AVIENT CORP (AVNT) FY 2023 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 2023 and 2022. For a discussion of changes from fiscal year 2021 to fiscal year 2022, 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, 2022, filed with the SEC on February 22, 2023.
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 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 fluoropolymer and silicone colorants. Headquartered in Avon Lake, Ohio, with 2023 sales of $3.1 billion from continuing operations, we have manufacturing and warehouses around the globe, with 61% of our sales to customers 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.
As Avient has evolved into a specialty materials company, we’ve continued to refine and increase our commitment to sustainability. Like all that we do, we start by putting our customers first, then look inward to make a difference. Our guiding principle of sustainability is to enable our customers’ innovation and sustainability goals through products and services. Our four cornerstones of People, Products, Planet and Performance guide our investments and actions, and we are making significant contributions in each. Examples of how our materials science is enabling sustainability for our customers include developing unique technologies that improve the recyclability of products and allow recycled content to be incorporated in products, thus advancing a more circular economy; light-weighting solutions that replace heavier traditional materials like metal, glass and wood, which can improve fuel efficiency in all modes of transportation and reduce carbon footprint; and sustainable infrastructure solutions that increase energy efficiency, renewable energy, natural resource conservation and fiber optic / 5G network accessibility.
In addition, we continue to engage and invest in the Alliance to End Plastic Waste (AEPW). Avient joined the AEPW as a founding member, along with 29 other member companies, in January 2019. As of December 31, 2023, the AEPW had committed over $1.5 billion to help end plastic waste in the environment through investment in infrastructure, innovation, education, and clean-up activities. Our commitment to AEPW is yet another example of the importance we place on being a global leader in all aspects of how we define sustainability: People, Products, Planet and Performance.
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We have identified four key growth drivers to drive profitable, organic sales growth: sustainable solutions, composites, healthcare and emerging regions. We also 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 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 enable us to continue to invest in our core capabilities and continue to support growth in key markets and product offerings.
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
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 materials 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 were $935.5 million, of which $7.3 million was received in the year ended December 31, 2023. The results of the Distribution business are presented as discontinued operations for all periods presented.
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| Results of Operations | Variances — Favorable (Unfavorable) | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 versus 2022 | |||||||||||||||||||
| (Dollars in millions, except per share data) | 2023 | 2022 | 2021 | Change | % Change | ||||||||||||||
| Sales | $ | 3,142.8 | $ | 3,396.9 | $ | 3,315.5 | $ | (254.1) | (7.5) | % | |||||||||
| Cost of sales | 2,250.3 | 2,514.2 | 2,371.7 | 263.9 | 10.5 | % | |||||||||||||
| Gross margin | 892.5 | 882.7 | 943.8 | 9.8 | 1.1 | % | |||||||||||||
| Selling and administrative expense | 695.7 | 639.4 | 664.1 | (56.3) | (8.8) | % | |||||||||||||
| Operating income | 196.8 | 243.3 | 279.7 | (46.5) | (19.1) | % | |||||||||||||
| Interest expense, net | (115.3) | (119.8) | (75.2) | 4.5 | 3.8 | % | |||||||||||||
| Other income (expense), net | 5.8 | (59.7) | (1.0) | 65.5 | nm | ||||||||||||||
| Income from continuing operations before income taxes | 87.3 | 63.8 | 203.5 | 23.5 | 36.8 | % | |||||||||||||
| Income tax (expense) benefit | (11.0) | 19.3 | (51.9) | (30.3) | nm | ||||||||||||||
| Net income from continuing operations | $ | 76.3 | $ | 83.1 | $ | 151.6 | $ | (6.8) | (8.2) | % | |||||||||
| (Loss) income from discontinued operations, net of income taxes | (0.1) | 620.3 | 79.0 | (620.4) | nm | ||||||||||||||
| Net income | 76.2 | 703.4 | 230.6 | (627.2) | (89.2) | % | |||||||||||||
| Net (income) loss attributable to noncontrolling interests | (0.5) | (0.3) | 0.2 | (0.2) | nm | ||||||||||||||
