NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of 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, we have employees at sales, manufacturing and distribution facilities across North America, South America, Europe, the Middle East, Asia, and Africa. We provide value to our customers through our ability to link our knowledge of polymers and formulation technology with our manufacturing and supply chain to provide value added solutions to designers, assemblers and processors of plastics. When used in these notes to the consolidated financial statements, the terms “we,” “us,” “our,” “Avient” and the “Company” mean Avient Corporation and its consolidated subsidiaries.
Our operations are reported in three reportable segments: Color, Additives and Inks; Specialty Engineered Materials; and Distribution. See Note 15, Segment Information, for more information.
Accounting Standards Adopted
On January 1, 2021, the Company adopted Financial Accounting Standards Board (FASB) Account Standards Update (ASU) 2019-12, Income Taxes (ASC 740) - Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in FASB Accounting Standards Codification (ASC) 740 and also clarifies and amends existing guidance to improve consistent application. The adoption of ASU 2019-12 did not result in any material impact.
Accounting Standards Not Yet Adopted
ASU 2020-04, Reference Rate Reform (ASU 2020-04), provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as LIBOR. The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. These expedients are effective for the period from March 2020 to December 31, 2022. The Company has not adopted any of the expedients or exceptions through December 31, 2021 but will continue to evaluate the impact of adopting this standard on our consolidated financial statements and disclosures.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Avient and its subsidiaries. All majority-owned affiliates over which we have control are consolidated. Transactions with related parties, including joint ventures, are in the ordinary course of business.
Historical information has been retrospectively adjusted to reflect the classification of discontinued operations. Discontinued operations are further discussed in Note 3, Discontinued Operations.
Use of Estimates
Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from these estimates.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with a maturity of less than three months to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value.
Allowance for Doubtful Accounts
We evaluate the collectability of receivables based on a combination of factors, each of which are adjusted if specific circumstances change. We reserve for amounts determined to be uncollectible based on a specific customer’s inability to meet its financial obligation to us. We also record a general reserve based on the age of receivables past due, current conditions and forecasted information, the credit risk of specific customers, economic conditions and historical experience. In estimating the allowance, we take into consideration the existence of credit insurance.
Inventories
Raw materials and finished goods are carried at lower of cost or market using either the weighted average cost or the first-in, first-out (FIFO) method. The inventory reserve totaled $24.5 million and $22.5 million at December 31, 2021 and 2020, respectively.
Long-lived Assets
Property, plant and equipment is carried at cost, net of depreciation and amortization that is computed using the straight-line method over the estimated useful lives of the assets, which generally ranges from three to 15 years for machinery and equipment and up to 40 years for buildings. We depreciate certain assets associated with closing manufacturing locations over a shortened life (through the cease-use date). Software is amortized over periods not exceeding 10 years. Property, plant and equipment is generally depreciated on accelerated methods for income tax purposes. We expense repair and maintenance costs as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset.
We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of income from continuing operations in the accompanying Consolidated Statements of Income.
We account for operating and finance leases under the provisions of FASB ASC Topic 842.
Finite-lived intangible assets, which consist primarily of customer relationships, patents and technology are amortized over their estimated useful lives. The useful lives range up to 20 years.
We assess the recoverability of long-lived assets when events or changes in circumstances indicate that we may not be able to recover the assets’ carrying amount. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset to the expected future undiscounted cash flows associated with the asset. We measure the amount of impairment of long-lived assets as the amount by which the carrying value of the asset exceeds the fair value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. No such impairments were recognized during 2021, 2020 or 2019.
Goodwill and Indefinite Lived Intangible Assets
In accordance with the provisions of FASB ASC Topic 350, Intangibles — Goodwill and Other, we assess the fair value of goodwill on an annual basis or at an interim date if potential impairment indicators are present. Goodwill is the excess of the purchase price paid over the fair value of the net assets of the acquired business. Goodwill is tested for impairment, quantitatively or qualitatively, at the reporting unit level. Our reporting units have been identified 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.
