AVIENT CORP (AVNT) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide information that is supplemental to, and should be read together with, our consolidated financial statements and the accompanying notes contained in this Annual Report on Form 10-K. Information in this Item 7 is intended to assist the reader in obtaining an understanding of our consolidated financial statements, the changes in certain key items in those financial statements from year to year, the primary factors that accounted for those changes, and any known trends or uncertainties that we are aware of that may have a material effect on our future performance, as well as how certain accounting principles affect our consolidated financial statements. Unless otherwise noted, the discussion that follows includes a comparison of our results of operations, liquidity and capital resources, and cash flows for fiscal years 2021 and 2020. For a discussion of changes from fiscal year 2019 to fiscal year 2020, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021.
The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Cautionary Note on Forward-Looking Statements” and Item 1A, “Risk Factors.”
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, 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, with 2021 sales of $4.8 billion, we have manufacturing sites and distribution facilities around the globe, with 69% and 46% of our respective Color, Additives and Inks and Specialty Engineered Materials segments' sales outside the United States. 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.
Strategy and Key Trends
To achieve our vision, we have implemented a strategy with four core components: specialization, globalization, operational excellence and commercial excellence. Specialization differentiates us through products, services, technology and solutions that add value. Globalization allows us to service our customers with consistency wherever their operations might be around the world. Operational excellence empowers us to respond to the voice of the customer while focusing on continuous improvement. Commercial excellence enables us to deliver value to customers by supporting their growth and profitability with superior customer service.
We are also committed to sustainability through our four cornerstones of People, Products, Planet, and Performance. Part of our long term investment in sustainability started in January 2019, when Avient, along with 29 other member companies, joined together as founding members of the Alliance to End Plastic Waste (AEPW). The AEPW has thus far committed over $1.5 billion to help end plastic waste in the environment through investment in infrastructure, innovation, education, and clean-up activities. The AEPW enables and brings to scale solutions to minimize and manage plastic waste and promote solutions for used plastics that move towards a circular economy. Our commitment to AEPW confirms the importance we place on being a global leader in all aspects of how we define sustainability: People, Products, Planet and Performance. We have invested and are making important contributions in each, which are discussed in depth in our sustainability report.
In the short term, we will maintain our focus on sales growth with expanding margins, with a goal of offsetting economic headwinds in certain end markets and geographies, raw material volatility and logistics cost inflation. Longer term, we will continue to focus on accelerating the launch of new products and collaborating with our customers to develop new and unique solutions for their benefit while focusing on our four cornerstones of sustainability named above to ensure the growth we achieve is sustainable for us and our customers. Capital expenditures will be focused primarily to support sales growth, investment in recent acquisitions, and other strategic investments. We also continue to consider acquisitions and other synergy opportunities that complement our core platforms. These actions will ensure that we continue to invest in our core capabilities and continue to support growth in key markets and product offerings.
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We will continue our enterprise-wide Lean Six Sigma program directed at improving margin, profitability and cash flow by applying proven management techniques and strategies to key areas of the business, such as pricing, supply chain and operations management, productivity and quality. Long-term trends that currently provide opportunities to leverage our strategy and commitment to sustainability include improving health and wellness, protecting the environment, globalizing and localizing and increasing energy efficiency. Examples of how our strategy supports these trends can be found in numerous initiatives: active participation in the medical device market, leveraging our global footprint to deliver consistent solutions globally, light weighting and metal replacement and development of solutions that respond to ever-changing market needs by offering alternatives to traditional materials.
Recent 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 December 31, 2021, 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.
Clariant Color Acquisition
On July 1, 2020, the Company completed the Clariant Color Acquisition. The Clariant Color Acquisition increased the Company's scale, product depth and geographic reach in its Color, Additives and Inks segment. Clariant Color has leading portfolios of solid and liquid colorants that include sustainable solutions for alternative energy, and reduced material requirements for packaging and light weighting. In connection with the completion of the Clariant Color Acquisition and effective as of June 30, 2020, the Company amended its existing Articles of Incorporation to change its name to Avient Corporation. In conjunction with its rebranding and new name, the Company also changed its ticker symbol from "POL" to "AVNT", effective at the start of trading on July 13, 2020.