| Net income attributable to Avient common shareholders | $ | 75.7 | $ | 703.1 | $ | 230.8 | $ | (627.4) | (89.2) | % | |||||||||
| Earnings per share attributable to Avient common shareholders - basic: | |||||||||||||||||||
| Continuing operations | $ | 0.83 | $ | 0.91 | $ | 1.66 | |||||||||||||
| Discontinued operations | — | 6.80 | 0.87 | ||||||||||||||||
| Total | $ | 0.83 | $ | 7.71 | $ | 2.53 | |||||||||||||
| Earnings per share attributable to Avient common shareholders - diluted: | |||||||||||||||||||
| Continuing operations | $ | 0.83 | $ | 0.90 | $ | 1.65 | |||||||||||||
| Discontinued operations | — | 6.73 | 0.86 | ||||||||||||||||
| Total | $ | 0.83 | $ | 7.63 | $ | 2.51 | |||||||||||||
| Gross margin as a percentage of sales | 28.4 | % | 26.0 | % | 28.5 | % |
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Sales
Sales decreased $254.1 million, or 7.5%, in 2023 compared to 2022. The APM Acquisition, which began to be reflected in results as of September 1, 2022, increased sales by 7.4%, which was more than offset by the impacts of lower global demand and customer destocking. In addition, unfavorable foreign exchange rates had a 0.8% impact.
Gross Margin
Gross margin as a percentage of sales was 28.4% in 2023 as compared to 26.0% in 2022. The gross margin improvement was driven primarily by favorable price and mix, including a full year of APM results in 2023, and raw material deflation. Further, 2023 included $52.1 million of higher environmental remediation costs, while 2022 included $34.4 million of expense associated with the APM Acquisition purchase accounting inventory step-up and $19.2 million of higher restructuring costs.
Selling and administrative expense
These costs include selling, technology, administrative functions, amortization of intangible assets, corporate and general expenses. Selling and administrative expense in 2023 increased $56.3 million compared to 2022, primarily driven by a full year of APM results and higher restructuring costs of $9.6 million in 2023.
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Interest expense, net
Interest expense, net decreased $4.5 million in 2023 as compared to 2022. Higher interest expense related to new debt incurred to finance the APM Acquisition and the impact of higher interest rates on our variable term debt was partially offset by $15.8 million of higher interest income from cash equivalents and cross-currency swaps. Additional reductions resulted from $10.0 million of committed financing costs incurred in 2022 associated with the APM Acquisition along with a $13.7 million reduction in other debt financing costs.
Other income (expense), net
Other income (expense), net resulted in income in 2023 primarily related to a $32.3 million year-over-year change in the mark-to-market expense associated with pension and post-retirement plans. In addition, 2022 included a $30.9 million mark-to-market loss on derivative contracts entered into to hedge the purchase price of the APM Acquisition.
Income taxes
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) | 2023 | 2022 | ||||
| U.S. federal income tax rate | 21.0 | % | 21.0 | % | ||
| Net tax on GILTI and FDII | 1.9 | 2.8 | ||||
| International tax on certain current and prior year earnings | 3.9 | 0.2 | ||||
| Non-deductible acquisition related costs | — | 0.9 | ||||
| Non-deductible interest | 5.3 | 2.9 | ||||
| Research and development credit | (3.7) | (5.0) | ||||
| Capital losses | (5.4) | (88.1) | ||||
| State and local tax, net | (2.3) | (4.0) | ||||
| International tax rate differential | 0.2 | (5.5) | ||||
| International permanent items | (7.5) | 12.1 | ||||
| Net impact of uncertain tax positions | (5.3) | 12.9 | ||||
| Changes in valuation allowances | 3.6 | 15.4 | ||||
| Other | 0.9 | 4.2 | ||||
| Effective income tax rate | 12.6 | % | (30.2) | % |
The consolidated effective income tax rate from continuing operations was 12.6%, which was lower than the U.S. federal rate of 21%. This lower rate was primarily driven by the recognition of tax benefits of 7.5% associated with tax impairments of investments in affiliates, driven in part from European restructuring actions. Further, we recognized a 5.4% tax benefit from federal and state capital losses associated with an international affiliate's tax status change in 2022. Finally, we recognized tax benefits from the reduction of uncertain tax positions as well as the U.S. R&D tax credit, which reduced the tax rate, 5.3% and 3.7%, respectively. Partially offsetting these benefits were non-deductible foreign interest, 5.3%, tax associated with foreign income repatriation, 3.9%, and an increase of our valuation allowance which impacted the rate 3.6%.
