PolyOne Corporation (filing metadata names AVIENT CORP)
Entity note: The filing is PolyOne Corporation’s Form 10-K, not a filing under the name Avient. It covers the fiscal year ended December 31, 2016; quarterly figures below identify the fourth quarter where relevant.
Business context and reporting period
PolyOne supplied specialized polymer materials, color and additive systems, engineered materials, plastic sheet and film solutions, and polymer distribution. It reported five segments: Color, Additives and Inks; Specialty Engineered Materials; Designed Structures and Solutions; Performance Products and Solutions; and PolyOne Distribution. The company reported 2016 sales of $3.34 billion, with 36% to customers outside the United States.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Sales | $3,339.8 million | $3,377.6 million |
| Gross margin | $706.2 million; 21.1% of sales | $681.5 million; 20.2% of sales |
| Operating income | $281.9 million; 8.4% of sales | $250.9 million; 7.4% of sales |
| Net income from continuing operations | $165.0 million | $144.7 million |
| Diluted continuing-operations EPS | $1.95 | $1.63 |
| Cash from operating activities | $221.3 million | $227.2 million |
| Capital expenditures | $84.2 million | $91.2 million |
| Total debt | $1,258.3 million | $1,146.6 million |
| Cash and cash equivalents | $226.7 million | $279.8 million |
| Reported liquidity | $612.9 million | $621.7 million |
Operating cash flow less capital expenditures was approximately $137.1 million in 2016. Investing activities used $235.4 million, including $164.2 million for acquisitions. Financing activities used $34.0 million; the company repurchased $86.2 million of shares and paid $40.2 million in cash dividends. The 2016 dividend declared was $0.495 per share, versus $0.420 in 2015.
Material changes versus the prior comparable period
- Sales declined 1.1%. Acquisitions added 2.0% and industrial and consumer market growth added 3.8%, while lower selling prices from reduced hydrocarbon-based raw-material costs, foreign exchange, and legacy Spartech volume declines weighed on sales.
- Operating income rose 12.4%, helped by higher gross margin and lower restructuring costs. Net income from continuing operations rose 14.0%; diluted EPS increased from $1.63 to $1.95.
- Segment results were mixed. Performance Products and Solutions operating income rose to $74.4 million from $57.4 million; Specialty Engineered Materials increased to $81.1 million from $79.6 million. Designed Structures and Solutions swung to a $3.8 million operating loss from $13.8 million income. Color, Additives and Inks income fell to $127.5 million from $135.4 million; Distribution income was broadly flat at $68.2 million.
- Debt increased by $111.7 million, principally reflecting the $100 million term-loan increase used in connection with acquisitions. Cash declined by $53.1 million during the year.
- Acquisitions included Kraton assets and technologies and the Gordon Composites, Polystrand and Gordon Holdings businesses. Comptek was acquired in November 2016; SilCoTec was acquired on January 3, 2017.
Outlook, management commentary, risks and unusual items
- Management’s stated priorities were sales growth with expanding margins, specialization, globalization, operational and commercial excellence, new-product development, and continued Lean Six Sigma work. The filing does not provide a specific 2017 revenue or earnings forecast.
- 2017 capital expenditures were estimated at $90 million to $95 million, mainly for growth, recent acquisitions and strategic investments. Expected 2017 cash environmental expenditures were approximately $10 million. Management said operating cash flow and available revolving-credit capacity were expected to support operations, debt service, dividends and authorized share repurchases.
- Major risks include cyclical end-market demand, raw-material and energy cost volatility, price competition, foreign-exchange changes, international operating risks, acquisition integration, pension assumptions, information-system and cyber risks, and debt covenants and refinancing or liquidity needs.
- Environmental liabilities were accrued at $117.3 million. The company had not accrued for potential remediation costs relating to the lower Passaic River because it could not estimate its liability, if any; the EPA’s selected remedy for an eight-mile section had an estimated discounted cost of $1.4 billion. The filing states additional costs at other sites are reasonably possible but not currently estimable.
- The Custom Engineered Structures reporting unit was identified as at risk of future goodwill impairment. Its estimated fair value exceeded carrying value by 8.0% in the October 2016 test; the unit included $108.8 million of goodwill. Total goodwill was $677.4 million.
- Unusual items included an $8.4 million fourth-quarter pension mark-to-market gain in 2016, compared with an $11.6 million fourth-quarter charge in 2015. 2016 restructuring charges were $19.0 million, versus $41.9 million in 2015. The effective tax rate increased to 25.8% from 13.7%; the 2015 rate benefited substantially from amended tax returns and foreign tax credit use.
- At year-end, 83% of cash was held outside the United States; repatriation could result in taxes. The company reported compliance with debt covenants. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management identified no material weaknesses.
Important facts for investors to verify
- Confirm the issuer identity and ticker: the supplied filing is PolyOne Corporation’s 2016 10-K, despite the AVIENT CORP request metadata.
- Review whether Designed Structures and Solutions can recover from its operating loss and whether the Custom Engineered Structures unit’s impairment headroom remains adequate.
- Track acquisition integration, acquired-business contributions, and the effect of the higher debt balance and interest obligations on cash generation.
- Assess the scope, timing and potential allocation of environmental remediation costs, especially the unaccrued lower Passaic River matter.
- Monitor operating cash flow, working capital, foreign-exchange effects, and progress against management’s margin and capital-spending priorities.