AVIENT CORP - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
(Mark One)
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the quarterly period ended March 31, 2022
OR
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||
For the transition period from to .
Commission file number 1-16091
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AVIENT CORPORATION
(Exact name of registrant as specified in its charter)
________________________________________________
| Ohio | 34-1730488 | ||||||||||
| (State or other jurisdiction | (I.R.S. Employer Identification No.) | ||||||||||
| of incorporation or organization) | |||||||||||
| Avient Center | |||||||||||
| 33587 Walker Road | 44012 | ||||||||||
Avon Lake, Ohio | |||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code: (440) 930-1000
Former name, former address and former fiscal year, if changed since last report: Not Applicable
_______________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Shares, par value $.01 per share | AVNT | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of the registrant’s outstanding common shares, par value $.01 per share, as of March 31, 2022 was 91,426,041.
AVIENT CORPORATION
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Avient Corporation
Condensed Consolidated Statements of Income (Unaudited)
(In millions, except per share data)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Sales | $ | 1,293.8 | $ | 1,162.3 | |||||||
| Cost of sales | 1,000.1 | 859.9 | |||||||||
| Gross margin | 293.7 | 302.4 | |||||||||
| Selling and administrative expense | 165.1 | 182.0 | |||||||||
| Operating income | 128.6 | 120.4 | |||||||||
| Interest expense, net | (16.9) | (19.3) | |||||||||
| Other (expense) income, net | (0.6) | 1.5 | |||||||||
| Income before income taxes | 111.1 | 102.6 | |||||||||
| Income tax expense | (26.6) | (22.9) | |||||||||
| Net income | 84.5 | 79.7 | |||||||||
| Net income attributable to noncontrolling interests | (0.3) | (0.4) | |||||||||
| Net income attributable to Avient common shareholders | $ | 84.2 | $ | 79.3 | |||||||
| Earnings per share attributable to Avient common shareholders - Basic | $ | 0.92 | $ | 0.87 | |||||||
| Earnings per share attributable to Avient common shareholders - Diluted | $ | 0.91 | $ | 0.86 | |||||||
| Weighted-average shares used to compute earnings per common share: | |||||||||||
| Basic | 91.5 | 91.3 | |||||||||
| Dilutive impact of share-based compensation | 0.8 | 0.9 | |||||||||
| Diluted | 92.3 | 92.2 | |||||||||
| Anti-dilutive shares not included in diluted common shares outstanding | 0.2 | 0.1 | |||||||||
| Cash dividends declared per share of common stock | $ | 0.2375 | $ | 0.2125 | |||||||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
1 AVIENT CORPORATION
Avient Corporation
Consolidated Statements of Comprehensive Income (Unaudited)
(In millions)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net income | $ | 84.5 | $ | 79.7 | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Translation adjustments and related hedging instruments | (9.2) | (51.0) | |||||||||
| Cash flow hedges | 1.3 | 0.8 | |||||||||
| Total other comprehensive loss | (7.9) | (50.2) | |||||||||
| Total comprehensive income | 76.6 | 29.5 | |||||||||
| Comprehensive income attributable to noncontrolling interests | (0.3) | (0.4) | |||||||||
| Comprehensive income (loss) attributable to Avient common shareholders | $ | 76.3 | $ | 29.1 | |||||||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
2 AVIENT CORPORATION
Avient Corporation
Condensed Consolidated Balance Sheets
(In millions)
(Unaudited) March 31, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 562.6 | $ | 601.2 | |||||||
| Accounts receivable, net | 757.9 | 642.3 | |||||||||
| Inventories, net | 475.4 | 461.1 | |||||||||
| Other current assets | 134.3 | 122.4 | |||||||||
| Total current assets | 1,930.2 | 1,827.0 | |||||||||
| Property, net | 661.9 | 676.1 | |||||||||
| Goodwill | 1,283.4 | 1,286.4 | |||||||||
| Intangible assets, net | 904.1 | 925.2 | |||||||||
| Operating lease assets, net | 67.1 | 74.1 | |||||||||
| Other non-current assets | 200.3 | 208.4 | |||||||||
| Total assets | $ | 5,047.0 | $ | 4,997.2 | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term and current portion of long-term debt | $ | 607.5 | $ | 8.6 | |||||||
| Accounts payable | 642.3 | 553.9 | |||||||||
| Current operating lease obligations | 21.7 | 24.2 | |||||||||
| Accrued expenses and other current liabilities | 288.1 | 353.9 | |||||||||
| Total current liabilities | 1,559.6 | 940.6 | |||||||||
| Non-current liabilities: | |||||||||||
| Long-term debt | 1,250.2 | 1,850.3 | |||||||||
| Pension and other post-retirement benefits | 98.5 | 100.0 | |||||||||
| Deferred income taxes | 99.4 | 100.6 | |||||||||
| Non-current operating lease obligations | 45.9 | 50.1 | |||||||||
| Other non-current liabilities | 164.1 | 165.1 | |||||||||
| Total non-current liabilities | 1,658.1 | 2,266.1 | |||||||||
| SHAREHOLDERS' EQUITY | |||||||||||
| Avient shareholders’ equity | 1,813.2 | 1,774.7 | |||||||||
| Noncontrolling interest | 16.1 | 15.8 | |||||||||
| Total equity | 1,829.3 | 1,790.5 | |||||||||
| Total liabilities and equity | $ | 5,047.0 | $ | 4,997.2 | |||||||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
3 AVIENT CORPORATION
Avient Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Activities | |||||||||||
| Net income | $ | 84.5 | $ | 79.7 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 35.7 | 36.6 | |||||||||
| Accelerated depreciation and amortization | 2.1 | 0.5 | |||||||||
| Share-based compensation expense | 3.2 | 2.7 | |||||||||
| Changes in assets and liabilities, net of the effect of acquisitions: | |||||||||||
| Increase in accounts receivable | (118.8) | (137.6) | |||||||||
| Increase in inventories | (15.1) | (35.1) | |||||||||
| Increase in accounts payable | 90.5 | 67.3 | |||||||||
| Decrease in pension and other post-retirement benefits | (4.0) | (7.1) | |||||||||
| Decrease in accrued expenses and other assets and liabilities, net | (59.2) | (3.4) | |||||||||
| Net cash provided by operating activities | 18.9 | 3.6 | |||||||||
| Investing activities | |||||||||||
| Capital expenditures | (13.3) | (16.5) | |||||||||
| Other investing activities | — | (2.0) | |||||||||
| Net cash used by investing activities | (13.3) | (18.5) | |||||||||
| Financing activities | |||||||||||
| Purchase of common shares for treasury | (15.8) | (4.2) | |||||||||
| Cash dividends paid | (21.7) | (19.5) | |||||||||
| Repayment of long-term debt | (2.4) | (2.3) | |||||||||
| Payments of withholding tax on share awards | (3.9) | (3.1) | |||||||||
| Net cash used by financing activities | (43.8) | (29.1) | |||||||||
| Effect of exchange rate changes on cash | (0.4) | (11.0) | |||||||||
| Decrease in cash and cash equivalents | (38.6) | (55.0) | |||||||||
| Cash and cash equivalents at beginning of year | 601.2 | 649.5 | |||||||||
| Cash and cash equivalents at end of period | $ | 562.6 | $ | 594.5 | |||||||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
