Avient Corporation — Q2 2022 Form 10-Q
Business context and period. Avient supplies specialty engineered materials, color and additive systems, advanced composites and polymer distribution. This unaudited report covers the quarter and six months ended June 30, 2022; comparisons are with the same 2021 periods.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Sales | $1,302.4 million | $1,235.2 million | $2,596.2 million | $2,397.5 million |
| Gross margin | $303.8 million; 23.3% | $288.7 million; 23.4% | $597.5 million; 23.0% | $591.1 million; 24.7% |
| Operating income | $129.5 million; 9.9% | $108.1 million; 8.8% | $258.1 million; 9.9% | $228.5 million; 9.5% |
| Net income attributable to Avient shareholders | $84.7 million | $68.8 million | $168.9 million | $148.1 million |
| Diluted EPS | $0.92 | $0.74 | $1.83 | $1.60 |
- Sales rose 5% in Q2 and 8% in the first half. Management attributed growth to healthcare and consumer demand, composite applications, and price increases tied to raw-material inflation; weaker China demand and foreign-exchange movements partly offset growth.
- Q2 gross margin was nearly flat year over year; first-half gross margin contracted, with cost of sales at 77.0% of sales versus 75.3%. Management cited cost inflation. Operating income increased, supported by lower selling and administrative costs and improved segment results.
- Q2 interest expense fell to $16.2 million from $19.5 million; first-half expense fell to $33.1 million from $38.8 million, primarily reflecting cross-currency swaps. Effective tax rates increased to 26.1% for Q2 and 25.0% for the first half, versus 22.6% and 22.5%.
- First-half operating cash flow was $106.7 million, up from $68.1 million, reflecting higher earnings and lower comparative working-capital investment. Investing activities provided $41.1 million, including $75.1 million of cross-currency-swap settlement proceeds, partly offset by $34.0 million of capital expenditures. Financing used $88.4 million, including $43.5 million of dividends and $36.4 million of share repurchases.
Financial position and material changes
- At June 30, cash and equivalents were $645.1 million; revolving-credit availability was $487.1 million, for reported liquidity of $1,132.2 million. Approximately 69% of cash was held outside the U.S.
- Total debt was $1,868.8 million principal, or $1,856.8 million net of discounts and issuance costs, versus $1,873.3 million principal at year-end. Debt due within one year was reported at $607.7 million net; the debt schedule lists $608.6 million of principal maturities in 2023. No revolver borrowings were outstanding. Avient reported covenant compliance.
- Current assets included $752.6 million of receivables and $494.0 million of inventory. Compared with December 31, 2021, short-term and current debt rose from $8.6 million to $607.7 million, while long-term debt fell from $1,850.3 million to $1,249.1 million.
- Segment sales and operating income generally increased. Q2 Color, Additives and Inks operating income rose to $93.6 million from $86.3 million; Distribution rose to $27.1 million from $23.7 million. Specialty Engineered Materials operating income decreased to $36.6 million from $37.3 million, with management citing unfavorable mix and cost inflation.
- Other comprehensive loss was $49.3 million in Q2, largely reflecting currency translation and related hedging instruments; this reduced comprehensive income despite higher net income.
Outlook, transactions and risks
- No quantified full-year earnings or sales guidance is provided in the supplied filing text. Management said remaining-2022 cash needs outside the acquisition were expected to be met from cash, operating cash flow and, if needed, revolver availability. Expected uses include interest, taxes, dividends, repurchases, environmental costs, capital spending and debt repayment.
- Avient agreed to acquire DSM’s Dyneema protective-materials business for €1.38 billion, subject to customary adjustments and closing conditions. Required regulatory approvals had been received, but the acquisition had not closed as of the report. The company expected to incur approximately $1.2 billion of additional debt and intended to issue new long-term debt rather than use its committed $900 million bridge facility. Avient was also exploring a possible sale of its Distribution business.
- Risks highlighted include acquisition integration and financing, increased leverage and ability to service debt, energy-price and supply volatility related to the Russia-Ukraine conflict, COVID-19 and supply-chain effects, China demand, raw-material inflation, currency movements, and environmental and litigation contingencies. Management noted that energy disruptions could cause manufacturing interruptions; contingency plans may not shift all affected production.
- Environmental accruals were $119.9 million at June 30, including a $107.7 million reserve for the Calvert City matter. Avient recorded $5.0 million of environmental expense and received $8.2 million in insurance recoveries in the first half. Additional costs beyond accruals are reasonably possible but cannot currently be estimated.
- Other unusual items include $75.1 million of cash proceeds from swap settlements and $7.6 million of Q2 environmental insurance recoveries. July 2022 subsequent events included settlement and replacement of cross-currency swaps, generating $65.6 million in proceeds.
Important facts for investors to verify
- Whether and when the Dyneema acquisition closes, its final U.S.-dollar cost, financing terms and post-close leverage.
- Whether the contemplated Distribution-business sale proceeds, and its effect on the remaining segment mix and earnings.
- Plans to address the substantial 2023 debt maturity and the effect of refinancing costs and interest rates.
- Whether inflation, China demand, foreign exchange and energy-market conditions affect margins and cash conversion beyond this quarter.
- Future environmental remediation costs and recoveries, particularly for the Calvert City site.