Our annual measurement date for testing impairment of goodwill and indefinite-lived intangibles is October 1. We completed our testing of impairment as of October 1, noting no impairment in 2021, 2020 or 2019. There are no reporting units identified as at-risk of impairment. The future occurrence of a potential indicator of impairment would require an interim assessment for some or all of the reporting units prior to the next required annual assessment on October 1, 2022.
We test our goodwill either quantitatively or qualitatively for impairment. For our quantitative approach, we use an income approach to estimate the fair value of our reporting units. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that is determined based on current market conditions. The projection uses management’s best estimates of economic and market conditions over the projected period including growth rates in sales, costs, and estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures and changes in future working capital requirements. We validate our estimates of fair value under the income approach by considering the implied control premium and conclude whether the implied control premium is reasonable based on other recent market transactions.
A qualitative approach for both goodwill and indefinite-lived intangible assets is performed if the last quantitative test exceeded certain thresholds. During our qualitative approach, we assess whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we determine it is more likely than not that the fair value is less than carrying value, a quantitative impairment test is performed for each asset, as described above.
Indefinite-lived intangible assets primarily consist of the GLS, ColorMatrix, Gordon Composites, and Fiber-Line trade names. Indefinite-lived intangible assets are tested, quantitatively or qualitatively, for impairment annually at the same time we test goodwill for impairment. For our quantitative approach, the implied fair value of indefinite-lived intangible assets is determined based on significant unobservable inputs, as summarized below. The fair value of the trade names is calculated using a “relief from royalty” methodology. This approach involves two steps: (1) estimating reasonable royalty rates 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 using a weighted-average cost of capital that is determined based on current market conditions. This fair value is then compared with the carrying value of the trade name.
Litigation Reserves
FASB ASC Topic 450, Contingencies, requires that we accrue for loss contingencies associated with outstanding litigation, claims and assessments for which management has determined it is probable that a loss contingency exists and the amount of loss can be reasonably estimated. We recognize expense associated with professional fees related to litigation claims and assessments as incurred. Refer to Note 12, Commitments and Contingencies, for further information.
Derivative Financial Instruments
FASB ASC Topic 815, Derivative and Hedging, requires that all derivative financial instruments, such as foreign exchange contracts, be recognized in the financial statements and measured at fair value, regardless of the purpose or intent in holding them.
We are exposed to foreign currency changes and to changes in cash flows due to changes in our contractually specified interest rates (e.g., LIBOR) in the normal course of business. We have established policies and procedures that manage this exposure through the use of financial instruments. By policy, we do not enter into these instruments for trading purposes or speculation. We formally assess, designate and document, as a hedge of an underlying exposure, the qualifying derivative instrument that will be accounted for as an accounting hedge at inception. Additionally, in accordance with ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, we assess at inception whether the financial instruments used in the hedging transaction are highly effective at offsetting changes in either the fair values or cash flows of the underlying exposures. If highly effective, any subsequent test may be done qualitatively.
The net interest payments accrued each month for effective instruments designated as a hedge are reflected in net income as adjustments of interest expense and the remaining change in the fair value of the derivatives is recorded as a component of Accumulated Other Comprehensive Income (Loss) (AOCI). Instruments not designated as hedges are adjusted to fair value at each period end, with the resulting gains and losses recognized in the accompanying Consolidated Statements of Income immediately.
Refer to Note 16, Derivatives and Hedging, for more information.
Pension and Other Post-retirement Plans
We account for our pensions and other post-retirement benefits in accordance with FASB 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. Refer to Note 11, Employee Benefit Plans, for more information.
