PolyOne Corporation (now Avient) — Q2 2017 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2017. PolyOne supplies specialized polymer materials, color and additive systems, and polymer distribution services. Results are presented for continuing operations after retrospectively classifying its Designed Structures and Solutions (DSS) segment as discontinued operations.
Key financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Sales | $814.1 million | $758.2 million | $1,610.8 million | $1,497.1 million |
| Gross margin | $188.0 million (23.1%) | $181.9 million (24.0%) | $370.3 million (23.0%) | $358.5 million (23.9%) |
| Operating income | $80.0 million (9.8%) | $81.8 million (10.8%) | $164.0 million (10.2%) | $152.2 million (10.2%) |
| Continuing-operations net income | $49.6 million | $50.1 million | $97.9 million | $88.3 million |
| Net income (loss), including discontinued operations | $(181.4) million | $50.0 million | $(134.5) million | $89.0 million |
| Diluted EPS, continuing operations | $0.60 | $0.59 | $1.19 | $1.04 |
| Operating cash flow | Not separately provided quarterly | $43.7 million | $54.6 million |
At June 30, 2017, cash was $191.1 million; revolving-credit availability was $294.7 million, for reported liquidity of $485.8 million. Debt principal was $1,415.2 million, versus $1,273.7 million at December 31, 2016; net carrying debt was $1,400.1 million. Total assets were $2,712.6 million and shareholders’ equity was $558.1 million. The quarterly dividend declared was $0.135 per share.
Material changes and operating trends
- Sales rose 7.4% in Q2 and 7.6% in the first half. Management attributed first-half growth to 6.2% organic growth and 2.3% from acquisitions, partly offset by 0.9% unfavorable foreign exchange.
- Q2 operating income declined 2.2% despite higher sales; first-half operating income increased 7.8%. Raw-material inflation contributed to higher cost of sales and lower gross-margin percentages.
- Segment sales increased year over year in all four continuing segments. First-half operating income improved in Performance Products and Solutions and PolyOne Distribution, while Specialty Engineered Materials declined; Color, Additives and Inks was slightly higher.
- First-half operating cash flow fell $10.9 million year over year, which management attributed primarily to working-capital investment supporting higher revenue. Investing used $162.2 million, including $137.9 million for acquisitions; financing provided $80.2 million, including net revolving-credit borrowings.
Outlook, unusual items and risks
- No specific earnings or revenue guidance is provided. Management said the 2017 acquisitions of SilCoTec and Rutland, together with Mesa acquired July 6, were expected to add approximately $85 million in annual sales.
- PolyOne sold DSS on July 19, 2017, after quarter-end, for $115 million cash, subject to a working-capital adjustment. The company recorded an estimated $295.9 million pretax impairment/loss on classification as held for sale, or $229.3 million after tax, in Q2. DSS contributed a $231.0 million after-tax discontinued-operations loss for the quarter.
- Debt covenants were in compliance at June 30. The company reported approximately 90% of cash held outside the United States and noted potential taxes on repatriation.
- Environmental remediation accruals were $116.3 million. Additional costs may be possible, but the company said they could not currently be estimated; it assessed the potential Passaic River matter as not reasonably estimable for accrual and not expected to be material based on information then available.
- Key stated risks include raw-material and energy prices or supply, foreign exchange and other international risks, customer credit, market and capacity changes, acquisition integration, environmental and legal contingencies, and access to credit markets.
Important facts for investors to verify
- Final DSS sale proceeds and any working-capital adjustment, and whether the recorded loss differs from the final transaction outcome.
- How raw-material inflation, pricing, and mix affect margins in subsequent quarters.
- Cash conversion and working-capital trends, particularly receivables and inventory growth.
- Debt and liquidity after acquisition spending and DSS divestiture proceeds, including covenant headroom and the 2022 debt maturities.
- Integration and realized sales contribution from the acquisitions, and developments in environmental remediation exposures.