AVNT 10-Q Quarterly Report Sept. 30, 2010

AVIENT CORP

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10-Q 1 l40891e10vq.htm FORM 10-Q e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2010


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

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

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.

þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). o Yes o No

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


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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

The number of outstanding shares of the registrant’s common stock, $0.01 par value, as of November 2, 2010 was 93,546,206.

TABLE OF CONTENTS


Part I — Financial Information
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
Part II — Other Information
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 6. Exhibits
SIGNATURE
EXHIBIT INDEX
EX-4.1
EX-4.2
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Part I — Financial Information

Item 1. Financial Statements

PolyOne Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In millions, except per share data)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
				Adjusted						Adjusted
	2010			2009			2010			2009
Sales	$	680.8		$	548.3		$	2,004.1		$	1,508.2

Cost of sales		569.6			442.3			1,662.7			1,270.5

Gross margin		111.2			106.0			341.4			237.7
Selling and administrative		77.1			56.3			224.0			203.6
Adjustment to impairment of goodwill		—			—			—			5.0
Income from equity affiliates		10.5			5.2			19.8			28.6

Operating income		44.6			54.9			137.2			57.7
Interest expense, net		(7.5	)		(8.5	)		(23.2	)		(26.1	)
Debt extinguishment costs		(29.4	)		—			(29.4	)		—
Other expense, net		(0.3	)		(1.2	)		(2.2	)		(8.5	)

Income before income taxes		7.4			45.2			82.4			23.1
Income tax (expense) benefit		(6.4	)		3.1			(17.3	)		5.6

Net income (loss)	$	1.0		$	48.3		$	65.1		$	28.7


Earnings per common share:
Basic earnings	$	0.01		$	0.52		$	0.70		$	0.31
Diluted earnings	$	0.01		$	0.51		$	0.68		$	0.31

Weighted-average shares used to compute earnings per share:
Basic		93.1			92.4			92.8			92.4
Diluted		96.3			93.9			95.7			93.0

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In millions)


	(Unaudited)		Adjusted
	September 30,		December 31,
	2010		2009
Assets
Current assets:
Cash and cash equivalents	$	307.9	$	222.7
Accounts receivable, net		349.4		274.4
Inventories		234.3		183.7
Other current assets		28.1		38.0

Total current assets		919.7		718.8
Property, net		368.1		392.4
Investment in equity affiliates and nonconsolidated subsidiary		12.4		5.8
Goodwill		163.7		163.5
Other intangible assets, net		68.7		71.7
Deferred income tax assets		6.5		8.1
Other non-current assets		75.9		55.7

Total assets	$	1,615.0	$	1,416.0


Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt	$	19.9	$	19.9
Short-term debt		—		0.5
Accounts payable		310.2		238.3
Accrued expenses		135.4		117.0

Total current liabilities		465.5		375.7
Long-term debt		434.0		389.2
Post-retirement benefits other than pensions		19.7		21.8
Pension benefits		162.0		173.0
Other non-current liabilities		110.7		98.6
Shareholders’ equity		423.1		357.7

Total liabilities and shareholders’ equity	$	1,615.0	$	1,416.0

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)


	Nine Months Ended
	September 30,
				Adjusted
	2010			2009
Operating Activities
Net income	$	65.1		$	28.7
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		41.5			49.8
Deferred income tax provision		4.1			9.4
Debt extinguishment costs		27.7			—
Provision for doubtful accounts		2.0			3.0
Stock compensation expense		3.2			2.2
Adjustment to impairment of goodwill		—			5.0
Asset write-downs and impairment charges		0.4			7.7
Companies carried at equity:
Income from equity affiliates		(19.8	)		(28.6	)
Dividends and distributions received		11.6			27.6
Change in assets and liabilities, net of acquisition:
Increase in accounts receivable		(78.0	)		(20.2	)
(Increase) decrease in inventories		(51.8	)		55.0
Increase in accounts payable		73.1			97.8
Decrease in sale of accounts receivable		—			(14.2	)
Increase (decrease) in accrued expenses and other		3.3			(6.3	)

Net cash provided by operating activities		82.4			216.9

Investing Activities
Capital expenditures		(18.9	)		(15.9	)
Proceeds from sale of equity affiliate and other assets		7.8			—

Net cash used by investing activities		(11.1	)		(15.9	)

Financing Activities
Change in short-term debt		(0.4	)		(5.5	)
Issuance of long-term debt, net of issuance costs		353.6			—
Repayment of long-term debt		(316.0	)		—
Payment of debt extinguishment costs		(27.7	)		—
Proceeds from exercise of stock options		3.9			—

Net cash provided (used) by financing activities		13.4			(5.5	)

Effect of exchange rate changes on cash		0.5			1.2

Increase in cash and cash equivalents		85.2			196.7
Cash and cash equivalents at beginning of period		222.7			44.3

Cash and cash equivalents at end of period	$	307.9		$	241.0

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

PolyOne Corporation and Subsidiaries
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, consisting of normal recurring accruals 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, 2009 of PolyOne Corporation.

Operating results for the three months and nine months ended September 30, 2010 are not necessarily indicative of the results that may be attained in subsequent periods or for the year ending December 31, 2010.

Note 2 — Change in Accounting Principle

Effective January 1, 2010, we elected to change our method of valuing inventories for certain U.S. businesses to the first-in, first-out (FIFO) method, while in prior years, these inventories were valued using the last-in, first-out (LIFO) method. As a result of this change, all inventories are valued using the FIFO method. Inventories accounted for under the FIFO method as a percent of total consolidated inventories was 76%, with the remainder determined on a LIFO basis at December 31, 2009. We believe the FIFO method is preferable as it conforms the inventory costing methods for all of our inventories to a single method and improves comparability with our industry peers. The FIFO method also better reflects current acquisition cost of those inventories on our consolidated balance sheets. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 250, Accounting Changes and Error Corrections , all prior periods presented have been adjusted to apply the new method retrospectively. The effect of the change in our inventory costing method increased our inventory balance and retained earnings by $42.4 million as of January 1, 2009. There were no tax effects to retained earnings for any of the periods presented below due to the fact that we have a valuation allowance recorded against our net deferred tax assets in the United States.

We have presented the effects of the change in accounting principle for inventory costs on our consolidated financial statements for 2010 and 2009 below. We have condensed the comparative financial statements for financial statement line items that were not affected by the change in accounting principle.

Condensed Consolidated Statements of Operations


	Three months ended September 30, 2010									Three months ended September 30, 2009
	Computed			Change			Reported			Originally			Change
(In millions, except per share data)	under LIFO			to FIFO			under FIFO			Reported			to FIFO			Adjusted
Sales	$	680.8		$	—		$	680.8		$	548.3		$	—		$	548.3
Cost of sales		570.4			(0.8	)		569.6			441.0			1.3			442.3

Gross margin		110.4			0.8			111.2			107.3			(1.3	)		106.0
Selling and administrative		77.1			—			77.1			56.3			—			56.3
Income from equity affiliates		10.5			—			10.5			5.2			—			5.2

Operating income		43.8			0.8			44.6			56.2			(1.3	)		54.9
Interest and other expense, net		(37.2	)		—			(37.2	)		(9.7	)		—			(9.7	)

Income before income taxes		6.6			0.8			7.4			46.5			(1.3	)		45.2
Income tax expense		(6.4	)		—			(6.4	)		3.1			—			3.1

Net income	$	0.2		$	0.8		$	1.0		$	49.6		$	(1.3	)	$	48.3


Earnings per common share:
Basic earnings per common share	$	0.00		$	0.01		$	0.01		$	0.54		$	(0.02	)	$	0.52
Diluted earnings per common share	$	0.00		$	0.01		$	0.01		$	0.53		$	(0.02	)	$	0.51


	Nine months ended September 30, 2010									Nine months ended September 30, 2009
	Computed			Change			Reported			Originally			Change
(In millions, except per share data)	under LIFO			to FIFO			under FIFO			Reported			to FIFO			Adjusted
Sales	$	2,004.1		$	—		$	2,004.1		$	1,508.2		$	—		$	1,508.2
Cost of sales		1,663.8			(1.1	)		1,662.7			1,255.4			15.1			1,270.5

Gross margin		340.3			1.1			341.4			252.8			(15.1	)		237.7
Selling and administrative		224.0			—			224.0			203.6			—			203.6
Other income, net		19.8			—			19.8			23.6			—			23.6

Operating income		136.1			1.1			137.2			72.8			(15.1	)		57.7
Interest and other expense, net		(54.8	)		—			(54.8	)		(34.6	)		—			(34.6	)

Income before income taxes		81.3			1.1			82.4			38.2			(15.1	)		23.1
Income tax expense		(17.3	)		—			(17.3	)		5.6			—			5.6

Net income	$	64.0		$	1.1		$	65.1		$	43.8		$	(15.1	)	$	28.7


Earnings per common share:
Basic earnings per common share	$	0.69		$	0.01		$	0.70		$	0.47		$	(0.16	)	$	0.31
Diluted earnings per common share	$	0.67		$	0.01		$	0.68		$	0.47		$	(0.16	)	$	0.31

Condensed Consolidated Balance Sheets


	September 30, 2010
	Computed		Change		Reported
(In millions)	under LIFO		to FIFO		under FIFO
Assets
Current assets:
Inventories	$	209.1	$	25.2	$	234.3
Other current assets		685.4		—		685.4

Total current assets		894.5		25.2		919.7
Other non-current assets		695.3		—		695.3

Total assets	$	1,589.8	$	25.2	$	1,615.0


Liabilities and Shareholders’ Equity
Current liabilities	$	465.5	$	—	$	465.5
Non-current liabilities		726.4		—		726.4
Shareholders’ equity		397.9		25.2		423.1