4 AVIENT CORPORATION
Avient Corporation
Consolidated Statements of Shareholders' Equity (Unaudited)
(In millions)
| Common Shares | Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares | Common Shares Held in Treasury | Common Shares | Additional Paid-in Capital | Retained Earnings | Common Shares Held in Treasury | Accumulated Other Comprehensive (Loss) Income | Total Avient shareholders' equity | Non-controlling Interests | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | 122.2 | (30.6) | $ | 1.2 | $ | 1,511.8 | $ | 1,208.0 | $ | (900.7) | $ | (45.6) | $ | 1,774.7 | $ | 15.8 | $ | 1,790.5 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 84.2 | — | — | 84.2 | 0.3 | 84.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (7.9) | (7.9) | — | (7.9) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared (1) | — | — | — | — | (21.7) | — | — | (21.7) | — | (21.7) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common shares | — | (0.3) | — | — | — | (15.8) | — | (15.8) | — | (15.8) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation and exercise of awards | — | 0.1 | — | (2.2) | — | 1.9 | — | (0.3) | — | (0.3) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 122.2 | (30.8) | $ | 1.2 | $ | 1,509.6 | $ | 1,270.5 | $ | (914.6) | $ | (53.5) | $ | 1,813.2 | $ | 16.1 | $ | 1,829.3 | ||||||||||||||||||||||||||||||||||||||||||||
(1) Dividends declared per share were $0.2375 for the three months ended March 31, 2022. | ||
| Common Shares | Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares | Common Shares Held in Treasury | Common Shares | Additional Paid-in Capital | Retained Earnings | Common Shares Held in Treasury | Accumulated Other Comprehensive (Loss) Income | Total Avient shareholders' equity | Non-controlling Interests | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | 122.2 | (30.8) | $ | 1.2 | $ | 1,513.3 | $ | 1,057.4 | $ | (901.2) | $ | 26.4 | $ | 1,697.1 | $ | 14.6 | $ | 1,711.7 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 79.3 | — | — | 79.3 | 0.4 | 79.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (50.2) | (50.2) | — | (50.2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared (1) | — | — | — | — | (19.5) | — | — | (19.5) | — | (19.5) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common shares | — | (0.1) | — | — | — | (4.2) | — | (4.2) | — | (4.2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation and exercise of awards | — | 0.1 | — | 2.9 | — | 1.6 | — | 4.5 | — | 4.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 122.2 | (30.8) | $ | 1.2 | $ | 1,516.2 | $ | 1,117.2 | $ | (903.8) | $ | (23.8) | $ | 1,707.0 | $ | 15.0 | $ | 1,722.0 | ||||||||||||||||||||||||||||||||||||||||||||
(1) Dividends declared per share were $0.2125 for the three months ended March 31, 2021. | ||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
5 AVIENT CORPORATION
Avient Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 — BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Form 10-Q instructions and in the opinion of management contain all adjustments, including those that are normal, recurring and necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. These interim financial statements should be read in conjunction with the financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2021 of Avient Corporation, formerly known as PolyOne Corporation. When used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Avient” and the “Company” mean Avient Corporation and its consolidated subsidiaries.
Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be attained in subsequent periods or for the year ending December 31, 2022.
Accounting Standards Not Yet Adopted
Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (ASU 2020-04), provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as LIBOR. The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rates expected to be discontinued. The amendments in ASU 2020-04 are effective through December 31, 2022. The Company is currently evaluating the impact of adopting this standard, if any, on our consolidated financial statements and disclosures.
Note 2 — BUSINESS COMBINATIONS
On July 1, 2021, the Company completed its acquisition of Magna Colours Ltd. (Magna Colours), a market leader in sustainable, water-based inks technology for the textile screen printing industry, for the purchase price of $47.6 million, net of cash acquired. The results of the Magna Colours business are reported in the Color, Additives and Inks segment. The preliminary purchase price allocation resulted in intangible assets of $27.5 million and goodwill of $22.0 million, partially offset by net liabilities assumed. Goodwill is not deductible for tax purposes. The intangible assets that have been acquired are being amortized over a period of 10 to 20 years.
6 AVIENT CORPORATION
Note 3 — GOODWILL AND INTANGIBLE ASSETS
Goodwill as of March 31, 2022 and December 31, 2021 and changes in the carrying amount of goodwill by segment were as follows:
| (In millions) | Specialty Engineered Materials | Color, Additives and Inks | Distribution | Total | |||||||||||||||||||
| Balance at December 31, 2021 | $ | 236.3 | $ | 1,048.5 | $ | 1.6 | $ | 1,286.4 | |||||||||||||||
| Currency translation | (0.1) | (2.9) | — | (3.0) | |||||||||||||||||||
| Balance at March 31, 2022 | $ | 236.2 | $ | 1,045.6 | $ | 1.6 | $ | 1,283.4 | |||||||||||||||
Indefinite and finite-lived intangible assets consisted of the following:
| As of March 31, 2022 | |||||||||||||||||||||||
| (In millions) | Acquisition Cost | Accumulated Amortization | Currency Translation | Net | |||||||||||||||||||
| Customer relationships | $ | 507.2 | $ | (141.9) | $ | 3.1 | $ | 368.4 | |||||||||||||||
| Patents, technology and other | 566.7 | (141.7) | (2.5) | 422.5 | |||||||||||||||||||
| Indefinite-lived trade names | 113.2 | — | — | 113.2 | |||||||||||||||||||
| Total | $ | 1,187.1 | $ | (283.6) | $ | 0.6 | $ | 904.1 | |||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||
| (In millions) | Acquisition Cost | Accumulated Amortization | Currency Translation | Net | |||||||||||||||||||
| Customer relationships | $ | 507.2 | $ | (135.4) | $ | 6.0 | $ | 377.8 | |||||||||||||||
| Patents, technology and other | 566.7 | (134.3) | 1.8 | 434.2 | |||||||||||||||||||
| Indefinite-lived trade names | 113.2 | — | — | 113.2 | |||||||||||||||||||
| Total | $ | 1,187.1 | $ | (269.7) | $ | 7.8 | $ | 925.2 | |||||||||||||||
Note 4 — LEASING ARRANGEMENTS
We lease certain manufacturing facilities, warehouse space, machinery and equipment, vehicles and information technology equipment. The majority of our leases are operating leases. Finance leases are immaterial to our condensed consolidated financial statements. Operating lease assets and obligations are reflected within Operating lease assets, net, Current operating lease obligations, and Non-current operating lease obligations, respectively, on the Condensed Consolidated Balance Sheets.