The 2022 consolidated effective income tax rate from continuing operations was a benefit of 30.2%. We recognized a net tax benefit of 88.1% in 2022 from federal and state capital loss deductions associated with an international affiliate's tax status change. We also recognized a tax benefit of 5.5% associated with earnings in foreign jurisdictions with statutory rates below the U.S. federal income tax rate. Further, the state and local tax benefit was 4.0%, driven by a U.S. tax loss.
Offsetting these benefits in 2022 were the tax impact of international permanent items of 12.1%, which primarily included an unfavorable tax effect of withholding taxes. We also increased our valuation allowance, which impacted the rate 15.4%, for deferred tax assets that are unlikely to create income tax benefits before their expiration. Further, uncertain tax positions increased, which impacted the rate 12.9%, primarily associated with European restructuring charges which are not expected to realize and a tax effect of non-deductible foreign interest of 2.9%.
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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, 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 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.
Avient has two reportable segments: (1) Color, Additives and Inks and (2) Specialty Engineered Materials. Our segments are further discussed in Note 15, Segment Information, to the accompanying consolidated financial statements.
Sales and Operating Income
| 2023 versus 2022 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | 2023 | 2022 | Change | % Change | |||||||||||||
| Sales: | |||||||||||||||||
| Color, Additives and Inks | $ | 2,007.4 | $ | 2,355.0 | $ | (347.6) | (14.8) | % | |||||||||
| Specialty Engineered Materials | 1,138.2 | 1,044.4 | 93.8 | 9.0 | % | ||||||||||||
| Corporate | (2.8) | (2.5) | (0.3) | nm | |||||||||||||
| Sales | $ | 3,142.8 | $ | 3,396.9 | $ | (254.1) | (7.5) | % | |||||||||
| Operating income: | |||||||||||||||||
| Color, Additives and Inks | $ | 259.9 | $ | 301.0 | $ | (41.1) | (13.7) | % | |||||||||
| Specialty Engineered Materials | 142.5 | 140.1 | 2.4 | 1.7 | % | ||||||||||||
| Corporate | (205.6) | (197.8) | (7.8) | (3.9) | % | ||||||||||||
| Operating income | $ | 196.8 | $ | 243.3 | $ | (46.5) | (19.1) | % |
nm - not meaningful
Color, Additives and Inks
Sales decreased $347.6 million, or 14.8%, in 2023 compared to 2022, primarily driven by lower global demand and customer destocking.
Operating income decreased $41.1 million, or 13.7%, in 2023 compared to 2022, primarily due to lower global demand, customer destocking and unfavorable foreign exchange rates, which had a 1.3% impact, partially offset by the carryforward of price increases, raw material deflation and cost reduction actions.
Specialty Engineered Materials
Sales increased by $93.8 million, or 9.0%, in 2023 compared to 2022. The APM Acquisition, which began to be reflected in results as of September 1, 2022, increased sales by 24.2%, which was partially offset by the impacts of lower global demand and customer destocking.
Operating income increased by $2.4 million, or 1.7%, in 2023 compared to 2022, driven primarily by the APM Acquisition, raw material deflation and cost reduction actions, partially offset by lower global demand, customer destocking and unfavorable foreign exchange rates, which had a 1.7% impact.