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) in 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | Cumulative Translation Adjustment and Related Hedging Instruments | | Pension and other post-retirement benefits | | Cash Flow Hedges | | | | Total |
| Balance at January 1, 2019 | | $ | (86.2) | | | $ | 5.2 | | | $ | (1.3) | | | | | $ | (82.3) | |
| Translation Adjustments | | (6.9) | | | — | | | — | | | | | (6.9) | |
| Unrealized losses | | 9.1 | | | — | | | (2.5) | | | | | 6.6 | |
| | | | | | | | | | |
| Balance at December 31, 2019 | | (84.0) | | | 5.2 | | | (3.8) | | | | | (82.6) | |
| Translation Adjustments | | 152.3 | | | — | | | — | | | | | 152.3 | |
| Unrealized losses | | (41.7) | | | — | | | (1.6) | | | | | (43.3) | |
| | | | | | | | | | |
| Balance at December 31, 2020 | | 26.6 | | | 5.2 | | | (5.4) | | | | | 26.4 | |
| Translation Adjustments | | (127.7) | | | — | | | — | | | | | (127.7) | |
| Unrealized gains | | 52.5 | | | — | | | 3.2 | | | | | 55.7 | |
| | | | | | | | | | |
| Balance at December 31, 2021 | | $ | (48.6) | | | $ | 5.2 | | | $ | (2.2) | | | | | $ | (45.6) | |
| | | | | | | | | | |
Fair Value of Financial Instruments
FASB ASC Topic 820, Fair Value Measurements and Disclosures, requires disclosures of the fair value of financial instruments. The estimated fair values of financial instruments were principally based on market prices where such prices were available and, where unavailable, fair values were estimated based on market prices of similar instruments.
Foreign Currency Translation
Revenues and expenses are translated at average currency exchange rates during the related period. Assets and liabilities of foreign subsidiaries are translated using the exchange rate at the end of the period. The resulting translation adjustments are recorded as accumulated other comprehensive income or loss. Gains and losses resulting from foreign currency transactions, including intercompany transactions that are not considered long-term investments, are included in Other income (expense), net.
Revenue Recognition
We recognize revenue once control of the product is transferred to the customer, which typically occurs when products are shipped from our facilities.
Shipping and Handling Costs
Shipping and handling costs are included in cost of sales.
Research and Development Expense
Research and development costs of $83.2 million in 2021, $59.8 million in 2020 and $50.6 million in 2019 are charged to expense as incurred.
Environmental Costs
We expense costs that are associated with managing hazardous substances and pollution in ongoing operations on a current basis. Costs associated with environmental contamination are accrued when it becomes probable that a liability has been incurred and our proportionate share of the cost can be reasonably estimated. 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 may be able to recover 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.
Share-Based Compensation
We account for share-based compensation under the provisions of FASB ASC Topic 718, Compensation - Stock Compensation, which requires us to estimate the fair value of share-based awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service
periods in the accompanying Consolidated Statements of Income. As of December 31, 2021, we had one active share-based employee compensation plan, which is described more fully in Note 14, Share-Based Compensation.
Income Taxes
Deferred income tax liabilities and assets are determined based upon the differences between the financial reporting and tax basis of assets and liabilities and are measured using the tax rate and laws currently in effect. In accordance with FASB ASC Topic 740, Income Taxes, we evaluate our deferred income taxes to determine whether a valuation allowance should be established against the deferred tax assets or whether the valuation allowance should be reduced based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. See Note 13, Income Taxes, for additional detail.
Note 2 — BUSINESS COMBINATIONS
On July 1, 2020, we completed our acquisition of the equity interests in the global color business of Clariant AG, a corporation organized and existing under the law of Switzerland (Clariant), and certain assets of Clariant Chemicals (India) Limited, a public limited company incorporated in India and an indirect majority owned subsidiary of Clariant (Clariant India). The business and assets are collectively referred to as Clariant Color and the acquisitions are collectively referred to as the Clariant Color Acquisition.
Total consideration paid by the Company to complete the Clariant Color Acquisition was $1.4 billion, net of cash and debt. To finance the purchase of Clariant Color, 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 our Performance Products and Solutions business segment (PP&S). For additional details related to the sale of PP&S and the senior unsecured notes offering, refer to Note 3, Discontinued Operations and Note 6, Financing Arrangements, respectively.
