As recently as last March, some analysts and investors were wondering whether PolyOne Corp. was going to be able to stay out of bankruptcy. But since then, the specialty plastics company based in Avon Lake, Ohio, has become something of a Wall Street darling as it aggressively has attacked its cost structure and inventory levels and dramatically improved its balance sheet.
Along the way, PolyOne's stock price has bounced from a low of $1.34 a share March 9 to recent sustained levels of slightly more than $5 a share. That's a rise in value of nearly 275 percent, which dwarfs even the impressive gain of 48 percent posted by the Standard & Poor's 500 during the same time period.
As the stock price indicates, it has been a long ride over a short haul for PolyOne, said Chief Financial Officer Robert Patterson.
For the first quarter, the story was, 'Hey, PolyOne is going to survive,' said Patterson, referring to the company reporting a loss of $9.3 million, but also a $78 million improvement in cash flow during the quarter that helped bring its liquidity position up to $189 million.
That first quarter was met with a sigh of relief, Patterson said.
That's because some observers thought PolyOne might not avoid U.S. Bankruptcy Court, especially when it began the year with a relatively weak cash position of $44 million in an economy as bad as any in decades, Patterson said.
Before the first quarter was completed and results were announced, analysts and rating agencies were beating down PolyOne's stock as well as its debt rating.
We believe PolyOne is not out of the woods from a liquidity standpoint, KeyBanc Capital Markets analyst Saul Ludwig wrote in his March 2 assessment of the company.
Ludwig said the company had a very bright management team, but he pinned its ability to avoid Chapter 11 bankruptcy protection from creditors upon successfully implementing an announced cost-cutting strategy and expertly managing its working capital. Even with that, Ludwig wrote: We think the odds of [PolyOne] making it through this challenging period without having to file Chapter 11 are slightly better than 50 percent as he reiterated an underweight rating, suggesting investors unload the stock.
Since then, Ludwig and the market have changed their tunes about the company.
By July, PolyOne was trading above $3 a share, and Ludwig was advising investors to buy the stock. In his most recent report, issued Aug. 18 after the company beat analysts' estimates with second-quarter earnings of 13 cents a share vs. an anticipated loss of 2 cents Ludwig still was telling clients to buy at prices above $5. He now believes the stock will reach $8 in the next 12 months.
Price support in general for products of specialty chemical companies, along with PolyOne's successful cash- and cost-management initiatives, led Ludwig to continue to recommend the stock in August, he reported.
Patterson said PolyOne's improvement strategy included inventory reduction, diligent application of Six Sigma management tactics and the ability to implement cost-cutting strategies adopted in 2008.
In the first six months of 2009, inventory was reduced by $47 million, to $149.5 million, as the company attacked its raw material stockpile in January, then began reducing its finished goods on hand in February. Purchasing managers were prohibited from buying anything unless it was a customer emergency, Patterson said, while six newly trained Six Sigma black belts were pulled from their normal company duties and assigned to work on inventory reduction and cost savings full time.
We had to reverse this PolyOne trend of 'buy it now and hope you sell it in the first quarter,' Patterson said of the change in strategies.
This is a made-to-order shop now, he added.
Dmitry Silversteyn, senior research analyst with Longbow Research in Independence, Ohio, said PolyOne had plenty of room for improvement and it has taken advantage of that by executing its plans well.
I think they've clearly done a good job within the environment they find themselves, he said. They are the product of numerous acquisitions, some of which were well-integrated and some that were not. There's a lot of low-hanging fruit but that doesn't mean you can't fall on your face getting to it.
The inventory reduction freed up cash at the same time PolyOne consolidated the way it pays vendors. It pays once a month the fifth day of the second month after it receives vendors' invoices.
That practice means PolyOne doesn't need to write checks every week or every day, and it enables vendors to know when they'll be paid, Patterson said. It also generated $40 million in cash by creating an initial lag in payments when the program was implemented, he said.
In the meantime, PolyOne continued to consolidate its manufacturing operations. Since July 2008, it has closed eight plants representing 20 percent of its manufacturing facilities and reduced its overall headcount by 5 percent, eliminating about 800 positions worldwide.
Now, bankruptcy might not be looming, but PolyOne is keeping its hatches battened down because it does not yet have confidence that revenues will rebound to their former levels. There have been encouraging signs, like a 5 percent increase in sales from its business in Asia from the first quarter of 2009 to the second. But its second-quarter sales of $496.5 million still were down 34 percent from the like quarter of 2008.
Patterson said the moves the company has made this year not only please investors, but also position it well for continued sluggishness in the economy generally.
The best news we could possibly deliver in the future is a better top line, he said. But, he added, No one is planning for a return to the highs of 2005 and 2006. We don't have those in the models, even in a best-case scenario.
Silversteyn said PolyOne is positioning itself to one day make new acquisitions and take market share in the specialty plastics arena.
In the meantime, it still has more room than most companies to achieve further cost savings via lean manufacturing programs, production cuts and reduced work hours, while keeping its prices and margins intact.
There are still some fairly meaty programs [we] can extract a lot of value from over the next two to three years, even if the top-line growth does not occur, he said.
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