Total liabilities and shareholders’ equity	$	1,589.8	$	25.2	$	1,615.0


	December 31, 2009
	Originally		Change
(In millions)	Reported		to FIFO		Adjusted
Assets
Current assets:
Inventories	$	159.6	$	24.1	$	183.7
Other current assets		535.1		—		535.1

Total current assets		694.7		24.1		718.8
Other non-current assets		697.2		—		697.2

Total assets	$	1,391.9	$	24.1	$	1,416.0


Liabilities and Shareholders’ Equity
Current liabilities	$	375.7	$	—	$	375.7
Non-current liabilities		682.6		—		682.6
Shareholders’ equity		333.6		24.1		357.7

Total liabilities and shareholders’ equity	$	1,391.9	$	24.1	$	1,416.0

Condensed Consolidated Statement of Cash Flows


	Nine months ended September 30, 2010
	Computed			Change			Reported
(In millions)	under LIFO			to FIFO			under FIFO
Operating Activities
Net income	$	64.0		$	1.1		$	65.1
Adjustments to reconcile net income to net cash provided by operating activities:
Other adjustments, net		70.7			—			70.7
Change in assets and liabilities, net of acquisition:
Increase in inventories		(50.7	)		(1.1	)		(51.8	)
Decrease in other		(1.6	)		—			(1.6	)

Net cash provided by operating activities		82.4			—			82.4
Net cash used by investing activities		(11.1	)		—			(11.1	)
Net cash provided by financing activities		13.4			—			13.4
Effect of exchange rate changes on cash		0.5			—			0.5

Increase in cash and cash equivalents		85.2			—			85.2
Cash and cash equivalents at beginning of period		222.7			—			222.7

Cash and cash equivalents at end of period	$	307.9			—		$	307.9


	Nine months ended September 30, 2009
	Originally			Change
(In millions)	Reported			to FIFO			Adjusted
Operating Activities
Net income	$	43.8		$	(15.1	)	$	28.7
Adjustments to reconcile net income to net cash provided by operating activities:
Other adjustments, net		76.1			—			76.1
Change in assets and liabilities, net of acquisition:
Decrease in inventories		39.9			15.1			55.0
Increase in other		57.1			—			57.1

Net cash provided by operating activities		216.9			—			216.9
Net cash used by investing activities		(15.9	)		—			(15.9	)
Net cash provided by financing activities		(5.5	)		—			(5.5	)
Effect of exchange rate changes on cash		1.2			—			1.2

Increase in cash and cash equivalents		196.7			—			196.7
Cash and cash equivalents at beginning of period		44.3			—			44.3

Cash and cash equivalents at end of period	$	241.0			—		$	241.0

Note 3 — Goodwill

Goodwill as of September 30, 2010 and December 31, 2009, by operating segment, was as follows:


	September 30,		December 31,
(In millions)	2010		2009
Global Specialty Engineered Materials	$	82.5	$	82.4
Global Color, Additives and Inks		72.2		72.1
Performance Products and Solutions		7.4		7.4
PolyOne Distribution		1.6		1.6

Total	$	163.7	$	163.5

Note 4 — Inventories

As discussed in Note 2, Change in Accounting Principle , effective January 1, 2010, we elected to change our costing method for certain inventories. We applied this change in accounting principle by adjusting all prior periods presented retrospectively. Components of inventories are as follows:


			Adjusted
	September 30,		December 31,
(In millions)	2010		2009
At FIFO cost:
Finished products	$	146.5	$	108.4
Work in process		2.8		2.4
Raw materials and supplies		85.0		72.9

	$	234.3	$	183.7

Note 5 — Property


	September 30,			December 31,
(In millions)	2010			2009
Land and land improvements	$	41.6		$	40.7
Buildings		281.0			277.0
Machinery and equipment		916.1			916.5

		1,238.7			1,234.2
Less accumulated depreciation and amortization		(870.6	)		(841.8	)

	$	368.1		$	392.4

Note 6 — Income Taxes

Income tax expense was $6.4 million for the third quarter of 2010 compared to a benefit of $3.1 million in the third quarter of 2009. For the first nine months of 2010, we recognized income tax expense of $17.3 million compared to a benefit of $5.6 million in the first nine months of 2009. We record our interim provision for income taxes based on our estimated annual effective tax rate as well as certain items discrete to the current period. Our interim provision as well as our estimated annual effective tax rate is impacted by a number of factors including our U.S. federal and state and foreign income tax loss carry forwards and our ability to use them as well as changes to our unrealized tax benefits.

We increased existing valuation allowances against our deferred tax assets by $5.1 million in the third quarter of 2010 as a result of a pre-tax loss in the United States during that period primarily related to debt extinguishment costs. We decreased the same valuation allowance by $11.4 million in the first nine months of 2010 as a result of generating positive pre-tax income during that period. The related non-cash income tax expense was $3.0 million and a benefit of $12.1 million in the third quarter and first nine months of 2010, respectively, and related to various U.S. federal, state, local, and foreign deferred tax assets. Also, during the third quarter and first nine months of 2010, we recognized $1.9 million and $2.5 million, respectively, of income tax expense, including the related interest and penalties, associated with

uncertain tax positions. Our effective tax rates for the third quarter and first nine months of 2010 reflect these items and the impact of foreign earnings which are taxed at rates that differ from the United States.

We decreased existing valuation allowances against our deferred tax assets by $28.4 million in the third quarter of 2009 and $34.6 million for the first nine months of 2009. This non-cash benefit to income tax expense related to various U.S. federal, state, local and foreign deferred tax assets. Also, during the third quarter and first nine months of 2009, we recognized $1.5 million of income tax expense and $1.5 million of income tax benefit, respectively, including related interest and penalties, associated with uncertain tax positions.

We recognize interest and penalties related to uncertain income tax items in the provision for income taxes.

Note 7 — Investment in Equity Affiliates

The results of operations of SunBelt Chlor-Alkali Partnership (SunBelt) are included in the SunBelt Joint Venture segment. We own 50% of SunBelt.

The following table presents SunBelt’s summarized financial results for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in millions)	2010		2009		2010		2009
Net sales	$	51.6	$	36.9	$	120.6	$	135.1
Operating income	$	21.3	$	11.6	$	41.0	$	59.2
Partnership income as reported by SunBelt	$	19.3	$	9.6	$	35.1	$	53.2

Equity affiliate earnings recorded by PolyOne	$	9.7	$	4.8	$	17.6	$	26.6


	September 30,		December 31,
(In millions)	2010		2009
Current assets	$	45.7	$	16.1
Non-current assets		82.5		94.1

Total assets		128.2		110.2


Current liabilities		23.4		21.4
Non-current liabilities		85.3		85.3

Total liabilities		108.7		106.7

Partnership capital	$	19.5	$	3.5

Other investments in equity affiliates are discussed below.

We own 50% of BayOne Urethane Systems, L.L.C. (BayOne), which is included in the Global Color, Additives and Inks operating segment. Through its disposition on October 13, 2009, the former Geon Polimeros Andinos equity affiliate (owned 50%) was included in the Performance Products and Solutions operating segment. Combined summarized financial information for these equity affiliates follows.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(Dollars in millions)	2010		2009		2010		2009
As reported by other equity affiliates:
Net sales	$	15.6	$	20.9	$	42.7	$	63.3
Operating income	$	1.7	$	1.2	$	4.5	$	4.8
Partnership income as reported by other equity affiliates	$	1.6	$	1.0	$	4.4	$	4.1

Equity affiliate earnings recorded by PolyOne	$	0.8	$	0.4	$	2.2	$	2.0

Note 8 — Weighted-Average Shares Used in Computing Earnings Per Share


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2010		2009		2010		2009
Weighted-average shares outstanding — basic		93.1		92.4		92.8		92.4


Weighted-average shares — diluted:
Weighted-average shares outstanding — basic		93.1		92.4		92.8		92.4
Plus dilutive impact of stock options and awards		3.2		1.5		2.9		0.6

Weighted-average shares — diluted		96.3		93.9		95.7		93.0

Outstanding stock options with exercise prices greater than the average price of the common shares and certain other awards are anti-dilutive and are not included in the computation of diluted earnings per share. For the three months and nine months ended September 30, 2010, 1.1 million and 1.0 million, respectively, of these options and awards were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. For the three months and nine months ended September 30, 2009, 5.5 million and 5.9 million, respectively, were excluded from the computation of the diluted loss per share.

Note 9 — Employee Separation and Plant Phaseout

Management has undertaken certain restructuring initiatives to improve profitability, and as a result, we have incurred employee separation and plant phaseout costs. Employee separation and plant phaseout costs are reflected on the line Corporate and eliminations in Note 13, Segment Information . For further discussion of these initiatives, see Note 3, Employee Separation and Plant Phaseout , to the consolidated financial statements and the accompanying notes included in PolyOne’s Annual Report on Form 10-K for the year ended December 31, 2009.

A summary of total employee separation and plant phaseout costs for the three months and nine months ended September 30, 2010 and 2009, including where the charges are recorded in the accompanying condensed consolidated statements of operations, follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In millions)	2010		2009		2010		2009
Cost of sales	$	0.8	$	10.5	$	1.1	$	23.2
Selling and administrative		0.5		1.6		0.8		2.0

Total employee separation and plant phaseout	$	1.3	$	12.1	$	1.9	$	25.2

Cash payments during the three months ended September 30, 2010 and 2009 were $1.8 million and $6.6 million, respectively. Cash payments during the nine months ended September 30, 2010 and 2009 were $6.2 million and $26.9 million, respectively. Included in Cost of sales for the nine months ended September 30, 2010 were charges of $0.2 million for accelerated depreciation on assets related to these restructuring initiatives, all of which were recognized during the first quarter. For the three months and nine months ended September 30, 2009, charges of $2.1 million and $7.5 million, respectively, related to accelerated depreciation were included in Cost of sales .