Total consideration paid by the Company to complete the Clariant Color Acquisition was $1.4 billion net of cash and debt. To finance the Clariant Color Acquisition, the Company used $496.1 million of net proceeds from the issuance of common shares in an underwritten public offering completed in February 2020 and $640.5 million of net proceeds from a senior unsecured notes offering completed in May 2020, and funded the balance using the net proceeds of the October 2019 sale of PP&S.
Other Acquisitions
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.
Highlights and Executive Summary
A summary of Avient’s sales, operating income, income from continuing operations, net of income taxes and net income from continuing operations attributable to Avient common shareholders is included in the following table:
| (In millions) | 2021 | 2020 | 2019 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Sales | $ | 4,818.8 | $ | 3,242.1 | $ | 2,862.7 | |||||
| Operating income | 381.2 | 189.3 | 156.8 | ||||||||
| Net income from continuing operations, net of income taxes | 230.6 | 133.8 | 75.7 | ||||||||
| Net income from continuing operations attributable to Avient common shareholders | 230.8 | 132.0 | 75.5 |
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| Results of Operations | Variances — Favorable (Unfavorable) | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 versus 2020 | |||||||||||||||||||
| (Dollars in millions, except per share data) | 2021 | 2020 | 2019 | Change | % Change | ||||||||||||||
| Sales | $ | 4,818.8 | $ | 3,242.1 | $ | 2,862.7 | $ | 1,576.7 | 48.6 | % | |||||||||
| Cost of sales | 3,719.2 | 2,457.8 | 2,205.5 | (1,261.4) | (51.3) | % | |||||||||||||
| Gross margin | 1,099.6 | 784.3 | 657.2 | 315.3 | 40.2 | % | |||||||||||||
| Selling and administrative expense | 718.4 | 595.0 | 500.4 | (123.4) | (20.7) | % | |||||||||||||
| Operating income | 381.2 | 189.3 | 156.8 | 191.9 | 101.4 | % | |||||||||||||
| Interest expense, net | (75.3) | (74.6) | (59.5) | (0.7) | (0.9) | % | |||||||||||||
| Other (expense) income, net | (1.3) | 24.3 | 12.1 | (25.6) | nm | ||||||||||||||
| Income from continuing operations before income taxes | 304.6 | 139.0 | 109.4 | 165.6 | 119.1 | % | |||||||||||||
| Income tax expense | (74.0) | (5.2) | (33.7) | (68.8) | nm | ||||||||||||||
| Net income from continuing operations | $ | 230.6 | $ | 133.8 | $ | 75.7 | $ | 96.8 | 72.3 | % | |||||||||
| (Loss) income from discontinued operations, net of income taxes | — | (0.4) | 513.1 | 0.4 | nm | ||||||||||||||
| Net income | 230.6 | 133.4 | 588.8 | 97.2 | 72.9 | % | |||||||||||||
| Net loss (income) attributable to noncontrolling interests | 0.2 | (1.8) | (0.2) | 2.0 | nm | ||||||||||||||
| Net income attributable to Avient common shareholders | $ | 230.8 | $ | 131.6 | $ | 588.6 | $ | 99.2 | 75.4 | % | |||||||||
| Earnings per share attributable to Avient common shareholders - basic: | |||||||||||||||||||
| Continuing operations | $ | 2.53 | $ | 1.47 | $ | 0.98 | |||||||||||||
| Discontinued operations | — | (0.01) | 6.64 | ||||||||||||||||
| Total | $ | 2.53 | $ | 1.46 | $ | 7.62 | |||||||||||||
| Earnings per share attributable to Avient common shareholders - diluted: | |||||||||||||||||||
| Continuing operations | $ | 2.51 | $ | 1.46 | $ | 0.97 | |||||||||||||
| Discontinued operations | — | (0.01) | 6.61 | ||||||||||||||||
| Total | $ | 2.51 | $ | 1.45 | $ | 7.58 |
nm - not meaningful
Sales
Sales increased $1,576.7 million, or 48.6%, in 2021 compared to 2020, due to the Clariant Color Acquisition, as well as growth in many end markets and price increases associated with raw material inflation.
