Avient (AVNT) - 2022 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents Avient Corporation's unaudited condensed consolidated financial statements, including key statements and detailed explanatory notes Condensed Consolidated Statements of Income (Loss) Key Financial Performance (in millions): | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales | $823.3 | $818.0 | $2,606.5 | $2,508.5 | | Operating income | $40.6 | $52.8 | $242.9 | $229.6 | | Net (loss) income attributable to Avient common shareholders | $(10.3) | $52.9 | $158.6 | $201.0 | | (Loss) earnings per share attributable to Avient common shareholders - Basic (Total) | $(0.11) | $0.58 | $1.74 | $2.20 | Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive Income (Loss) (in millions): | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :----------------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net (loss) income | $(10.7) | $52.6 | $158.5 | $201.7 | | Translation adjustments and related hedging instruments | $(61.1) | $(29.4) | $(120.4) | $(70.9) | | Total other comprehensive loss | $(60.9) | $(28.7) | $(118.1) | $(68.7) | | Total comprehensive (loss) income | $(71.6) | $23.9 | $40.4 | $133.0 | | Comprehensive (loss) income attributable to Avient common shareholders | $(71.2) | $24.2 | $40.5 | $132.3 | Condensed Consolidated Balance Sheets Balance Sheet Highlights (in millions): | Metric | September 30, 2022 | December 31, 2021 | | :--------------------------------- | :----------------- | :------------------ | | Total current assets | $1,988.3 | $1,827.0 | | Property, net | $965.4 | $672.3 | | Goodwill | $1,491.0 | $1,284.8 | | Intangible assets, net | $1,525.7 | $925.2 | | Total assets | $6,307.1 | $4,997.2 | | Total current liabilities | $1,555.6 | $940.7 | | Total non-current liabilities | $3,015.4 | $2,266.0 | | Total liabilities and equity | $6,307.1 | $4,997.2 | | Avient shareholders' equity | $1,720.4 | $1,774.7 | Condensed Consolidated Statements of Cash Flows Cash Flow Summary (in millions): | Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :---------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $223.9 | $110.0 | | Net cash used by investing activities | $(1,387.9) | $(112.3) | | Net cash provided (used) by financing activities | $1,138.1 | $(91.5) | | Decrease in cash and cash equivalents | $(56.8) | $(104.3) | | Cash and cash equivalents at end of period | $544.4 | $545.2 | - Net cash used by investing activities significantly increased in 2022, primarily due to $1,426.1 million for business acquisitions[11] - Net cash provided by financing activities in 2022 was largely driven by $1,300.0 million in debt proceeds[11] Condensed Consolidated Statements of Shareholders' Equity Changes in Avient Shareholders' Equity (in millions): | Item | Balance at Jan 1, 2022 | Balance at Sep 30, 2022 | | :------------------------------------ | :--------------------- | :---------------------- | | Total Avient shareholders' equity | $1,774.7 | $1,720.4 | | Net income (loss) for Q3 2022 | N/A | $(10.3) | | Other comprehensive loss for Q3 2022 | N/A | $(60.9) | | Cash dividends declared for Q3 2022 | N/A | $(21.6) | Notes to Condensed Consolidated Financial Statements Note 1 — BASIS OF PRESENTATION - The unaudited condensed consolidated financial statements are prepared in accordance with Form 10-Q instructions and include all normal, recurring, and necessary adjustments[18] - Historical information has been retrospectively adjusted to reflect the classification of discontinued operations[18] - The Company is evaluating ASU 2020-04 (Reference Rate Reform) but does not expect any material impact on its consolidated financial statements[19] Note 2 — BUSINESS COMBINATIONS - On September 1, 2022, Avient completed the acquisition of DSM Protective Materials (APM), including the Dyneema® brand, for $1.4 billion, net of cash acquired, enhancing Avient's material offerings of composites and engineered fibers[20][65] - The APM acquisition was financed by $575.0 million from a new Senior Secured Term Loan due 2029 and $725.0 million aggregate principal of 7.125% Senior Notes due 2030[20][65] Preliminary Purchase Price Allocation for APM Acquisition (September 1, 2022, in millions): | Asset/Liability | Amount | | :-------------------------- | :----- | | Cash and cash equivalents | $50.7 | | Accounts receivable | $52.2 | | Inventories | $136.2 | | Property | $361.9 | | Intangible assets (total) | $728.7 | | Goodwill | $277.1 | | Total purchase price consideration | $1,476.8 | - Sales and loss from continuing operations of APM since the acquisition date (September 1, 2022) were $32.3 million and $7.0 million, respectively, with the loss including $10.6 million from inventory step-up[21] - On July 1, 2021, the Company acquired Magna Colours Ltd. for $47.6 million, net of cash acquired, adding sustainable, water-based inks technology to the Color, Additives and Inks segment[24][67] Note 3 — DISCONTINUED OPERATIONS - On August 11, 2022, Avient entered into an agreement to sell its Distribution business for $950.0 million in cash to an affiliate of H.I.G. Capital[25][66] - The Distribution business's assets and liabilities are classified as held-for-sale, and its operating results are presented as discontinued operations for all periods presented[25] Financial Performance of Discontinued Operations (in millions): | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales | $398.6 | $401.8 | $1,211.6 | $1,108.9 | | Income before income taxes | $24.1 | $25.7 | $79.8 | $77.4 | | Income from discontinued operations, net of income taxes | $17.1 | $19.2 | $58.8 | $57.7 | Assets and Liabilities Held-for-Sale (in millions): | Category | September 30, 2022 | December 31, 2021 | | :------------------------ | :----------------- | :------------------ | | Total assets held-for-sale | $367.8 | $382.2 | | Total liabilities held-for-sale | $170.3 | $154.4 | Note 4 — GOODWILL AND INTANGIBLE ASSETS Goodwill by Segment (in millions): | Segment | Balance at Dec 31, 2021 | Acquisition of businesses | Currency translation | Balance at Sep 30, 2022 | | :----------------------------- | :---------------------- | :------------------------ | :------------------- | :---------------------- | | Specialty Engineered Materials | $236.3 | $277.1 | $(13.1) | $500.3 | | Color, Additives and Inks | $1,048.5 | — | $(57.8) | $990.7 | | Total | $1,284.8 | $277.1 | $(70.9) | $1,491.0 | Intangible Assets, Net (September 30, 2022, in millions): | Category | Acquisition Cost | Accumulated Amortization | Currency Translation | Net | | :---------------------------- | :--------------- | :----------------------- | :------------------- | :------ | | Customer relationships | $705.9 | $(156.0) | $(25.4) | $524.5 | | Patents, technology and other | $841.8 | $(158.2) | $(42.1) | $641.5 | | Indefinite-lived trade names | $368.0 | — | $(8.3) | $359.7 | | Total | $1,915.7 | $(314.2) | $(75.8) | $1,525.7 | - Goodwill increased by $277.1 million primarily due to the APM acquisition, recorded in the Specialty Engineered Materials segment[21][31] Note 5 — INVENTORIES, NET Components of Inventories, net (in millions): | Category | As of September 30, 2022 | As of December 31, 2021 | | :------------------------- | :----------------------- | :---------------------- | | Finished products | $197.8 | $90.0 | | Work in process | $25.6 | $21.2 | | Raw materials and supplies | $218.1 | $194.6 | | Inventories, net | $441.5 | $305.8 | - Inventories, net increased by $135.7 million from December 31, 2021, to September 30, 2022, with finished products showing the largest increase[34] Note 6 — PROPERTY, NET Components of Property, net (in millions): | Category | As of September 30, 2022 | As of December 31, 2021 | | :-------------------------- | :----------------------- | :---------------------- | | Land and land improvements | $80.9 | $91.5 | | Buildings | $382.2 | $348.1 | | Machinery and equipment | $1,272.8 | $965.4 | | Property, gross | $1,735.9 | $1,405.0 | | Less accumulated depreciation | $(770.5) | $(732.7) | | Property, net | $965.4 | $672.3 | - Property, net increased by $293.1 million from December 31, 2021, to September 30, 2022, primarily driven by an increase in machinery and equipment[35] Note 7 — INCOME TAXES - For the three months ended September 30, 2022, the effective tax rate benefit from continuing operations was 4.1%, below the U.S. federal statutory rate of 21.0%, due to a pretax loss, state income tax benefits, and U.S. R&D tax credit, partially offset by foreign withholding tax liabilities and GILTI tax[37] - For the nine months ended September 30, 2022, the effective tax rate from continuing operations was 29.4%, above the U.S. federal statutory rate of 21.0%, primarily due to foreign withholding tax liabilities, GILTI tax, and increased valuation allowances[37] Note 8 — FINANCING ARRANGEMENTS Debt Instruments (September 30, 2022, in millions): | Instrument | Principal Amount | Net Debt | Weighted average interest rate | | :------------------------------------ | :--------------- | :------- | :----------------------------- | | Senior secured term loan due 2026 | $606.6 | $601.7 | 2.95% | | Senior secured term loan due 2029 | $575.0 | $546.8 | 5.51% | | 5.25% senior notes due 2023 | $600.0 | $599.5 | 5.25% | | 