Lease expense is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. The components of lease cost recognized within our Condensed Consolidated Statements of Income were as follows:
| Three Months Ended March 31, | ||||||||||||||
| (In millions) | 2022 | 2021 | ||||||||||||
| Cost of sales | $ | 4.4 | $ | 5.6 | ||||||||||
| Selling and administrative expense | 2.3 | 2.6 | ||||||||||||
| Total operating lease cost | $ | 6.7 | $ | 8.2 | ||||||||||
We often have options to renew lease terms for buildings and other assets. The exercise of lease renewal options are generally at our sole discretion. In addition, certain lease arrangements may be terminated prior to their original expiration date at our discretion. We evaluate renewal and termination options at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors. The weighted average remaining lease term for our operating leases as of March 31, 2022 and 2021 was 4.7 years and 5.0 years, respectively.
The discount rate implicit within our leases is generally not determinable and, therefore, the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for our leases is determined
7 AVIENT CORPORATION
based on lease term and currency in which lease payments are made, adjusted for impacts of collateral. The weighted average discount rates used to measure our operating lease liabilities as of March 31, 2022 and 2021 were 3.7%.
Maturity Analysis of Operating Lease Liabilities:
| As of March 31, 2022 | ||||||||
| (In millions) | ||||||||
| 2022 | $ | 19.3 | ||||||
| 2023 | 19.9 | |||||||
| 2024 | 12.7 | |||||||
| 2025 | 7.7 | |||||||
| 2026 | 4.6 | |||||||
| Thereafter | 10.3 | |||||||
| Total lease payments | 74.5 | |||||||
| Less amount of lease payment representing interest | (6.8) | |||||||
| Total present value of lease payments | $ | 67.7 | ||||||
Note 5 — INVENTORIES, NET
Components of Inventories, net are as follows:
| (In millions) | As of March 31, 2022 | As of December 31, 2021 | |||||||||
| Finished products | $ | 248.7 | $ | 244.4 | |||||||
| Work in process | 27.0 | 21.2 | |||||||||
| Raw materials and supplies | 199.7 | 195.5 | |||||||||
| Inventories, net | $ | 475.4 | $ | 461.1 | |||||||
Note 6 — PROPERTY, NET
Components of Property, net are as follows:
| (In millions) | As of March 31, 2022 | As of December 31, 2021 | |||||||||
| Land and land improvements | $ | 89.6 | $ | 91.5 | |||||||
| Buildings | 351.6 | 350.6 | |||||||||
| Machinery and equipment | 976.3 | 972.3 | |||||||||
| Property, gross | 1,417.5 | 1,414.4 | |||||||||
| Less accumulated depreciation | (755.6) | (738.3) | |||||||||
| Property, net | $ | 661.9 | $ | 676.1 | |||||||
Note 7 — INCOME TAXES
During the three months ended March 31, 2022, the Company’s effective tax rate of 23.9% was above the U.S. federal statutory rate of 21.0% primarily due to state taxes, foreign withholding tax liability accrued associated with the future repatriation of certain current year foreign earnings, and global intangible low-taxed income (GILTI) tax. These unfavorable items were partially offset by the favorable foreign tax rate differential and U.S. research and development credit.
During the three months ended March 31, 2021, the Company’s effective tax rate of 22.3% was above the U.S. federal statutory rate of 21.0% primarily due to state taxes, foreign withholding tax liability accrued associated with the future repatriation of certain current year foreign earnings, and GILTI tax. These unfavorable items were partially offset by the favorable foreign tax rate differential and U.S. research and development credit.
8 AVIENT CORPORATION
Note 8 — FINANCING ARRANGEMENTS
Debt consists of the following instruments:
| As of March 31, 2022 (in millions) | Principal Amount | Unamortized discount and debt issuance cost | Net Debt | Weighted average interest rate | |||||||||||||||||||
| Senior secured revolving credit facility due 2026 | $ | — | $ | — | $ | — | — | % | |||||||||||||||
| Senior secured term loan due 2026 | 609.8 | 5.7 | 604.1 | 1.89 | % | ||||||||||||||||||
5.25% senior notes due 2023 | 600.0 | 1.1 | 598.9 | 5.25 | % | ||||||||||||||||||
5.75% senior notes due 2025 | 650.0 | 6.3 | 643.7 | 5.75 | % | ||||||||||||||||||
| Other Debt | 11.0 | — | 11.0 | ||||||||||||||||||||
| Total Debt | 1,870.8 | 13.1 | 1,857.7 | ||||||||||||||||||||
| Less short-term and current portion of long-term debt | 608.6 | 1.1 | 607.5 | ||||||||||||||||||||
| Total long-term debt, net of current portion | $ | 1,262.2 | $ | 12.0 | $ | 1,250.2 | |||||||||||||||||
| As of December 31, 2021 (in millions) | Principal Amount | Unamortized discount and debt issuance cost | Net Debt | Weighted average interest rate | |||||||||||||||||||
| Senior secured revolving credit facility due 2026 | $ | — | $ | — | $ | — | — | % | |||||||||||||||
| Senior secured term loan due 2026 | 611.5 | 6.2 | 605.3 | 1.85 | % | ||||||||||||||||||
5.25% senior notes due 2023 | 600.0 | 1.4 | 598.6 | 5.25 | % | ||||||||||||||||||
5.75% senior notes due 2025 | 650.0 | 6.8 | 643.2 | 5.75 | % | ||||||||||||||||||
| Other Debt | 11.8 | — | 11.8 | ||||||||||||||||||||
| Total Debt | 1,873.3 | 14.4 | 1,858.9 | ||||||||||||||||||||
| Less short-term and current portion of long-term debt | 8.6 | — | 8.6 | ||||||||||||||||||||
| Total long-term debt, net of current portion | $ | 1,864.7 | $ | 14.4 | $ | 1,850.3 | |||||||||||||||||
As of March 31, 2022, we had no borrowings outstanding under our Revolving Credit Facility, which had remaining availability of $464.4 million.
The agreements governing our senior secured revolving credit facility, our senior secured term loan, and the indentures and credit agreements governing other debt contain a number of customary financial and restrictive covenants that, among other things, limit our ability to: consummate asset sales, incur additional debt or liens, consolidate or merge with any entity or transfer or sell all or substantially all of our assets, pay dividends or make certain other restricted payments, make investments, enter into transactions with affiliates, create dividend or other payment restrictions with respect to subsidiaries, make capital investments and alter the business we conduct. As of March 31, 2022, we were in compliance with all covenants.
The estimated fair value of Avient’s debt instruments at March 31, 2022 and December 31, 2021 was $1,881.3 million and $1,917.7 million, respectively. The fair value of Avient’s debt instruments was estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities and represent Level 2 measurements within the fair value hierarchy.