Cost of sales
As a percent of sales, cost of sales increased from 75.8% in 2020 to 77.2% in 2021, primarily as a result of rising raw material costs.
Selling and administrative expense
These costs include selling, technology, administrative functions, corporate and general expenses. Selling and administrative expense in 2021 increased $123.4 million compared to 2020, primarily driven by the Clariant Color Acquisition.
Other (expense) income, net
Other income, net decreased $25.6 million in 2021 as compared to 2020 due to a mark-to-market adjustment and curtailments on our pension and other post-employment benefit obligations that resulted in a loss of $9.4 million in 2021, while it resulted in a gain of $17.2 million in 2020 (see Note 11, Employee Benefit Plans to the accompanying condensed consolidated financial statements). All components of net periodic benefit cost, except for service costs, are presented herein.
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Income taxes
The Company is subject to taxation in the U.S. and numerous international jurisdictions. In determining the effective income tax rate, the Company analyzes various factors, including annual earnings, the laws of taxing jurisdictions in which the earnings were generated, the impact of state and local income taxes, the ability to use tax credits, net operating loss carryforwards, and available planning alternatives. Discrete items, including the effect of changes in tax laws, statutory tax rates, and valuation allowances or other non-recurring tax adjustments are reflected in the period in which they occur as an addition to, or reduction from, the tax provision.
We recognize the resulting tax on global intangible low-taxed income (GILTI) and the deduction of foreign-derived intangible income (FDII) as a period expense in the period in which the tax is incurred.
A reconciliation of the applicable U.S. federal statutory tax rate to the consolidated effective income tax rate from continuing operations along with a description of significant or other reconciling items is included below.
| Twelve Months Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (In millions) | 2021 | 2020 | ||||
| Federal statutory income tax rate | 21.0 | % | 21.0 | % | ||
| Tax (benefit) expense on GILTI and FDII | (1.7) | 3.1 | ||||
| International tax on certain current and prior year earnings | 1.4 | 2.0 | ||||
| Net impact of non-deductible acquisition earnouts and transaction cost | 0.1 | 1.8 | ||||
| Research and development credit | (0.8) | (2.1) | ||||
| Carryback of capital losses | (0.4) | (13.1) | ||||
| State and local tax, net | 1.4 | (3.4) | ||||
| International tax rate differential | (0.2) | (2.7) | ||||
| International permanent items | 0.2 | (5.2) | ||||
| Net impact of uncertain tax positions | 0.7 | 1.0 | ||||
| Changes in valuation allowances | 1.7 | 0.5 | ||||
| Other | 0.9 | 0.8 | ||||
| Effective income tax rate | 24.3 | % | 3.7 | % |
2021 compared to 2020
For 2021, we recognized a U.S. tax benefit of $5.5 million (1.7%) from decreased tax on GILTI and FDII arising from higher domestic income. This benefit compared to tax expense on GILTI and FDII of $4.3 million (3.1%) for 2020.
We recognized a tax benefit of $1.2 million (0.4%) and $18.2 million (13.1%) in 2021 and 2020, respectively, from a carryback of capital losses.
For 2021, state and local tax expense was $4.2 million (1.4%), which resulted from normal operations. In 2020, we had a state and local tax benefit of $4.7 million (3.4%), which included favorable prior year tax provision adjustments and a state tax benefit from carryback of capital losses.
For 2021, international permanent items included the favorable tax effect of notional interest deductions and a change in a foreign tax rate. Offsetting these items were withholding taxes on intercompany foreign-to-foreign income and deferred tax adjustments which resulted in a net unfavorable tax impact of $0.6 million (0.2%). For 2020, International permanent items also included the favorable tax effect of notional interest deductions, favorable tax treatment of foreign exchanges losses, partially offset by non-deductibility of interest expense related to the receipt of tax-exempt dividends, which resulted in a net favorable tax impact of $7.2 million (5.2%).
