AVNT 10-Q Quarter ended March 31, 2012

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2012

For the transition period from to .

Commission file number 1-16091

POLYONE CORPORATION

(Exact name of registrant as specified in its charter)

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. x Yes ¨ 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). x Yes ¨ 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):

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

The number of outstanding shares of the registrant’s common stock, $0.01 par value, as of April 20, 2012 was 89,594,904.

PolyOne Corporation and Subsidiaries

(In millions, except per share data)

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

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PolyOne Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(In millions)

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

3

PolyOne Corporation and Subsidiaries

(In millions)

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

4

PolyOne Corporation and Subsidiaries

(In millions)

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

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PolyOne Corporation and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS (UNAUDITED)

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, 2011 of PolyOne Corporation.

Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be attained in subsequent periods or for the year ending December 31, 2012.

On December 21, 2011, PolyOne, pursuant to the terms of an Agreement and Plan of Merger (Merger Agreement) with ColorMatrix Group, Inc. (ColorMatrix) and Audax ColorMatrix Holdings, LLC, acquired all of the equity of ColorMatrix. The acquisition date fair value of the consideration transferred, which consisted solely of cash, was $486.1 million, net of cash acquired of $1.9 million. ColorMatrix is a developer and manufacturer of performance enhancing, additives for plastic products, liquid colorants, and fluoropolymer and silicone colorants, and operates globally with research and development and production facilities in North America, South America, Europe and Asia. The ColorMatrix acquisition reflects our strategy to expand our specialty business and our international presence.

At December 31, 2011, the allocation of the purchase price to the assets acquired and liabilities assumed from the ColorMatrix acquisition was preliminary as we had not completed our assessment of deferred income taxes, acquired property, intangibles, obligations or finalized the working capital set forth in the purchase agreement. The following table summarizes the adjustments made to the purchase price allocation during the three-month period ended March 31, 2012.

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Our consolidated financial statements at December 31, 2011 were retrospectively adjusted to reflect the above adjustments. As of March 31, 2012 the purchase price allocation remains preliminary and will be finalized as we complete our assessment of deferred income taxes, acquired property and obligations. The purchase price allocation will be finalized during 2012.

In March 2012, funding of our joint venture with E.A. Juffali & Brothers Company occurred. The joint venture enables PolyOne to expand its Global Color and Additives business into the Middle East. The new joint venture is 51% owned by PolyOne and is based in Jeddah, Saudi Arabia. The joint venture is reflected within our condensed consolidated financial statements, including the non-controlling interest.

Goodwill as of and for the periods ended March 31, 2012 and December 31, 2011, and changes in the carrying amount of goodwill by operating segment was as follows:

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

Components of Inventories are as follows:

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Components of Property, net are as follows:

Income tax expense was $11.3 million for the first quarter of 2012 compared to $60.9 million in the first quarter of 2011. The decrease in income tax expense is primarily related to the income taxes on the sale of our 50% equity interest in SunBelt Chlor Alkali Partnership (SunBelt) joint venture during the first quarter of 2011. In addition, our interim provision was impacted by a decrease in valuation allowances of $0.1 million in the first quarter of 2012 and $2.4 million in the first quarter of 2011.

For the three months ended March 31, 2012 and 2011, 0.8 million and 0.4 million of equity-based awards, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. Additionally, during the first quarter of 2012, 0.8 million stock appreciation rights (SARs) were granted under the PolyOne Corporation 2010 Equity and Performance Incentive Plan. These awards vest in three tranches with each tranche having separate market and time vesting conditions. The first tranche vests at the later of one year and when PolyOne’s cumulative common stock price appreciates at least 10% from the grant date for 30 consecutive trading days. The second tranche vests at the later of two years and when PolyOne’s cumulative common stock price appreciates at least 15% from the grant date for 30 consecutive trading days. The third tranche vests at the later of three years and when PolyOne’s cumulative common stock price appreciates at least 20% from the grant date for 30 consecutive trading days. The 0.8 million SARs were excluded from the calculation of diluted earnings per share as none of the market conditions were met as of March 31, 2012.

Components of defined benefit pension plan costs are as follows:

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

Debt consists of the following instruments:

On December 21, 2011, we entered into a five-year senior secured revolving credit facility, which includes up to $300.0 million in revolving loans, subject to a borrowing base with advances against U.S. and Canadian accounts receivable and inventory. We have the option to increase the availability under the revolving credit facility to $350.0 million, subject to our meeting certain requirements and obtaining commitments for such increase. As of March 31, 2012, we were in compliance with all covenants, there were no outstanding borrowings, and we had availability of $156.0 million under the revolving credit facility.

Segment information for the three months ended March 31, 2012 and 2011 is as follows:

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Environmental —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 three months ended March 31, 2012 and 2011, we recognized $1.6 million and $1.5 million, respectively, of expense related to environmental activities at all of our active and inactive sites. During the three months ended March 31, 2011, we received $1.9 million of reimbursements of previously incurred environmental remediation costs while no reimbursements were received during the three months ended March 31, 2012. The gains associated with these reimbursements are included within Cost of sales in our Condensed Consolidated Statement of Operations.

Based on estimates that were prepared by our environmental engineers and consultants, we had accrued $75.2 million at March 31, 2012 and $76.2 million at December 31, 2011 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 March 31, 2012. 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 Contingencies , to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Guarantee— On February 28, 2011, we sold our 50% equity interest in SunBelt to Olin for $132.3 million in cash and the assumption by Olin of the obligations under our guarantee of senior secured notes issued by SunBelt of $42.7 million at the time of sale, $36.6 million as of March 31, 2012. Unless the guarantee is formally assigned to Olin, we remain obligated under the guarantee, although Olin has agreed to indemnify us for amounts that we may be obligated to pay under the guarantee.

Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy is established, which categorizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

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The carrying amounts and fair values of our financial instruments as of March 31, 2012 and December 31, 2011 are as follows:

The fair value of derivative instruments determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, spot and forward rates, as well as option volatility and non-performance risk.

Other Fair Value Measurements

The estimated fair value of the company’s debt instruments at March 31, 2012 and December 31, 2011 was $731.8 million and $723.7 million, respectively, compared to carrying values of $706.4 million and $707.0 million as of March 31, 2012 and December 31, 2011, respectively. The fair value of the company’s debt instruments represent level 2 measurements within the fair value hierarchy and were estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities.

When translating results from foreign operations into U.S. dollar, we are subject to foreign exchange related risks in our operating results. In 2012, we initiated a hedging strategy to mitigate this foreign exchange risk related to the Euro using foreign exchange option contracts to hedge against unfavorable movements in foreign currency exchange rates. Our hedging strategy is intended to hedge 75% of our Euro denominated forecasted operating income for a period of up to twelve months. We are also exposed to foreign exchange risk arising from intercompany lending transactions denominated in various foreign currencies that are subject to foreign exchange rate movement over the term of the loans. To mitigate this risk, we enter into foreign exchange forward contracts with major financial institutions. The counterparties to these instruments are financial institutions with strong credit ratings. PolyOne maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions.

Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Condensed Consolidated Balance Sheets. These instruments are not designated as a hedge, therefore, any gain or loss is immediately recognized in income.

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The fair value of derivative financial instruments recorded in the Condensed Consolidated Balance Sheets follows:

The effects of derivative instruments on our Condensed Consolidated Statements of Operations as well as where they are recognized for the three months ended are as follows:

Changes in equity for the three months ended March 31, 2012 and March 31, 2011 are as follows: