PolyOne Corporation (POL) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The filing is by PolyOne Corporation; it does not use the name Avient. Financial amounts are in millions except per-share data.
Business context and reporting period
PolyOne supplied specialized polymer materials, services and solutions through Color, Additives and Inks; Specialty Engineered Materials; and Distribution. Following an agreement to sell Performance Products and Solutions (PP&S), its results are presented as discontinued operations and prior periods were reclassified.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $705.3 | $729.0 | $2,204.1 | $2,203.9 |
| Gross margin | $160.5 | $157.2 | $503.9 | $483.9 |
| Operating income | $43.1 | $48.7 | $136.3 | $148.4 |
| Continuing-operations net income | $23.6 | $32.5 | $69.3 | $88.9 |
| Net income | $43.1 | $50.2 | $123.5 | $148.3 |
| Diluted EPS, total | $0.56 | $0.62 | $1.58 | $1.84 |
- Q3 gross margin was 22.8% of sales versus 21.6% a year earlier; operating margin was 6.1% versus 6.7%. Nine-month operating margin was 6.2% versus 6.7%.
- Q3 sales fell 3.3%; management attributed the change to 6% lower organic sales and 1% unfavorable foreign exchange, partly offset by 4% acquisition growth. Nine-month sales were essentially flat.
- Nine-month operating cash flow was $198.6, compared with $170.9. Capital expenditures were $47.9; acquisition spending was $119.6; investing cash use was $162.2. Cash rose to $199.6 from $170.9 at year-end.
- At September 30, total debt was $1,438.9 principal ($1,424.9 net carrying value), versus $1,371.8 principal at December 31, 2018. Cash plus revolving-credit availability was $441.9, down from $451.6. The company reported compliance with debt covenants. Approximately 93% of cash was held outside the United States.
- Current assets were $1,173.8 and current liabilities $625.5. The balance sheet included $265.5 of PP&S assets held for sale and $105.2 of related liabilities.
Material changes and segment performance
- Color, Additives and Inks Q3 sales fell 5.6% and operating income fell 6.6%; management cited softness in automotive and consumer markets, partly offset by packaging and healthcare demand and improved pricing and mix.
- Specialty Engineered Materials Q3 sales rose 9.8%, largely reflecting acquisitions; operating income increased 7.4%. Management cited composites and North American wire and cable strength, offset by weakness in transportation and electronics.
- Distribution Q3 sales declined 8.0% amid weaker consumer and automotive demand and lower selling prices, while operating income increased 6.8% on improved mix and pricing.
- Fiber-Line was acquired in January for $152.7, including contingent consideration. It contributed $29.4 of Q3 sales and $85.3 for the nine-month period. PolyOne recorded acquisition earnout charges of $10.0 in Q3 and $20.7 year to date, primarily reflecting improved acquired-business results.
- Cash dividends declared were $0.195 per share in Q3, compared with $0.175 a year earlier. Nine-month share repurchases totaled $26.9.
Outlook, risks, contingencies and unusual items
- PolyOne agreed to sell PP&S for $775 in cash, subject to a working-capital adjustment. Closing was expected in Q4 2019, subject to regulatory approval and customary conditions; the filing provides no numerical earnings or revenue guidance.
- Environmental accruals totaled $113.6 at September 30. The Calvert City reserve was $101.8. The company did not accrue for the lower Passaic River matter because potential responsibility and allocation were undetermined and the liability could not be estimated; related proceedings and cost allocation remained ongoing.
- Other stated risks include weaker end-market demand, foreign exchange and political or regulatory developments, raw-material and energy costs and supply, pricing pressure, acquisition integration, environmental and legal contingencies, cyber risks, and completing the PP&S sale.
- Operating lease accounting was adopted in 2019, adding $65.0 of lease assets and obligations at September 30. Management reported no material cumulative retained-earnings effect.
Important facts for investors to verify
- Whether the PP&S sale closed on the expected terms and timing, and the resulting use of proceeds and impact on debt.
- Organic demand trends by segment, especially automotive, consumer, transportation and electronics markets, and the contribution from acquisitions.
- How acquisition earnout charges, integration costs and acquired-business performance affect future operating income.
- Environmental exposure and potential additional costs, particularly for Calvert City and the lower Passaic River.
- Debt maturities, revolving-credit availability, covenant headroom and the concentration of cash outside the United States.