PolyOne Corporation (now identified in the request as Avient Corp.) — Q1 2018 Form 10-Q
Business context and reporting period
The filing is for the three months ended March 31, 2018, compared with the three months ended March 31, 2017. PolyOne supplied specialty polymer materials and solutions through four segments: Color, Additives and Inks; Specialty Engineered Materials; Performance Products and Solutions; and PolyOne Distribution. Results are unaudited.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales | $901.6 million | $796.7 million |
| Gross margin | $198.5 million; 22.0% of sales | $182.2 million; 22.9% of sales |
| Operating income | $78.8 million; 8.7% of sales | $82.0 million; 10.3% of sales |
| Net income from continuing operations | $47.7 million | $48.3 million |
| Net income attributable to common shareholders | $46.9 million | $46.9 million |
| Diluted earnings per share | $0.58 | $0.57 |
| Cash provided by (used in) operating activities | $26.7 million | $(23.7) million |
Sales rose 13.2%, reflecting 5.9% organic growth, 4.4% from acquisitions and 2.9% favorable foreign exchange. Cost of sales increased to 78.0% of sales from 77.1%; management cited raw-material inflation and higher North American logistics costs. Selling and administrative expense increased $19.5 million, partly due to acquired businesses and prior-year legal and tax-reserve benefits.
Cash and cash equivalents were $165.5 million at March 31, down from $243.6 million at year-end. Available revolving credit was $305.9 million, for reported liquidity of $471.4 million, versus $573.9 million at December 31. Working capital was 10.6% of sales, compared with 10.1% a year earlier. Operating cash flow included a $27.9 million U.S. federal income-tax refund. Investing cash outflow was $85.9 million, including the IQAP acquisition and $12.9 million of capital expenditures; financing cash outflow was $22.1 million, including share repurchases and dividends.
Total debt was $1,367.6 million principal amount ($1,353.9 million carrying value), compared with $1,323.5 million principal at December 31. Cash less carrying-value debt was approximately $1,188.4 million. The company reported covenant compliance. On April 11, 2018, after quarter-end, it amended its term loan and reduced the interest margin by 25 basis points.
Material changes and segment results
- Color, Additives and Inks sales grew 27.9% to $270.9 million and operating income rose to $42.1 million; acquisition contribution was significant.
- Specialty Engineered Materials sales increased 2.5% to $163.1 million, but operating income fell to $20.1 million, reflecting weaker North American sales and cost inflation.
- Performance Products and Solutions sales increased 4.0% to $191.0 million and operating income rose to $22.7 million.
- PolyOne Distribution sales increased 10.3% to $315.5 million, while operating income declined to $18.2 million.
- Corporate and eliminations were $(24.3) million of operating income versus $(16.7) million, partly because the prior-year period benefited from a legal settlement and reversal of non-income-tax reserves.
On January 2, 2018, PolyOne acquired Spain-based IQAP Masterbatch Group for $73.0 million, net of cash acquired. IQAP contributed $16.7 million of Q1 sales and was expected by management to add approximately $56.0 million of annual sales.
Outlook, risks, contingencies and unusual items
The filing provides no specific full-year earnings or sales guidance. Management highlighted raw-material and logistics cost inflation, commercial investment and acquisition integration. The company adopted ASC 606 without a significant revenue-recognition impact. Its Q1 effective tax rate was 25.9%, versus 29.0% a year earlier; foreign withholding tax related to planned repatriation and GILTI partly offset the benefit of the lower U.S. federal tax rate. Management said its TCJA accounting remained provisional and estimated cash tax payable for the transition tax at less than $10.0 million.
Environmental accruals totaled $116.5 million at March 31. The Calvert City site reserve was $107.0 million; the EPA’s proposed remedy was estimated at $244.0 million, and the company said the reserve could increase depending on the EPA’s 2018 decision. For the lower Passaic River matter, no remediation liability was accrued because the company could not estimate its potential allocation. The filing also identifies risks including raw-material and energy supply or price changes, foreign-exchange and political exposure, demand and pricing conditions, operational disruptions, cyberattacks, and litigation or environmental developments.
Important facts for investors to verify
- Whether sales growth and margin performance persist as raw-material and logistics costs change.
- IQAP’s contribution, integration progress and realized performance against the expected annual sales contribution.
- Cash generation, working-capital needs, liquidity and debt levels following the acquisition, buybacks and dividend payments.
- The outcome of the Calvert City EPA process and any resulting change to the $107.0 million site reserve; potential Passaic River exposure remains unestimated.
- Final TCJA-related tax accounting and cash tax obligations, including foreign withholding taxes and GILTI.