The Clariant Color Acquisition is being accounted for under the acquisition method of accounting in accordance with ASC Topic 805. As of June 30, 2021, the purchase accounting for the Clariant Color Acquisition was finalized.
The summarized purchase price allocation is as follows: | | | | | | | | | | | | | | | | | |
| (In millions) | Preliminary Allocation As of December 31, 2020 | | Measurement Period Adjustments | | Final Allocation |
| Cash and cash equivalents | $ | 145.1 | | | $ | — | | | $ | 145.1 | |
| Accounts receivable | 170.8 | | | — | | | 170.8 | |
| Inventories | 99.0 | | | 0.2 | | | 99.2 | |
| Other current assets | 56.9 | | | 6.3 | | | 63.2 | |
| Property | 267.6 | | | (7.5) | | | 260.1 | |
| Goodwill | 569.0 | | | (7.8) | | | 561.2 | |
| Intangible assets: | | | — | | | |
| Customer relationships | 221.9 | | | (20.7) | | | 201.2 | |
| Trade names and trademarks | 32.0 | | | 2.8 | | | 34.8 | |
| Patents, technology and other | 273.9 | | | 7.4 | | | 281.3 | |
| Operating lease assets | 30.1 | | | — | | | 30.1 | |
| Other long-term assets | 1.3 | | | 5.8 | | | 7.1 | |
| Short term debt | (0.4) | | | — | | | (0.4) | |
| Accounts payable | (92.7) | | | 1.2 | | | (91.5) | |
| Current operating lease obligations | (2.8) | | | — | | | (2.8) | |
| Accrued expenses and other current liabilities | (81.2) | | | (4.5) | | | (85.7) | |
| Long-term debt | (6.7) | | | — | | | (6.7) | |
| Non-current operating lease obligations | (25.8) | | | — | | | (25.8) | |
| Deferred tax liabilities | (60.7) | | | 25.9 | | | (34.8) | |
| Pension and other post-retirement benefits | (53.8) | | | — | | | (53.8) | |
| Other long-term liabilities | (5.4) | | | (6.7) | | | (12.1) | |
| Non-controlling interests | (12.8) | | | (2.4) | | | (15.2) | |
| Total purchase price consideration | $ | 1,525.3 | | | $ | — | | | $ | 1,525.3 | |
The intangible assets that have been acquired are being amortized over a period of 18 to 20 years.
Goodwill of $561.2 million was recorded and allocated to the Color, Additives and Inks segment. The goodwill recognized is primarily attributable to the expected synergies to be achieved from the business combination. A portion of the goodwill is deductible for tax purposes.
Had the Clariant Color Acquisition occurred on January 1, 2019, which was the beginning of the fiscal year prior to the acquisition, sales and income from continuing operations before income taxes for the years ended December 31, 2020 and 2019 on a pro forma basis would have been as follows:
| | | | | | | | | | | |
| (Unaudited) |
| |
| (In millions) | 2020 | | 2019 |
| Sales | $ | 3,782.5 | | | $ | 3,981.3 | |
Income from continuing operations before income taxes | 204.2 | | | 98.9 | |
The unaudited pro forma financial information has been calculated after applying our accounting policies and adjusting the historical results with pro forma adjustments that assume the Clariant Color Acquisition occurred on January 1, 2019. These unaudited pro forma results do not represent financial results realized, nor are they intended to be a projection of future results. In preparation of the pro forma financial information, we eliminated certain historical allocations made by Clariant as they do not represent the stand alone operations of Clariant Color and replaced them with costs more likely to occur as a part of Avient. This elimination removed expense of $6.6 million and $12.7 million during 2020 and 2019, respectively. The amortization of inventory step-up from the preliminary purchase price allocation was $9.7 million, and is reflected in Cost of sales. Additionally, we incurred $10.1 million of costs related to committed financing which are reflected in Interest expense, net. The amounts
associated with the amortization of inventory step-up and costs related to committed financing were removed from 2020, and presented in the pro forma financial information.