Note 9 — SEGMENT INFORMATION
Avient has three reportable segments: (1) Color, Additives and Inks; (2) Specialty Engineered Materials; and (3) Distribution. Operating income is the primary measure that is reported to our chief operating decision maker (CODM) for purposes of allocating resources to the segments and assessing their performance. Operating income at the segment level does not include: corporate general and administrative expenses that are not allocated to segments; intersegment sales and profit eliminations; charges related to specific strategic initiatives such as the consolidation of operations; restructuring activities, including employee separation costs resulting from personnel reduction programs, plant closure and phase-in costs; executive separation agreements; share-based compensation costs; asset impairments; environmental remediation costs, along with related gains from insurance recoveries, and other liabilities for facilities no longer owned or closed in prior years; gains and losses on the divestiture of joint ventures and equity investments; actuarial gains and losses associated with our pension and other post-retirement benefit plans; and certain other items that are not included in the measure of segment profit or loss that is reported to and reviewed by our CODM. These costs are included in Corporate and eliminations.
9 AVIENT CORPORATION
Segment information for the three months ended March 31, 2022 and 2021 is as follows:
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||
| (In millions) | Sales to External Customers | Total Sales | Operating Income | Sales to External Customers | Total Sales | Operating Income | |||||||||||||||||||||||||||||
| Color, Additives and Inks | $ | 648.0 | $ | 649.5 | $ | 94.5 | $ | 607.9 | $ | 609.3 | $ | 88.8 | |||||||||||||||||||||||
| Specialty Engineered Materials | 223.3 | 244.7 | 39.7 | 195.8 | 216.5 | 34.2 | |||||||||||||||||||||||||||||
| Distribution | 422.5 | 432.9 | 24.2 | 354.9 | 362.7 | 24.0 | |||||||||||||||||||||||||||||
| Corporate and eliminations | — | (33.3) | (29.8) | 3.7 | (26.2) | (26.6) | |||||||||||||||||||||||||||||
| Total | $ | 1,293.8 | $ | 1,293.8 | $ | 128.6 | $ | 1,162.3 | $ | 1,162.3 | $ | 120.4 | |||||||||||||||||||||||
| Total Assets | |||||||||||
| (In millions) | As of March 31, 2022 | As of December 31, 2021 | |||||||||
| Color, Additives and Inks | $ | 3,021.0 | $ | 2,965.2 | |||||||
| Specialty Engineered Materials | 783.8 | 771.0 | |||||||||
| Distribution | 397.4 | 384.9 | |||||||||
| Corporate and eliminations | 844.8 | 876.1 | |||||||||
| Total assets | $ | 5,047.0 | $ | 4,997.2 | |||||||
Note 10 — COMMITMENTS AND CONTINGENCIES
We have been notified by federal and state environmental agencies and by private parties that we may be a potentially responsible party (PRP) in connection with the environmental investigation and remediation of certain sites. While government agencies frequently assert that PRPs are jointly and severally liable at these sites, in our experience, the interim and final allocations of liability costs are generally made based on the relative contribution of waste. We may also initiate corrective and preventive environmental projects of our own to ensure safe and lawful activities at our operations. We believe that compliance with current governmental regulations at all levels will not have a material adverse effect on our financial position, results of operations or cash flows.
In September 2007, the United States District Court for the Western District of Kentucky (Court) in the case of Westlake Vinyls, Inc. v. Goodrich Corporation, et al., held that Avient must pay the remediation costs at the former Goodrich Corporation Calvert City facility (now largely owned and operated by Westlake Vinyls, Inc. (Westlake Vinyls)), together with certain defense costs of Goodrich Corporation. The rulings also provided that Avient can seek indemnification for contamination attributable to Westlake Vinyls.
Following the rulings, the parties to the litigation agreed to settle all claims regarding past environmental costs incurred at the site. The settlement agreement provides a mechanism to pursue allocation of future remediation costs at the Calvert City site to Westlake Vinyls. We will adjust our accrual, in the future, consistent with any such future allocation of costs. Additionally, we continue to pursue available insurance coverage related to this matter and recognize gains as we receive reimbursement.
The environmental obligation at the site arose as a result of an agreement between The B.F. Goodrich Company (n/k/a Goodrich Corporation) and our predecessor, The Geon Company, at the time of the initial public offering in 1993. Under the agreement, The Geon Company agreed to indemnify Goodrich Corporation for certain environmental costs at the site. Neither Avient nor The Geon Company ever operated the facility.
Since 2009, Avient, along with respondents Westlake Vinyls, and Goodrich Corporation, has worked with the United States Environmental Protection Agency (USEPA) to address contamination at the site. The USEPA issued its Record of Decision (ROD) in September 2018, selecting a remedy consistent with our accrual assumptions. In April 2019, the respondents signed an Administrative Settlement Agreement and Order on Consent with the USEPA to conduct the remedial design actions at the site. In February 2020, the respondents signed the agreed Consent Decree and remedial action Work Plan, which received Federal Court approval in January 2021. Our current reserve totals $110.7 million for this matter.
During the three months ended March 31, 2022, Avient recognized $2.0 million of expense related to environmental remediation costs, compared to $0.5 million recognized during the three months ended March 31, 2021.
10 AVIENT CORPORATION
During the three months ended March 31, 2022 and 2021, Avient received $0.6 million and $4.5 million, respectively, of insurance recoveries for previously incurred environmental costs. These expenses and insurance recoveries are included within Cost of sales within our Condensed Consolidated Statements of Income.
Our Condensed Consolidated Balance Sheets include accruals totaling $122.5 million and $124.5 million as of March 31, 2022 and December 31, 2021, respectively, based on our estimates of probable future environmental expenditures relating to previously contaminated sites. These undiscounted amounts are included in Accrued expenses and other current liabilities and Other non-current liabilities on the accompanying Condensed Consolidated Balance Sheets. The accruals represent our best estimate of probable future costs that we can reasonably estimate, based upon currently available information and technology and our view of the most likely remedy. Depending upon the results of future testing, completion and results of remedial investigation and feasibility studies, the ultimate remediation alternatives undertaken, changes in regulations, technology development, new information, newly discovered conditions and other factors, it is reasonably possible that we could incur additional costs in excess of the amount accrued at March 31, 2022. However, such additional costs, if any, cannot be currently estimated.
Avient is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations, tax audits, product claims, personal injuries, and employment related matters. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes our current reserves are appropriate and these matters will not have a material adverse effect on the condensed consolidated financial statements.
Note 11 — DERIVATIVES AND HEDGING
We are exposed to market risks, such as changes in foreign currency exchange rates and interest rates. To manage the volatility related to these exposures we may enter into various derivative transactions. We formally assess, designate and document, as a hedge of an underlying exposure, the qualifying derivative instrument that will be accounted for as an accounting hedge at inception. Additionally, we assess both at inception and at least quarterly thereafter, whether the financial instruments used in the hedging transaction are effective at offsetting changes in either the fair values or cash flows of the underlying exposures. In accordance with ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12), that ongoing assessment will be done qualitatively for highly effective relationships.
