PolyOne Corporation (now Avient) — Q1 2013 Form 10-Q
Entity note: The supplied filing is for PolyOne Corporation, not a registrant named Avient Corporation. It covers the three months ended March 31, 2013; comparative figures are for Q1 2012 unless noted.
Business context and material developments
PolyOne supplies specialty polymer materials, formulations, color and additive systems, plastic sheet and packaging solutions, and polymer distribution. On March 13, 2013, it acquired Spartech, expanding its specialty materials and sheet and packaging businesses. Spartech contributed $54.7 million of reported-quarter sales. PolyOne also agreed to sell its vinyl resin business to Mexichem for $250 million cash, with closing expected by Q3 2013, subject to approvals and customary conditions. The business was classified as discontinued operations and held for sale.
Financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Sales | $801.1 million | $745.5 million |
| Gross margin | $162.3 million; 20.3% of sales | $132.3 million; 17.7% of sales |
| Operating income | $40.5 million; 5.1% of sales | $37.4 million; 5.0% of sales |
| Continuing-operations net income | $11.0 million | $15.3 million |
| Net income attributable to PolyOne shareholders | $15.3 million | $20.2 million |
| Diluted EPS | $0.16 | $0.22 |
| Operating cash flow | $(91.5) million | $(20.1) million |
| Capital expenditures | $12.9 million | $7.9 million |
Sales rose 7.5%, driven by an 8.7% contribution from acquisitions and 3.2% from pricing and mix, partly offset by a 4.4% volume decline. Gross margin improved mainly on specialty-segment mix. Selling and administrative expense increased to $121.9 million from $95.3 million, including acquisition-related and integration costs. Continuing-operations income was affected by $10.6 million of debt-extinguishment costs and higher interest expense. The Resin Business generated $32.4 million sales and $4.1 million net income, versus $35.5 million and $4.9 million in Q1 2012.
Liquidity, debt and cash flow
Cash was $168.9 million at March 31, 2013, down from $210.0 million at year-end. Reported liquidity, including $284.9 million of revolving-credit availability, was $453.8 million. Total debt was $1,055.5 million, compared with $706.9 million at December 31, 2012. PolyOne issued $600 million of 5.25% senior notes due 2023, repaid its $297 million term loan, and refinanced and expanded its revolving facility to $400 million, maturing in 2018. It reported compliance with all debt covenants and $25 million drawn on the revolver.
Operating cash use increased year over year, principally reflecting a $50 million voluntary pension contribution and higher incentive and tax payments. Investing cash use was $248.7 million, primarily due to the Spartech acquisition; financing provided $299.3 million. Management said available cash, borrowing capacity and expected divestiture proceeds should support operations and debt service. About 84.9% of cash was held outside the United States, and repatriation could be affected by taxes.
Outlook, commentary and risks
- Management targeted $65 million of annual run-rate Spartech synergies by the end of the third year after acquisition, with $60 million of expected costs to achieve them; $8 million had been recognized by quarter-end. Purchase-price allocation remained preliminary.
- The Mexichem sale was expected to yield approximately $150 million after tax. A $15 million termination fee may apply in specified circumstances; completion remains subject to regulatory and other conditions.
- PolyOne planned to repurchase at least 10 million shares over 18–24 months, subject to market conditions, liquidity needs and contractual restrictions. It repurchased 843,567 shares for $20.8 million during the quarter.
- No specific earnings guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Key disclosed risks include acquisition integration and synergy execution, volume weakness in Europe and certain end markets, raw-material pricing and supply, foreign exchange, customer credit, financing-market access, and environmental and legal contingencies.
- Environmental reserves were $78.2 million at March 31, 2013. The filing stated that possible additional remediation costs could not then be estimated. The Calvert City remediation allocation remained uncertain; Lower Passaic River remediation scope and allocation were also undetermined. A proposed settlement of Spartech shareholder litigation remained subject to court approval; PolyOne said it was insured for those lawsuits.
Most important facts for investors to verify
- Confirm the issuer and corporate-name history: this filing identifies PolyOne Corporation, despite the request metadata naming Avient Corp.
- Track completion and proceeds of the Mexichem divestiture, including regulatory conditions and any effect on future earnings and cash flow.
- Assess Spartech integration, preliminary purchase accounting, one-time costs and delivery of the stated $65 million synergy target.
- Monitor working capital and operating cash generation after the unusually large pension contribution and acquisition-related cash requirements.
- Review leverage, interest costs, liquidity availability, and the pace of share repurchases alongside debt-service and pension obligations.
- Follow environmental reserves and litigation developments, including matters for which potential exposure was not yet estimable.