Costs incurred in connection with the Clariant Color Acquisition were $19.2 million in 2020. These fees were charged to Selling and Administrative expense.
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. The preliminary purchase price allocation resulted in intangible assets of $27.5 million and goodwill of $22.0 million, partially offset by net liabilities assumed. Goodwill is not deductible for tax purposes. The intangible assets that have been acquired are being amortized over a period of 10 to 20 years.
Our acquisitions of PlastiComp, Inc. (PlastiComp) on May 31, 2018 and Fiber-Line, LLC (Fiber-Line) on January 2, 2019 involved contingent earnout consideration. The PlastiComp earnout had a ceiling of $35.0 million that was reached during the first quarter of 2020 and paid in the third quarter of 2020. The Fiber-Line earnout was based on two annual earnout periods, with the second earnout period target based on year-one results. A payment of $53.9 million associated with the first Fiber-Line earnout period was made in the first quarter of 2020. There was no payment made for the second Fiber-Line earnout period, which ended on December 31, 2020.
Note 3 — DISCONTINUED OPERATIONS
On October 25, 2019, we divested the PP&S segment for $782.1 million cash. The sale resulted in the recognition of an after-tax gain of $457.7 million, which is reflected within Income (loss) from discontinued operations, net of income taxes.
The Company has continuing involvement with the former PP&S business following the close of the transaction. The Company entered into a four-year distribution agreement with the former PP&S business to be the exclusive distributor for certain products, under terms that were similar prior to the disposal transaction. The Company and the former PP&S business have also entered into contract manufacturing and supply agreements for certain products for a two-year period. For the twelve months ended December 31, 2021 and 2020, our net cash outflow related to the agreements was approximately $114.1 million and $65.0 million, respectively.
The following table summarizes the discontinued operations associated with PP&S for the years ended December 31, 2020 and 2019.
| | | | | | | | | | | |
| (In millions) | 2020 | | 2019 |
| Sales | $ | — | | | $ | 488.9 | |
| Cost of sales | — | | | (390.1) | |
| Selling and administrative expense | (0.9) | | | (28.0) | |
| Gain on sale | — | | | 591.2 | |
| Pretax (loss) income of discontinued operations | (0.9) | | | 662.0 | |
| Income tax expense | 0.5 | | | (148.9) | |
| (Loss) income from discontinued operations, net of taxes | $ | (0.4) | | | $ | 513.1 | |
The following table presents the depreciation, amortization, and capital expenditures of our discontinued operations for the twelve months ended December 31, 2020 and 2019. There were no other significant operating or investing non-cash items for the twelve months ended December 31, 2020 and 2019.
| | | | | | | | | | | |
| |
| (In millions) | 2020 | | 2019 |
| Depreciation and amortization | $ | — | | | $ | 9.4 | |
| Capital Expenditures | — | | | 14.1 | |
Note 4 — GOODWILL AND INTANGIBLE ASSETS
Goodwill as of December 31, 2021 and 2020 and changes in the carrying amount of goodwill by segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Specialty Engineered Materials | | Color, Additives and Inks | | Distribution | | Total |
| Balance at January 1, 2020 | $ | 236.3 | | | $ | 447.8 | | | $ | 1.6 | | | $ | 685.7 | |
| Acquisition of businesses | — | | | 569.0 | | | — | | | 569.0 | |
| Currency translation | 1.5 | | | 51.9 | | | — | | | 53.4 | |
| Balance at December 31, 2020 | 237.8 | | | 1,068.7 | | | 1.6 | | | 1,308.1 | |
| Acquisition of businesses | — | | | 14.1 | | | — | | | 14.1 | |
| Currency translation | (1.5) | | | (34.3) | | | — | | | (35.8) | |
| Balance at December 31, 2021 | $ | 236.3 | | | $ | 1,048.5 | | | $ | 1.6 | | | $ | 1,286.4 | |
