Avient Corp: Form 10-Q for the period ended Sep 30, 2023

Our Business

We are a premier formulator 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, performance fibers, advanced composites, and color and additive systems. 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 manufacturing and warehouses 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 and its consolidated subsidiaries.

Highlights and Executive Summary

Trends and Developments

APM Acquisition

On September 1, 2022, the Company completed the acquisition of the DSM Protective Materials business, including the Dyneema® brand, the World's Strongest Fiber™. The ultra-light specialty fiber is used in demanding applications such as ballistic personal protection, marine and sustainable infrastructure, renewable energy, industrial protection and outdoor sports. The acquired business is collectively referred to as APM, and the acquisition is referred to as the APM Acquisition. The APM Acquisition enhances Avient's material offerings of composites and engineered fibers.Total consideration paid by the Company was $1.4 billion, net of cash acquired.

Distribution business sale

On November 1, 2022, Avient sold its Distribution business to an affiliate of H.I.G. Capital for $950.0 million in cash, subject to a customary working capital adjustment. Total proceeds received were $935.5 million, of which $7.3 million was received in the nine months ended September 30, 2023. The results of the Distribution business are presented as discontinued operations for all periods presented.

Results of Operations — The three and nine months ended September 30, 2023 compared to three and nine months ended September 30, 2022:

(Dollars in millions, except per share data)

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Sales

Sales decreased $69.6 million, or 8.5%, in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The APM Acquisition increased sales by 7.2% and favorable foreign exchange rates had a 1.0% impact, which was more than offset by impacts of lower global demand and customer destocking. Sales decreased $182.7 million, or 7.0%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The APM Acquisition increased sales by 9.7%, which was more than offset by the impacts of lower global demand and customer destocking, while unfavorable foreign exchange rates had a 1.3% impact.

Gross Margin

Gross margin as a percentage of sales was 25.9% for the three months ended September 30, 2023 compared to 23.7% for the three months ended September 30, 2022. The gross margin improvement was driven primarily by mix and raw material deflation in 2023. Further, 2023 included $19.3 million of higher environmental remediation costs, while 2022 included $10.6 million of expense associated with the APM Acquisition purchase accounting inventory step-up.

Gross margin as a percentage of sales was 28.2% for the nine months ended September 30, 2023 compared to 27.3% for the nine months ended September 30, 2022. The gross margin improvement was driven primarily by mix and raw material deflation in 2023, which more than offset higher environmental remediation charges of $28.7 million.

Selling and administrative expense

Selling and administrative expense increased $6.2 million and $62.1 million during the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily driven by the APM Acquisition, which began to be reflected in results as of September 1, 2022.

Interest expense, net

Interest expense, net decreased $7.0 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 as a result of committed financing costs of $10.0 million incurred in the three months ended September 30, 2022 associated to the APM Acquisition. Interest expense, net increased $18.1 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, related to new debt incurred to finance the APM Acquisition and the impact of higher interest rates on our variable term debt.

Income taxes

During the three months ended September 30, 2023, the Company’s effective tax rate was a benefit of 3.1% versus expense of 4.1% for the three months ended September 30, 2022. The income tax rate decrease is primarily driven by a favorable return-to-provision adjustment related to a 2022 capital loss deduction partially offset by the impact of higher non-deductible expense.

During the nine months ended September 30, 2023, the Company's effective tax rate was 26.9% versus 29.4% for the nine months ended September 30, 2022. The income tax rate decrease is primarily driven by the capital loss deduction combined with favorable international tax rate differentials. These benefits were partially offset by higher valuation allowances and foreign withholding tax associated with the future repatriation of certain foreign earnings.

SEGMENT INFORMATION

Avient has two reportable segments: (1) Color, Additives and Inks; and (2) Specialty Engineered Materials. As a result of the agreement to divest the Distribution business segment, we have removed Distribution as a separate reportable segment and its results are presented as a discontinued operation. Historical information has been retrospectively adjusted to reflect these changes.

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; 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.

Sales and Operating Income — The three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022:

(Dollars in millions)

Color, Additives and Inks

Sales decreased $79.1 million, or 14.0%, and $316.2 million, or 17.0%, in the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022, primarily driven by lower global demand and customer destocking.

Operating income decreased $4.1 million and $58.6 million in the three and nine months ended September 30, 2023, respectively, compared to the three and nine months ended September 30, 2022 driven primarily by the impacts of the aforementioned lower global demand and customer destocking. Lower raw material costs and cost reduction actions have partially offset the demand impacts.

Specialty Engineered Materials

Sales increased $9.7 million, or 3.8%, in the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The APM Acquisition increased sales by 22.8%, which was partially offset by the impacts of lower global demand and customer destocking. Sales increased $134.8 million, or 18.1%, in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The APM Acquisition increased sales by 34.0%, which was partially offset by the impacts of lower global demand and customer destocking.

Operating income decreased $1.1 million in the three months ended September 30, 2023 compared to the three months ended September 30, 2022 due to lower demand and customer destocking, partially offset by the APM Acquisition, lower raw material costs and other cost reductions. Operating income increased $8.2 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 due to the APM Acquisition and cost saving actions, partially offset by lower demand and customer destocking.