The following table details the changes to the reserves associated with these restructuring initiatives for the nine months ended September 30, 2010:


	Employee			Plant Phaseout Costs
	Separation						Asset
(Dollars in millions)	Costs			Cash Closure			Write-downs			Total
Realignment of certain manufacturing plants
Balance at January 1, 2010	$	3.0		$	1.7		$	—		$	4.7
Charge		1.0			0.6			0.3			1.9
Utilized		(3.3	)		(2.4	)		(0.3	)		(6.0	)
Impact of foreign currency translation		—			0.1			—			0.1

Balance at September 30, 2010	$	0.7		$	—		$	—		$	0.7

We do not expect to incur significant expenses associated with these activities in the remainder of 2010.

Note 10 — Employee Benefit Plans

Components of defined benefit pension plan costs are as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In millions)	2010			2009			2010			2009
Service cost	$	0.4		$	0.4		$	1.2		$	1.1
Interest cost		7.5			8.4			22.3			24.1
Expected return on plan assets		(6.6	)		(6.3	)		(19.6	)		(17.1	)
Curtailment gain		—			—			—			(0.5	)
Amortization of unrecognized losses, transition obligation and prior service costs		2.6			1.7			7.6			10.2

	$	3.9		$	4.2		$	11.5		$	17.8

Components of postretirement health care plan benefit costs are as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In millions)	2010			2009			2010			2009
Service cost	$	—		$	0.1		$	—		$	0.2
Interest cost		0.4			1.1			1.1			4.0
Curtailment gain		—			(21.1	)		—			(21.1	)
Amortization of unrecognized losses, transition obligation and prior service costs		(4.2	)		(2.4	)		(12.6	)		(4.2	)

	$	(3.8	)	$	(22.3	)	$	(11.5	)	$	(21.1	)

On January 15, 2009, our Board of Directors approved and adopted changes to the Geon Pension Plan (Geon Plan), the Benefit Restoration Plan (BRP), the voluntary retirement savings plan (RSP) and the Supplemental Retirement Benefit Plan (SRP). Effective March 20, 2009, the amendments permanently froze future benefit accruals and provided that participants will not receive credit under the Geon Plan or the BRP for any eligible earnings paid on or after that date.

On September 1, 2009, we adopted changes to our postretirement healthcare plan whereby, effective January 1, 2010, the plan, for certain eligible retirees, was discontinued, and benefits will be phased out through December 31, 2012.

Note 11 — Financing Arrangements

Short-term debt — At September 30, 2010, there was no short-term debt outstanding.

Long-term debt — Long-term debt consisted of the following:


	September 30,		December 31,
(Dollars in millions)	2010 ⁽¹⁾		2009 ⁽¹⁾
8.875% senior notes due May 2012	$	24.0	$	279.5
7.500% debentures due December 2015		50.0		50.0
7.375% senior notes due September 2020		360.0		—
Medium-term notes:
6.52% medium-term notes due February 2010		—		19.9
6.58% medium-term notes due February 2011		19.9		19.7
Credit facility borrowings, facility expires March 2011		—		40.0


Total long-term debt		453.9		409.1
Less current portion		19.9		19.9


Total long-term debt, net of current portion	$	434.0	$	389.2


⁽¹⁾		Book values include unamortized discounts and adjustments related to hedging instruments, as applicable.

Current maturities of long-term debt at September 30, 2010 consists of $19.9 million of our 6.58% medium-term notes due February 2011.

In February 2010, we repaid $20 million aggregate principal amount of our 6.52% medium-term notes.

In July 2010, we repaid $40 million of outstanding borrowings and terminated the related commitments under our $40 million unsecured revolving and letter of credit facility, which was scheduled to mature on March 20, 2011. Debt extinguishment costs of $1.4 million related to the early retirement of this debt are shown within the Debt extinguishment costs line in our Consolidated Statement of Operations.

In September 2010, we issued $360 million of senior unsecured notes at par that mature in September 2020 and bear interest at 7.375% per annum, payable semi-annually in arrears on March 15th and September 15th of each year. Deferred financing costs of $7.0 million from the issuance are included in Other non-current assets and will be amortized over 10 years, the term of the senior unsecured notes. We used a portion of the net proceeds from the issuance of these notes to repurchase $256 million aggregate principle amount of its 8.875% senior notes due May 2012 at a premium of $25.6 million in the third quarter of 2010. The tender premium, $0.7 million of other debt extinguishment costs and the write-off of deferred note issuance costs of $1.7 million are shown within the Debt extinguishment costs line in our Consolidated Statement of Operations.

We are exposed to market risk from changes in foreign currency exchange rates. Information about our risks and exposure management is included in Item 7A “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no material changes in the market risk from December 31, 2009, to September 30, 2010.

Note 12 — Sale of Accounts Receivable

Accounts receivable consist of the following:


	September 30,			December 31,
(In millions)	2010			2009
Trade accounts receivable	$	159.2		$	129.2
Retained interest in securitized accounts receivable		194.9			151.1
Allowance for doubtful accounts		(4.7	)		(5.9	)

	$	349.4		$	274.4

Sale of Accounts Receivable — Under the terms of our receivables sale facility, we sell accounts receivable to PolyOne Funding Corporation (PFC) and PolyOne Funding Canada Corporation (PFCC), both wholly owned, bankruptcy-remote subsidiaries. PFC and PFCC, in turn, may sell an undivided interest in up to $175 million and $25 million of these accounts receivable, respectively, to certain investors. The receivables sale facility matures in June 2012. As of September 30, 2010 and December 31, 2009, accounts receivable totaling $194.9 million and $151.1 million, respectively, were sold by us to PFC and PFCC. The maximum amount of proceeds that PFC and PFCC may receive under the facility is limited to the lesser of $200 million or 85% of the eligible domestic and Canadian accounts receivable sold. As of September 30, 2010 and December 31, 2009, neither PFC and PFCC had sold any of their undivided interests in accounts receivable.

The receivables sale facility also makes up to $40 million available for the issuance of standby letters of credit as a sub-limit within the $200 million limit under the facility, of which $13.9 million was used at September 30, 2010. The level of availability under the receivables sale facility is based on the prior month’s total accounts receivable sold to PFC and PFCC, as reduced by outstanding letters of credit. Additionally, availability is dependent upon compliance with a fixed charge coverage ratio covenant related primarily to operating performance that is set forth in the related agreements. As of September 30, 2010, we were in compliance with these covenants. As of September 30, 2010, $139.5 million of securitized accounts receivable were available for sale.

Note 13 — Segment Information

On February 4, 2010, we announced a new global organization structure that will help us better serve our global customers, drive our earnings growth, better execute our strategy, and leverage our geographic footprint. Our former International Color and Engineered Materials operating segment has been split and is now reported within the Global Specialty Engineered Materials operating segment and the Global Color, Additives and Inks operating segment. In addition, our former Resin and Intermediates segment is now referred to as the SunBelt Joint Venture. We now have five reportable segments: (1) Global Color, Additives and Inks; (2) Global Specialty Engineered Materials; (3) Performance Products and Solutions; (4) PolyOne Distribution; and (5) SunBelt Joint Venture.

As a result of these changes to PolyOne’s segment structure, prior period segment information was reclassified to conform to the 2010 presentation. These changes did not impact total segment results.

Segment information for the three months and nine months ended September 30, 2010 and 2009, adjusted to reflect our new segment reporting structure and change in accounting principle follows:


	Three Months Ended September 30, 2010								Three Months Ended September 30, 2009
	Sales to External					Segment Operating			Sales to External					Segment Operating
(In millions)	Customers		Total Sales			Income			Customers		Total Sales			Income
Global Specialty Engineered Materials	$	128.0	$	136.9		$	14.1		$	100.8	$	107.3		$	8.1
Global Color, Additives and Inks		134.5		135.2			10.0			122.9		122.9			9.4
Performance Products and Solutions		180.8		198.2			17.9			161.9		180.9			12.8
PolyOne Distribution		237.5		238.4			12.2			162.7		163.1			6.5
SunBelt Joint Venture		—		—			8.6			—		—			3.8
Corporate and eliminations		—		(27.9	)		(18.2	)		—		(25.9	)		14.3

Total	$	680.8	$	680.8		$	44.6		$	548.3	$	548.3		$	54.9


	Nine Months Ended September 30, 2010								Nine Months Ended September 30, 2009
	Sales to External					Segment Operating			Sales to External					Segment Operating
(In millions)	Customers		Total Sales			Income			Customers		Total Sales			Income
Global Specialty Engineered Materials	$	366.0	$	390.7		$	38.3		$	273.0	$	290.1		$	12.3
Global Color, Additives and Inks		401.1		403.2			30.5			343.6		344.7			17.0
Performance Products and Solutions		544.0		600.4			47.6			457.8		510.0			26.3
PolyOne Distribution		693.0		695.7			32.4			433.8		435.1			15.3
SunBelt Joint Venture		—		—			14.4			—		—			23.5
Corporate and eliminations		—		(85.9	)		(26.0	)		—		(71.7	)		(36.7	)

Total	$	2,004.1	$	2,004.1		$	137.2		$	1,508.2	$	1,508.2		$	57.7


	Total Assets
			Adjusted
	September 30, 2010		December 31, 2009
Global Specialty Engineered Materials	$	355.6	$	324.1
Global Color, Additives and Inks		354.0		344.7
Performance Products and Solutions		301.2		282.6
PolyOne Distribution		197.3		152.9
SunBelt Joint Venture		10.3		2.0
Corporate and eliminations		396.6		309.7

Total	$	1,615.0	$	1,416.0

Note 14 — 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 investigation and remediation of certain environmental waste disposal 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 believe that our potential continuing liability with respect to these sites will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. In addition, we 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 condition.

