PolyOne Corporation (now Avient) — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2017. The filing registrant is PolyOne Corporation; the filing does not identify itself as an Avient filing.
Business and key financial results
PolyOne provides specialized polymer materials, colorants, additives, inks, engineered materials and polymer distribution. Results reflect four continuing segments: Color, Additives and Inks; Specialty Engineered Materials; Performance Products and Solutions; and PolyOne Distribution. Amounts below are in millions except per-share data.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $818.5 | $746.7 | $2,429.3 | $2,243.8 |
| Gross margin | $179.5 | $166.1 | $549.8 | $524.6 |
| Operating income | $67.7 | $72.0 | $231.7 | $224.2 |
| Continuing-operations net income | $40.2 | $42.8 | $138.1 | $131.1 |
| Net income (loss), including discontinued operations | $38.8 | $42.3 | $(95.7) | $131.3 |
| Diluted EPS, continuing operations | $0.49 | $0.51 | $1.68 | $1.55 |
Gross margin was approximately 21.9% in Q3 (22.2% prior year) and 22.6% year to date (23.4% prior year). Operating margin was approximately 8.3% in Q3 (9.6% prior year) and 9.5% year to date (10.0% prior year). Q3 sales rose 9.6%; management attributed growth to organic gains, acquisitions and, for the quarter, favorable foreign exchange. Year-to-date sales increased 8.3%.
For the nine months, operating cash flow was $111.2, capital expenditures were $52.0, and cash and equivalents increased to $233.5 from $225.5 at year-end 2016. Cash flow from operations was below the prior-year $132.5, principally reflecting working-capital needs as sales grew. Cash dividends paid were $33.2 and share repurchases were $70.7.
At September 30, cash was $233.5 and reported total debt was $1,352.0 net of discounts and issuance costs ($1,367.0 principal). Approximate net debt on that carrying-value basis was $1,118.5. Short- and long-term debt totaled $1,352.0; liquidity, including $277.8 of revolving-credit availability, was $511.3, down from $611.7 at December 31, 2016. The company reported compliance with debt covenants.
Material changes and drivers
- On July 19, PolyOne sold its Designed Structures and Solutions (DSS) segment for $115.0 cash. DSS is reported as discontinued operations. The nine-month discontinued-operations loss was $233.8, including the sale loss; continuing-operations results therefore give a clearer view of ongoing operations.
- PolyOne acquired SilCoTec, Rutland and Mesa during 2017 for a combined $163.8 net of cash acquired. Their results are included in Color, Additives and Inks; management expected the acquisitions to add approximately $85.0 of annual sales.
- Q3 operating income declined 6.0% despite higher sales. Raw-material inflation reduced gross-margin percentage; higher selling and administrative expense, including employee costs and acquired-business costs, also weighed on results. Corporate and eliminations expense increased.
- Year-to-date operating income rose 3.3%, with improvement in Color, Additives and Inks, Performance Products and Solutions, and Distribution partly offset by lower Specialty Engineered Materials operating income and higher corporate costs.
- On August 15, the term-loan margin was reduced by 25 basis points to 200 basis points under the amended loan terms.
Outlook, risks and contingencies
The filing gives no specific financial guidance. Management noted that interim results are not necessarily indicative of full-year results. It cited raw-material price, quality and supply changes; foreign exchange and other international risks; demand and industry-capacity changes; outages and maintenance; acquisition integration and expected benefits; credit-market access; cyberattacks; and litigation and environmental matters as risks to future results. Hurricane Harvey increased manufacturing costs in Performance Products and Solutions during Q3.
Environmental remediation accruals were $117.8 at September 30. The company said additional costs are reasonably possible but cannot currently be estimated. For the lower Passaic River matter, PolyOne said uncertainties prevented a reasonable estimate and any potential accrual would not be material to its financial statements. It also described ongoing Calvert City remediation and insurance-recovery efforts.
Approximately 83% of cash was held outside the United States; repatriation could create tax costs, which the company said were not practicable to determine. No material changes to reported market-risk exposures or contractual obligations were identified. 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
- Reconcile the $233.8 year-to-date discontinued-operations loss with the DSS sale accounting and the continuing-operations earnings trend.
- Track whether pricing and cost actions offset raw-material inflation and restore segment and consolidated margins.
- Assess acquisition integration, the expected approximately $85.0 of annual acquired sales, and the associated debt and working-capital demands.
- Monitor liquidity, revolving-credit availability, debt maturities—including $710.1 scheduled for 2022—and covenant compliance.
- Follow environmental remediation estimates, particularly Calvert City and the Passaic River, and any developments affecting the $117.8 accrual.