Corporate

Corporate costs increased $1.1 million in the three months ended September 30, 2023, driven by $19.3 million of higher environmental remediation costs in 2023 while the three months ended September 30, 2022 included $10.6 million of expense associated with the APM purchase accounting inventory step-up as well as $8.0 million of transaction costs associated with the acquisition. Corporate costs increased $38.8 million in the nine months ended September 30, 2023 primarily driven by $28.7 million of higher environmental costs and $12.9 million of higher restructuring charges.

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 September 30, 2023 and December 31, 2022:

(In millions)

As of September 30, 2023, approximately 62% of the Company’s cash and cash equivalents resided outside the United States.

Expected sources of cash needed to satisfy cash requirements for 2023 include our cash on hand, cash from operations and available liquidity under our revolving credit facility, if needed, and we believe that these sources will provide sufficient liquidity to satisfy our expected uses of cash for at least the next twelve months and the foreseeable future thereafter. Expected uses of cash for 2023 include interest payments, cash taxes, dividend payments, share repurchases, environmental remediation costs and capital expenditures.

Cash Flows

The following describes the significant components of cash flows from operating, investing and financing activities for the nine months ended September 30, 2023 and 2022.

Operating Activities — In the nine months ended September 30, 2023, net cash provided by operating activities was $47.1 million as compared to $223.9 million for the nine months ended September 30, 2022, driven primarily by lower earnings and taxes paid associated with the sale of the Distribution business.

Investing Activities — Net cash used by investing activities during the nine months ended September 30, 2023 of $65.4 million primarily reflects the impact of capital expenditures, offset by $7.3 million of proceeds received from the divestiture of the Distribution business.

Net cash provided by investing activities during the nine months ended September 30, 2022 of $1,387.9 million reflects $1,426.1 million related to the APM Acquisition and capital expenditures of $55.1 million, partially offset by the settlement of cross-currency swaps of $93.3 million.

Financing Activities — Net cash used by financing activities for the nine months ended September 30, 2023 of $176.0 million primarily reflects $103.8 million for the payment of long-term debt and $67.6 million of dividends paid.

Net cash provided by financing activities for the nine months ended September 30, 2022 of $1,138.1 million primarily reflects $1,300.0 million of debt proceeds, $65.2 million of dividends paid, debt financing costs of $49.3 million, repayment of debt of $6.8 million, and the repurchase of our outstanding common shares of $36.4 million.

Debt

As of September 30, 2023, our principal amount of debt totaled $2,112.5 million. Aggregate maturities of the principal amount of debt for the current year, next four years and thereafter, are as follows:

(In millions)

19 AVIENT CORPORATION

On August 16, 2023, the Company refinanced its senior secured term loans by amending its Credit Agreement (the "Term Loan Amendment"). Pursuant to the Term Loan Amendment, Avient incurred a new tranche of Senior Secured Term Loan due 2029 in an aggregate principal amount of $731.6 million. The proceeds, together with $102.3 million of cash on hand, were used to settle all of the outstanding principal of previous tranches of senior secured term loans. The amendment aligned the maturity date for all of the Company’s term loan debt to August 29, 2029. The amendment also aligned and reduced the interest rates per annum, which now are either (i) Adjusted Term SOFR (as defined in the Term Loan Amendment) plus 2.50%, or (ii) a Base Rate (as defined in the Term Loan Amendment) plus 1.50%. We recognized $1.9 million related to the write-off of unamortized issuance costs and discounts within Interest expense, net for the three and nine months ended September 30, 2023 as a result of the amendment.

As of September 30, 2023, we were in compliance with all financial and restrictive covenants pertaining to our debt. For additional information regarding our debt, please see Note 9, 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 12, Derivatives and Hedging to the accompanying condensed consolidated financial statements.

Material Cash Requirements

We have future obligations under various contracts relating to debt and interest payments, derivative instruments, operating leases, pension and post-retirement benefit plans, purchase obligations, and environmental remediation obligations. During the nine months ended September 30, 2023, we completed the Term Loan Amendment, refer to Note 9, Financing Arrangements, and recorded adjustments to the Calvert City environmental remediation accrual, refer to Note 11, Commitments and Contingencies. There were no other material changes to these obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2022.

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 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;
• an inability to raise or sustain prices for products or services;
• 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;
• our ability to achieve strategic objectives and successfully integrate acquisitions, including APM;
• other factors affecting our business beyond our control, including without limitation, changes in the general economy, changes in interest rates, changes in the rate of inflation and any recessionary conditions; and
• other factors described in our Annual Report on Form 10-K for the year ended December 31, 2022 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.

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, 2022.

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 September 30, 2023 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

We face a number of risks that could adversely affect our business, results of operations, financial position or cash flows. A discussion of our risk factors can be found in Item 1A, Risk factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. During the nine months ended September 30, 2023, there were no material changes to our previously disclosed risk factors.