During the nine months ended September 30, 2010 and 2009, we recognized $10.2 million and $8.3 million, respectively, of expense related to environmental activities at all of our active and inactive sites. During the nine months ended September 30, 2010 and 2009, we received $14.4 million and $23.9 million, respectively, of proceeds from insurance recoveries. The gains associated with these recoveries are included within Cost of sales in our Consolidated Statement of Operations.

Based on estimates that were prepared by our environmental engineers and consultants, we had accrued $80.8 million at September 30, 2010 and $81.7 million at December 31, 2009 for probable future environmental expenditures related to previously contaminated sites. The accruals represent our best estimate of the remaining probable remediation costs, based upon information and technology that is currently available and our view of the most likely remedy. Depending upon the results of future testing, the ultimate remediation alternatives undertaken, changes in regulations, 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, 2010. However, such additional costs, if any, cannot be currently estimated. Our estimate of the liability may be revised as new regulations or technologies are developed or additional information is obtained. Additional information related to environmental liabilities is in Note 12, Commitments and

Related-Party Information , to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009.

We guarantee $48.8 million of SunBelt’s outstanding senior secured notes in connection with the construction of a chlor-alkali facility in McIntosh, Alabama. This debt matures in equal annual installments through 2017.

Note 15 — Fair Value

The estimated fair values of financial instruments were principally based on market prices where such prices were available and, where unavailable, fair values were estimated based on market prices of similar instruments. Short-term foreign exchange contracts are the only asset or liability recorded at fair value on a recurring basis. These contracts are measured based on exchange rates at September 30, 2010 and classified as a Level 2 fair value measurement within the fair value hierarchy.

The following table summarizes the contractual amounts of our foreign exchange contracts as of September 30, 2010. Foreign currency amounts are translated at exchange rates as of September 30, 2010. The “Buy” amounts represent the U.S. dollar equivalent of commitments to purchase currencies, and the “Sell” amounts represent the U.S. dollar equivalent of commitments to sell currencies.


	September 30, 2010
Currency (In millions)	Buy		Sell
U.S. Dollar	$	58.1
Euro			$	53.9
British pound			$	4.2

The carrying amounts and fair values of our financial instruments as of September 30, 2010 and December 31, 2009 are as follows:


	September 30, 2010						December 31, 2009
(In millions)	Carrying Amount			Fair Value			Carrying Amount		Fair Value
Cash and cash equivalents	$	307.9		$	307.9		$	222.7	$	222.7
Long-term debt
Credit facility borrowings		—			—			40.0		40.0
7.500% debentures		50.0			51.0			50.0		45.8
8.875% senior notes		24.0			26.4			279.5		285.1
7.375% senior notes		360.0			370.8			—		—
Medium-term notes		19.9			20.1			39.6		38.4
Foreign exchange contracts		(1.6	)		(1.6	)		0.5		0.5

Note 16 — Comprehensive Income

The following table sets forth the reconciliation of net income to comprehensive income:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In millions)	2010			2009			2010			2009
Net income	$	1.0		$	48.3		$	65.1		$	28.7
Amortization of unrecognized (losses) gains, transition obligation and prior service costs, net of tax of $0.8 for the nine months ended September 30, 2010		(1.6	)		(0.7	)		(4.2	)		5.5
Net gain occurring in the year due to plan amendments (See Note 10)		—			37.0			—			55.5
Translation adjustment		13.0			3.9			(1.7	)		2.8
Other		0.1			—			—			0.1

Total comprehensive income	$	12.5		$	88.5		$	59.2		$	92.6

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 thermoplastic compounds, specialty polymer formulations, color and additive systems, thermoplastic resin distribution and specialty vinyl resins. We also have two equity investments: one in a manufacturer of caustic soda and chlorine and one in a formulator of polyurethane compounds. Headquartered in Avon Lake, Ohio, we have employees at manufacturing sites and distribution facilities in North America, Europe and Asia and joint ventures in North America. We provide value to our customers through our ability to link our knowledge of polymers and formulation technology with our manufacturing and supply chain to provide an essential link between large chemical producers (our raw material suppliers) and designers, assemblers and processors of plastics (our customers).

Recent Developments

Change in Accounting Principle

Issuance of 7.375% Senior Notes and Debt Extinguishment

In September 2010, we issued $360 million aggregate principal amount of senior unsecured notes at par. The notes mature in September 2020 and bear interest at 7.375% per annum, payable semi-annually in arrears on March 15th and September 15th of each year. Deferred financing costs from the issuance of $7.0 million are included in Other non-current assets and will be amortized over the term of the senior unsecured notes. We used a portion of the net proceeds from these notes to repurchase $256 million aggregate principal amount of our 8.875% senior notes due May 2012 at a premium of $25.6 million in a tender offer in the third quarter of 2010. The tender premium, $0.7 million of other debt extinguishment costs and the write off of deferred note issuance costs of $1.7 million are shown within the Debt Extinguishment Costs line in our Consolidated Statement of Operations. On October 8, 2010, we repurchased an additional $1 million aggregate principal amount of our 8.875% senior notes due May 2012 in a tender offer.

On July 7, 2010, we fully repaid $40 million of outstanding borrowings under and terminated our credit agreement, dated January 3, 2008, with Citicorp USA, Inc. (the Credit Agreement). The Credit Agreement provided for an unsecured revolving and letter of credit facility with total commitments of up to $40 million and was scheduled to expire on March 20, 2011. In connection with the repayment of this facility, we incurred $1.4 million of debt extinguishment costs.

Highlights and Executive Summary

Selected Financial Data


	Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)	2010		2009 Adjusted		2010		2009 Adjusted
Sales	$	680.8	$	548.3	$	2,004.1	$	1,508.2
Operating income	$	44.6	$	54.9	$	137.2	$	57.7
Net income	$	1.0	$	48.3	$	65.1	$	28.7

Sales increased 24.2% and 32.9% in the third quarter and first nine months of 2010, respectively, as compared to the third quarter and first nine months of 2009. Volumes in the third quarter and first nine months of 2010 increased 14.6% and 22.6%, respectively, versus the corresponding periods in 2009. Sales through the third quarter were also impacted by increased market pricing associated with raw material inflation. Sales increased across many of our end markets in the

third quarter and first nine months of 2010 as compared to the corresponding periods in 2009, led by gains in the industrial, transportation, wire and cable, healthcare and consumer end markets.

Operating income decreased $10.3 million in the third quarter of 2010 compared to the third quarter of 2009. Operating income in the third quarter of 2009 reflected a gain of $23.9 million associated with the reimbursement of previously incurred environmental costs and a gain of $21.1 million associated with the curtailment of our post-retirement health care plan. Income from our equity investment in the SunBelt Chlor-Alkali Partnership (SunBelt) increased $4.9 million in the third quarter of 2010. Charges related to environmental remediation and plant related restructuring were $5.2 million in the third quarter of 2010 versus $17.5 million in the third quarter of 2009. Operating income in the third quarter of 2010 improved $17.5 million due to an increase in volumes and ongoing efficiency gains from our Lean Six Sigma initiatives.

Operating income increased $79.5 million in the first nine months of 2010 compared to the first nine months of 2009. Gains from insurance and legal settlements of $21.6 million favorably impacted operating income in the first nine months of 2010 while operating income in the first nine months of 2009 included gains of $23.9 million and $21.1 million associated with an insurance settlement and the curtailment of our post-retirement health care plan, respectively. Charges related to environmental remediation and plant related restructuring were $12.1 million in the first nine months of 2010 versus $33.5 million in the first nine months of 2009. Operating income for the first nine months of 2009 included a $5.0 million charge related to the adjustment to our 2008 estimated year-end goodwill impairment charge as compared to no such charge in the first nine months of 2010. Income from our equity investment in SunBelt decreased $9.0 million in the first nine months of 2010 as compared to the same period in 2009. Operating income improved $85.5 million in the first nine months of 2010 due to increased volumes and ongoing efficiency gains from our Lean Six Sigma initiatives.

Net income decreased in the third quarter of 2010 due to the $29.4 million of debt extinguishment costs, partially offset by the items discussed above. Income tax expense increased in the third quarter of 2010 as compared to the corresponding period in 2009 primarily due to our improved operating results.

Net income increased in the first nine months of 2010 due to the items discussed above, partially offset by the $29.4 million of debt extinguishment costs. In addition, Other expense, net decreased $6.3 million in the first nine months of 2010 primarily due to decreased foreign exchange losses. Income tax expense increased in the first nine months of 2010 as compared to the corresponding period in 2009 primarily due to our improved operating results.


(In millions)	September 30, 2010		December 31, 2009
Cash and cash equivalents	$	307.9	$	222.7
Accounts receivable facility availability		139.5		112.8

Liquidity	$	447.4	$	335.5

Debt, short- and long-term	$	453.9	$	409.6

In the first nine months of 2010, liquidity increased by $111.9 million driven by the increase in our cash balance and the increase in accounts receivable availability. The increase in cash of $85.2 million includes proceeds of $21.6 million from insurance and legal settlements, $9.8 million from the sale of our investment in, and payment of the related seller note receivable from, O’Sullivan Films and net proceeds of $353.6 million from the issuance of our 7.375% senior notes due 2020. A portion of the net proceeds from the issuance of our 7.375% senior notes was used to repurchase $256 million aggregate principal amount of our 8.875% senior notes due May 2012 in a tender offer, which resulted in the extinguishment of $256 million of debt and related payment of $26.3 million of debt extinguishment costs through September 30, 2010. Additionally, we repaid our $40 million credit facility, paid $1.4 million of extinguishment costs associated therewith, and repaid $20 million aggregate principal of our 6.52% medium-term notes. The increase in our accounts receivable facility availability reflects an increase in sales.