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Segment Information
Operating income is the primary measure that is reported to our chief operating decision maker for purposes of making decisions about 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; environmental remediation costs and other liabilities for facilities no longer owned or closed in prior years; actuarial gains and losses associated with our pension and 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 chief operating decision maker. These costs are included in Corporate and eliminations.
Avient has three reportable segments: (1) Color, Additives and Inks; (2) Specialty Engineered Materials; and (3) Distribution. Our segments are further discussed in Note 15, Segment Information, to the accompanying consolidated financial statements.
Sales and Operating Income
| 2021 versus 2020 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | 2021 | 2020 | Change | % Change | |||||||||||||
| Sales: | |||||||||||||||||
| Color, Additives and Inks | $ | 2,401.6 | $ | 1,502.9 | $ | 898.7 | 59.8 | % | |||||||||
| Specialty Engineered Materials | 918.9 | 708.8 | 210.1 | 29.6 | % | ||||||||||||
| Distribution | 1,630.9 | 1,110.3 | 520.6 | 46.9 | % | ||||||||||||
| Corporate and eliminations | (132.6) | (79.9) | (52.7) | (66.0) | % | ||||||||||||
| Sales | $ | 4,818.8 | $ | 3,242.1 | $ | 1,576.7 | 48.6 | % | |||||||||
| Operating income: | |||||||||||||||||
| Color, Additives and Inks | $ | 303.1 | $ | 180.8 | $ | 122.3 | 67.6 | % | |||||||||
| Specialty Engineered Materials | 132.0 | 94.4 | 37.6 | 39.8 | % | ||||||||||||
| Distribution | 93.2 | 69.5 | 23.7 | 34.1 | % | ||||||||||||
| Corporate and eliminations | (147.1) | (155.4) | 8.3 | 5.3 | % | ||||||||||||
| Operating income | $ | 381.2 | $ | 189.3 | $ | 191.9 | 101.4 | % | |||||||||
| Operating income as a percentage of sales: | |||||||||||||||||
| Color, Additives and Inks | 12.6 | % | 12.0 | % | 0.6 | % | points | ||||||||||
| Specialty Engineered Materials | 14.4 | % | 13.3 | % | 1.1 | % | points | ||||||||||
| Distribution | 5.7 | % | 6.3 | % | (0.6) | % | points | ||||||||||
| Total | 7.9 | % | 5.8 | % | 2.1 | % | points |
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Color, Additives and Inks
Sales increased $898.7 million, or 59.8%, in 2021 compared to 2020, primarily due to the Clariant Color Acquisition, as well as growth in nearly all end markets and regions and price increases associated with raw material inflation.
On a pro forma basis to include Clariant Color in all periods, sales increased by $359.5 million, or 18.0%, in 2021 compared to 2020, as a result of growth in nearly all end markets and regions as well as price increases associated with raw material inflation. Favorable foreign exchange also contributed 2%.
Operating income increased $122.3 million, or 67.6%, in 2021 compared to 2020 primarily due to the Clariant Color Acquisition, as well as growth in nearly all end markets and price increases associated with raw material inflation.
On a pro forma basis to include Clariant Color in all periods, operating income increased by 34.0% in 2021 compared to 2020, as a result of the sales growth discussed above and capture of integration synergies, partially offset by raw material and cost inflation.
Specialty Engineered Materials
Sales increased by $210.1 million, or 29.6%, in 2021 compared to 2020, largely driven by high demand for advanced composite materials and growth in many end markets.
Operating income increased by $37.6 million in 2021 compared to 2020 due to increased sales and continued growth of higher margin specialty and composites solutions.
Distribution
Sales increased $520.6 million, or 46.9%, in 2021 compared to 2020 driven by increased demand as well as higher average selling prices. Operating income increased $23.7 million, or 34.1%, in 2021 compared to 2020 as a result of the sales growth discussed above, partially offset by raw material cost inflation.