Net Investment Hedge
During October and December 2018, as a means of mitigating the impact of currency fluctuations on our euro investments in foreign entities, we executed a total of six cross currency swaps, in which we will pay fixed-rate interest in euros and receive fixed-rate interest in U.S. dollars with a combined notional amount of 250.0 million euros and which mature in March 2023. In August and September 2020, we executed an additional five cross currency swaps, which were structured similarly to those executed in 2018. These swaps had a combined notional amount of 677.0 million euros, which were set to mature in May 2025. In September 2021, we executed five cross currency swap transactions that extended the length of the 2020 swaps agreements through 2028. Additionally, we entered into three new cross currency swaps with a combined notional amount of 338.7 million euros that also mature in 2028. These effectively convert a portion of our U.S. dollar denominated fixed-rate debt to euro denominated fixed-rate debt. Included in Interest expense, net within the Condensed Consolidated Statements of Income are a gain of $5.6 million and $3.5 million for the three months ended March 31, 2022 and 2021, respectively. These gains were recognized within Interest expense, net within the Condensed Consolidated Statements of Income.
We designated the cross currency swaps as net investment hedges of our net investment in our European operations under ASU 2017-12 and applied the spot method to these hedges. The changes in fair value of the derivative instruments that are designated and qualify as hedges of net investments in foreign operations are recognized within Accumulated Other Comprehensive Income (AOCI) to offset the changes in the values of the net investment being hedged. Gains of $6.8 million and $22.9 million, net of tax, were recognized within translation adjustments in AOCI for the three months ended March 31, 2022 and 2021, respectively.
Derivatives Designated as Cash Flow Hedging Instruments
In August 2018, we entered into two interest rate swaps with a combined notional amount of $150.0 million to manage the variability of cash flows in the interest rate payments associated with our existing LIBOR-based interest payments, effectively converting $150.0 million of our floating rate debt to a fixed rate. We began to receive floating rate interest payments based upon one-month U.S. dollar LIBOR and in return are obligated to pay interest at a fixed rate of 2.732% until November 2022. We have designated these interest rate swap contracts as cash flow hedges pursuant to ASC Topic 815, Derivatives and Hedging. The net interest payments accrued each month for these highly effective hedges are reflected in net income as adjustments of interest expense and the remaining change in the fair
11 AVIENT CORPORATION
value of the derivatives is recorded as a component of AOCI. The amount of expense recognized within Interest expense, net in our Condensed Consolidated Statements of Income was $1.0 million for each of the three months ended March 31, 2022 and 2021. Gains of $1.3 million and $0.8 million, net of tax, were recognized in AOCI for the three months ended March 31, 2022 and 2021, respectively.
All of our derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy. We determine the fair value of our derivatives based on valuation methods, which project future cash flows and discount the future amounts present value using market based observable inputs, including interest rate curves and foreign currency rates.
The fair value of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets is as follows:
| (In millions) | Balance Sheet Location | As of March 31, 2022 | As of December 31, 2021 | ||||||||||||||
| Assets | |||||||||||||||||
| Cross Currency Swaps (Net Investment Hedge) | Other current assets | $ | 17.0 | $ | — | ||||||||||||
Cross Currency Swaps (Net Investment Hedge) | Other non-current assets | 24.5 | 31.7 | ||||||||||||||
| Liabilities | |||||||||||||||||
Interest Rate Swaps (Cash Flow Hedge) | Other current liabilities | 1.3 | 3.1 | ||||||||||||||
Note 12 — SUBSEQUENT EVENTS
On April 19, 2022, we entered into a signing protocol (the Signing Protocol) with Koninklijke DSM N.V., a public limited liability company incorporated under the laws of the Netherlands (DSM). Pursuant to the terms of the Signing Protocol, after completion of the consultation process with the relevant Dutch works council, Avient and DSM will enter into a Sale and Purchase Agreement (the Purchase Agreement) pursuant to which we will, among other things, acquire from DSM (a) all of the equity of DSM Protective Materials International B.V., a private limited liability company organized under the laws of the Netherlands, DSM Protective Materials B.V., a private limited liability company organized under the laws of the Netherlands, and DSM Protective Materials LLC, a Delaware limited liability company, and (b) certain other assets related to DSM's protective materials business (including the Dyneema© Brand) (such equity and assets together, the Dyneema Business) (such acquisition of the Dyneema Business, the Dyneema Acquisition).
Pursuant to the terms of the Purchase Agreement, we have agreed to acquire the Dyneema Business for an aggregate purchase price of €1.38 billion, subject to certain customary adjustments for a European “locked box” transaction (the Purchase Price). Certain Purchase Price payments are Euro-denominated and are subject to change based on fluctuations in the Euro-USD exchange rate. In addition to the consultation process with the Dutch works council, the closing of the Dyneema Acquisition will be subject to the satisfaction or waiver of customary and other conditions, including the receipt of required regulatory approvals.
In connection with the Dyneema Acquisition, on April 19, 2022, we entered into a Commitment Letter with Morgan Stanley Senior Funding, Inc. and J.P. Morgan (the Commitment Parties), pursuant to which the Commitment Parties will commit to providing us with a senior secured term loan facility and a senior unsecured bridge loan (the Bridge Facility) for an aggregated $1.54 billion for the purpose of funding the Dyneema Acquisition. The commitment is subject to various conditions, including the execution of definitive documentation and other customary closing conditions. We currently intend to issue new senior unsecured notes in lieu of borrowing under the Bridge Facility.
On April 20, 2022, we executed additional cross currency swaps, pursuant to which we will pay fixed-rate interest in euros and receive fixed-rate interest in U.S. dollars with a combined notional amount of €900 million, which mature in April 2028. Additionally, we entered into foreign currency forward contracts with an aggregate notional amount of €350 million, which are scheduled to mature within one year.
In conjunction with our intent to acquire the Dyneema Business, we plan to explore a potential sale of our Distribution business.
12 AVIENT CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Business
We are a premier provider of specialized and sustainable material solutions that transform customer challenges into opportunities, bringing new products to life for a better world. Our products include specialty engineered materials, advanced composites, color and additive systems and polymer distribution. We are also a highly specialized developer and manufacturer of performance enhancing additives, liquid colorants, and fluoropolymer and silicone colorants. Headquartered in Avon Lake, Ohio, we have employees at sales, manufacturing and distribution facilities across the globe. We provide value to our customers through our ability to link our knowledge of polymers and formulation technology with our manufacturing and supply chain capabilities to provide value-added solutions to designers, assemblers and processors of plastics. When used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Avient” and the “Company” mean Avient Corporation, formerly known as PolyOne Corporation, and its consolidated subsidiaries.
Highlights and Executive Summary
A summary of Avient’s sales, operating income, net income and net income attributable to Avient common shareholders follows:
| Three Months Ended March 31, | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Sales | $ | 1,293.8 | $ | 1,162.3 | |||||||
| Operating income | 128.6 | 120.4 | |||||||||
| Net income | $ | 84.5 | $ | 79.7 | |||||||
| Net income attributable to Avient common shareholders | $ | 84.2 | $ | 79.3 | |||||||
Trends and Developments
COVID-19
We have continued to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it has impacted our employees, customers, supply chain and distribution network. Although we are unable to predict the ultimate impact of the COVID-19 outbreak at this time, the pandemic has in the past adversely affected, and could in the future adversely affect our business. While we concluded there were no indicators of impairment as of March 31, 2022, any significant sustained adverse change in financial results or macroeconomic conditions could result in future impairments of long-lived assets. The extent to which our operations may continue to be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact.
