Business context and reporting period
PolyOne Corporation (now identified in the request as Avient Corp.) filed this Form 10-Q for the quarter ended September 30, 2018. The company supplies specialized polymer materials, colorants, additives and distribution services through four reportable segments. Unless noted otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $883.0 | $818.5 | $2,699.4 | $2,429.3 |
| Gross margin | $184.9 | $179.5 | $579.9 | $549.6 |
| Operating income | $70.5 | $65.7 | $226.7 | $225.7 |
| Continuing-operations net income | $50.2 | $40.2 | $149.4 | $138.1 |
| Net income (loss) | $50.2 | $38.8 | $148.3 | $(95.7) |
| Diluted EPS, continuing operations | $0.62 | $0.49 | $1.85 | $1.68 |
Q3 sales rose 7.9%, reflecting 6.1% organic growth and 2.3% contribution from acquisitions, partly offset by 0.5% unfavorable foreign exchange. Nine-month sales increased 11.1%, from organic growth, acquisitions and favorable foreign exchange. Q3 gross margin was about 20.9% of sales versus 21.9% a year earlier; operating margin was 8.0% in both periods. Nine-month gross margin was about 21.5% versus 22.6%, and operating margin was 8.4% versus 9.3%.
Cost of sales rose faster than sales: raw-material inflation and higher North American logistics costs were key factors. Q3 continuing-operations income benefited from a lower 9.7% effective tax rate, versus 21.9% a year earlier; nine-month rates were 17.7% and 24.5%. The filing attributes tax benefits to the Tax Cuts and Jobs Act, foreign tax items, a depreciation-method election and the foreign-derived intangible income deduction, partly offset by taxes on repatriated earnings.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $170.9, up from $111.2, reflecting improved operating results and working capital and a $27.9 federal tax refund.
- Investing activities used $145.9, including $98.6 for acquisitions and $51.2 of capital expenditures. Financing activities used $83.0, including $53.0 of share repurchases and $42.1 of dividends.
- Cash was $180.8 at September 30, 2018, down from $243.6 at year-end 2017. Revolver availability was $299.8, for reported total liquidity of $480.6, down from $573.9.
- Debt principal totaled $1,349.0; balance-sheet debt, net of unamortized costs, was $1,336.2. Long-term debt was $1,316.8. The largest scheduled maturities are $707.5 in 2022 and $600.5 in 2023. The company reported compliance with debt covenants.
- About 93% of cash was held outside the United States. Repatriation may involve foreign taxes.
Material changes, outlook and risks
- Q3 operating income increased 7.3%, while nine-month operating income was nearly flat despite 11.1% sales growth. Segment pressure included higher raw-material and freight costs, weaker mix and softer demand in some North American building, construction and appliance markets. Color, Additives and Inks was the strongest segment contributor; Distribution and Performance Products and Solutions reported lower operating income.
- PolyOne acquired IQAP for $73.0 net of cash acquired in January and PlastiComp for $44.6, including contingent earn-out consideration, in May. The acquisitions contributed to sales growth and increased goodwill and intangibles.
- The company provided no specific earnings or sales guidance in the supplied filing text. Management cautioned that interim results are not necessarily indicative of full-year results.
- Environmental matters remain significant. The company had $115.4 of accrued environmental obligations, including a $103.8 reserve for the Calvert City site. The EPA selected a remedy consistent with the company’s accrual assumptions; negotiations on remedial design were invited. In the lower Passaic River matter, a third-party allocation process was underway and a contribution suit had been filed; the company had not accrued a liability because its allocation could not be estimated.
- Other disclosed risks include raw-material and energy costs and supply, logistics, pricing, foreign exchange and political risks, interest rates, demand and industry capacity, litigation and environmental outcomes, and information-system failures or cyberattacks.
Important facts for investors to verify
- Whether sales growth can translate into improved margins as input and logistics costs remain elevated.
- The sustainability of segment operating performance, especially in Distribution and Performance Products and Solutions.
- Future acquisition contributions, integration costs and contingent consideration for PlastiComp.
- Environmental exposure beyond the $115.4 accrued balance, particularly Calvert City and the unaccrued Passaic River matter.
- Debt maturities concentrated in 2022–2023, available liquidity, and the effect of foreign-held cash and repatriation taxes.
- How tax benefits and provisional Tax Cuts and Jobs Act accounting adjustments affect future effective tax rates.