Avient Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in millions of dollars except per-share data. Results are presented with the Distribution business classified as discontinued operations.
Business context and material developments
Avient supplies specialty engineered materials, composites, engineered fibers, and color and additive systems. On September 1, 2022, it acquired DSM Protective Materials, including the Dyneema brand, for approximately $1.4 billion net of cash acquired. The acquired business contributed $32.3 million of sales and a $7.0 million pretax loss from acquisition through quarter-end; that loss included $10.6 million of inventory step-up expense.
Avient agreed to sell its Distribution business for $950 million, subject to a working-capital adjustment. The sale closed November 1, 2022, after quarter-end. The company said after-tax proceeds would fund redemption of its $600 million 5.25% notes due 2023 and repayment of $150 million of term loans.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $823.3 | $818.0 | $2,606.5 | $2,508.5 |
| Gross margin | $195.4 (23.7%) | $215.6 (26.4%) | $710.7 (27.3%) | $727.3 (29.0%) |
| Operating income | $40.6 (4.9%) | $52.8 (6.5%) | $242.9 (9.3%) | $229.6 (9.2%) |
| Continuing-operations net income (loss) | $(27.8) | $33.4 | $99.7 | $144.0 |
| Net income (loss) attributable to Avient shareholders | $(10.3) | $52.9 | $158.6 | $201.0 |
| Diluted EPS, total | $(0.11) | $0.57 | $1.72 | $2.18 |
Q3 sales rose 0.6%, but operating income fell 23.1%. Nine-month sales grew 3.9% and operating income rose 5.8%, while continuing-operations net income declined 30.8%. Price increases related to raw-material inflation supported sales, but lower demand and foreign-exchange headwinds weighed on results. Q3 sales included a 3.9% contribution from APM and a 7.1% negative foreign-exchange impact. Cost of sales as a share of sales rose to 76.3% from 73.6% for the quarter, reflecting raw-material inflation, acquisition-related costs, and higher environmental remediation costs.
Q3 continuing-operations results included $37.3 million of net interest expense and $32.3 million of other expense, versus $19.0 million and $1.6 million of expense and income, respectively, in the prior-year quarter. Other expense included $38.2 million related to currency derivatives associated with the APM acquisition. The nine-month effective tax rate from continuing operations was 29.4%, compared with 18.2% in 2021.
By segment, Q3 Color, Additives and Inks sales declined 3.6% to $565.6 million, while operating income increased 2.7% to $68.6 million. Specialty Engineered Materials sales rose 11.4% to $258.2 million, and operating income rose 4.7% to $31.4 million. Corporate and eliminations costs increased to $59.4 million from $44.0 million, including higher remediation and acquisition costs.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $223.9 million, up from $110.0 million, primarily reflecting lower working-capital use.
- Investing cash outflow was $1,387.9 million, including $1,426.1 million for APM, partly offset by $93.3 million of cross-currency swap settlements. Capital expenditures were $55.1 million.
- Financing cash inflow was $1,138.1 million, including $1,300.0 million of debt proceeds. Cash declined $56.8 million from year-end to $544.4 million.
- At September 30, principal debt was $3,166.4 million; balance-sheet debt, net of discounts and issuance costs, was $3,116.8 million. Cash was $544.4 million. The company had $485.1 million of revolving-credit availability and reported total liquidity of $1,029.5 million.
- Debt rose substantially to fund APM, including a $575 million 2029 term loan and $725 million of 7.125% notes due 2030. Avient reported compliance with debt covenants and no revolver borrowings.
- Environmental accruals totaled $131.6 million, including a $120.9 million reserve for the Calvert City matter. Q3 remediation expense was $18.8 million.
Outlook, risks and unusual items
The filing provides no specific earnings or sales guidance. Management reported that lower demand was accelerating toward the end of Q3 and cited raw-material and energy costs, foreign exchange, interest rates, economic and recessionary conditions, supply-chain disruption, and the company’s ability to achieve APM’s strategic objectives as risks. The filing also identifies possible additional environmental-remediation costs beyond recorded accruals, although the additional amount could not be estimated. Management stated that previously disclosed risk factors had no material changes during the quarter.
The Distribution sale closed after quarter-end. APM purchase accounting remained preliminary, and its final allocation could differ materially from estimates. The company had not included APM in its internal-control assessment for the acquisition year; management said disclosure controls were effective.
Most important facts for investors to verify
- Whether the Distribution sale proceeds and planned debt repayments were completed as described, and the resulting debt maturity and interest-cost profile.
- Final APM purchase accounting, integration progress, and whether the acquisition delivers expected strategic and financial benefits.
- Whether lower demand, foreign-exchange effects, inflation, and margin pressure persist or improve.
- Environmental remediation developments, especially the Calvert City reserve and potential costs beyond amounts accrued.
- Cash conversion and liquidity following the acquisition, divestiture, and debt repayments.