Business context and reporting period
Avient Corporation (formerly PolyOne) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company provides specialty materials, color and additive systems, engineered materials, and polymer distribution. Results are compared with 2019; the former Performance Products and Solutions business, divested in October 2019, is reported as discontinued operations.
Avient completed its acquisition of Clariant’s global masterbatch business and certain India assets on July 1, 2020, for approximately $1.3 billion net of cash. The acquired business contributed $264.2 million of third-quarter sales and $18.3 million of pretax income. Purchase accounting remained preliminary.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $924.5 million | $705.3 million | $2,245.1 million | $2,204.1 million |
| Gross margin | $210.2 million; 22.7% | $160.5 million; 22.8% | $531.4 million; 23.7% | $503.9 million; 22.9% |
| Operating income / margin | $33.5 million / 3.6% | $43.1 million / 6.1% | $124.3 million / 5.5% | $136.3 million / 6.2% |
| Net income from continuing operations | $2.6 million | $23.6 million | $59.1 million | $69.3 million |
| Net income attributable to Avient shareholders | $1.7 million | $43.0 million | $57.3 million | $123.3 million |
| Diluted EPS, continuing operations | $0.02 | $0.30 | $0.64 | $0.89 |
Third-quarter sales rose 31.1%, primarily because of Clariant; nine-month sales rose 1.9%. Excluding acquisition effects on a pro forma basis, Color, Additives and Inks sales fell 4.9% in the quarter and 7% year to date, reflecting COVID-19-related demand weakness. In the nine-month comparison, 2019 net income included $54.2 million from discontinued operations; 2019 also included a $457.7 million after-tax divestiture gain.
Q3 cost of sales included $15.8 million of environmental remediation expense and $10.5 million of acquired-inventory step-up amortization. Q3 selling and administrative expense increased $59.3 million, mainly due to Clariant. Net interest expense increased $14.2 million, including $9.6 million of committed acquisition financing costs. The Q3 effective tax rate was 51.9%, which management attributed in part to tax items and low pretax income.
Operating cash flow for the first nine months was $68.7 million, versus $198.6 million in 2019. The decline primarily reflected $142.0 million of taxes on the divestiture gain and acquisition-related earnout payments. Investing cash outflow was $1,369.0 million, including $1,342.7 million for acquisitions; financing cash inflow was $1,011.5 million, including equity and debt offerings. Cash declined to $577.3 million from $864.7 million at year-end 2019.
At September 30, cash was $577.3 million and revolving-credit availability was $254.7 million, for reported liquidity of $832.0 million. Principal debt was $1,893.8 million (net carrying debt $1,873.9 million), versus $1,242.8 million principal at December 31, 2019. Debt included $650 million of 5.75% senior notes due 2025; the company reported compliance with debt covenants. Capital expenditures were estimated at approximately $65 million for 2020.
Material changes, outlook and risks
- Acquisition-driven reported growth masked continued pandemic-related softness. Specialty Engineered Materials and Distribution sales declined year over year in Q3; management cited weaker automotive, inks, consumer and other end markets. Cost containment, mix, and lower raw-material costs partly offset volume pressure.
- Management expects a restructuring plan tied to Clariant integration, implemented over multiple years, with approximately $75 million in charges ($55 million cash and $20 million non-cash) and approximately $35 million of additional capital expenditures. The company expects a $75 million annualized synergy run rate by the end of the third year after acquisition.
- Management said COVID-19 had adversely affected and was expected to continue affecting operations, results, financial position and cash flows; its ultimate impact could not be estimated and could be material. Potential effects include facility disruption, supply-chain constraints, cost increases, and workforce unavailability. No impairment indicators were identified as of September 30, but sustained adverse changes could lead to future impairments.
- Environmental remediation is a significant exposure: accrued environmental liabilities totaled $122.3 million, including a $108.2 million reserve for the Calvert City site. The company said additional costs beyond accrued amounts are reasonably possible but not currently estimable. It reported $19.3 million of environmental expense and $8.7 million of insurance recoveries for the first nine months.
- Other execution and financial risks include final Clariant purchase accounting and working-capital adjustments, integration and synergy realization, elevated debt and interest costs, foreign-currency and market risks, and the uncertain allocation of Passaic River remediation costs. Management considered its current estimate for that allocation not material.
Important facts for investors to verify
- Whether Clariant integration delivers the stated $75 million synergy run rate, and the timing and cash impact of the restructuring and additional capital spending.
- Final acquisition consideration and purchase-price allocation, including the proposed $44.0 million working-capital and net-debt adjustment, whose review remained open.
- Future demand and margins by segment as COVID-19 effects evolve, particularly whether pro forma Color, Additives and Inks declines stabilize.
- Cash conversion, acquisition-related payments, debt maturities and interest burden, and continued covenant compliance.
- Environmental reserve adequacy and developments at Calvert City and the Passaic River sites.