Avient Corporation — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2021, compared with the same periods in 2020. Avient provides specialty engineered materials, color and additive systems, and polymer distribution. Its three reportable segments are Color, Additives and Inks; Specialty Engineered Materials; and Distribution. The Clariant Color acquisition closed July 1, 2020, making year-to-date comparisons materially affected by acquisition timing.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $1,219.8 million | $924.5 million | $3,617.3 million | $2,245.1 million |
| Gross margin | $255.4 million; 20.9% | $210.2 million; 22.7% | $846.5 million; 23.4% | $531.4 million; 23.7% |
| Operating income | $78.7 million; 6.5% margin | $33.5 million; 3.6% margin | $307.2 million; 8.5% margin | $124.3 million; 5.5% margin |
| Net income | $52.6 million | $2.6 million | $201.7 million | $58.6 million |
| Net income attributable to Avient shareholders | $52.9 million | $1.7 million | $201.0 million | $57.3 million |
| Diluted EPS | $0.57 | $0.02 | $2.18 | $0.63 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $110.0 million | $68.7 million |
Q3 sales rose 32% and operating income rose 135% year over year. Nine-month sales rose 61% and operating income rose 147%; the filing attributes much of the year-to-date increase to the Clariant acquisition, as well as end-market growth and pricing. For Color, Additives and Inks, nine-month pro forma sales including Clariant for both periods increased 20%, and operating income increased 43% year over year.
Liquidity, debt and cash flow
- At September 30, 2021, cash was $545.2 million, down from $649.5 million at December 31, 2020. Revolving credit availability was $407.0 million, for reported total liquidity of $952.2 million.
- Principal debt was $1,875.3 million; balance-sheet debt, net of discounts and issuance costs, was $1,859.7 million. Long-term debt was $1,851.0 million. The largest stated principal maturities are $608.6 million in 2023 and $658.7 million in 2025.
- Nine-month operating cash flow of $110.0 million included substantial working-capital investment: accounts receivable increased $199.7 million and inventories increased $156.2 million. Capital expenditures were $62.7 million; the Magna Colours acquisition used $47.6 million.
- Nine-month financing cash outflow was $91.5 million, including $58.2 million of dividends and $16.5 million of debt repayments. Cash declined by $104.3 million over the period. About 72% of cash was held outside the United States.
- Avient reported compliance with all debt covenants at September 30, 2021. On October 26, 2021, it amended its asset-based revolving credit agreement, increasing the facility to $500 million, with a possible additional $150 million subject to conditions, and extending maturity to October 26, 2026.
Material changes, outlook and risks
- Management cited recovery in the business through Q3 2021 after adverse COVID-19 impacts in 2020, but said the pandemic’s scope and duration, supply-chain effects and recovery remain uncertain. No quantified earnings or sales guidance is provided in the filing.
- Management attributed sales growth to demand across nearly all end markets and regions and price increases tied to raw-material inflation. Raw-material and conversion-cost inflation pressured margins: cost of sales rose to 79.1% of sales in Q3 from 77.3% a year earlier. Segment margins were mixed, with Q3 Distribution and Specialty Engineered Materials margins lower year over year.
- The July 1, 2021 Magna Colours acquisition cost $47.6 million net of cash acquired and was reported in Color, Additives and Inks. Clariant purchase accounting was finalized in June 2021.
- Environmental remediation remains a significant contingency. Total environmental accruals were $129.3 million at September 30, 2021, including a $117.6 million reserve for the Calvert City matter. The company said additional costs beyond accruals are reasonably possible but cannot currently be estimated.
- Other disclosed risks include raw-material availability and prices, currency and political risks, acquisition integration and expected synergies, litigation and environmental matters, cyber risks, and changing plastics regulation and demand. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- The effective tax rate was 14.1% in Q3 2021 versus 51.9% in Q3 2020; the filing cites tax benefits and prior-year adjustments, partly offset by state and foreign taxes.
Most important facts for investors to verify
- How much reported growth reflects underlying volume and price versus acquisitions and foreign exchange, particularly for the nine-month comparison affected by Clariant.
- Whether pricing and integration synergies can offset continued raw-material, conversion and supply-chain cost inflation, and how segment margins develop.
- Working-capital requirements and cash conversion, given the large receivables and inventory increases and the decline in cash.
- The eventual cost and timing of environmental remediation, especially the Calvert City obligation and any exposure beyond recorded reserves.
- Debt maturity and refinancing plans, covenant headroom, and the availability and borrowing-base limits of the amended revolving facility.
- Whether favorable tax items recur and whether management issues quantified forward guidance in subsequent filings.