Magna Colours Acquisition
On July 1, 2021, the Company completed its acquisition of Magna Colours, a market leader in sustainable, water-based inks technology for the textile screen printing industry, for the purchase price of $47.6 million, net of cash acquired. The results of the Magna Colours business are reported in the Color, Additives and Inks segment. The preliminary purchase price allocation resulted in intangible assets of $27.5 million and goodwill of $22.0 million, partially offset by net liabilities assumed. Goodwill is not deductible for tax purposes. The intangible assets that have been acquired are being amortized over a period of 10 to 20 years.
Dyneema Acquisition
On April 19, 2022, we entered into a signing protocol (the Signing Protocol) with Koninklijke DSM N.V., a public limited liability company incorporated under the laws of the Netherlands (DSM). Pursuant to the terms of the Signing Protocol, after completion of the consultation process with the relevant Dutch works council, Avient and DSM will enter into a Sale and Purchase Agreement (the Purchase Agreement) pursuant to which we will, among other things, acquire from DSM (a) all of the equity of DSM Protective Materials International B.V., a private limited liability company organized under the laws of the Netherlands, DSM Protective Materials B.V., a private limited liability company organized under the laws of the Netherlands, and DSM Protective Materials LLC, a Delaware limited liability company, and (b) certain other assets related to DSM's protective materials business (including the
13 AVIENT CORPORATION
Dyneema© Brand) (such equity and assets together, the Dyneema Business) (such acquisition of the Dyneema Business, the Dyneema Acquisition).
Pursuant to the terms of the Purchase Agreement, we have agreed to acquire the Dyneema Business for an aggregate purchase price of €1.38 billion, subject to certain customary adjustments for a European “locked box” transaction (the Purchase Price). Certain Purchase Price payments are Euro-denominated and are subject to change based on fluctuations in the Euro-USD exchange rate. In addition to the consultation process with the Dutch works council, the closing of the Dyneema Acquisition will be subject to the satisfaction or waiver of customary and other conditions, including the receipt of required regulatory approvals.
In conjunction with our intent to acquire the Dyneema Business, we plan to explore a potential sale of our Distribution business.
Results of Operations — The three months ended March 31, 2022 compared to three months ended March 31, 2021:
| Three Months Ended March 31, | Variances — Favorable (Unfavorable) | ||||||||||||||||||||||
| (Dollars in millions, except per share data) | 2022 | 2021 | Change | % Change | |||||||||||||||||||
| Sales | $ | 1,293.8 | $ | 1,162.3 | $ | 131.5 | 11.3 | % | |||||||||||||||
| Cost of sales | 1,000.1 | 859.9 | (140.2) | (16.3) | % | ||||||||||||||||||
| Gross margin | 293.7 | 302.4 | (8.7) | (2.9) | % | ||||||||||||||||||
| Selling and administrative expense | 165.1 | 182.0 | 16.9 | 9.3 | % | ||||||||||||||||||
| Operating income | 128.6 | 120.4 | 8.2 | 6.8 | % | ||||||||||||||||||
| Interest expense, net | (16.9) | (19.3) | 2.4 | 12.4 | % | ||||||||||||||||||
| Other (expense) income, net | (0.6) | 1.5 | (2.1) | nm | |||||||||||||||||||
| Income before income taxes | 111.1 | 102.6 | 8.5 | 8.3 | % | ||||||||||||||||||
| Income tax expense | (26.6) | (22.9) | (3.7) | (16.2) | % | ||||||||||||||||||
| Net income | 84.5 | 79.7 | 4.8 | 6.0 | % | ||||||||||||||||||
| Net income attributable to noncontrolling interests | (0.3) | (0.4) | 0.1 | nm | |||||||||||||||||||
| Net income attributable to Avient common shareholders | $ | 84.2 | $ | 79.3 | $ | 4.9 | 6.2 | % | |||||||||||||||
| Earnings per share attributable to Avient common shareholders - Basic | $ | 0.92 | $ | 0.87 | |||||||||||||||||||
| Earnings (loss) per share attributable to Avient common shareholders - Diluted | $ | 0.91 | $ | 0.86 | |||||||||||||||||||
nm - not meaningful
Sales
Sales increased $131.5 million in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 as a result of price increases associated with raw material inflation, growth in the healthcare and consumer end market and certain composite applications. These increases offset demand conditions in China as a result of the recent COVID lockdowns and in Europe as a result of the ongoing war in Ukraine, as well as weaker foreign exchange rates primarily from the Euro.
Cost of sales
As a percent of sales, cost of sales increased from 74.0% to 77.3% in the three months ended March 31, 2021 to March 31, 2022, primarily as a result of raw material inflation, higher wages and logistics costs, and lower insurance recoveries on previously incurred environmental remediation costs.
Selling and administrative expense
Selling and administrative expense decreased $16.9 million during the three months ended March 31, 2022 compared to the three months ended March 31, 2021, driven primarily by weaker foreign exchange and lower incentive accruals.
14 AVIENT CORPORATION
Interest expense, net
Interest expense, net decreased $2.4 million in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to additional cross currency swaps entered into in 2021 (See Note 11, Derivatives and Hedging for details).
Income taxes
During the three months ended March 31, 2022, the Company’s effective tax rate was 23.9% versus 22.3% for the three months ended March 31, 2021. The income tax rate increase is primarily due to the higher tax effects of state income taxes, GILTI tax and less of a favorable foreign tax rate differential.
SEGMENT INFORMATION
Avient has three reportable segments: (1) Color, Additives and Inks; (2) Specialty Engineered Materials; and (3) Distribution. Operating income is the primary measure that is reported to our chief operating decision maker (CODM) for purposes of allocating resources to the segments and assessing their performance. Operating income at the segment level does not include: corporate general and administrative expenses that are not allocated to segments; intersegment sales and profit eliminations; charges related to specific strategic initiatives such as the consolidation of operations; restructuring activities, including employee separation costs resulting from personnel reduction programs, plant closure and phase-in costs; executive separation agreements; share-based compensation costs; asset impairments; environmental remediation costs, along with related gains from insurance recoveries, and other liabilities for facilities no longer owned or closed in prior years; gains and losses on the divestiture of joint ventures and equity investments; actuarial gains and losses associated with our pension and other post-retirement benefit plans; and certain other items that are not included in the measure of segment profit or loss that is reported to and reviewed by our CODM. These costs are included in Corporate and eliminations.