Corporate
Costs increased $7.8 million, or 3.9%, in 2023 compared to 2022, primarily driven by $52.1 million of higher environmental remediation costs in 2023 and $8.1 million of higher mark-to-market costs associated with Avient deferred compensation plans, partially offset by lower acquisition related expense of $47.5 million, which includes $34.4 million of expense associated with the APM inventory step-up, and $9.6 million of lower restructuring costs in 2023.
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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, 2023:
| (In millions) | ||
|---|---|---|
| Cash and cash equivalents | $ | 545.8 |
| Revolving credit availability | 199.7 | |
| Liquidity | $ | 745.5 |
As of December 31, 2023, approximately 69% 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 for at least twelve months and the foreseeable future thereafter.
Expected sources of cash needed to satisfy cash requirements in 2024 include our cash on hand, cash from operations and available liquidity under our revolving credit facility, if necessary. Expected uses of cash in 2024 include interest payments, cash taxes, dividend payments, share repurchases, environmental remediation costs and capital expenditures. Capital expenditures are currently estimated to be approximately $140 million in 2024, primarily to support sales growth, our continued investment in recent acquisitions, including the implementation of a cloud-based ERP system, S/4HANA, and other strategic investments.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities:
| (In millions) | 2023 | 2022 | 2021 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash provided by (used by): | |||||||||||
| Operating Activities | $ | 201.6 | $ | 398.4 | $ | 233.8 | |||||
| Investing Activities | (94.2) | (504.0) | (150.2) | ||||||||
| Financing Activities | (201.7) | 166.4 | (114.6) | ||||||||
| Effect of exchange rate on cash | (1.0) | (20.9) | (17.3) | ||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (95.3) | $ | 39.9 | $ | (48.3) |
Operating Activities
In 2023, net cash provided by operating activities decreased to $201.6 million as compared to $398.4 million in 2022, driven primarily by lower earnings and taxes paid associated with the sale of the Distribution business, partially offset by a decrease in working capital.
Investing Activities
Net cash used by investing activities during 2023 of $94.2 million primarily reflects the impact of capital expenditures of $119.4 million, which were partially offset by the net proceeds from the sale of the Distribution business of $7.3 million, proceeds from plant closures of $7.6 million and other investing inflows of $10.3 million.
Financing Activities
Net cash used by financing activities of $201.7 million in 2023 primarily reflects $105.8 million reduction in long-term debt and $90.2 million of dividends paid.
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Total Debt
The following table summarizes debt as of December 31, 2023 and 2022.
| (In millions) | 2023 | 2022 | ||||
|---|---|---|---|---|---|---|
| Senior secured revolving credit facility due 2026 | $ | — | $ | — | ||
| Senior secured term loan due 2026 | — | 423.6 | ||||
| Senior secured term loan due 2029 | 709.0 | 385.5 | ||||
| 5.75% senior notes due 2025 | 647.2 | 645.2 | ||||
| 7.125% senior notes due 2030 | 716.2 | 714.9 | ||||
| Other Debt | 7.6 | 9.7 | ||||
| Total Debt | $ | 2,080.0 | $ | 2,178.9 | ||
| Less short-term debt | 9.5 | 2.2 | ||||
| Total long-term debt, net of current portion | $ | 2,070.5 | $ | 2,176.7 |
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 year ended December 31, 2023 as a result of the amendment.
The Company maintains a senior secured revolving credit facility (the Revolving Credit Facility), which matures on October 26, 2026 and provides a maximum borrowing facility size of $500.0 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. As of December 31, 2023, we had no borrowings outstanding under our Revolving Credit Facility, which had remaining availability of $199.7 million. As of December 31, 2022, we had no borrowings under our Revolving Credit Facility, which had remaining availability of $246.2 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, 2023, 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 consolidated financial statements.
Letters of Credit
Our Revolving Credit Facility provides up to $50.0 million for the issuance of letters of credit, $13.3 million of which was used at December 31, 2023. These letters of credit are issued by the bank in favor of third parties and are mainly related to required insurance programs.