Corporate and Eliminations
Costs declined $8.3 million in 2021 compared to 2020 primarily due to lower acquisition related expense.
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 December 31, 2021:
| (In millions) | ||
|---|---|---|
| Cash and cash equivalents | $ | 601.2 |
| Revolving credit availability | 485.5 | |
| Liquidity | $ | 1,086.7 |
As of December 31, 2021, approximately 71% of the Company’s cash and cash equivalents resided outside the United States.
Based on current projections, we believe that we will be able to continue to manage and control working capital, discretionary spending and capital expenditures and that cash provided by operating activities, along with available borrowing capacity under our revolving credit facilities, will allow us to maintain adequate levels of available capital to fund our operations, meet debt service obligations, continue paying dividends, and opportunistically repurchase outstanding common shares.
Expected sources of cash needed to satisfy cash requirements in 2022 include our cash on hand, cash from operations and available liquidity under our revolving credit facility, if needed. Expected uses of cash in 2022 include interest payments, cash taxes, dividend payments, share repurchases, environmental remediation costs, capital expenditures and debt repayment. Capital expenditures are currently estimated to be approximately $135 million in 2022, primarily to support sales growth, our continued investment in recent acquisitions and other strategic investments.
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Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities:
| (In millions) | 2021 | 2020 | 2019 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash provided by (used by): | |||||||||||
| Operating Activities | $ | 233.8 | $ | 221.6 | $ | 300.8 | |||||
| Investing Activities | (150.2) | (1,431.6) | 611.9 | ||||||||
| Financing Activities | (114.6) | 982.0 | (218.3) | ||||||||
| Effect of exchange rate on cash | (17.3) | 12.8 | (0.6) | ||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (48.3) | $ | (215.2) | $ | 693.8 |
Operating activities
In 2021, net cash provided by operating activities was $233.8 million as compared to $221.6 million in 2020, as greater earnings, lower payments for taxes and the absence of earn out payments from prior acquisitions were largely offset by the build in working capital to support the sales growth realized in 2021.
Investing Activities
Net cash used by investing activities during 2021 of $150.2 million primarily reflects $47.6 million related to the Magna Acquisition and capital expenditures of $100.6 million.
Financing Activities
Net cash used by financing activities in 2021 primarily reflects $77.7 million in dividends paid and the repayment of long term debt of $18.5 million.
Total Debt
The following table summarizes debt as presented at December 31, 2021 and 2020.
| (In millions) | 2021 | 2020 | ||||
|---|---|---|---|---|---|---|
| Senior secured revolving credit facility due 2026 | $ | — | $ | — | ||
| 5.25% senior notes due 2023 | 598.6 | 597.5 | ||||
| 5.75% senior notes due 2025 | 643.2 | 641.2 | ||||
| Senior secured term loan due 2026 | 605.3 | 610.0 | ||||
| Other debt | 11.8 | 23.9 | ||||
| Total debt | $ | 1,858.9 | $ | 1,872.6 | ||
| Less short-term and current portion of long-term debt | 8.6 | 18.6 | ||||
| Total long-term debt, net of current portion | $ | 1,850.3 | $ | 1,854.0 |
The Company maintains a senior secured revolving credit facility, which matures on October 26, 2026 and provides a maximum borrowing facility size of $500 million, subject to a borrowing base with advances against certain U.S. and international accounts receivable, inventory and other assets as specified in the agreement. On October 26, 2021, the Company and certain of its subsidiaries entered into the First Amendment to the Third Amended and Restated Credit Agreement (the ABL Amendment) with Wells Fargo Capital Finance, LLC, as administrative agent (in such capacity, Administrative Agent) and the various lenders and other agents party thereto. The ABL Amendment amends the Third Amended and Restated Credit Agreement, dated June 28, 2019, by and among the Company and certain subsidiaries of the Company party thereto, Wells Fargo Capital Finance, LLC, as administrative agent, and the various lenders and other agents party thereto. The ABL Amendment, among other things, (i) increased the Company’s total revolving credit line to $500 million (which may be increased by up to $150 million subject to the Company meeting certain requirements and obtaining commitments for such increase) (the Revolving Credit Facility), subject to the borrowing base limitations, (ii) extended the maturity date of the Revolving Credit Facility to October 26, 2026 (subject to certain exceptions), (iii) modified the borrowing base to include qualified cash subject to certain limitations, (iv) modified the applicable margin and the unused line fee to be based on availability, and (v) modified certain negative covenants to provide additional flexibility. As of December 31, 2021, we had no borrowings outstanding under our Revolving Credit Facility, which had remaining availability of $485.5 million. As of December 31, 2020, we had no borrowings under our Revolving Credit Facility, which had remaining availability of $278.2 million.
