Avient Corp: Form 10-Q for the period ended Mar 31, 2024

Our Business

We are a premier formulator of specialized and sustainable materials 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 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.

Results of Operations — The three months ended March 31, 2024 compared to three months ended March 31, 2023:

(Dollars in millions, except per share data)

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Sales

Sales decreased $16.7 million or 2.0% in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by lower sales in Europe, partially offset by increased demand in the defense end market.

Gross Margin

Gross margin as a percentage of sales was 33.6% for the three months ended March 31, 2024 compared to 29.3% for the three months ended March 31, 2023. The gross margin improvement was driven primarily by the benefit from raw material deflation, lower restructuring charges and mix improvement.

Selling and administrative expense

Selling and administrative expense decreased $6.3 million during the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by lower restructuring charges which were partially offset by increased employee costs.

Interest expense, net

Interest expense, net decreased $2.2 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by the partial principal prepayment and refinancing of our senior secured term loans during the third quarter of 2023.

Income taxes

During the three months ended March 31, 2024, the Company’s effective tax rate was 25.3% versus 26.6% for the three months ended March 31, 2023. The income tax rate decrease is primarily due to the lower tax expense associated with valuation allowances partially offset by unfavorable rate impacts associated with foreign earnings mix and permanent items for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

SEGMENT INFORMATION

Avient has two reportable segments: (1) Color, Additives and Inks; and (2) Specialty Engineered Materials.

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 costs 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; costs incurred directly in relation to acquisitions or divestitures; integration 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 months ended March 31, 2024 compared to the three months ended March 31, 2023:

(Dollars in millions)

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Color, Additives and Inks

Sales decreased $21.7 million, or 4.0%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, driven by lower demand, primarily in Europe.

Operating income increased $9.2 million, or 14.0%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to benefits from raw material deflation, which more than offset lower European demand.

Specialty Engineered Materials

Sales increased $4.7 million, or 1.5%, in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily driven by increased demand for defense applications, which was partially offset by demand weakness in the telecommunications end market and unfavorable foreign exchange rates, which had an impact of 0.7%

Operating income increased $10.3 million, or 23.9%, in the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, primarily due to increased demand noted above, mix improvement and benefits from raw material deflation.

Corporate

Corporate costs decreased $17.4 million, or 33.7%, in the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 primarily due to $20.8 million of lower 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 March 31, 2024 and December 31, 2023:

(In millions)

As of March 31, 2024, approximately 77% of the Company’s cash and cash equivalents resided outside the United States.

Expected sources of cash needed to satisfy cash requirements for 2024 include our cash on hand, cash from operations and available liquidity under our revolving credit facility, if necessary. 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 2024 include interest payments, cash taxes, dividend payments, 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 three months ended March 31, 2024 and 2023.

Operating Activities — Net cash used by operating activities increased $20.6 million during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 as a $43.8 million investment in working capital was partially offset by $29.3 million of higher earnings.

Investing Activities — Net cash used by investing activities during the three months ended March 31, 2024 of $24.5 million primarily reflects the impact of capital expenditures.

Net cash used by investing activities during the three months ended March 31, 2023 of $13.0 million reflects the impact of capital expenditures of $20.3 million, offset by proceeds received from the divestiture of the Distribution business of $7.3 million.

Financing Activities — Net cash used by financing activities for the three months ended March 31, 2024 of $28.1 million primarily reflects $23.5 million of dividends paid.

Net cash used by financing activities for the three months ended March 31, 2023 of $25.6 million primarily reflects $22.5 million of dividends paid.

Debt

As of March 31, 2024, our principal amount of debt totaled $2,107.8 million. Aggregate maturities of the principal amount of debt for the current year, next four years and thereafter, are as follows:

(In millions)

As of March 31, 2024, we were in compliance with all financial and restrictive covenants pertaining to our debt. For additional information regarding our debt, please see Note 7, 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 8, 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, operating leases, pension and post-retirement benefit plans and purchase obligations. During the three months ended March 31, 2024, there were no material changes to these obligations as reported in our Annual Report on Form 10-K for the year ended December 31, 2023.

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;
• disruptions or inefficiencies in our supply chain, logistics, or operations;
• changes in laws and regulations in jurisdictions where we conduct business, including with respect to plastics and climate change;
• fluctuations in raw material prices, quality and supply, and in energy prices and supply;
• demand for our products and services;
• 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;
• our ability to achieve strategic objectives and successfully integrate acquisitions, including the implementation of a cloud-based enterprise resource planning (ERP) system, S/4HANA;
• 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, geopolitical conflicts, and any recessionary conditions; and
• other factors described in our Annual Report on Form 10-K for the year ended December 31, 2023 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, 2023.

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, 2024 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, 2023. During the three months ended March 31, 2024, there were no material changes to our previously disclosed risk factors.