Avient Corporation (NYSE: AVNT) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022. Financial amounts are in millions, except per-share data. Avient formulates specialty and sustainable materials, including color and additive systems, specialty engineered materials, performance fibers and advanced composites.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Sales | $845.7 | $892.2 | Down 5.2% |
| Gross margin | $247.6; 29.3% of sales | $254.4; 28.5% of sales | Down $6.8; margin up |
| Operating income | $57.1; 6.8% of sales | $102.2; 11.5% of sales | Down 44.1% |
| Continuing-operations net income | $21.3 | $64.7 | Down 67.1% |
| Net income attributable to Avient shareholders | $19.9 | $84.2 | Down 76.4% |
| Diluted EPS | $0.22 total; $0.23 continuing operations | $0.91 total; $0.70 continuing operations | |
| Operating cash flow | $(22.2) | $18.9 | Down $41.1 |
| Capital expenditures | $20.3 | $13.3 |
Interest expense, net increased to $28.8 from $16.9, reflecting acquisition-related debt and higher rates on variable-rate term debt. The effective tax rate was 26.6%, versus 23.5%. Cost of sales declined to 70.7% of sales from 71.5%, primarily on mix and raw-material deflation, partly offset by higher restructuring charges.
Liquidity, debt and balance sheet
- Cash was $582.7 at March 31, down from $641.1 at year-end. Total liquidity, including $226.8 of available revolving-credit capacity, was $809.5, versus $887.3 at December 31, 2022.
- Debt principal totaled $2,215.5; reported long-term debt, net of current portion, was $2,177.7, with $2.2 of short-term debt. Cash less debt principal was approximately $1,632.8 net debt.
- No revolving-credit borrowings were outstanding; the company reported compliance with all debt covenants.
- Current assets were $1,564.3 and current liabilities $837.2. Approximately 58% of cash was held outside the United States.
- Cash dividends paid were $22.5. No shares were repurchased during the quarter.
Material changes and management commentary
- Management attributed the 5.2% sales decline mainly to lower global demand, customer destocking and unfavorable currency effects. The APM acquisition contributed 10.8% to sales growth, but did not offset these pressures.
- Color, Additives and Inks sales fell 17.3% to $537.0 and segment operating income fell 30.6% to $65.6. Specialty Engineered Materials sales rose 27.4% to $309.7, with APM contributing 39.7% to sales growth; segment operating income increased 12.5% to $43.1.
- Corporate costs increased to $51.6 from $30.6, primarily reflecting higher restructuring charges. The company recorded $14.1 of additional headcount-reduction charges in Q1 in response to lower global demand.
- Operating cash flow was negative, which management attributed primarily to lower earnings. Cash declined by $58.4 during the quarter.
Acquisitions, divestiture and unusual items
- Avient acquired DSM Protective Materials, including the Dyneema brand, on September 1, 2022, for $1.4 billion net of cash acquired. Preliminary purchase accounting included $396.5 of goodwill; final purchase-price allocation remained subject to the measurement period.
- The Distribution business was sold in November 2022 for $950.0 cash consideration, subject to working-capital adjustment. Total proceeds received were $935.5, including $7.3 received in Q1 2023. Distribution results are classified as discontinued operations. Q1 2022 included $401.6 of Distribution sales and $19.8 of after-tax discontinued-operations income; Q1 2023 had a $0.9 discontinued-operations loss.
- The Clariant Color integration restructuring plan is expected to continue through 2024, with approximately $75.0 of total charges anticipated; $55.8 had been incurred through March 31, 2023.
Outlook, risks and contingencies
The filing provides no specific earnings or sales guidance. Management identified cash on hand, operating cash flow and revolving-credit availability as expected sources for 2023 cash needs; expected uses include interest, taxes, dividends, share repurchases, environmental remediation and capital expenditures. The filing says material cash obligations had not changed materially from the 2022 Form 10-K.
- Environmental accruals totaled $111.5 at March 31, including a $102.0 reserve for the Calvert City site. The company warns that additional costs beyond accruals are reasonably possible but cannot currently be estimated.
- Other disclosed risks include demand and customer destocking, raw-material and energy costs, foreign exchange, interest rates, acquisition integration, regulation, supply disruptions, cyberattacks, litigation and restructuring-cost variability. Avient reported no material changes to previously disclosed risk factors during the quarter.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether demand and customer destocking improve, particularly in Color, Additives and Inks, and the extent to which APM can sustain growth and profitability.
- How restructuring charges, APM integration costs and acquisition-related interest affect operating income, cash generation and debt reduction.
- Progress toward finalizing APM purchase accounting and the performance of the acquired business against acquisition expectations.
- Cash-flow conversion, liquidity and refinancing exposure, including the $652.2 of scheduled principal maturities in 2025.
- Potential changes in environmental remediation exposure beyond the $111.5 accrued balance.