Results of Operations — Three Months Ended September 30, 2010 vs. the Three Months Ended

September 30, 2009


	Three Months Ended September 30,						Variances-Favorable (Unfavorable)
(Dollars in millions, except per share data)	2010			2009			Change			% Change
Sales	$	680.8		$	548.3		$	132.5			24.2	%

Cost of sales		569.6			442.3			(127.3	)		(28.8	)%

Gross margin		111.2			106.0			5.2			4.9	%
Selling and administrative		77.1			56.3			(20.8	)		(36.9	)%
Income from equity affiliates		10.5			5.2			5.3			101.9	%

Operating income		44.6			54.9			(10.3	)		(18.8	)%
Interest expense, net		(7.5	)		(8.5	)		1.0			(11.8	)%
Debt extinguishment costs		(29.4	)		—			(29.4	)	NM
Other expense, net		(0.3	)		(1.2	)		(0.9	)		(75.0	)%

Income before income taxes		7.4			45.2			(37.8	)		(83.6	)%
Income tax (expense) benefit		(6.4	)		3.1			(9.5	)		(306.5	)%

Net income	$	1.0		$	48.3		$	(47.3	)		(97.9	)%


Basic earnings per common share	$	0.01		$	0.52

Diluted earnings per common share	$	0.01		$	0.51
NM — Not meaningful

Sales

Sales increased 24.2% in the third quarter of 2010 as compared to the third quarter of 2009. Volumes increased 14.6% versus the comparable period in 2009. Additionally, sales were favorably impacted by a higher value sales mix and increased market pricing principally associated with raw material inflation. These positive items were partially offset by the impact of unfavorable changes in currency exchange rates of 1%, primarily due to a weaker Euro.

Cost of Sales

These costs include raw materials, plant conversion, distribution, environmental remediation and plant-related restructuring charges. These costs comprised 83.7% of sales in the third quarter of 2010 as compared to 80.7% in the third quarter of 2009. Cost of sales in the third quarter of 2009 includes a gain of $23.9 million associated with insurance settlements. Charges related to environmental remediation and plant related restructuring in cost of sales were $4.7 million in the third quarter 2010 as compared to $15.9 million in the same period in 2009. In addition, cost of sales increased as a percentage of sales due to mix changes, principally due to increased sales from our Distribution business, which has lower gross margin percentages than our other businesses. Distribution sales increased from 29.7% to 34.9% of total PolyOne sales in the third quarter of 2010 as compared to the third quarter of 2009.

Selling and Administrative

These costs include selling, technology, administrative functions, corporate and general expenses and amortization of intangible assets. Selling and administrative costs in the third quarter of 2009 included a $21.1 million curtailment gain associated with the curtailment of our post-retirement health care plan. In the third quarter of 2010, selling and administrative was favorably impacted by lower pension and other post-employment benefit expenses and the impact of changes in currency exchange rates. Partially offsetting these favorable items in the third quarter of 2010 was increased incentive compensation expense resulting from improved performance results.

Income from Equity Affiliates

Income from equity affiliates is summarized as follows:


	Three Months Ended September 30,
(In millions)	2010		2009
SunBelt	$	9.7	$	4.8
Other equity affiliates		0.8		0.4

	$	10.5	$	5.2

During the third quarter of 2010, Income from equity affiliates increased as compared to the corresponding period in 2009 due to increased earnings from our SunBelt joint venture driven primarily by higher prices and increased volume for caustic soda and improved volume for chlorine as compared to the third quarter of 2009.

Interest Expense, net

Interest expense, net decreased in the third quarter of 2010 as compared to the third quarter of 2009 due primarily to lower average borrowing levels.

Included in Interest expense, net for each of the three months ended September 30, 2010 and 2009 is interest income of $0.7 million and $0.9 million, respectively.

Debt Extinguishment Costs

Debt extinguishment costs include costs related to the repurchase of our 8.875% senior notes due 2012 in a tender offer and costs associated with the repayment of our $40 million credit facility in the third quarter of 2010. We incurred $25.6 million of premiums related to our tender offer from which we extinguished $256 million aggregate principal amount of our 8.875% senior notes. In addition, we wrote off $1.7 million of deferred financing fees and incurred other extinguishment costs of $0.7 million. In connection with the repayment of our $40 million credit facility, we incurred extinguishment costs of $1.4 million.

Other Expense, net

Financing costs associated with our receivables sale facility, foreign currency gains and losses and other miscellaneous items were as follows:


	Three Months Ended September 30,
(In millions)	2010			2009
Currency exchange gains	$	5.2		$	1.7
Foreign exchange contracts losses, net		(6.0	)		(2.3	)
Receivable sale facility fees		(0.2	)		(0.4	)
Other income (expense), net		0.7			(0.2	)

Other expense, net	$	(0.3	)	$	(1.2	)

Income Tax (Expense) Benefit

For the third quarter of 2010, we recognized income tax expense of $6.4 million compared to a benefit of $3.1 million in the third quarter of 2009. Valuation allowances against our deferred tax assets increased by $5.1 million in the third quarter of 2010 as a result of a pre-tax loss in the United States during that period primarily related to debt extinguishment costs from the repayment of our $40 million credit facility and $256 million of our 8.875% senior notes. The related non-cash charge to income tax expense was $3.0 million, associated with various U.S. federal, state, local, and foreign deferred tax assets. During the third quarter of 2010, we recognized $1.9 million of income tax expense, including the related interest and penalties, associated with uncertain tax positions. Our effective tax rate for the third quarter of 2010 reflects these items and the impact of foreign earnings which are taxed at rates that differ from the United States. We decreased existing valuation allowances against our deferred tax assets by $28.4 million in the third

quarter of 2009. This non-cash benefit to income tax expense related to various U.S. federal, state, local and foreign deferred tax assets. In the third quarter of 2009, we recognized $1.5 million of income tax expense associated with uncertain tax positions. During the third quarter of 2009, we recognized $3.4 million of benefit related to a state tax refund.

Results of Operations — Nine Months Ended September 30, 2010 versus the Nine Months Ended September 30, 2009


	Nine Months Ended September						Variances-Favorable
	30,						(Unfavorable)
(Dollars in millions, except per share data)	2010			2009			Change			% Change
Sales	$	2,004.1		$	1,508.2		$	495.9			32.9	%

Cost of sales		1,662.7			1,270.5			(392.2	)		(30.9	)%

Gross margin		341.4			237.7			103.7			43.6	%
Selling and administrative		224.0			203.6			(20.4	)		(10.0	)%
Adjustment to impairment of goodwill		—			5.0			(5.0	)	NM
Income from equity affiliates		19.8			28.6			(8.8	)		(30.8	)%

Operating income		137.2			57.7			79.5			137.8	%
Interest expense, net		(23.2	)		(26.1	)		2.9			11.1	%
Debt extinguishment costs		(29.4	)		—			(29.4	)	NM
Other expense, net		(2.2	)		(8.5	)		6.3			74.1	%

Income before income taxes		82.4			23.1			59.3			256.7	%
Income tax (expense) benefit		(17.3	)		5.6			(22.9	)	NM

Net income	$	65.1		$	28.7		$	36.4			126.8	%


Basic earnings per common share	$	0.70		$	0.31

Diluted earnings per common share	$	0.68		$	0.31
NM — Not meaningful

Sales

Sales increased 32.9% in the first nine months of 2010 as compared to the first nine months of 2009. Volumes in the first nine months of 2010 increased 22.6% versus the comparable period in 2009. Additionally, sales were impacted by increased market pricing associated with raw material inflation.

Cost of Sales

Cost of sales declined to 83.0% of sales in the first nine months of 2010 as compared to 84.2% in the first nine months of 2009. Cost of sales in the first nine months of 2010 was favorably impacted by the realization of savings associated with the previously announced plant realignment activities and savings associated with our Lean Six Sigma initiatives. Cost of sales in the first nine months of 2010 and 2009 reflects gains of $19.1 million and $23.9 million, respectively, associated with legal and insurance settlements. Charges related to environmental remediation and plant related restructuring in cost of sales were $11.3 million in the first nine months of 2010 as compared to $31.5 million in the first nine months of 2009. In addition, cost of sales increased as a percentage of sales due to mix changes, principally due to increased sales from our Distribution business, which has lower gross margin percentages than our other businesses. Distribution sales increased from 28.8% to 34.6% of total PolyOne sales in the first nine months of 2010 as compared to the first nine months of 2009.

Selling and Administrative

Selling and administrative costs increased in the first nine months of 2010 as compared to the first nine months of 2009 as the prior year period includes a $21.1 million curtailment gain associated with the phase out of certain of our other post-retirement benefit plans. In the first nine months of 2010, these costs were favorably impacted by lower pension and other post-employment benefit expenses and savings associated with our previously announced restructuring activities.

These items were partially offset by increased incentive compensation expense resulting from improved performance results.

Adjustment to 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 million in 2008. Upon completion of the analysis in the first quarter of 2009, we revised our estimate of goodwill impairment to $175 million, and, accordingly, we recorded $5.0 million of additional goodwill impairment. There were no such charges in the first nine months of 2010.

