PolyOne Corporation (now identified in metadata as Avient Corp.) — Q2 2018 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2018, compared with the same 2017 periods. PolyOne supplied specialty polymer materials, additives, engineered materials and distribution services through four reportable segments. The 2017 comparison includes a large loss from discontinued operations following the sale of its Designed Structures and Solutions business.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $914.8 million | $814.1 million | $1,816.4 million | $1,610.8 million |
| Gross margin | $196.5 million; 21.5% of sales | $187.9 million; 23.1% | $395.0 million; 21.8% | $370.1 million; 23.0% |
| Operating income | $77.4 million; 8.5% of sales | $78.0 million; 9.6% | $156.2 million; 8.6% | $160.0 million; 9.9% |
| Continuing-operations net income | $51.5 million | $49.6 million | $99.2 million | $97.9 million |
| Net income (loss) attributable to common shareholders | $51.3 million | $(181.4) million | $98.2 million | $(134.5) million |
| Diluted EPS from continuing operations | $0.64 | $0.60 | $1.23 | $1.19 |
| Operating cash flow | Not separately provided for the quarter | $108.9 million | $43.7 million |
Six-month capital expenditures were $31.5 million, implying operating cash flow less capital expenditures of $77.4 million. Cash and equivalents were $158.6 million at June 30, down from $243.6 million at year-end 2017. Total principal debt was $1,344.7 million (net carrying debt $1,331.2 million); revolving credit availability was $325.5 million and reported total liquidity was $484.1 million. The company reported compliance with debt covenants.
Material changes and performance drivers
- Sales rose 12.4% in Q2 and 12.8% for the first half. Management attributed first-half growth to organic growth of 6.1%, acquisitions of 4.4% and favorable foreign exchange of 2.3%.
- Operating income declined despite sales growth. Cost of sales rose faster than revenue, with management citing raw-material inflation and higher North American logistics costs; selling and administrative expense also increased.
- Color, Additives and Inks was the strongest growth segment: first-half sales increased 25.1% and operating income 18.6%, including acquisition contributions. Distribution sales rose 10.7%, but operating income fell 5.1%. Specialty Engineered Materials first-half operating income declined 3.1%; Performance Products and Solutions operating income increased 2.0%.
- Q2 and first-half common-shareholder earnings turned positive versus 2017, primarily because the 2017 periods included the substantial DSS divestiture loss. Continuing-operations earnings increased more modestly.
- PolyOne acquired IQAP for $73.0 million, net of cash acquired, and PlastiComp for total consideration of $44.3 million, including contingent earn-out consideration. IQAP contributed $33.0 million of first-half sales; management estimated annual sales of approximately $56.0 million.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Environmental remediation remains a significant exposure. Reserves were $114.2 million at June 30, including $105.6 million for the Calvert City site based on the EPA’s proposed remedy. The final remedy could change the reserve. No remediation liability was accrued for the lower Passaic River matter because the company could not estimate its potential allocation.
- Six-month environmental remediation expense was $11.8 million; insurance recoveries were $2.3 million. Management said additional costs beyond recorded accruals are reasonably possible but cannot currently be estimated.
- Approximately 93% of cash was held outside the United States. Repatriations may incur foreign taxes; estimated cash tax payable on the one-time transition tax was expected to be less than $10 million.
- Key stated risks include raw-material and energy prices or availability, logistics costs, foreign exchange and political or regulatory risks, pricing pressure, market demand, environmental and legal contingencies, and cyber or information-system failures.
- The company adopted ASC 606 without a significant revenue-recognition impact. Its accounting for certain Tax Cuts and Jobs Act effects remained provisional; a measurement-period adjustment favorably affected the 2018 tax rate.
Important facts for investors to verify
- Whether price increases and other actions can offset raw-material inflation and logistics costs, and restore operating margins.
- Acquisition integration, PlastiComp’s contingent earn-out, and the realized growth and returns from IQAP and PlastiComp.
- Final Calvert City remediation requirements and any future allocation or liability for the Passaic River matter.
- Cash conversion and liquidity trends, given lower cash balances, acquisition spending, share repurchases and dividends.
- Final tax effects under the Tax Cuts and Jobs Act, including foreign repatriation taxes and transition-tax cash payments.