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On April 11, 2018, the Company entered into a fifth amendment to its senior secured term loan. Under the terms of the amended senior secured term loan, the margin was reduced by 25 basis points to 175 basis points. At the Company's discretion, interest is based upon (i) a margin rate of 75 basis points plus a Prime Rate, subject to a floor of 175 basis points. On November 9, 2018, the Company entered into a sixth amendment to its senior secured term loan, which extended the maturity to 2026. Repayments in the amount of one percent of the aggregate principal amount as of August 3, 2016 are payable annually, while the remaining balance matures on January 30, 2026. The total principal repayments for the year ended December 31, 2021 were $6.5 million.
The agreements governing our Revolving Credit Facility and our senior secured term loan, and the indentures and credit agreements governing other debt, contain a number of customary financial and restrictive covenants. As of December 31, 2021, we were in compliance with all customary financial and restrictive covenants pertaining to our debt.
For additional information regarding our debt, please see Note 6, Financing Arrangements to the accompanying condensed consolidated financial statements.
Letters of Credit
Our Revolving Credit Facility provides up to $50.0 million for the issuance of letters of credit, $12.1 million of which was used at December 31, 2021. These letters of credit are issued by the bank in favor of third parties and are mainly related to insurance claims.
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. The following table summarizes our obligations as of December 31, 2021 that are expected to impact liquidity and cash flow in future periods. See Liquidity and Capital Resources for additional discussion of our ability to generate and access cash to meet requirements as well as plans for use of cash in both the short-term and long-term.
| Payment Due by Period | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In millions) | Total | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | ||||||||||||||||||||
| Total debt (1) | $ | 1,873.3 | $ | 8.6 | $ | 608.6 | $ | 8.6 | $ | 658.7 | $ | 6.9 | $ | 581.9 | |||||||||||||
| Operating leases | 81.3 | 26.3 | 19.8 | 12.6 | 7.7 | 4.6 | 10.3 | ||||||||||||||||||||
| Interest on long-term debt obligations (2) | 241.8 | 84.4 | 68.5 | 52.6 | 33.7 | 1.6 | 1.0 | ||||||||||||||||||||
| Pension and post-retirement obligations (3) | 89.4 | 9.5 | 8.9 | 8.7 | 9.0 | 9.0 | 44.3 | ||||||||||||||||||||
| Purchase obligations (4) | 40.5 | 27.5 | 8.1 | 3.0 | 1.5 | 0.4 | — | ||||||||||||||||||||
| Total | $ | 2,326.3 | $ | 156.3 | $ | 713.9 | $ | 85.5 | $ | 710.6 | $ | 22.5 | $ | 637.5 |
(1)Total debt includes both the current and long-term portions of debt and capital lease obligations.
(2)Represents estimated contractual interest payments for all outstanding debt.
(3)This represents estimates related to the funding obligations of our pension and other post retirement plans. These contributions are based on actuarial estimates of future assumed payments based upon retirement and payment patterns for a 10-year period. The estimates in the table may differ materially from actual future payments due to uncertainties regarding the assumptions involved in estimating future required contributions to our pension and non-pension post retirement benefit plans, including (i) interest rate levels (ii) the amount and timing of asset returns and (iii) what, if any, changes may occur in pension funding legislation.
(4)Purchase obligations are primarily comprised of service agreements related to telecommunication, information technology, utilities and other manufacturing plant services and certain capital commitments.