5.75% senior notes due 2025 | $650.0 | $644.6 | 5.75% | | 7.125% senior notes due 2030 | $725.0 | $714.4 | 7.125% | | Total Debt | $3,166.4 | $3,116.8 | N/A | - The Company issued $725 million aggregate principal amount of 7.125% Senior Notes due 2030 on August 10, 2022[39] - On August 29, 2022, the Company incurred a new tranche of Senior Secured Term Loan due 2029 in an aggregate principal amount of $575 million[40] - Net proceeds from the 2030 Notes and 2029 Term Loan were used to finance a portion of the APM Acquisition[41] - As of September 30, 2022, the Company had no borrowings outstanding under its senior secured revolving credit facility, with $485.1 million remaining availability, and was in compliance with all debt covenants[42] Note 9 — SEGMENT INFORMATION - Avient now has two reportable segments: Color, Additives and Inks, and Specialty Engineered Materials, following the reclassification of the Distribution business as a discontinued operation[43][74] Segment Sales and Operating Income (in millions): | Segment | Sales (3M Sep 30, 2022) | Op. Income (3M Sep 30, 2022) | Sales (9M Sep 30, 2022) | Op. Income (9M Sep 30, 2022) | | :----------------------------- | :---------------------- | :--------------------------- | :---------------------- | :--------------------------- | | Color, Additives and Inks | $565.6 | $68.6 | $1,864.2 | $256.7 | | Specialty Engineered Materials | $258.2 | $31.4 | $743.6 | $104.9 | | Corporate and eliminations | $(0.5) | $(59.4) | $(1.3) | $(118.7) | | Total | $823.3 | $40.6 | $2,606.5 | $242.9 | Segment Total Assets (in millions): | Segment | As of September 30, 2022 | As of December 31, 2021 | | :----------------------------- | :----------------------- | :---------------------- | | Color, Additives and Inks | $2,718.5 | $2,965.2 | | Specialty Engineered Materials | $2,317.3 | $771.0 | | Corporate and eliminations | $903.5 | $878.8 | | Assets held for sale | $367.8 | $382.2 | | Total assets | $6,307.1 | $4,997.2 | Note 10 — COMMITMENTS AND CONTINGENCIES - Avient has an environmental obligation at the former Goodrich Corporation Calvert City facility, with a current reserve of $120.9 million for remediation costs[48][49] Environmental Remediation Costs and Recoveries (in millions): | Metric | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 | | :-------------------------------- | :------------------------------ | :----------------------------- | | Environmental remediation expense | $18.8 | $23.8 | | Insurance recoveries | $0.1 | $8.3 | - Accruals for probable future environmental expenditures totaled $131.6 million as of September 30, 2022[49] Note 11 — DERIVATIVES AND HEDGING - Avient uses cross-currency swaps as net investment hedges to mitigate currency fluctuations on euro investments, with combined notional amounts of €1,467.2 million (May 2025) and €900.0 million (August 2027)[51] - Gains of $98.2 million (3 months) and $150.2 million (9 months) were recognized in Accumulated Other Comprehensive Income (AOCI) for net investment hedges in 2022[52] - Interest rate swaps with a notional amount of $150.0 million are designated as cash flow hedges, converting floating-rate debt to a fixed rate of 2.732% until November 2022[53] - Derivatives not designated for hedge accounting, including forward starting cross-currency swaps (€900.0 million) and foreign currency forward contracts (€350 million) for the APM acquisition, resulted in an expense of $38.2 million (3 months) and $37.3 million (9 months) in Other income, net[54] Fair Value of Derivative Financial Instruments (in millions): | Instrument | Balance Sheet Location | September 30, 2022 | December 31, 2021 | | :------------------------------------ | :----------------------- | :----------------- | :------------------ | | Interest Rate Swaps (Cash Flow Hedge) | Other current assets | $0.1 | — | | Cross Currency Swaps (Net Investment Hedge) | Other non-current assets | $103.3 | $31.7 | | Interest Rate Swaps (Cash Flow Hedge) | Other current liabilities | — | $3.1 | Note 12 — SUBSEQUENT EVENTS - The sale of the Distribution business was completed on November 1, 2022[58] - After-tax proceeds from the sale are being used to redeem the entire outstanding $600.0 million of 5.25% Senior Notes due March 15, 2023[59] - An additional $150.0 million of the proceeds is being used to repay a portion of the senior secured term loans[59] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on Avient's financial condition and results of operations, including strategic developments, performance analysis, liquidity, and capital resources Our Business - Avient Corporation is a premier provider of