initiatives and employee productivity goals could also affect our future profitability |
| We have a significant amount of goodwill, and any future goodwill impairment charges could adversely impact our results of operations |
| As of December 31, 2005, we had goodwill of dlra315dtta3 million on our balance sheet |
| We completed the annual impairment review required by Statement of Financial Accounting Standards Nodtta 142, “Goodwill and Other Intangible Assets” (SFAS Nodtta 142) during the third quarter of 2005, and determined that there was no impairment |
| However, the occurrence of a potential indicator of impairment, such as a significant adverse change in legal factors or business climate, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of, would require us to perform another valuation analysis, as required under SFAS Nodtta 142, for some or all of our reporting units prior to the next required annual assessment |
| These types of events and the resulting analysis could result in additional charges for goodwill, which could adversely impact our results of operations |
| Lower investment performance by our pension plan assets may require us to increase our pension liability and expense, which may also lead us to accelerate funding of our pension obligations and divert funds from other potential uses |
| Lower investment performance by our pension plan assets or a decline in the stock market could result in an increase in our defined benefit pension plan obligations |
| We cannot predict whether changing economic conditions or other factors will require us to make contributions in excess of our current expectations, diverting funds that we could apply to other uses |
| As a result, we may need to modify our capital expenditure plans to meet our obligations |
| In addition, federal legislation has been proposed that could, if enacted, require us to increase our funding obligations and the premiums that we would pay to the Pension Benefit Guaranty Corporation |
| The impact of this legislation depends upon the requirements of the legislation, if enacted, and the investment performance of our pension plan assets, and could adversely affect our results of operations, financial position and cash flows |
| An inability to collect the remaining balances owed to us from purchasers of our former businesses could affect our financial position |
| In the third quarter of 2004, we sold our Elastomers and Performance Additives business, and in February 2006, we sold our Engineered Films business |
| These transactions included seller financing, where we retained notes receivable for a portion of the purchase price that is owed to us |
| The ability to collect these funds from the purchasers of these businesses depends upon the future results of operations, financial position and cash flows of the purchasers |
| The purchasers may not have the funds necessary to repay the principal and interest due to us on these notes when they become due |
| We have some employee benefit plans that are self-insured |
| Many of our US employees participate in health care plans that we self-insure |
| We maintain a stop-loss insurance policy that covers the cost of certain individually large claims under these plans |
| Actual costs under these plans can be affected by rising medical costs, and are subject to variability depending primarily upon employee enrollment and demographics, the actual number and costs of claims made, and how much the stop-loss insurance we purchase covers the cost of these claims |
| If our cost estimates differ from actual costs, our results of operations and financial condition could be adversely impacted |
| Our business depends upon good relations with our employees |
| We may experience difficulties in maintaining appropriate relations with unions and employees in certain locations |
| About 4prca of our employees at continuing operations are represented by, or are in negotiations to be represented by, labor unions |
| In addition, problems or changes affecting employees in certain locations may affect relations with our employees at other locations |
| The risk of labor disputes, work stoppages or other disruptions in production could adversely affect us |
| If we cannot successfully negotiate or renegotiate collective bargaining agreements or if the negotiations take an excessive amount of time, there may be a heightened risk of a prolonged work stoppage |
| Any work stoppage could have a material adverse effect in the productivity and profitability of a manufacturing facility or in our operations as a whole |
| The guarantee of our SunBelt joint venture’s debt could result in our having to pay the outstanding principal and interest if SunBelt cannot make these payments when due |
| We guaranteed dlra73dtta1 million of SunBelt’s outstanding senior secured notes at December 31, 2005 in connection with the construc- _________________________________________________________________ POLYONE CORPORATION _________________________________________________________________ 11 _________________________________________________________________ [51]Table of Contents tion of a chlor-alkali facility |
| If SunBelt is unable to make the future payments required on this debt as they come due, it could result in our having to make those payments on SunBelt’s behalf, which could adversely impact our financial condition |
| The value of our intangible assets depends upon realizing future cash flows |
| Our intangible assets are primarily non-contractual customer relationships, sales contracts, patents and technology |
| The carrying value of each of these assets is reduced, if necessary, to its estimated net future cash flows at the end of each year, or more often if an indicator of impairment exists |
| There is no assurance that the future expected cash flows will be realized, which could negatively affect the carrying value or recoverability of these assets |