PolyOne Corporation (now Avient) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless stated otherwise. The filing issuer is PolyOne Corporation. Amounts are in millions of dollars except per-share data.
Business and results
PolyOne supplies specialized polymer materials, color and additive systems, engineered materials, and polymer distribution services. Following its October 2019 divestiture of the Performance Products and Solutions segment, it reported three operating segments: Color, Additives and Inks; Specialty Engineered Materials; and Distribution.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sales | $711.5 | $750.6 | Down 5.2% |
| Gross margin | $171.5 | $168.1 | Up 2.0% |
| Operating income | $52.8 | $47.1 | Up 12.1% |
| Continuing-operations net income | $33.1 | $22.5 | Up 47.1% |
| Net income | $32.8 | $38.3 | Down 14.4% |
| Diluted EPS | $0.38 | $0.49 | — |
Gross margin was approximately 24.1% of sales versus 22.4%; operating margin was 7.4% versus 6.3%. Net income comparisons were affected by discontinued operations: Q1 2019 included $15.8 of after-tax income from the divested segment, while Q1 2020 recorded a $0.3 loss from discontinued operations. Continuing-operations diluted EPS was $0.38 versus $0.29.
Cash flow, balance sheet and capital
- Cash flow: Operating activities used $12.8, versus $24.7 used in Q1 2019. Management cited working-capital improvements, partly offset by a $21.0 Fiber-Line earnout payment. Investing activities provided $1.2; financing activities provided $430.9, primarily reflecting the February equity offering.
- Cash and liquidity: Cash and equivalents were $1,280.2 at quarter-end, up from $864.7 at year-end 2019. Cash plus revolving-credit availability was $1,576.8; approximately 19.6% of cash was held outside the U.S. The cash increase included $496.3 of net equity-offering proceeds.
- Debt: Principal debt was $1,240.6; reported debt net of discounts and issuance costs was $1,227.9. Long-term debt on the balance sheet was $1,209.7, with $18.2 current. The company reported compliance with debt covenants. Quarter-end debt maturities include $607.0 in 2024 and $595.6 thereafter.
- Shareholder returns: The quarterly dividend declared was $0.2025 per share. PolyOne repurchased 1.0 million shares for $13.6 during March.
Material changes and management commentary
- Sales fell across all three segments: Color, Additives and Inks down 2.6%, Specialty Engineered Materials down 2.4%, and Distribution down 8.8%. Distribution’s decline reflected lower volume and average selling prices.
- Operating income improved in Color, Additives and Inks and Specialty Engineered Materials, and was broadly flat in Distribution. Management attributed the overall margin improvement to favorable mix, lower raw-material costs, pricing actions, and lower discretionary spending. Foreign exchange reduced sales growth.
- Interest expense declined to $9.4 from $15.9, reflecting lower average variable debt balances and interest income on cash raised through the equity offering. The effective tax rate was 26.5%, compared with 28.1%.
- COVID-19 had no material adverse effect on reported Q1 results, but management said future effects on operations, customers, suppliers, results, and cash flows were uncertain and could be material. The filing describes challenges in Europe and China and in certain end markets.
- PolyOne agreed to acquire Clariant’s global masterbatch business outside India and Clariant India’s masterbatch business for $1.45 billion in cash, subject to customary adjustments and closing conditions. India shareholder approval was received in February; the acquisitions were expected to close in 2020. The company planned to use divestiture proceeds, equity proceeds, and an anticipated senior-notes offering; COVID-related capital-market disruption could make financing more difficult.
- Estimated 2020 capital expenditures were reduced to approximately $40 from a prior estimate of $65 in response to COVID-19. No full-year earnings or revenue guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- Environmental accruals totaled $109.7 at March 31. The Calvert City reserve was $99.6; further costs could arise. A separate lower Passaic River remediation liability could not be estimated and was not accrued.
- The Clariant transaction carries approval, financing, closing, integration, and synergy risks, including the possibility that notes financing may not be available on commercially reasonable terms.
- COVID-19 impacts and related economic and financial-market disruption remain uncertain. Other disclosed risks include foreign exchange, raw-material supply and pricing, litigation and environmental matters, and acquisition execution.
- The company recorded a $1.0 earnout charge in selling and administrative expense. It also adopted the expected-credit-loss accounting standard, with an immaterial cumulative adjustment to opening retained earnings.
Important facts for investors to verify
- Whether the Clariant masterbatch acquisitions closed, their final purchase-price adjustments, and the actual financing mix and cost.
- Subsequent COVID-19 effects on sales, margins, working capital, cash flow, and customer or supplier demand.
- Whether operating cash flow improves after the Q1 outflow and whether the elevated cash balance is largely committed to the acquisition.
- Changes in environmental reserves, especially Calvert City, and any developments affecting the unaccrued Passaic River exposure.
- Progress against the revised $40 million 2020 capital-expenditure estimate and any later changes to business outlook.