Avient (AVNT) - 2021 Q4 - Annual Report

PART I Item 1. Business Avient Corporation is a global formulator of specialized polymer solutions, operating in three segments with a focus on R&D and human capital Business Overview Avient, rebranded in 2020, is a global formulator of specialized material solutions with 102 manufacturing sites and $4.8 billion in 2021 sales - Avient is a global formulator of specialized polymer solutions with products including specialty engineered materials, advanced composites, and color systems[4] - The company was formed as PolyOne Corporation in 2000 and rebranded to Avient Corporation in July 2020 following the acquisition of Clariant's global color business[4] 2021 Company Snapshot | Metric | Value | | :--- | :--- | | 2021 Sales | $4.8 billion | | International Sales % | ~53% | | Manufacturing Sites | 102 | | Distribution Facilities | 8 | Avient Segments Avient operates through three reportable segments: Color, Additives and Inks; Specialty Engineered Materials; and Distribution - Avient's operations are structured into three reportable segments: Color, Additives and Inks; Specialty Engineered Materials; and Distribution[7] Competition Avient faces intense competition in plastics formulation and polymer distribution, based on service, innovation, quality, and price - The plastics formulation and distribution industries are highly competitive, with competition based on factors like service, performance, innovation, quality, and price[8] Raw Materials Primary raw materials include thermoplastic resins, TiO2, pigments, and additives, with minor supply disruptions experienced in 2021 - Primary raw materials include thermoplastic resins, TiO2, pigments, and specialty additives. The company experienced some non-material supply disruptions and logistical delays in 2021[10] Research and Development Avient invests significantly in R&D, employing 1,000 associates to develop new product formulations for market and sustainability needs Research and Development Investment | Year | R&D Investment (in millions) | | :--- | :--- | | 2021 | $83.2 | | 2020 | $59.8 | | 2019 | $50.6 | Human Capital Resources Avient employs 8,700 globally, prioritizing safety, diversity, and inclusion, and has been recognized as a Great Place to Work - As of year-end 2021, Avient employed approximately 8,700 people, with 34% in the U.S. and Canada, 34% in EMEA, 25% in Asia, and 7% in Latin America[18] - The company maintained a world-class safety record in 2021 with a recordable incident rate of 0.55 per 100 full-time workers, compared to an industry average of 3.50 in 2020[19] - Avient demonstrates a strong commitment to diversity, with 42% of its Board of Directors and 64% of the CEO's direct reports being female or racially/ethnically diverse[22] Item 1A. Risk Factors Avient faces material risks including global operating, business-specific (demand, costs, cybersecurity), capital, credit, and COVID-19 pandemic impacts Global Operating Risks Avient's substantial international sales (53%) expose it to global operating risks like regulatory changes, political instability, and data privacy - The company conducts a substantial portion of its business outside the U.S., with approximately 53% of sales in foreign countries, exposing it to various international risks[31] Business Risks Business risks include demand volatility, manufacturing hazards, raw material cost fluctuations, regulatory compliance, and cybersecurity threats - Demand for products can be affected by economic downturns, competition, and changes in environmental regulations[32] - Fluctuations in the cost of electricity, fuel, logistics, and raw materials can cause volatility in financial results[34] - Cybersecurity breaches and information system threats pose a risk to the security of systems, networks, and sensitive data, which could harm the business[35] Capital and Credit Risks Capital and credit risks include limited access to capital, restrictive debt covenants, significant debt servicing, and goodwill impairment risk - Debt agreements contain various restrictive covenants that limit actions such as selling assets, incurring additional debt, and paying dividends[36][37] - As of December 31, 2021, the company had goodwill of $1,286.4 million, which could be subject to impairment charges if adverse business changes occur[40] COVID-19 Pandemic Risks The COVID-19 pandemic poses ongoing risks including production shutdowns, supply chain disruptions, cost increases, and reduced customer liquidity - The COVID-19 pandemic could negatively impact the business through production shutdowns, supply chain disruptions, increased costs, and reduced customer liquidity[43] Item 2. Properties Avient operates 102 manufacturing sites and 8 distribution facilities globally, with sufficient production capacity for the foreseeable future - The company operates 102 manufacturing sites and 8 distribution facilities globally. The majority of manufacturing sites are owned, while distribution facilities are leased[44] Information About Our Executive Officers This section lists Avient's executive officers as of February 4, 2022, including their positions and professional biographies - Lists the names, ages, and positions of the company's executive officers as of February 4, 2022, along with their professional backgrounds[47][48][49] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Avient's common shares trade on the NYSE (AVNT), with 1,543 holders of record and an active share repurchase program - The company's common stock is traded on the NYSE under the ticker AVNT[51] Share Repurchase Activity (Q4 2021) | Period | Total Number of Shares Purchased | Maximum Shares Remaining for Purchase | | :--- | :--- | :--- | | Oct 2021 | 0 | 5,757,472 | | Nov 2021 | 0 | 5,757,472 | | Dec 2021 | 0 | 5,757,472 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, Avient achieved significant sales and operating income growth, driven by acquisitions and segment performance, while maintaining strong liquidity Results of Operations In 2021, sales grew 48.6% to $4.82 billion and operating income rose 101.4% to $381.2 million, driven by acquisition and market growth Consolidated Results of Operations (2021 vs. 2020) | Metric (in millions) | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Sales | $4,818.8 | $3,242.1 | 48.6% | | Gross margin | $1,099.6 | $784.3 | 40.2% | | Operating income | $381.2 | $189.3 | 101.4% | | Net income from continuing operations | $230.6 | $133.8 | 72.3% | | Diluted EPS from continuing operations | $2.51 | $1.46 | 71.9% | - The increase in sales was attributed to the Clariant Color Acquisition, growth in many end markets, and price increases to counter raw material inflation[65] - The effective income tax rate increased to 24.3% in 2021 from 3.7% in 2020. The 2020 rate was significantly lower due to a $18.2 million (13.1%) tax benefit from a carryback of capital losses[72][73] Segment Information All three segments, Color, Additives and Inks, Specialty Engineered Materials, and Distribution, reported significant sales growth in 2021 Segment Sales and Operating Income (2021 vs. 2020) | Segment (in millions) | 2021 Sales | 2020 Sales | % Change | 2021 Op. Income | 2020 Op. Income | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Color, Additives and Inks | $2,401.6 | $1,502.9 | 59.8% | $303.1 | $180.8 | 67.6% | | Specialty Engineered Materials | $918.9 | $708.8 | 29.6% | $132.0 | $94.4 | 39.8% | | Distribution | $1,630.9 | $1,110.3 | 46.9% | $93.2 | $69.5 | 34.1% | - The Color, Additives and Inks segment's growth was primarily driven by the Clariant Color Acquisition[78] - The Specialty Engineered Materials segment's growth was largely driven by high demand for advanced composite materials[79] Liquidity and Capital Resources Avient maintained strong liquidity of $1.09 billion at year-end 2021, with total debt at $1.86 billion, and sufficient capital for future operations Liquidity Summary (as of Dec 31, 2021) | Component (in millions) | Amount | | :--- | :--- | | Cash and cash equivalents | $601.2 | | Revolving credit availability | $485.5 | | Total Liquidity | $1,086.7 | Total Debt Summary (as of Dec 31) | (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Total debt | $1,858.9 | $1,872.6 | - Capital expenditures are estimated to be approximately $135 million in 2022[82] Cash Flows Operating cash flow increased slightly to $233.8 million in 2021, while investing and financing activities used $150.2 million and $114.6 million, respectively Summary of Cash Flows (in millions) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from Operating Activities | $233.8 | $221.6 | | Net cash from Investing Activities | ($150.2) | ($1,431.6) | | Net cash from Financing Activities | ($114.6) | $982.0 | Critical Accounting Policies and Estimates Critical accounting policies involve significant estimates for environmental liabilities ($124.5 million), pension plans, income taxes, and goodwill impairment testing - The undiscounted accrual for probable future environmental expenditures was $124.5 million at December 31, 2021[95] - For pension and post-retirement plans, the company recognized a $9.4 million loss in 2021, primarily due to actual asset returns being lower than assumed returns[97] - The annual goodwill impairment test, performed as of October 1, 2021, resulted in no impairment charges, with no reporting units considered to be at risk[98] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Avient manages market risks from interest rate and foreign currency fluctuations using derivative financial instruments for mitigation, not speculation - The company is exposed to market risks from interest rate changes on variable-rate debt and foreign currency fluctuations[100] - Derivative instruments are used for risk management purposes to mitigate these exposures, not for speculation[100] Item 8. Financial Statements and Supplementary Data This section presents Avient's consolidated financial statements for 2021, along with management's report and the independent auditor's unqualified opinion Consolidated Financial Statements The consolidated financial statements show 2021 sales of $4.8 billion, net income of $230.6 million, and total assets of $5.0 billion Key Financial Highlights (Year Ended Dec 31, 2021) | Metric (in millions, except per share data) | 2021 Value | | :--- | :--- | | Sales | $4,818.8 | | Operating Income | $381.2 | | Net Income | $230.6 | | Diluted EPS | $2.51 | | Total Assets (at year-end) | $4,997.2 | | Total Equity (at year-end) | $1,790.5 | Notes to Consolidated Financial Statements Notes provide detailed disclosures on business combinations (Clariant Color Acquisition), financing ($1.86 billion debt), environmental liabilities ($124.5 million), and segment information - The purchase accounting for the $1.4 billion Clariant Color Acquisition was finalized as of June 30, 2021, resulting in $561.2 million of goodwill allocated to the Color, Additives and Inks segment (Note 2)[160][163] - As of December 31, 2021, total debt was $1.86 billion, consisting primarily of senior notes and a senior secured term loan. The company was in compliance with all debt covenants (Note 6)[179][181] - Environmental liabilities totaled $124.5 million as of December 31, 2021, with the majority ($113.2 million) related to the Calvert City remediation site (Note 12)[211] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material weaknesses - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[249] - Management's annual report on internal control over financial reporting concluded that such controls were effective as of December 31, 2021, with no material weaknesses identified[250] PART III Item 10. Directors, Executive Officers and Corporate Governance This section incorporates by reference information from the 2022 Proxy Statement regarding directors, audit committee, and corporate governance - Information regarding directors, the audit committee, and corporate governance is incorporated by reference from the 2022 Proxy Statement[255] Item 11. Executive Compensation This section incorporates by reference executive and director compensation information from the 2022 Proxy Statement - Information regarding executive and director compensation is incorporated by reference from the 2022 Proxy Statement[256] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters This section details equity compensation plans, including 2.5 million securities to be issued and 2.34 million available for future issuance Equity Compensation Plan Information | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 2,501,061 | $35.64 | 2,340,343 | | Total | 2,501,061 | $35.64 | 2,340,343 | PART IV Item 15. Exhibit and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Annual Report on Form 10-K - Lists all financial statements and exhibits included in the Form 10-K filing, such as credit agreements, incentive plans, and required SEC certifications[261][262][263]