Income from Equity Affiliates

Income from equity affiliates is summarized as follows:


	Nine Months Ended September 30,
(In millions)	2010		2009
SunBelt	$	17.6	$	26.6
Other equity affiliates		2.2		2.0

	$	19.8	$	28.6

During the first nine months of 2010, Income from equity affiliates decreased as compared to the corresponding period in 2009 due to lower earnings from our SunBelt joint venture driven primarily by lower caustic soda prices. The negative impact of caustic soda pricing was partially offset by the favorable impact of increased volume for caustic soda and improved pricing and volume for chlorine as compared to the first nine months of 2009.

Interest Expense, Net

Interest expense, net decreased in the first nine months of 2010 as compared to the first nine months of 2009 due primarily to lower average borrowing levels.

Included in Interest expense, net for the first nine months of 2010 and 2009 was interest income of $2.3 million and $2.4 million, respectively.

Debt Extinguishment Costs

Other Expense, Net

Financing costs associated with our receivables sale facility, foreign currency gains and losses and other miscellaneous items were as follows:


	Nine Months Ended September 30,
(In millions)	2010			2009
Currency exchange (loss) gain	$	(4.2	)	$	1.3
Foreign exchange contracts gain (loss)		2.4			(8.4	)
Fees and discount on sale of trade receivables		(0.9	)		(1.0	)
Other income (expense), net		0.5			(0.4	)

Other expense, net	$	(2.2	)	$	(8.5	)

Income Tax (Expense) Benefit

For the first nine months of 2010, we recognized income tax expense of $17.3 million compared to a benefit of $5.6 million in the first nine months of 2009. Valuation allowances against our deferred tax assets decreased by $11.4 million for the first nine months of 2010 as a result of generating positive pretax income during that period. The related non-cash benefit to income tax expense was $12.1 million, associated with various U.S. federal, state, local, and foreign deferred tax assets. In the first nine months of 2009, we decreased existing valuation allowances against our deferred tax assets by $34.6 million. During the first nine months of 2010, we recognized $2.5 million of income tax expense, including the related interest and penalties, associated with uncertain tax positions. Our effective tax rate for the first nine months of 2010 reflects these items and the impact of foreign earnings which are taxed at rates that differ from the United States. For the first nine months of 2009, we recognized $1.5 million of income tax benefits due to adjustments of liability estimates related to foreign tax audits. For the first nine months of 2009, we recognized $3.4 million of benefit related to a state tax refund.

SEGMENT INFORMATION

Operating income is the primary financial measure that is reported to the chief operating decision maker for purposes of allocating resources to the segment and assessing its performance. Operating income at the segment level does not include: corporate general and administrative costs 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 phaseout costs; executive separation agreements; share-based compensation costs; asset and goodwill impairments; environmental remediation costs for facilities no longer owned or closed in prior years; gains and losses on the divestiture of joint ventures and equity investments; and certain other items that are not included in the measure of segment profit or loss that is reported to and reviewed by the chief operating decision maker. These costs are included in Corporate and eliminations .

During the first quarter of 2010, we announced our new global organization structure that will help us better serve our global customers, drive our earnings growth, better execute our strategy, and leverage our strong geographic footprint. As a result, our former International Color and Engineered Materials operating segment has been split and is now reported within the Global Specialty Engineered Materials operating segment and the Global Color, Additives and Inks operating segment. In addition, our former Resin and Intermediates segment is now referred to as the SunBelt Joint Venture. As a result of these changes, we now have five reportable segments: (1) Global Color, Additives and Inks; (2) Global Specialty Engineered Materials; (3) Performance Products and Solutions; (4) PolyOne Distribution; and (5) SunBelt Joint Venture.

As a result of these changes to PolyOne’s segment structure, all prior period segment information was reclassified to conform to the 2010 presentation. These changes did not impact total segment results.

Sales and Operating Income — Three Months Ended September 30, 2010 versus the Three Months Ended September 30, 2009:


	Three Months Ended
	September 30,
(Dollars in millions)	2010			2009			Change			% Change
Sales:
Global Specialty Engineered Materials	$	136.9		$	107.3		$	29.6			27.6	%
Global Color, Additives and Inks		135.2			122.9			12.3			10.0	%
Performance Products and Solutions		198.2			180.9			17.3			9.6	%
PolyOne Distribution		238.4			163.1			75.3			46.2	%
Corporate and eliminations		(27.9	)		(25.9	)		(2.0	)		7.7	%

	$	680.8		$	548.3		$	132.5			24.2	%


Operating income (loss):
Global Specialty Engineered Materials	$	14.1		$	8.1		$	6.0			74.1	%
Global Color, Additives and Inks		10.0			9.4			0.6			6.4	%
Performance Products and Solutions		17.9			12.8			5.1			39.8	%
PolyOne Distribution		12.2			6.5			5.7			87.7	%
SunBelt Joint Venture		8.6			3.8			4.8			126.3	%
Corporate and eliminations		(18.2	)		14.3			(32.5	)		(227.3	)%

	$	44.6		$	54.9		$	(10.3	)		(18.8	)%


Operating income (loss) as a percentage of sales:
Global Specialty Engineered Materials		10.3	%		7.5	%	2.8% points
Global Color, Additives and Inks		7.4	%		7.6	%	(0.2)% points
Performance Products and Solutions		9.0	%		7.1	%	1.9% points
PolyOne Distribution		5.1	%		4.0	%	1.1% points
Total		6.6	%		10.0	%	(3.4)% points

Global Specialty Engineered Materials

Sales increased $29.6 million, or 27.6%, in the third quarter of 2010 compared to the third quarter of 2009 primarily due to improved demand in our end markets, a higher value sales mix and new business gains. Volumes increased 15.1% as compared to the third quarter of 2009 driven by growth in consumer, electrical and electronics, industrial, wire and cable and healthcare end markets. These items were partially offset by the unfavorable impact of changes in currency exchange rates of approximately 3%.

Operating income increased $6.0 million in the third quarter of 2010 compared to the third quarter of 2009 primarily due to increased volumes.

Global Color, Additives and Inks

Sales increased $12.3 million, or 10.0%, in the third quarter of 2010 compared to the third quarter of 2009 primarily due to a 6.2% increase in volumes and a 7.8% increase in market pricing associated with raw material inflation. Gains in the industrial, appliance and packaging end markets led the volume increase. These items were partially offset by the unfavorable impact of changes in currency exchange rates of approximately 4%.

Operating income increased $0.6 million in the third quarter of 2010 as compared to the third quarter of 2009 driven by increased volumes, which was partially offset by unfavorable changes in sales mix.

Performance Products and Solutions

Sales increased $17.3 million, or 9.6%, in the third quarter of 2010 compared to the third quarter of 2009. Volumes increased 12.7% as compared to the third quarter of 2009, driven primarily by improvements in the industrial, packaging and healthcare end markets, which more than offset declines in revenues in building and construction. Mix changes reduced revenues 3.1% while favorably impacting operating income, as sales from our Producer Services business, which maintains an average selling price half that of the consolidated Performance Products and Solutions segment, increased revenue 21% as compared to the third quarter of 2009.

Operating income increased $5.1 million in the third quarter of 2010 compared to the third quarter of 2009 primarily due to the increase in volumes and favorable product mix.

PolyOne Distribution

PolyOne Distribution sales increased $75.3 million, or 46.2%, in the third quarter of 2010 compared to the third quarter of 2009, reflecting a 17.1% increase in volume. The remainder of the increase in sales was due to increased market pricing associated with raw material inflation and mix.

Operating income increased $5.7 million in the third quarter of 2010 compared to the third quarter of 2009 due to the increase in volume and a more profitable mix of products sold. These items were partially offset by variable selling costs, primarily due to increased incentive compensation expenses associated with our improved performance.

SunBelt Joint Venture

Income from the SunBelt Joint Venture increased $4.8 million in the third quarter of 2010 compared to the third quarter of 2009 driven primarily by a 34% increase in volume combined with increased market pricing. The volume increase was driven primarily by our largest customer purchasing ahead of their plant maintenance schedule for the fourth quarter of 2010.

Corporate and Eliminations

The following table breaks down Corporate and eliminations into its various components for the third quarter of 2010 and 2009:


	Three Months Ended September 30,
(In millions)	2010			2009
Curtailment gain related to postretirement health care plan (a)	$	—		$	21.1
Gains from insurance and legal settlements (b)		—			23.9
Environmental remediation costs		(3.9	)		(5.4	)
Employee separation and plant phaseout (c)		(1.3	)		(12.1	)
Share-based compensation		(1.1	)		(0.8	)
Incentive compensation		(6.9	)		(7.0	)
Unallocated pension and postretirement medical expense		0.9			(2.4	)
All other and eliminations (d)		(5.9	)		(3.0	)

Total Corporate and eliminations	$	(18.2	)	$	14.3


(a)		During the third quarter of 2009, we amended certain of our post-retiree healthcare plans whereby benefits to be paid under these plans will be phased out through 2012, resulting in a curtailment gain of $21.1 million.

(b)		During the third quarter of 2009, we recorded gains associated with insurance settlements of $23.9 million related to reimbursement of previously incurred environmental costs.

(c)		During the third quarter of 2008, we announced the restructuring of certain manufacturing assets, primarily in North America. In January 2009, we announced the initiation of cost saving measures that included eliminating approximately 370 jobs, implementing reduced work schedules, closing a facility and idling certain other capacity.

(d)		All other and eliminations is comprised of intersegment eliminations and corporate general and administrative costs that are not allocated to segments.