Sales and Operating Income — The three months ended March 31, 2022 compared to the three months ended March 31, 2021:
| Three Months Ended March 31, | Variances — Favorable (Unfavorable) | ||||||||||||||||||||||
| (Dollars in millions) | 2022 | 2021 | Change | % Change | |||||||||||||||||||
| Sales: | |||||||||||||||||||||||
| Color, Additives and Inks | $ | 649.5 | $ | 609.3 | $ | 40.2 | 6.6 | % | |||||||||||||||
Specialty Engineered Materials | 244.7 | 216.5 | 28.2 | 13.0 | % | ||||||||||||||||||
| Distribution | 432.9 | 362.7 | 70.2 | 19.4 | % | ||||||||||||||||||
| Corporate and eliminations | (33.3) | (26.2) | (7.1) | (27.1) | % | ||||||||||||||||||
| Total Sales | $ | 1,293.8 | $ | 1,162.3 | $ | 131.5 | 11.3 | % | |||||||||||||||
| Operating income: | |||||||||||||||||||||||
| Color, Additives and Inks | $ | 94.5 | $ | 88.8 | $ | 5.7 | 6.4 | % | |||||||||||||||
Specialty Engineered Materials | 39.7 | 34.2 | 5.5 | 16.1 | % | ||||||||||||||||||
| Distribution | 24.2 | 24.0 | 0.2 | 0.8 | % | ||||||||||||||||||
| Corporate and eliminations | (29.8) | (26.6) | (3.2) | (12.0) | % | ||||||||||||||||||
| Total Operating Income | $ | 128.6 | $ | 120.4 | $ | 8.2 | 6.8 | % | |||||||||||||||
| Operating income as a percentage of sales: | |||||||||||||||||||||||
| Color, Additives and Inks | 14.5 | % | 14.6 | % | (0.1) | % points | |||||||||||||||||
Specialty Engineered Materials | 16.2 | % | 15.8 | % | 0.4 | % points | |||||||||||||||||
| Distribution | 5.6 | % | 6.6 | % | (1.0) | % points | |||||||||||||||||
Total | 9.9 | % | 10.4 | % | (0.5) | % points | |||||||||||||||||
15 AVIENT CORPORATION
Color, Additives and Inks
Sales increased $40.2 million in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to higher selling prices across all regions and end markets. Demand conditions in the Americas remained strong, particularly in healthcare, which was offset by slowdowns in China as a result of the recent COVID lockdowns and in Europe as a result of the ongoing war in Ukraine.
Operating income increased $5.7 million in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to aforementioned price increases associated with raw material inflation, lower selling, general, and administrative expenses driven by synergies from prior acquisitions and lower incentives. These benefits were partially offset by weaker foreign exchange rates, wage inflation, higher supply chain costs, and demand conditions in China and Europe.
Specialty Engineered Materials
Sales increased $28.2 million in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to higher selling prices across all regions and end markets. Gains in the healthcare end market and growth in certain composite applications more than offset lower demand in China and transportation applications.
Operating income increased $5.5 million in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 due to aforementioned sales increases. These benefits were partially offset by wage inflation and higher supply chain costs.
Distribution
Sales increased $70.2 million in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021, driven by increased average selling prices which offset lower demand.
Operating income in the three months ended March 31, 2022 was flat compared to the three months ended March 31, 2021 as margins were slightly compressed from higher cost inventory.
Corporate and Eliminations
Costs increased $3.2 million, or 12%, in the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 due to higher environmental remediation costs and lower insurance recoveries on previously incurred environmental costs.
Liquidity and Capital Resources
Our objective is to finance our business through operating cash flow and an appropriate mix of debt and equity. By laddering the maturity structure, we avoid concentrations of debt maturities, reducing liquidity risk. We may from time to time seek to retire or purchase our outstanding debt with cash and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. We may also seek to repurchase our outstanding common shares. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved have been and may continue to be material.
The following table summarizes our liquidity as of March 31, 2022 and December 31, 2021:
| (In millions) | As of March 31, 2022 | As of December 31, 2021 | |||||||||
| Cash and cash equivalents | $ | 562.6 | $ | 601.2 | |||||||
| Revolving credit availability | 464.4 | 485.5 | |||||||||
| Liquidity | $ | 1,027.0 | $ | 1,086.7 | |||||||
As of March 31, 2022, approximately 66% of the Company’s cash and cash equivalents resided outside the United States.
In connection with the Dyneema Acquisition, on April 19, 2022, we entered into a Commitment Letter with Morgan Stanley Senior Funding, Inc. and J.P. Morgan (the Commitment Parties), pursuant to which the Commitment Parties will commit to providing us with a $640.0 million senior secured term loan facility and a $900.0 million senior unsecured bridge loan (the Bridge Facility) for purposes of funding the Dyneema Acquisition. The commitment is subject to various conditions, including the execution of definitive documentation and other customary closing conditions. We currently intend to issue new senior unsecured notes in lieu of borrowing under the Bridge Facility.
16 AVIENT CORPORATION
Expected sources of cash needed to satisfy cash requirements for the remainder of 2022 outside of the Dyneema Acquisition include our cash on hand, cash from operations and available liquidity under our revolving credit facility, if needed. Outside of the Dyneema Acquisition, expected uses of cash for the remainder of 2022 include interest payments, cash taxes, dividend payments, share repurchases, environmental remediation costs, capital expenditures, and debt repayment.
Cash Flows
The following describes the significant components of cash flows from operating, investing and financing activities for the three months ended March 31, 2022 and 2021.
Operating Activities — In the three months ended March 31, 2022, net cash provided by operating activities was $18.9 million as compared to $3.6 million for the three months ended March 31, 2021, driven by increased earnings in 2022 and lower comparative investment in working capital.
Investing Activities — Net cash used by investing activities during the three months ended March 31, 2022 of $13.3 million reflects capital expenditures.
Net cash used by investing activities during the three months ended March 31, 2021 of $18.5 million primarily reflects capital expenditures of $16.5 million.
Financing Activities — Net cash used by financing activities for the three months ended March 31, 2022 of $43.8 million primarily reflects $21.7 million of dividends paid, repayment of debt of $2.4 million, repurchases of our outstanding common shares of $15.8 million, and the payment of withholding tax on share awards of $3.9 million.
Net cash provided by financing activities for the three months ended March 31, 2021 of $29.1 million primarily reflects $19.5 million of dividends paid, repurchases of our outstanding common shares of $4.2 million, and the payment of withholding tax on share awards of $3.1 million.
Debt
As of March 31, 2022, our principal amount of debt totaled $1,870.8 million. Aggregate maturities of the principal amount of debt for the current year, next four years and thereafter, are as follows:
| (In millions) | ||||||||
| 2022 | $ | 6.0 | ||||||
| 2023 | 608.6 | |||||||
| 2024 | 8.6 | |||||||
| 2025 | 658.7 | |||||||
| 2026 | 6.9 | |||||||
| Thereafter | 582.0 | |||||||
| Aggregate maturities | $ | 1,870.8 | ||||||
As of March 31, 2022, we were in compliance with all financial and restrictive covenants pertaining to our debt. For additional information regarding our debt, please see Note 8, Financing Arrangements to the accompanying condensed consolidated financial statements.
