Avient Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Avient formulates and manufactures specialty engineered materials, performance fibers, composites, colorants, and additives. Financial amounts below are in millions of dollars, except per-share data.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Sales | $824.4 | $891.0 | $1,670.1 | $1,783.2 |
| Gross margin | $240.7; 29.2% | $260.9; 29.3% | $488.3; 29.2% | $515.3; 28.9% |
| Operating income | $62.3; 7.6% | $100.1; 11.2% | $119.4; 7.1% | $202.3; 11.3% |
| Continuing-operations net income | $22.3 | $62.8 | $43.6 | $127.5 |
| Net income attributable to Avient shareholders | $22.1 | $84.7 | $42.0 | $168.9 |
| Diluted EPS, continuing operations | $0.24 | $0.68 | $0.47 | $1.38 |
| Operating cash flow | Not separately provided for the quarter | $(24.7) | $106.7 |
Interest expense, net was $29.4 in Q2 and $58.2 in the first half, versus $16.2 and $33.1 in the comparable 2022 periods. First-half capital expenditures were $45.9; dividends paid were $45.0. Cash declined to $528.7 from $641.1 at year-end 2022.
At June 30, 2023, total debt principal was $2,215.3 (reported net debt carrying value $2,181.4, including short-term debt); cash was $528.7. Revolver borrowings were zero, with $226.6 available. Total liquidity was $755.3. The company reported compliance with all debt covenants.
Material changes and segment results
- Q2 sales fell 7.5% and first-half sales fell 6.3%. Management attributed the declines primarily to lower global demand and customer destocking, with unfavorable foreign exchange also reducing sales. APM acquisition contributions were more than offset by these pressures.
- Color, Additives and Inks sales declined 19.2% in Q2 and 18.3% in the first half; operating income declined 27.4% and 29.0%, respectively.
- Specialty Engineered Materials sales increased 24.1% in Q2 and 25.8% in the first half, chiefly reflecting the APM acquisition; operating income rose 12.8% and 12.7%, respectively.
- Q2 operating income fell 37.8%; first-half operating income fell 41.0%. Higher selling and administrative expense—including acquisition and restructuring costs—and increased corporate costs contributed. Higher interest expense reflected acquisition financing and higher rates on variable-rate debt.
- The Distribution business was sold in November 2022 and is presented as discontinued operations. The 2022 comparison included its results; Q2 2022 included $21.9 of discontinued-operations income, while first-half 2022 included $41.7. Avient acquired DSM Protective Materials, including Dyneema, in September 2022 for approximately $1.4 billion net of cash acquired.
Outlook, risks, and unusual items
- No specific sales or earnings guidance is provided in this filing. Management said cash on hand, operating cash flow, and available revolver capacity are expected to cover anticipated cash needs for at least the next 12 months and foreseeable future.
- Management cited weak global demand and customer destocking. Other identified risks include raw-material and energy costs and availability, foreign exchange, interest rates, acquisition integration, cyber incidents, regulatory changes, and environmental matters.
- Environmental accruals totaled $117.2 at June 30, including $107.9 for the Calvert City site. Q2 and first-half 2023 environmental costs were $13.0 and $14.4, respectively, versus $3.0 and $5.0 in 2022. Avient warned that additional costs above accruals could be material but could not currently be estimated. Construction proposals expected in Q3 2023 could affect its cost assessment.
- The Clariant Color integration restructuring plan is expected to run through 2024, with approximately $75.0 of total charges anticipated; $56.5 had been incurred by June 30. Separate personnel reductions related to slowing demand generated $15.0 of charges in the first half.
- The effective tax rate was 31.8% for Q2 and 29.3% for the first half, above the 21% federal statutory rate, primarily due to foreign valuation allowances, GILTI, and foreign withholding taxes.
- First-half operating cash flow was negative, attributed primarily to lower earnings and taxes paid associated with the Distribution sale. Approximately 66% of cash was held outside the United States.
Most important facts to verify
- Whether demand and customer destocking improve, particularly in Color, Additives and Inks, and whether APM growth offsets weakness elsewhere.
- The trajectory of operating cash flow, cash balances, debt costs, and the 2025 debt maturity of $652.2.
- Calvert City remediation proposals and any resulting changes to the $107.9 site accrual or broader environmental liabilities.
- Remaining restructuring charges, integration costs, and progress toward the stated $75.0 plan estimate.
- The continuing impact of the Distribution divestiture and APM acquisition on comparability, earnings, and cash requirements.