Avient Corporation (NYSE: AVNT) — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020, with fourth-quarter results included. Figures are in U.S. dollars; amounts are in millions unless otherwise noted. Avient supplies specialty materials, color and additive systems, engineered polymers and polymer distribution. It completed the $1.4 billion Clariant masterbatch acquisition on July 1, 2020, changed its name from PolyOne to Avient, and operates three reportable segments.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales | $3,242.1 | $2,862.7 |
| Gross margin | $784.3; 24.2% of sales | $657.2; 23.0% of sales |
| Operating income | $189.3; 5.8% of sales | $156.8; 5.5% of sales |
| Continuing-operations net income | $133.8 | $75.7 |
| Diluted EPS, continuing operations | $1.46 | $0.97 |
| Cash from operations | $221.6 | $300.8 |
| Capital expenditures | $63.7 | $81.7 |
| Cash and cash equivalents at year-end | $649.5 | $864.7 |
| Total debt, net carrying value | $1,872.6 | $1,229.3 |
Year-end liquidity was reported as $929.4, comprising cash of $649.5 and revolving-credit availability of $279.9. There were no borrowings on the revolving facility, and the company reported compliance with debt covenants. Dividends declared were $0.82 per share in 2020. The company repurchased 1.25 million shares during the year for $22.4.
Material changes and drivers
- Sales rose 13.3%, primarily because the acquired Clariant business contributed $544.2 of revenue from its acquisition date. Sales declined organically 4.5% in Color, Additives and Inks; management cited COVID-related weakness, partly offset by healthcare and packaging demand.
- On a pro forma basis including Clariant for both years, sales were $3,782.5 in 2020 versus $3,981.3 in 2019. The filing attributes the decline mainly to pandemic-related demand weakness.
- Gross margin improved as a percentage of sales, which the company attributed mainly to mix, lower raw-material costs and cost containment. Selling and administrative expense increased by $94.6, primarily due to the acquisition.
- Continuing-operations net income increased, while total net income attributable to shareholders fell to $131.6 from $588.6 in 2019. The prior-year result included a $457.7 after-tax gain on the divestiture of Performance Products and Solutions (PP&S).
- Operating cash flow declined by $79.2, reflecting, among other items, $142.0 of taxes paid on the PP&S sale and $38.1 of earnout-liability payments, partly offset by lower working capital.
- Debt increased to fund the acquisition. The company issued $650.0 principal amount of 5.75% senior notes due 2025 and raised $496.1 net through an equity offering; acquisition funding also used proceeds from the PP&S sale.
Fourth-quarter results and unusual items
Fourth-quarter 2020 sales were $997.0, gross margin $252.9, operating income $65.0, and continuing-operations net income $74.7; diluted continuing-operations EPS was $0.81. Fourth-quarter 2019 sales were $658.6, operating income $20.5, and continuing-operations net income $6.4. The 2019 quarter also included $458.9 of after-tax income from discontinued operations, primarily the PP&S sale.
Fourth-quarter 2020 results included a $17.2 pension and post-retirement actuarial benefit. FY2020 income-tax expense was unusually low at $5.2, including an $18.2 one-time tax benefit from an internal reorganization of international subsidiaries. The filing does not isolate the precise contribution of each item to fourth-quarter earnings.
Outlook, risks and contingencies
- Management said it would focus in the near term on sales growth and expanding margins, while seeking to offset end-market and geographic headwinds, raw-material volatility and logistics-cost inflation. It did not provide quantitative revenue or earnings guidance.
- Management estimated 2021 capital expenditures of approximately $95.0 and cash environmental expenditures of approximately $20.0. The company also expects acquisition integration and restructuring costs.
- The Clariant integration restructuring plan is expected to run through 2023, with approximately $75 of charges anticipated. The company recorded $19.6 of employee-separation and restructuring charges in 2020.
- Environmental liabilities accrued were $119.7 at year-end, including a $106.4 reserve for the former Calvert City site. The company said additional costs are reasonably possible but not currently estimable. A separate Passaic River allocation process and litigation remain unresolved; management said its current best estimate of any liability there would not be material.
- Key risks include continuing COVID-19 effects on demand, operations and supply chains; raw-material and energy cost fluctuations; international currency, regulatory and political exposure; integration and synergy execution; environmental obligations; debt covenants and refinancing needs; and potential impairment of acquisition-related goodwill and intangibles. Clariant purchase accounting remained preliminary at year-end.
Key investor verification points
- Assess underlying organic performance separately from the Clariant acquisition, including the pro forma sales decline and segment margins.
- Review acquisition integration progress, the preliminary purchase-price allocation, expected synergies and the projected $75 restructuring program.
- Evaluate cash conversion and the planned uses of liquidity, including debt service, dividends, buybacks, capital spending and environmental payments.
- Monitor the Calvert City reserve, Passaic River proceedings and any changes in estimated remediation costs.
- Consider the one-time tax benefit and pension actuarial gain when evaluating 2020 earnings; compare continuing operations rather than headline net income with 2019, which included the PP&S divestiture gain.
- Note that management’s and the auditor’s internal-control assessments excluded Clariant MB, which represented approximately 41.6% of year-end assets and 16.8% of 2020 net sales.