Critical Accounting Policies and Estimates
Significant accounting policies are described more fully in Note 1, Description of Business and Summary of Significant Accounting Policies, to the accompanying consolidated financial statements. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires us to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and assumptions that we believe are reasonable considering the related facts and circumstances. The application of these critical accounting policies involves the exercise of judgment and use of assumptions for future uncertainties. Accordingly, actual results could differ significantly from these estimates. We believe that the following discussion addresses our most critical accounting policies, which are those that are the most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex judgments.
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| Description | Judgments and Uncertainties | Effect if Actual Results Differ from Assumptions | ||
|---|---|---|---|---|
| Environmental Liabilities | ||||
| • Based upon our estimates, we had an undiscounted accrual of $124.5 million at December 31, 2021 for probable future environmental expenditures. Any such provision is recognized using the Company's best estimate of the amount of loss incurred, or at the lower end of an estimated range, when a single best estimate is not determinable.• With respect to the former Goodrich Corporation Calvert City site, the United States Environmental Protection Agency (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. In October 2019, the USEPA sent a Special Notice Letter to Avient, Westlake Vinyls, and Goodrich Corporation, inviting negotiation of a Consent Decree to perform the remedial actions at the site. In 2020, the three companies, USEPA, and the US Department of Justice signed the agreed Consent Decree, which received Federal Court approval in January 2021.• In some cases, the Company recovers a portion of the costs relating to these obligations from insurers or other third parties; however, the Company records such amounts only when they are collected. | • This accrual represents our best estimate of the remaining probable costs based upon information and technology currently available. Depending upon the results of future testing, the ultimate remediation alternatives undertaken, changes in regulations, new information, newly discovered conditions and other factors, it is reasonably possible that we could incur additional costs in excess of the amount accrued. However, such additional costs, if any, cannot currently be estimated. Our estimate of this liability may be revised as new regulations or technologies are developed or additional information is obtained. | • If further developments or resolution of these matters are not consistent with our assumptions and judgments, we may need to recognize a significant adjustment in a future period. • As we progress through certain benchmarks such as completion of the remedial design and remedial action, additional information will become available that may require an adjustment to our existing reserves. |
25 AVIENT CORPORATION
| Description | Judgments and Uncertainties | Effect if Actual Results Differ from Assumptions | ||
|---|---|---|---|---|
| Pension and Other Post-retirement Plans | ||||
| • We account for our defined benefit pension plans and other post-retirement plans in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Update (ASC) Topic 715, Compensation — Retirement Benefits. We immediately recognize actuarial gains and losses in our operating results in the year in which the gains or losses occur. In 2021, we recognized a $9.4 million loss that was primarily the result of actual asset returns that were lower than our assumed returns. Partially offsetting the lower asset returns was an increase in our year end discount rate from 2.47% to 2.69%. | • Asset returns and interest rates significantly affect the value of future assets and liabilities of our pension and post-retirement plans and therefore the funded status of our plans. It is difficult to predict these factors due to the volatility of market conditions. • To develop our discount rate, we consider the yields of high-quality corporate bonds with maturities that correspond to the timing of our benefit obligations, referred to as the bond matching approach.• To develop our expected long-term return on plan assets, we consider historical and forward looking long-term asset returns and the expected investment portfolio mix of plan assets. The weighted-average expected long-term rate of return on plan assets was 4.86% for 2021, 5.05% for 2020 and 5.68% for 2019.• Life expectancy is a significant assumption that impacts our pension and other post-retirement benefits obligation. During 2020, we adopted the MP-2020 mortality improvement scale which was issued by the Society of Actuaries in October 2020. | • The expected long-term return on plan assets utilized as of January 1, 2021 and 2020 was 4.86% and 5.05%, respectively. An increase/decrease in our expected long-term return on plan assets of 50 basis points as of December 31, 2021 would result in a change of approximately $2.5 million to 2022 net periodic benefit cost. | ||
| Income Taxes | ||||