specialized and sustainable material solutions, including specialty engineered materials, advanced composites, ultra-lightweight and highly engineered fibers, and color and additive systems[62] - The company provides value by linking its knowledge of polymers and formulation technology with manufacturing and supply chain capabilities[62] Highlights and Executive Summary Avient's Key Financial Highlights (in millions): | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales | $823.3 | $818.0 | $2,606.5 | $2,508.5 | | Operating income | $40.6 | $52.8 | $242.9 | $229.6 | | Net (loss) income attributable to Avient common shareholders | $(10.3) | $52.9 | $158.6 | $201.0 | Trends and Developments - The Company completed the acquisition of DSM Protective Materials (APM) on September 1, 2022, for $1.4 billion, enhancing its material offerings[65] - Avient entered into an agreement on August 11, 2022, to sell its Distribution business for $950.0 million, which is now classified as a discontinued operation[66] - The acquisition of Magna Colours, a leader in sustainable, water-based inks, was completed on July 1, 2021, for $47.6 million[67] - The company continues to monitor the impact of the COVID-19 pandemic on its business, supply chain, and distribution network[68] Results of Operations Sales Performance (in millions): | Period | Sales (2022) | Sales (2021) | Change ($) | Change (%) | | :------------------------------------ | :----------- | :----------- | :--------- | :--------- | | Three Months Ended September 30 | $823.3 | $818.0 | $5.3 | 0.6% | | Nine Months Ended September 30 | $2,606.5 | $2,508.5 | $98.0 | 3.9% | - Sales growth in Q3 2022 was driven by the APM acquisition (3.9%) and price increases, partially offset by negative foreign exchange (7.1%) and lower global demand[70] - Cost of sales as a percentage of sales increased due to raw material inflation, acquisition-related costs, and higher environmental remediation costs[72] - Interest expense, net, increased significantly due to new debt issuances (2030 Notes and 2029 Term Loan) to fund the APM acquisition[72] - The effective tax rate for continuing operations was a 4.1% benefit in Q3 2022 (due to pretax loss) but a 29.4% expense for the nine months ended September 30, 2022 (due to foreign withholding tax liabilities and GILTI tax)[73] SEGMENT INFORMATION - The Distribution business segment has been removed and its results are presented as discontinued operations[74] Color, Additives and Inks Color, Additives and Inks Segment Performance (in millions): | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Sales | $565.6 | $586.6 | $1,864.2 | $1,820.3 | | Operating Income | $68.6 | $66.8 | $256.7 | $241.9 | | Operating income as a percentage of sales | 12.1% | 11.4% | 13.8% | 13.3% | - Sales decreased by 3.6% in Q3 2022, primarily due to a 7.7% negative impact from foreign exchange, partially offset by price increases[79] - Operating income increased due to pricing, lower selling and administrative expenses, and acquisition synergies, despite inflation, negative foreign exchange, and lower demand[79] Specialty Engineered Materials Specialty Engineered Materials Segment Performance (in millions): | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Sales | $258.2 | $231.7 | $743.6 | $685.3 | | Operating Income | $31.4 | $30.0 | $104.9 | $98.4 | | Operating income as a percentage of sales | 12.2% | 12.9% | 14.1% | 14.4% | - Sales increased by 11.4% in Q3 2022, driven by the APM acquisition (13.9%) and price increases, partially offset by a 5.6% negative foreign exchange impact[80] - Operating income increased due to pricing, the APM acquisition, and lower selling and administrative expenses, despite inflation, negative foreign exchange, and accelerating lower demand[81] Corporate and Eliminations - Corporate and Eliminations costs increased by $15.4 million (35%) in Q3 2022, primarily due to higher environmental remediation costs ($9.4 million) and acquisition costs ($13.2 million), partially offset by lower incentive costs[82] Liquidity and Capital Resources Liquidity Position (in millions): | Metric | As of September 30, 2022 | As of December 31, 2021 | | :---------------------------- | :----------------------- | :---------------------- | | Cash and cash equivalents | $544.4 | $601.2 | | Revolving credit availability | $485.1 | $485.5 | | Total Liquidity | $1,029.5 | $1,086.7 | - Approximately 50% of the Company's cash and cash equivalents resided outside the United States as of September 30, 2022[83] - Expected sources of cash for the remainder of 2022 include cash on hand, proceeds from the Distribution business