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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, 2023 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 | Less than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | ||||||||||||||
| Total debt (1) | $ | 2,110.5 | $ | 9.5 | $ | 667.4 | $ | 15.4 | $ | 1,418.2 | |||||||||
| Operating leases | 69.5 | 20.3 | 23.9 | 13.0 | 12.3 | ||||||||||||||
| Interest on debt obligations (2) | 680.1 | 144.5 | 232.9 | 214.1 | 88.6 | ||||||||||||||
| Pension and post-retirement obligations (3) | 76.9 | 8.0 | 15.7 | 15.6 | 37.6 | ||||||||||||||
| Purchase obligations (4) | 124.5 | 65.1 | 33.0 | 19.5 | 6.9 | ||||||||||||||
| Environmental obligations (5) | 157.2 | 32.1 | 89.8 | 6.2 | 29.0 | ||||||||||||||
| Total | $ | 3,061.5 | $ | 247.4 | $ | 972.9 | $ | 277.6 | $ | 1,563.6 |
(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.
(5)Includes estimated payments related to environmental remediation, primarily due to the ongoing remedial action at Calvert City.
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.
Revenue Recognition
Sales are recognized when control of promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services, which is typically when products are shipped from our facilities. The majority of the Company’s sales agreements contain performance obligations satisfied at a point in time when control is transferred to the customer. Avient records reductions to sales for customer incentives, primarily comprised of rebates, at the time of the initial sale. Rebates are estimated based on sales terms, historical experience along with annual sales projections. Rebate programs offered are typically credited to customers for achieving defined volume levels.
Environmental Liabilities
We are a party to a Consent Decree related to remedial actions at the former Goodrich Corporation Calvert City site and will incur environmental remediation costs related to this matter. We recognize an estimate of environmental liabilities on an undiscounted basis 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. In some cases, the Company recovers a portion of the costs relating to these obligations from insurers or other third parties, and the recovery is recognized when realization of the proceeds is deemed as probable.
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Environmental liabilities 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. As we progress through remedial design and remedial action related to the Goodrich Corporation Calvert City site, additional information will become available that may require an adjustment to our existing accrual.
Additional information related to the accounting for environmental liabilities is found in Note 12, Commitments and Contingencies.
Acquisitions of Businesses
The acquisition of a business is accounted for using the acquisition method of accounting which requires assets and liabilities to be recognized at their fair values on the acquisition date. The initial fair value of assets acquired and liabilities assumed may be revised based on the final determination of fair value during the measurement period of 12 months from the acquisition date. The Company generally determines the fair value of intangible assets acquired using third-party valuations that are prepared using discounted cash flow models that rely on the Company's estimates. These estimates can require judgement of future revenue growth rates, future margins, applicable royalty rates, customer retention and the applicable weighted-average cost of capital used to discount those estimated cash flows. Sensitivity analyses are performed around certain of these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.
For additional information about the acquisitions of businesses see Note 2, Business Combinations.
Pension and Other Post-retirement Benefit Plans
The measurement of liabilities related to pension plans and other post-retirement benefits plans is based on assumptions related to future events including interest rates, return on plan assets, and mortality assumptions. 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.
Asset returns and interest rates significantly affect the value of assets and liabilities related to 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 forward looking long-term asset returns and the expected investment portfolio mix of plan assets. Life expectancy is another significant assumption that impacts our pension and other post-retirement benefits obligation, which is based on mortality data and improvement scales issued by the Society of Actuaries.
Additional information related to the accounting for pension and other post-retirement benefits is found in Note 11, Employee Benefit Plans.
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 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.
25 AVIENT CORPORATION
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 recognize an income tax benefit from an uncertain tax position only if it is more likely than not that the benefit would be sustained upon examination by taxing authorities, based on the technical merits of the position. The Company evaluates and adjusts the amount of unrecognized income tax benefits based on changes in law, facts and circumstances. We record interest and penalties related to uncertain tax positions as a component of income tax expense. The ultimate resolution of unrecognized income tax benefits is often dependent upon uncontrollable factors such as the timing of finalizing resolutions of audit disputes through reaching settlement agreements, or changes in law.