Sales and Operating Income — Nine Months Ended September 30, 2010 versus the Nine Months Ended September 30, 2009:


	Nine Months Ended
	September 30,
(Dollars in millions)	2010			2009			Change			% Change
Sales:
Global Specialty Engineered Materials	$	390.7		$	290.1		$	100.6			34.7	%
Global Color, Additives and Inks		403.2			344.7			58.5			17.0	%
Performance Products and Solutions		600.4			510.0			90.4			17.7	%
PolyOne Distribution		695.7			435.1			260.6			59.9	%
Corporate and eliminations		(85.9	)		(71.7	)		(14.2	)		19.8	%

	$	2,004.1		$	1,508.2		$	495.9			32.9	%


Operating income (loss):
Global Specialty Engineered Materials	$	38.3		$	12.3		$	26.0			211.4	%
Global Color, Additives and Inks		30.5			17.0			13.5			79.4	%
Performance Products and Solutions		47.6			26.3			21.3			81.0	%
PolyOne Distribution		32.4			15.3			17.1			111.8	%
SunBelt Joint Venture		14.4			23.5			(9.1	)		(38.7	)%
Corporate and eliminations		(26.0	)		(36.7	)		10.7			(29.2	)%

	$	137.2		$	57.7		$	79.5			137.8	%


Operating income (loss) as a percentage of sales:
Global Specialty Engineered Materials		9.8	%		4.2	%	5.6% points
Global Color, Additives and Inks		7.6	%		4.9	%	2.7% points
Performance Products and Solutions		7.9	%		5.2	%	2.7% points
PolyOne Distribution		4.7	%		3.5	%	1.2% points
Total		6.8	%		3.8	%	3.0% points

Global Specialty Engineered Materials

Sales increased $100.6 million, or 34.7%, in the first nine months of 2010 compared to the first nine months of 2009 primarily due to improved demand in our end markets. Volumes increased 25.2% as compared to the first nine months of 2009 led by growth in the electrical and electronics, industrial and transportation end markets. Pricing and mix of products sold also favorably impacted sales by 7.6% while changes in currency exchange rates reduced sales approximately 1%.

Operating income increased $26.0 million in the first nine months of 2010 as compared to the first nine months of 2009 primarily due to increased volumes, improved sales mix and ongoing savings from our Lean Six Sigma initiatives. These items were partially offset by an increase in variable selling and administrative costs, primarily due to increased incentive compensation expenses associated with the improved performance results.

Global Color, Additives and Inks

Sales increased $58.5 million, or 17.0%, in the first nine months of 2010 compared to the first nine months of 2009 due to an increase in volumes, a higher value sales mix and new business gains. Volumes increased 13.1% as compared to the first nine months of 2009, with increases in most of our end markets, led by the transportation, industrial and appliance end markets. Pricing and mix of products sold also favorably impacted sales by 5.9% while changes in currency exchange rates reduced sales approximately 1%.

Operating income increased $13.5 million in the first nine months of 2010 as compared to the first nine months of 2009 driven by increased volumes and cost reductions from our restructuring initiatives. These items were partially offset by an increase in variable selling and administrative costs, primarily due to increased incentive compensation expenses associated with the improved performance results.

Performance Products and Solutions

Sales increased $90.4 million, or 17.7%, in the first nine months of 2010 compared to the first nine months of 2009. Volumes increased 20.5% compared to the first nine months of 2009, led by improvements in the industrial, automotive and healthcare end markets, which more than offset the slower than forecasted recovery in the building and construction end markets. Mix changes reduced revenues 2.8% while favorably impacting operating income, as sales from our Producer Services business, which maintains an average selling price half that of the consolidated Performance Products and Solutions segment, increased revenue 20% as compared to the first nine months of 2009.

Operating income increased $21.3 million in the first nine months of 2010 compared to the first nine months of 2009 primarily due to the increase in volumes and improved sales mix.

PolyOne Distribution

PolyOne Distribution sales increased $260.6 million, or 59.9%, in the first nine months of 2010 compared to the first nine months of 2009, reflecting a 26.3% increase in volume and new business gains. The remainder of the increase in sales was due to increased market pricing associated with raw material inflation and mix.

Operating income increased $17.1 million in the first nine months of 2010 compared to the first nine months of 2009 due to the increase in volume and leveraging our commercial and logistics infrastructure. These items were partially offset by an increase in variable selling costs, primarily due to increased incentive compensation expenses associated with our improved performance.

SunBelt Joint Venture

Income from the SunBelt Joint Venture declined $9.1 million in the first nine months of 2010 compared to the first nine months of 2009 primarily due to lower caustic soda pricing. The negative impact of caustic soda pricing was partially offset by the favorable impact of increased volume compared to the first nine months of 2009.

Corporate and Eliminations

The following table breaks down Corporate and eliminations into its various components for the first nine months of 2010 and 2009:


	Nine Months Ended September 30,
(In millions)	2010			2009
Curtailment of postretirement health care plan (a)	$	—		$	21.1
Gains from insurance and legal settlements (b)		21.6			23.9
Adjustment to impairment of goodwill (c)		—			(5.0	)
Environmental remediation costs		(10.2	)		(8.3	)
Employee separation and plant phaseout (d)		(1.9	)		(25.2	)
Share-based compensation		(3.2	)		(2.2	)
Incentive compensation		(22.8	)		(15.5	)
Unallocated pension and postretirement medical expense		2.9			(14.3	)
All other and eliminations (e)		(12.4	)		(11.2	)

Total Corporate and eliminations	$	(26.0	)	$	(36.7	)


(a)		During the third quarter of 2009, we amended certain of our postretiree healthcare plans whereby benefits to be paid under these plans will be phased out through 2012, resulting in a curtailment gain of $21.1 million.

(b)		In the first nine months of 2010 and 2009, we recorded gains associated with legal and insurance settlements of $21.6 million and $23.9 million, respectively. These settlements related to the reimbursement of previously incurred environmental costs and proceeds from workers’ compensation insurance claims.

(c)		In the first quarter of 2009, we increased our estimated 2008 year-end goodwill impairment charge of $170.0 million by $5.0 million.

(d)		During the third quarter of 2008, we announced the restructuring of certain manufacturing assets, primarily in North America. In January 2009, we announced the initiation of further cost saving measures that included eliminating approximately 370 jobs, implementing reduced work schedules, closing a facility and idling certain other capacity.

(e)		All other and eliminations is comprised of intersegment eliminations and corporate general and administrative costs that are not allocated to segments.

Liquidity and Capital Resources


(In millions)	September 30, 2010		December 31, 2009
Cash and cash equivalents	$	307.9	$	222.7
Accounts receivable sale facility availability		139.5		112.8

Liquidity	$	447.4	$	335.5

Liquidity is defined as an enterprise’s ability to generate adequate amounts of cash to meet both current and future needs. These needs include paying obligations as they mature, maintaining production capacity and providing for planned growth. Capital resources are sources of funds other than those generated by operations.

Cash Flows

The following describes the material components of cash flows from operating, investing and financing activities for the first nine months of 2010 and 2009.

Operating Activities — In first nine months of 2010, net cash provided by operating activities was $82.4 million as compared to $216.9 million in the first nine months of 2009. In the first nine months of 2010, working capital, which we define as accounts receivable plus inventory less accounts payable, increased reflecting our investment in support of our sales growth. In the first nine months of 2009, net cash provided by operating activities was favorably impacted by working capital improvements, which contributed $118.4 million. Working capital as a percentage of sales continued to improve, and for the first nine months of 2010 was 9.7% versus 10.1% for the first nine months of 2009. Accounts receivable as a percentage of quarterly sales increased to 51.3% as of September 30, 2010 as compared to 49.7% as of December 31, 2009. This increase is due to the fact that our sales are typically lowest in the month of December, and the increase in accounts receivable resulted principally from higher sales in September 2010 versus December 2009. Days sales outstanding over the period from December 31, 2009 to September 30, 2010 decreased from 49.1 to 47.6.

Investing Activities — Cash used by investing activities during the first nine months of 2010 was $11.1 million, which was primarily comprised of capital expenditures of $18.9 million. Partially offsetting these expenditures was cash proceeds from the sale of our investment in O’Sullivan and the collection of the principal on the related note receivable totaling $7.8 million. Cash used by investing activities in the first nine months of 2009 included $15.9 million of capital expenditures.

Financing Activities — Net cash used by financing activities in the first nine months of 2010 reflects proceeds from the issuance of our 7.375% senior notes due 2020 and the related tender offer by which $256 million aggregate principal amount of our 8.875% senior notes were extinguished through September 30, 2010. Additionally, we repaid our $40 million credit facility and $20 million aggregate principal amount of our 6.52% medium-term notes. In connection with the tender offer, we paid tender premiums and other costs of $26.3 million, and we paid $1.4 million of costs associated with the extinguishment of the $40 million credit facility. Proceeds from the exercise of stock options in the first nine months was $3.9 million. In the first nine months of 2009, net cash provided by financing activities reflected a $5.5 million decrease in short-term borrowings.

Capital Resources

The following table summarizes our available and outstanding facilities as of September 30, 2010:


(In millions)	Outstanding		Available
Long-term debt, including current maturities	$	453.9	$	—
Receivables sale facility		—		139.5

	$	453.9	$	139.5

We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. We may also seek to repurchase our outstanding equity securities. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Long-Term Debt

As of September 30, 2010, long-term debt totaled $453.9 million, with maturities ranging from 2011 to 2020. Current maturities of long-term debt at September 30, 2010 were $19.9 million.

Aggregate maturities of long-term debt for the next five years are: 2011 — $19.9 million; 2012 — $24.0 million; 2013 — $0.0 million; 2014 — $0.0 million; and thereafter — $410.0 million.