sale, operating cash flow, and available revolving credit[83] Cash Flows - Net cash provided by operating activities increased to $223.9 million for the nine months ended September 30, 2022, from $110.0 million in the prior year, primarily due to lower working capital[84] - Net cash used by investing activities significantly increased to $1,387.9 million, mainly reflecting the $1,426.1 million APM acquisition[84] - Net cash provided by financing activities was $1,138.1 million, primarily from $1,300.0 million in debt proceeds, partially offset by dividends paid, debt financing costs, and share repurchases[86] Debt - As of September 30, 2022, the principal amount of debt totaled $3,166.4 million[87] Aggregate Maturities of Principal Amount of Debt (in millions): | Year | Amount | | :--- | :----- | | 2022 | $3.2 | | 2023 | $614.3 | | 2024 | $14.3 | | 2025 | $664.4 | | 2026 | $12.6 | | Thereafter | $1,857.6 | | Aggregate maturities | $3,166.4 | - New debt includes $725 million of 7.125% Senior Notes due 2030 and a $575 million Senior Secured Term Loan due 2029, used to finance the APM Acquisition[88][89][90] - The Company was in compliance with all financial and restrictive covenants pertaining to its debt as of September 30, 2022[90] Derivatives and Hedging - Avient uses various derivative transactions to manage market risks related to foreign currency exchange rates and interest rates[91] Material Cash Requirements - Future obligations include debt and interest payments, derivative instruments, operating leases, pension and post-retirement benefit plans, and purchase obligations[92] - The 2029 Term Loan ($575 million) and 2030 Notes ($725 million) incurred during the nine months ended September 30, 2022, add to these material cash requirements[92] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section confirms no material changes to the company's market risk exposures since the Annual Report on Form 10-K for the year ended December 31, 2021 - No material changes to exposures to market risk have occurred since the Annual Report on Form 10-K for the year ended December 31, 2021[93] PART II — OTHER INFORMATION ITEM 4. CONTROLS AND PROCEDURES This section details the evaluation of Avient's disclosure controls and procedures, confirming their effectiveness and noting no material changes in internal control over financial reporting Disclosure controls and procedures - Avient's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 30, 2022[94] - The assessment of disclosure controls and procedures did not include the recently acquired APM business, which constituted approximately 26% of total assets and 1% of net sales, due to ongoing integration[94] Changes in internal control over financial reporting - There were no changes in Avient's internal control over financial reporting during the quarter ended September 30, 2022, that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting[95] ITEM 1. LEGAL PROCEEDINGS This section refers to Note 10, Commitments and Contingencies, for detailed information on legal proceedings - Information regarding certain legal proceedings is incorporated by reference from Note 10, Commitments and Contingencies[96] ITEM 1A. RISK FACTORS This section confirms no material changes to previously disclosed risk factors during the third quarter ended September 30, 2022 - No material changes to the previously disclosed risk factors occurred during the third quarter ended September 30, 2022[97] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section reports no common share repurchases during the third quarter of 2022, with 5.0 million shares remaining available under authorization - No common shares were purchased during the three months ended September 30, 2022[99] - Approximately 5.0 million shares remained available for purchase under the existing share repurchase authorization as of September 30, 2022[99] EXHIBIT INDEX This section lists all exhibits filed with the Form 10-Q, including key agreements for business transactions and certifications - Includes the Asset Purchase Agreement for the Distribution business sale[100] - Lists the Indenture for the 7.125% Senior Notes due 2030 and Amendment Agreement No. 7 for the Senior Secured Term Loan due 2029[100] - Contains certifications by the Chairman, President and CEO, and the Senior Vice President and Chief Financial Officer[100] SIGNATURES This section confirms the official signing of the report on behalf of Avient Corporation by the Senior Vice President and Chief Financial Officer - The report was signed by Jamie A. Beggs, Senior Vice President and Chief Financial Officer, on November 2, 2022[101]