PolyOne Corporation — Q1 2017 Form 10-Q
Business context and reporting period. The filing is for the three months ended March 31, 2017. PolyOne describes itself as a specialty polymer materials, services and solutions provider with five reportable segments. The request identifies AVIENT CORP, but the filing issuer is PolyOne Corporation; confirm the intended issuer.
Financial performance
Unless otherwise stated, amounts are in millions of dollars. Comparisons are with Q1 2016.
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Sales | $898.8 | $847.0; up 6.1% |
| Gross margin | $187.4; 20.9% of sales | $185.5; about 21.9% of sales |
| Operating income | $81.4; 9.1% of sales | $71.3; 8.4% of sales |
| Net income attributable to common shareholders | $46.9 | $39.1; up 19.9% |
| Diluted EPS | $0.57 | $0.46 |
| Cash from operations | $(23.7) | $(23.5) |
| Capital expenditures | $15.5 | $19.6 |
| Cash and cash equivalents | $157.7 at March 31 | $226.7 at December 31, 2016 |
| Debt | $1,313.0 principal; $1,297.1 carrying value | Principal amount was $1,274.1 at December 31, 2016 |
Sales growth reflected 7.1% organic volume growth and a 2.3% contribution from acquisitions, partly offset by unfavorable mix and price of 2.4% and foreign exchange of 0.9%. Selling and administrative expense fell $8.2 million, but the decrease included a $4.3 million legal settlement and a $3.8 million reversal of non-income-tax reserves. The effective tax rate was 28.6%, versus 31.6%.
Segments and material changes
- Color, Additives and Inks sales rose 3.4% to $211.8 million; operating income was $35.1 million, nearly unchanged.
- Specialty Engineered Materials sales rose 12.8% to $159.1 million, including acquisition contribution; operating income was $23.6 million, up slightly.
- Designed Structures and Solutions sales fell 5.9% to $102.1 million, and operating income swung to a $3.3 million loss from $0.4 million income, primarily due to unfavorable mix.
- Performance Products and Solutions sales grew 10.5% to $183.7 million and operating income increased to $22.1 million.
- PolyOne Distribution sales grew 6.4% to $286.1 million and operating income increased to $18.6 million.
Operating income increased 14.2%, aided by improved corporate and eliminations results, which included the legal settlement, reserve reversal and lower restructuring costs. Q1 restructuring charges were $3.9 million, compared with $7.1 million in Q1 2016. The company acquired SilCoTec on January 3, 2017; its results are reported in Color, Additives and Inks.
Cash, debt and liquidity
Operating cash outflow was nearly unchanged year over year. Higher earnings were offset by working-capital use, including increases in receivables and inventory. Investing cash outflow was $35.5 million, including $20.9 million for acquisitions. Financing cash outflow was $11.0 million: net revolver borrowings and other financing were more than offset by $34.3 million of share repurchases and $11.3 million of dividends. Cash declined by $69.0 million during the quarter.
The company reported total liquidity of $551.5 million, comprising $157.7 million cash and $393.8 million revolver availability. Separately, the financing note reports $389.7 million of availability under the revolver, while also noting $41.0 million of outstanding borrowings. The company amended its term loan to reduce the applicable margin by 50 basis points and amended its revolving facility, increasing its maximum size to $450 million and extending maturity to February 2022. It reported compliance with debt covenants at quarter-end.
Outlook, risks and unusual items
The filing provides no specific numerical earnings or sales guidance. Management cautions that Q1 results are not necessarily indicative of full-year results. Risks cited include raw-material and energy cost or supply changes, foreign exchange and other international risks, customer financial health, execution and integration of acquisitions, operational disruptions, working-capital and cost-reduction execution, and litigation and environmental matters.
Environmental remediation accruals were $116.9 million at March 31, 2017. The company says additional costs beyond accruals are reasonably possible but cannot currently be estimated. For the lower Passaic River, the USEPA selected a remedy for an eight-mile portion with an estimated discounted cost of $1.4 billion; PolyOne states that uncertainties prevent estimating its potential liability and that it does not expect the matter to be material to its consolidated financial statements based on current information. The Custom Engineered Structures reporting unit had only 8.0% fair-value headroom in the October 2016 goodwill test; management reported no Q1 impairment trigger, but warned that delayed business opportunities or operational improvements could lead to impairment.
Important facts for investors to verify
- Confirm whether this PolyOne filing is the intended filing for the AVIENT CORP request.
- Reconcile the reported $393.8 million liquidity-table revolver availability with the $389.7 million stated in the financing note.
- Track working-capital trends and operating cash conversion, given the quarterly operating cash outflow and reduced cash balance.
- Assess whether Designed Structures and Solutions can recover operating profitability and whether CES achieves the business gains and improvements underpinning its goodwill valuation.
- Monitor environmental remediation exposure, particularly the Passaic River matter, and any changes to the $116.9 million accrual.
- Separate recurring operating performance from the legal settlement, tax-reserve reversal and lower restructuring charges that benefited the quarter.