Avient Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Avient supplies specialty engineered materials, color and additive systems, advanced composites, and polymer distribution products. The prior-year comparison predates the July 2020 acquisition of Clariant’s masterbatch business (Clariant MB), so reported growth includes a substantial acquisition effect.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Sales | $1,162.3 million | $711.5 million |
| Gross margin | $302.4 million; 26.0% of sales | $171.5 million; 24.1% of sales |
| Operating income | $120.4 million; 10.4% of sales | $52.8 million; 7.4% of sales |
| Net income | $79.7 million | $32.8 million |
| Net income attributable to Avient shareholders | $79.3 million; diluted EPS $0.86 | $32.8 million; diluted EPS $0.38 |
| Operating cash flow | $3.6 million | $(12.8) million |
- Sales rose 63%, primarily due to Clariant MB. Gross margin increased as a percentage of sales from 24.1% to 26.0%, which management attributed to improved mix.
- Interest expense, net, increased to $19.3 million from $9.4 million, mainly reflecting the senior notes issued in May 2020. The effective tax rate was 22.3%, versus 26.5%.
- Segment operating income: Color, Additives and Inks $88.8 million; Specialty Engineered Materials $34.2 million; Distribution $24.0 million. On a pro forma basis including Clariant MB in both periods, Color, Additives and Inks sales grew 14% and operating income grew 42%.
Financial position and liquidity
- At March 31, 2021, cash was $594.5 million, total debt was $1,889.6 million principal ($1,871.5 million net carrying amount), and reported liquidity was $849.2 million, including $254.7 million of revolver availability. Cash was $649.5 million and liquidity $929.4 million at December 31, 2020.
- Current assets were $1,716.4 million and current liabilities $863.6 million. Approximately 80% of cash was held outside the United States.
- Operating cash flow was modest despite higher net income; increases in accounts receivable and inventory used cash. Capital expenditures were $16.5 million, dividends paid were $19.5 million, and cash declined by $55.0 million during the quarter.
- Debt maturities include $608.6 million in 2023 and $658.7 million in 2025. Avient reported compliance with all debt covenants.
- Other comprehensive loss was $50.2 million, primarily reflecting currency translation adjustments and related hedging instruments.
Changes, outlook and risks
- Reported sales and earnings increased substantially year over year, but results are not directly comparable because Clariant MB was acquired July 1, 2020. Clariant MB contributed $327.2 million of Q1 2021 sales and $41.5 million of pretax continuing-operations income.
- Management said the business was recovering from COVID-19 impacts experienced in 2020, while noting that the pandemic’s duration, vaccine rollout, resurgences and new variants make the outlook uncertain. The filing provides no specific full-year earnings or sales guidance.
- Management cited new product wins and recovering demand in healthcare, building and consumer markets, improved pricing and mix, integration synergies, record demand in Specialty Engineered Materials and Distribution, and strong composite-material demand.
- Clariant MB purchase accounting remained preliminary at quarter-end. Management was continuing valuation work, and final fair values could differ from provisional estimates. The acquired business represented approximately 41.1% of assets and 28.2% of quarterly sales; it was excluded from the company’s assessment of disclosure controls while integration continued.
- Environmental accruals totaled $115.1 million, including a $102.6 million reserve for the Calvert City site. The company said additional environmental costs are reasonably possible but cannot currently be estimated. It considers its reserves for other legal and administrative matters appropriate.
- Key stated risks include COVID-19 and economic conditions, foreign currency and political risks, raw-material and energy prices or supply, plastics regulation and demand, acquisition integration and expected synergies, cyberattacks, and environmental or litigation developments.
Important facts for investors to verify
- Separate acquisition-driven reported growth from underlying performance; review pro forma segment trends and the realization of Clariant MB integration synergies.
- Monitor working-capital needs and cash conversion, particularly receivables and inventory, alongside the company’s planned dividends, capital spending and debt payments.
- Review debt maturities, interest costs, covenant compliance and available revolving-credit capacity.
- Track completion of Clariant MB purchase accounting and its inclusion in internal-control assessments.
- Assess developments in environmental remediation, especially the Calvert City reserve and the Passaic River proceedings, where ultimate costs may change.