Each of our 7.375% senior notes due 2020, 7.500% debentures due 2015, 8.875% senior notes due 2012 and medium-term notes are our direct, unsecured obligations and are not guaranteed by any of our subsidiaries. Each of the indentures governing these debt securities contains limitations on our ability to incur secured debt.

Guarantee and Agreement

We entered into a definitive Guarantee and Agreement with Citicorp USA, Inc., KeyBank National Association and National City Bank (now PNC Bank) on June 6, 2006. Under this Guarantee and Agreement, we guarantee some treasury management and banking services provided to us and our subsidiaries, such as foreign currency forwards and bank overdrafts. This guarantee is secured by our inventories located in the United States.

Receivables Sale Facility

As of September 30, 2010, we had receivables sale facilities outstanding in the United States and Canada totaling $200 million. These facilities expire in June 2012. The maximum proceeds that we may receive are limited to the lesser of $200 million or 85% of the eligible domestic and Canadian accounts receivable sold. This facility also makes up to $40 million available for issuing standby letters of credit as a sub-limit within the $200 million facility, of which $13.9 million was used at September 30, 2010.

The facility requires us to maintain a minimum fixed charge coverage ratio (defined as Adjusted EBITDA less capital expenditures, divided by the sum of interest expense and scheduled debt repayments for the next four quarters) of at least 1 to 1 when average excess availability under the facility is $40 million or less. As of September 30, 2010, the average excess availability under the facility was greater than $40 million. Additionally, the fixed charge coverage ratio exceeded 1 to 1.

Each indenture governing our senior unsecured notes and debentures and our guarantee of the $48.8 million of SunBelt notes allows a specific level of secured debt, above which security must be provided on each indenture and our guarantee of the SunBelt notes. The receivables sale facility and our guarantee of the SunBelt notes are not considered debt under the covenants associated with our senior unsecured notes and debentures.

Note Receivable

Included in Other non-current assets as of September 30, 2010 is $25.2 million outstanding on a seller note receivable due from Excel Polymers LLC, which purchased our elastomers and performance additives business in August 2004. With the extension of this note in 2009, we were given a secured position in the assets of the business. This note accrues interest at 10% per annum and is due in full with accrued interest at maturity on February 29, 2012.

Contractual Obligations

We have future obligations under various contracts relating to debt and interest payments, operating leases, standby letters of credit, pension and postretirement benefit plans and purchase obligations. During the nine months ended September 30, 2010, there were no significant changes to these obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2009, except as it relates to the scheduled repayment of debt as previously discussed.

Critical Accounting Policies and Estimates

Effective January 1, 2010, we elected to change our method of valuing inventories for certain U.S. businesses to the FIFO method, while in prior years, these inventories were valued using the LIFO method. As a result of this change, all inventories are valued using the FIFO method. Inventories accounted for under the FIFO method as a percent of total consolidated inventories was 76%, with the remainder determined on a LIFO basis at December 31, 2009. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 250, Accounting Changes and Error Corrections , all prior periods presented have been adjusted to apply the new method retrospectively. The effect of the change in our inventory costing method increased our inventory balance and retained earnings by $42.4 million as of January 1, 2009.

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. 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 performance and/or sales. Factors that could cause actual results to differ materially from those implied by these forward-looking statements include, but are not limited to:

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

	•		changes in polymer consumption growth rates in the markets where PolyOne conducts business;

	•		changes in global industry capacity or in the rate at which anticipated changes in industry capacity come online in the polyvinyl chloride (PVC), chlor alkali, vinyl chloride monomer (VCM) or other industries in which PolyOne participates;

	•		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, including any developments that would require any increase in our costs and/or reserves for such contingencies;

	•		an inability to achieve or delays in achieving or achievement of less than the anticipated financial benefit from initiatives related to working capital reductions, cost reductions and employee productivity goals and our new global organization structure;

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

	•		an inability to maintain appropriate relations with unions and employees;

	•		the speed and extent of an economic recovery, including the recovery of the housing and chlor-alkali markets;

	•		the financial condition of our customers, including the ability of customers (especially those that may be highly leveraged and those with inadequate liquidity) to maintain their credit availability;

	•		disruptions, uncertainty or volatility in the credit markets that may limit our access to capital; and

	•		other factors affecting our business beyond our control, including, without limitation, changes in the general economy, changes in interest rates and changes in the rate of inflation.

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 inaccurate 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 furnished to the SEC. 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

We are exposed to certain market risks as part of our ongoing business operations, including risks from changes in interest rates on debt obligations and foreign currency exchange rates that could impact our financial condition, results of operations and cash flows. We manage our exposure to these and other market risks through regular operating and financing activities, including the use of derivative financial instruments. We intend to use these derivative financial instruments as risk management tools and not for speculative investment purposes.

Interest rate exposure — On July 7, 2010, we fully repaid the $40 million of outstanding borrowings and also terminated the related commitments under our credit agreement. Because this was our only variable rate debt, we currently have no significant exposure to changes in market interest rates.

To help manage borrowing costs, we may periodically enter into interest rate swap agreements. Under these arrangements, we agree to exchange, at specified intervals, the difference between fixed and floating interest amounts on agreed-upon notional principal amounts. As of September 30, 2010, there were no outstanding interest rate swap agreements.

Foreign currency exposure — We enter into intercompany lending transactions that are denominated in various foreign currencies and are subject to financial exposure from foreign exchange rate movement from the date a loan is recorded to the date it is settled or revalued. To mitigate this risk, we enter into foreign exchange contracts, which had a fair value of $1.6 million at September 30, 2010. Gains and losses on these contracts generally offset gains and losses on the assets and liabilities being hedged.

We face translation risks related to the changes in foreign currency exchange rates. Amounts invested in our foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting translation adjustments are recorded as a component of Accumulated other comprehensive income (loss) in the Shareholders’ equity section of the accompanying consolidated balance sheets. Net sales and expenses in our foreign operations’ foreign currencies are translated into varying amounts of U.S. dollars depending upon whether the U.S. dollar weakens or strengthens against other currencies. Therefore, changes in exchange rates may either positively or negatively affect our net sales and expenses from foreign operations as expressed in U.S. dollars.

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, 2010 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Part II — Other Information

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth information regarding repurchases of our common shares during the period indicated:


						Total Number of		Maximum Number of
						Shares Purchased as		Shares that May Yet
	Total Number of			Average Price Paid		Part of Publicly		be Purchased Under
Period	Shares Purchased			Per Share		Announced Program		the Program (1)
July 1 to July 31		—		$	—		—		8,750,000
August 1 to August 31		39,327	(2)		10.33		—		8,750,000
September 1 to September 30		—			—		—		8,750,000

Total		39,327		$	10.33		—


(1)		On August 18, 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.

(2)		Represents shares surrendered to our company to satisfy the exercise price in connection with the exercise of options.

Item 6. Exhibits


Exhibit No.		Description of Exhibit
4.1		Indenture, dated as of September 24, 2010, between the Company and Wells Fargo Bank, N.A., as Trustee

4.2		First Supplemental Indenture, dated as of September 24, 2010, between the Company and Wells Fargo Bank, N.A., as Trustee

10.1		Amended and Restated Deferred Compensation Plan for Non-Employee Directors

31.1		Certification of Stephen D. Newlin, 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 Robert M. Patterson, Senior Vice President and 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 of Stephen D. Newlin, Chairman, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Robert M. Patterson, Senior Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURE

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.


November 4, 2010	POLYONE CORPORATION
	/s/ Robert M. Patterson
	Robert M. Patterson
	Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Description of Exhibit
4.1		Indenture, dated as of September 24, 2010, between the Company and Wells Fargo Bank, N.A., as Trustee

4.2		First Supplemental Indenture, dated as of September 24, 2010, between the Company and Wells Fargo Bank, N.A., as Trustee

10.1		Amended and Restated Deferred Compensation Plan for Non-Employee Directors

31.1		Certification of Stephen D. Newlin, 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 Robert M. Patterson, Senior Vice President and 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 of Stephen D. Newlin, Chairman, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Robert M. Patterson, Senior Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

TABLE OF CONTENTS

Part I Financial Informationprint Item 1. Financial Statementsprint Note 1 Basis Of Presentationprint Note 2 Change in Accounting Principleprint Note 3 Goodwillprint Note 4 Inventoriesprint Note 5 Propertyprint Note 6 Income Taxesprint Note 7 Investment in Equity Affiliatesprint Note 8 Weighted-average Shares Used in Computing Earnings Per Shareprint Note 9 Employee Separation and Plant Phaseoutprint Note 10 Employee Benefit Plansprint Note 11 Financing Arrangementsprint Note 12 Sale Of Accounts Receivableprint Note 13 Segment Informationprint Note 14 Commitments and Contingenciesprint Note 15 Fair Valueprint Note 16 Comprehensive Incomeprint Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operationsprint Item 3. Quantitative and Qualitative Disclosures About Market Riskprint Item 4. Controls and Proceduresprint Part II Other Informationprint Item 2. Unregistered Sales Of Equity Securities and Use Of Proceedsprint Item 6. Exhibitsprint

Exhibits

EX-4.1 EX-4.2 EX-10.1 EX-31.1 EX-31.2 EX-32.1 EX-32.2

AVNT 10-Q Quarter ended Sept. 30, 2010

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Exhibits

Supplier name	Ticker
Exxon Mobil Corporation	XOM
Union Pacific Corporation	UNP
Danaher Corporation	DHR
Air Products and Chemicals, Inc.	APD
Roper Technologies, Inc.	ROP
ABB Ltd	ABB
CSX Corporation	CSX