Avient Corporation (formerly PolyOne) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Avient supplies specialty engineered materials, color and additive systems, and polymer distribution. Results reflect the continuing business; the Performance Products and Solutions segment was divested in October 2019 and is reported as discontinued operations.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $609.1 million | $748.2 million | $1,320.6 million | $1,498.8 million |
| Gross margin | $149.7 million; 24.6% of sales | $175.3 million; 23.4% | $321.2 million; 24.3% | $343.4 million; 22.9% |
| Operating income | $38.0 million; 6.2% of sales | $46.1 million; 6.2% | $90.8 million; 6.9% | $93.2 million; 6.2% |
| Net income from continuing operations | $23.4 million | $23.2 million | $56.5 million | $45.7 million |
| Net income attributable to Avient shareholders | $22.8 million | $42.1 million | $55.6 million | $80.3 million |
| Diluted EPS, continuing operations | $0.25 | $0.30 | $0.63 | $0.58 |
Q2 sales fell 18.6% and operating income fell 17.6% year over year. Continuing-operations income was nearly flat in Q2 and rose 23.6% for the first half, while reported net income declined because 2019 included income from the divested business. Gross margin improved, reflecting mix, cost containment and an $8.5 million environmental insurance recovery in Q2. Q2 other income included a $6.9 million pension settlement and remeasurement gain. Acquisition-related costs were $7.9 million in Q2 and $11.6 million for the first half.
All three operating segments reported lower Q2 sales and operating income. Sales declines were 15.2% in Color, Additives and Inks, 18.7% in Specialty Engineered Materials, and 22.1% in Distribution. Management cited COVID-19-related demand weakness, particularly in North America and Europe; packaging, healthcare and Asia were relative areas of strength. Foreign exchange reduced consolidated sales by 1.3% in Q2.
Cash flow, liquidity and debt
- First-half operating cash flow was $76.0 million, versus $99.4 million provided in the 2019 cash flow statement. Capital expenditures were $21.3 million; investing cash outflow was $9.0 million.
- Cash was $1,977.0 million at June 30, compared with $864.7 million at year-end 2019. The increase primarily reflected $496.1 million of net equity offering proceeds and $640.8 million of net senior-note proceeds.
- June 30 liquidity was $2,237.9 million, including $260.9 million of revolving-credit availability. After July cash payments for the acquisition and taxes, management reported pro forma liquidity of $717.2 million.
- Principal debt was $1,888.4 million ($1,867.7 million net carrying value), versus $1,242.8 million principal at year-end. The increase included $650 million of 5.75% senior notes due 2025, issued in May. The company reported compliance with debt covenants.
- Dividends declared were $0.2025 per share for Q2. Estimated 2020 capital expenditures were reduced to approximately $45 million from $65 million.
Acquisition, outlook and risks
On July 1, 2020, after quarter-end, Avient completed its acquisition of Clariant’s global masterbatch business and Clariant India’s masterbatch assets for preliminary consideration of $1.4 billion net of cash, subject to adjustments. Funding came from equity and senior-note proceeds and proceeds from the 2019 divestiture. The company also changed its name to Avient; its ticker changed to AVNT effective July 13. Management said the acquisition expands scale, product depth and geographic reach. Preliminary unaudited 2019 pro forma sales and net income were approximately $4.0 billion and $58 million; these figures are not forecasts.
Management said COVID-19 had adversely affected, and was expected to continue affecting, operations, results, financial position and cash flows; the ultimate impact could not be estimated and could be material. No full-year earnings guidance is stated in the provided filing text. The filing identifies risks including pandemic-related disruption, acquisition integration and expected benefits, raw-material and supply volatility, foreign exchange, credit-market conditions, and legal and environmental matters. Environmental accruals totaled $109.6 million at June 30; additional costs could arise but were not estimable. No remediation accrual was recorded for the lower Passaic River matter because liability and allocation remained uncertain.
Key facts for investors to verify
- Post-quarter acquisition funding, final purchase-price adjustments, integration costs, and resulting leverage and liquidity.
- Whether demand and margins recover from COVID-19-related declines across segments, especially Distribution and Specialty Engineered Materials.
- Cash conversion and working-capital trends; first-half operating cash flow was below the prior-year period.
- Environmental exposure beyond the $109.6 million recorded reserve, including the Calvert City and Passaic River matters.
- Future performance relative to the $45 million 2020 capital-expenditure estimate and the filing’s stated risks; the filing provides no earnings guidance.