PolyOne Corporation (now Avient) — Q1 2016 Form 10-Q
Business context and period: The filing is for the three months ended March 31, 2016. PolyOne provided specialized polymer materials, formulations, color and additive systems, plastic sheet and packaging solutions, and polymer distribution. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
- Revenue: $847.0, down 3.0% from $873.1. Management reported underlying sales growth of 3.8% and a 5.2% contribution from acquisitions, more than offset by lower selling prices associated with declining hydrocarbon-based raw material costs and unfavorable foreign exchange.
- Profit and margins: Gross margin was $185.5, up 9.2%; gross margin rate increased to 21.9% from 19.4%. Operating income was $71.3, up 1.7%, with operating margin of 8.4% versus 8.0%. Net income attributable to PolyOne shareholders was $39.1, up 29.5%; diluted EPS was $0.46 versus $0.34.
- Cash flow: Operating cash flow was negative $29.2, compared with negative $57.8 a year earlier. Capital expenditures were $19.6; acquisitions used $72.8, making investing cash flow negative $92.4. Cash declined $124.4 to $155.4. Operating cash flow less capital expenditures was negative $48.8.
- Liquidity and debt: The company reported liquidity of $487.8, comprising $155.4 cash and $332.4 revolving-credit availability. Debt carrying value was $1,192.9; principal debt was $1,209.4. Approximate net debt using carrying value less cash was $1,037.5. Revolver borrowings were $47.3, and the company said it was in compliance with all debt covenants.
- Other metrics: Selling and administrative expense increased to $114.2 from $99.7. The effective tax rate fell to 31.6% from 43.3%. The quarterly dividend declared was $0.12 per share, versus $0.10.
Changes versus Q1 2015
- Revenue fell while gross profit and operating income increased, reflecting improved operational efficiencies, mix, and lower input costs.
- Net income rose primarily alongside higher pretax income and a lower effective tax rate; the prior-year rate was elevated in part by an adverse court ruling on an uncertain tax position.
- Performance Products and Solutions operating income increased to $19.7 from $11.5. Designed Structures and Solutions operating income fell to $0.4 from $3.2, with lower sales cited as a factor.
- Cash used in operations improved by $28.6, but remained negative. Management attributed the improvement partly to higher earnings and lower incentive, payroll, interest, and tax payments; increased working capital partly offset those benefits.
- Weighted-average diluted shares declined to 85.5 million from 90.1 million. The company repurchased 1.5 million shares for $39.6 during the quarter.
Outlook, management commentary, and risks
- The filing gives no specific full-year earnings or revenue guidance. Management said remaining restructuring-related accelerated depreciation and ongoing costs of approximately $5.0 were expected in Q2 and Q3 2016, and did not expect remaining restructuring charges or further benefits to materially affect segments or consolidated results going forward.
- The company completed a $72.8 acquisition of certain Kraton assets in January 2016, reported in Specialty Engineered Materials. Purchase-price allocation remained preliminary. Magenta, acquired in December 2015, was reported in Color, Additives and Inks.
- Environmental accruals totaled $119.8 at quarter-end. For the lower Passaic River, the EPA selected a remedy for an eight-mile portion with an estimated discounted cost of $1.4 billion and issued a notice to more than 100 parties, including a PolyOne subsidiary. PolyOne had not accrued remediation costs for this matter, stating that its potential allocation could not be estimated. The stated cleanup estimate is for the remedy overall, not a company-specific liability.
- Other risks highlighted include raw-material and energy price or supply changes, foreign exchange and other international risks, pricing and demand, customer credit, execution and integration of acquisitions, restructuring and plant transitions, litigation and environmental matters, and access to capital. Approximately 90% of cash was held outside the United States; repatriation could involve tax consequences.
- The filing also reports a $12.2 guarantee related to SunBelt notes; Olin had agreed to indemnify PolyOne, but the guarantee had not been formally assigned.
Important facts for investors to verify
- Reconcile the liquidity summary’s $332.4 revolving availability with the $329.2 availability stated in the debt note.
- Track working-capital conversion and operating cash flow, given negative quarterly operating cash flow and cash reduction.
- Monitor whether the acquired Kraton assets and Magenta deliver the expected operating contribution, and whether the preliminary purchase-price allocations change.
- Follow the lower Passaic River proceedings and any subsequent company-specific liability estimate, as well as changes in the $119.8 environmental accrual.
- Assess segment trends, particularly the near break-even Designed Structures and Solutions result and the improvement in Performance Products and Solutions.
- Confirm the timing and amount of expected remaining restructuring costs and the company’s capacity for share repurchases and dividends under its debt covenants.