| • We account for income taxes using the asset and liability method under FASB ASC Topic 740. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, deferred tax assets are also recorded with respect to net operating losses and other tax attribute carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when realization of the benefit of deferred tax assets is not deemed to be more likely than not. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.• We recognize net tax benefits under the recognition and measurement criteria of FASB ASC Topic 740, Income Taxes, which prescribes requirements and other guidance for financial statement recognition and measurement of positions taken or expected to be taken on tax returns. We record interest and penalties related to uncertain tax positions as a component of income tax expense. | • The utilization of certain deferred tax assets is dependent on the amount and timing of taxable income that we will ultimately generate in the future and other factors, such as changes in tax laws. We have provided valuation allowances as of December 31, 2021, aggregating to $19.6 million against certain international, state and local net operating loss carryforwards and other deferred tax assets. As of December 31, 2021, the gross liability for unrecognized income tax benefits, including interest and penalties, totaled $21.3 million.• Undistributed and indefinitely reinvested earnings for certain consolidated non-U.S. subsidiaries were approximately $489 million as of December 31, 2021. No tax provision was made on these earnings as APB 23 provides guidance that U.S. companies do not need to recognize tax effects on international earnings that are indefinitely reinvested. Additionally, no deferred income taxes were recorded on taxable outside basis differences as it was not practicable to determine the tax provision impact. | • Although management believes that the estimates and judgments discussed herein are reasonable, actual results could differ, which could result in income tax expense or benefits that could be material. |
26 AVIENT CORPORATION
| Description | Judgments and Uncertainties | Effect if Actual Results Differ from Assumptions | ||
|---|---|---|---|---|
| Goodwill | ||||
| • Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies. We follow the guidance in ASC 350, Intangibles — Goodwill and Other, including subsequent updates, and test goodwill for impairment at least annually, absent a triggering event that would warrant an impairment assessment. On an ongoing basis, absent any impairment indicators, we perform our goodwill impairment testing as of the first day of October of each year. | • We have identified our reporting units at the operating segment level, or in most cases, one level below the operating segment level. Goodwill is allocated to the reporting units based on the estimated fair value at the date of acquisition.• We estimated fair value using the best information available to us, including market information and discounted cash flow projections using the income approach.• The income approach requires us to make assumptions and estimates regarding projected economic and market conditions, growth rates, operating margins and cash expenditures. Sensitivity analyses were performed around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values. | • If actual results are not consistent with our assumptions and estimates, we may be exposed to goodwill impairment charges.• The fair value of the reporting unit is based on a number of subjective factors including: (a) appropriate consideration of valuation approaches, (b) the consideration of our business outlook and (c) weighted average cost of capital (discount rate), growth rates and market multiples for our estimated cash flows.• Based on our 2021 annual impairment test performed on October 1st where both quantitative and qualitative tests were performed, we determined there were no reporting units considered to be at risk of impairment. We believe that the current assumptions and estimates are reasonable, supportable and appropriate. The business could be impacted by unforeseen changes in market factors or opportunities, which could impact our existing assumptions used in our impairment test. As such, there can be no assurance that these estimates and assumptions made for the purposes of the goodwill impairment test will prove to be accurate predictions of future performance. |
| Indefinite-lived Intangible Assets | ||||
|---|---|---|---|---|
| • Indefinite-lived intangible assets represent trade names associated with acquired companies. | • We estimate the fair value of trade names using a “relief from royalty payments” approach. This approach involves two steps: (1) estimating reasonable royalty rate for the trade name and (2) applying this royalty rate to a net sales stream and discounting the resulting cash flows to determine fair value. Fair value is then compared with the carrying value of the trade name. | • If actual results are not consistent with our assumptions and estimates, we may be exposed to impairment charges related to our indefinite lived trade name• Based on our 2021 annual impairment test, no trade names were considered at risk. |
Recent and Future Adoption of Accounting Standards
Information regarding recent and future adoption of accounting standards can be found in Note 1, Description of Business and Summary of Significant Accounting Policies, to the accompanying consolidated financial statements and is incorporated by reference herein.
27 AVIENT CORPORATION