Additional information related to the accounting for income taxes is found in Note 13, Income Taxes.
Goodwill
Goodwill is evaluated annually for impairment as of October 1 using either a quantitative or qualitative analysis. Goodwill is tested for impairment at the reporting unit level, and is based on the net assets for each reporting unit, including goodwill and intangible assets. The Company’s reporting units are at a level below the Company’s reportable operating segments. Goodwill is assigned to each reporting unit, as this represents the lowest level that constitutes a business and is the level at which management regularly reviews the operating results.
Additionally, goodwill is evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price.
Quantitative analyses are performed by estimating the fair value for each reporting unit using a discounted cash flow model. These analyses include estimates of future cash flows, future growth rates, terminal value amounts, and the applicable weighted-average cost of capital used to discount estimated cash flows. The future cash flows are based on the Company's long-term strategic plan, and a terminal value is used to estimate the reporting unit's cash flows beyond the period covered by the strategic plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. These analyses require the exercise of judgments, including judgments about appropriate discount rates, revenue growth, operating margins, and long-term growth rates.
A qualitative analysis is performed by assessing certain trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data, and other relevant qualitative factors. These trends and factors are compared to, and based on, the assumptions used in the most recent quantitative analysis performed for each reporting unit.
On October 1, 2023, we quantitatively tested goodwill as part of our annual goodwill impairment test. Based on the results of the test, the fair values for all of our reporting units exceeded the carrying values, and therefore there was no goodwill impairment. The APM reporting unit, included in the Specialty Engineered Materials segment, had a fair value that exceeded the carrying value by 7%. The fair value's close proximity to the carrying value was primarily due to the fact that the APM business was acquired approximately one year ago while interest rates have increased since the date of the acquisition which lowers the calculated fair value. Although we believe that the current assumptions and estimates are appropriate, the performance of this business could be impacted by negative or unforeseen changes in market factors and economic conditions, which could impact the valuation in the future. The carrying value of our APM reporting unit included goodwill of $447.2 million as of December 31, 2023.
Indefinite-lived Trade Names
Indefinite-lived trade names are evaluated annually for impairment as of October 1 using either a quantitative or qualitative analysis to determine whether their fair values exceed their respective carrying amounts. Additionally, indefinite-lived trade names are evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the asset is impaired. Events or circumstances that may result in an impairment review include changes in industry and market considerations, cost factors, financial performance, and other relevant entity-specific events that could affect inputs used to determine the respective fair values of the indefinite-lived intangible assets.
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Quantitative analyses are performed by estimating the fair value for each indefinite-lived trade name using a royalty relief methodology. These analyses include estimates of future cash flows that are based on the Company's long-term strategic plan and the applicable weighted-average cost of capital used to discount estimated cash flows. The primary inputs to these estimates require the exercise of judgements, including judgements about appropriate discount rates, revenue growth, royalty rates, and long-term growth rates.
A qualitative analysis is performed by assessing certain trends and factors, including projected market outlook and growth rates, forecasted and actual sales, discount rates, industry data, and other relevant qualitative factors. These trends and factors are compared to, and based on, the assumptions used in the most recent quantitative analysis performed for each indefinite-lived trade name.
On October 1, 2023, we performed a quantitative impairment assessment of our indefinite-lived trade names using the royalty relief methodology. Based on the quantitative impairment assessment of our trade names, the fair value for all of our trade names exceeded their carrying value, and therefore there was no impairment of indefinite-lived trade names. The fair value of the Dyneema trade name, which is part of the APM reporting unit, exceeded the carrying value by 9%. Although we believe that the current assumptions and estimates are appropriate, the value of this trade name could be impacted by negative or unforeseen changes in market factors and economic conditions. The carrying value of the trade name is $281.2 million as of December 31, 2023.
For additional information about goodwill and intangible assets see Note 4, Goodwill and Intangible Assets.
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.
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