Derivatives and Hedging
We are exposed to market risks, such as changes in foreign currency exchange rates and interest rates. To manage the volatility related to these exposures we may enter into various derivative transactions. For additional information regarding our derivative instruments, please see Note 11, Derivatives and Hedging and Note 12, Subsequent Events to the accompanying condensed consolidated financial statements.
Material Cash Requirements
We have future obligations under various contracts relating to debt and interest payments, operating leases, pension and post-retirement benefit plans and purchase obligations. During the three months ended March 31, 2022, there were no material changes to these obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2021.
17 AVIENT CORPORATION
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
In this Quarterly Report on Form 10-Q, statements that are not reported financial results or other historical information are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. They are based on management’s expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words such as "will," “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial condition, performance and/or sales. In particular, these include statements relating to future actions; prospective changes in raw material costs, product pricing or product demand; future performance; estimated capital expenditures; results of current and anticipated market conditions and market strategies; sales efforts; expenses; the outcome of contingencies such as legal proceedings and environmental liabilities; and financial results. Factors that could cause actual results to differ materially from those implied by these forward-looking statements include, but are not limited to:
•disruptions, uncertainty or volatility in the credit markets that could adversely impact the availability of credit already arranged and the availability and cost of credit in the future;
•the effect on foreign operations of currency fluctuations, tariffs and other political, economic and regulatory risks;
•the current and potential future impact of the COVID-19 pandemic on our business, results of operations, financial position or cash flows, including without limitation, any supply chain and logistics issues;
•changes in polymer consumption growth rates and laws and regulations regarding plastics in jurisdictions where we conduct business;
•fluctuations in raw material prices, quality and supply, and in energy prices and supply;
•production outages or material costs associated with scheduled or unscheduled maintenance programs;
•unanticipated developments that could occur with respect to contingencies such as litigation and environmental matters;
•our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends;
•information systems failures and cyberattacks;
•amounts for cash and non-cash charges related to restructuring plans that may differ from original estimates, including because of timing changes associated with the underlying actions;
•any material adverse changes in the Dyneema Business;
•our ability to achieve the strategic and other objectives relating to the Dyneema Acquisition, including any expected synergies, and the possible sale of the Distribution business segment; and
•other factors described in our Annual Report on Form 10-K for the year ended December 31, 2021 under Item 1A, “Risk Factors.”
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law. You are advised, however, to consult any further disclosures we make on related subjects in our reports on Forms 10-Q, 8-K and 10-K filed with the Securities and Exchange Commission. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to exposures to market risk as reported in our Annual Report on Form 10-K for the year ended December 31, 2021.
18 AVIENT CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures
Avient’s management, under the supervision of and with the participation of its Chief Executive Officer and its Chief Financial Officer, has evaluated the effectiveness of the design and operation of Avient’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report. Based upon this evaluation, Avient’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report, its disclosure controls and procedures were effective.
Changes in internal control over financial reporting
There were no changes in Avient’s internal control over financial reporting during the quarter ended March 31, 2022 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding certain legal proceedings can be found in Note 10, Commitments and Contingencies to the accompanying condensed consolidated financial statements and is incorporated by reference herein.
ITEM 1A. RISK FACTORS
The disclosure below modifies the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. These risks, along with those previously disclosed, could adversely affect our business, results of operations, financial position or cash flows.
Dyneema Acquisition Risks
The Dyneema Acquisition may not occur at all or may not occur in the expected time frame, which may negatively impact our share price.
On April 19, 2022, we entered into the Signing Protocol with DSM, pursuant to which we will enter into the Purchase Agreement and, subject to the satisfaction or waiver of specified conditions, we will acquire the Dyneema Business. The consummation of the Dyneema Acquisition is not assured. The Dyneema Acquisition is subject to risks and uncertainties, including the risks that the necessary regulatory approvals will not be obtained, the risk that Avient may be required to divest certain businesses or assets in connection with the Dyneema Acquisition, or that other closing conditions will not be satisfied. We cannot predict whether and when such conditions will be required or satisfied.
We may experience other difficulties integrating the Dyneema Business.
There can be no assurance that we will successfully or cost-effectively integrate the Dyneema Business. The failure to do so could have an adverse effect on our business, financial condition, results of operations and cash flow.
We will incur additional debt to complete the Dyneema Acquisition. Our ability to generate cash to service this debt depends on many factors beyond our control.
At March 31, 2022, we had total debt of approximately $1,870.8 million. We expect to incur approximately $1,390.0 million of debt to complete the Dyneema Acquisition.
Our ability to make payments on our debt, fund our other liquidity needs, and make planned capital expenditures will depend on our ability to generate cash in the future. A significant portion of our operations are conducted by our subsidiaries. Our cash flows and our ability to service our indebtedness, including our ability to pay the interest on and principal of our debt when due, may be dependent upon cash dividends and other distributions or other transfers from our subsidiaries. Our ability to generate cash, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
The degree to which we are currently leveraged and will be leveraged following the consummation of the Dyneema Acquisition could have important consequences for shareholders.
19 AVIENT CORPORATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below sets forth information regarding the repurchase of shares of our common shares during the period indicated.
| Period | Total Number of Shares Purchased | Weighted Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Maximum Number of Shares that May Yet be Purchased Under the Program (1) | |||||||||||||||||||
| January 1 to January 31 | — | $ | — | — | 5,757,472 | ||||||||||||||||||
| February 1 to February 28 | 300,000 | 52.69 | 300,000 | 5,457,472 | |||||||||||||||||||
| March 1 to March 31 | — | — | — | 5,457,472 | |||||||||||||||||||
| Total | 300,000 | $ | 52.69 | 300,000 | |||||||||||||||||||
(1) Our Board of Directors approved a common share repurchase program authorizing Avient to purchase its common shares in August 2008, which share repurchase authorization has been subsequently increased from time to time. On December 9, 2020, we announced that we would increase our share buyback by an additional 5 million shares. As of March 31, 2022, approximately 5.5 million shares remained available for purchase under these authorizations, which have no expiration. Purchases of common shares may be made by open market purchases or privately negotiated transactions and may be made pursuant to Rule 10b5-1 plans and accelerated share repurchases.
20 AVIENT CORPORATION
ITEM 6. EXHIBITS
EXHIBIT INDEX
| Exhibit No. | Exhibit Description | |||||||
| 101.INS | Inline XBRL Instance Document | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
† | Certain exhibits and schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided to the Securities and Exchange Commission upon request. | |||||||
| ** | Filed herewith. | |||||||
21 AVIENT CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| April 27, 2022 | AVIENT CORPORATION | |||||||
| /s/ Jamie A. Beggs | ||||||||
| Jamie A. Beggs Senior Vice President and Chief Financial Officer | ||||||||
22 AVIENT CORPORATION