Indefinite and finite-lived intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2021 |
| (In millions) | | Acquisition Cost | | Accumulated Amortization | | Currency Translation | | Net |
| Customer relationships | | $ | 507.2 | | | $ | (135.4) | | | $ | 6.0 | | | $ | 377.8 | |
| Patents, technology and other | | 566.7 | | | (134.3) | | | 1.8 | | | 434.2 | |
| Indefinite-lived trade names | | 113.2 | | | — | | | — | | | 113.2 | |
| Total | | $ | 1,187.1 | | | $ | (269.7) | | | $ | 7.8 | | | $ | 925.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2020 |
| (In millions) | | Acquisition Cost | | Accumulated Amortization | | Currency Translation | | Net |
| Customer relationships | | $ | 508.7 | | | $ | (109.8) | | | $ | 23.8 | | | $ | 422.7 | |
| Patents, technology and other | | 549.9 | | | (102.4) | | | 28.8 | | | 476.3 | |
| Indefinite-lived trade names | | 109.5 | | | — | | | — | | | 109.5 | |
| Total | | $ | 1,168.1 | | | $ | (212.2) | | | $ | 52.6 | | | $ | 1,008.5 | |
Amortization of finite-lived intangible assets included in continuing operations for the years ended December 31, 2021, 2020 and 2019 was $57.5 million, $43.5 million and $29.5 million, respectively.
We expect finite-lived intangibles amortization expense for the next five years as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | 2022 | | 2023 | | 2024 | | 2025 | | 2026 |
| Expected Amortization Expense | $ | 55.5 | | | $ | 53.1 | | | $ | 52.6 | | | $ | 52.6 | | | $ | 51.9 | |
Note 5 — EMPLOYEE SEPARATION AND RESTRUCTURING COSTS
As part of our integration efforts associated with the Clariant Color Acquisition, we are engaged in a restructuring plan. The restructuring plan is expected to enable us to better serve customers, improve efficiency and deliver anticipated synergy-related cost savings. We expect to incur costs for exit and disposal activities under generally accepted accounting principles when actions associated with the restructuring plan are approved and announced. The costs recorded in Cost of sales during 2021 and 2020 included $3.2 million and $0.4 million, respectively, related to fixed asset disposals and $7.0 million and $0.2 million, respectively, related to severance. Additionally, in 2021 there were other costs recorded in Cost of sales of $1.0 million. The costs recorded in Selling and administrative expense during 2021 and 2020 include $0.1 million and $6.4 million of severance, respectively, and $0.4 million and $0.2 million of other costs, respectively. We expect that the full restructuring plan will be implemented through 2023 and anticipate that we will incur approximately $75 million of charges in connection with the restructuring plan.
Total restructuring costs included in the Consolidated Statement of Income for the twelve months ended December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | |
| (in millions) | 2021 | | 2020 |
| Cost of goods sold | $ | 14.5 | | | $ | 4.2 | |
| Selling and administrative expenses | 0.2 | | | 15.4 | |
| Total employee separation and restructuring charges | $ | 14.7 | | | $ | 19.6 | |
Note 6 — FINANCING ARRANGEMENTS
For each of the periods presented, total debt consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 (in millions) | Principal Amount | | Unamortized discount and debt issuance cost | | Net Debt | | Weighted average interest rate |
| Senior secured revolving credit facility due 2026 | $ | — | | | $ | — | | | $ | — | | | — | % |
5.25% senior notes due 2023 | 600.0 | | | 1.4 | | | 598.6 | | | 5.25 | % |
5.75% senior notes due 2025 | 650.0 | | | 6.8 | | | 643.2 | | | 5.75 | % |
| Senior secured term loan due 2026 | 611.5 | | | 6.2 | | | 605.3 | | | 1.85 | % |
| Other Debt | 11.8 | | | — | | | 11.8 | | | |
| Total Debt | 1,873.3 | | | 14.4 | | | 1,858.9 | | | |
| Less short-term and current portion of long-term debt | 8.6 | | | — | | | 8.6 | | | |
| Total long-term debt, net of current portion | $ | 1,864.70 | | | $ | 14.40 | | | $ | 1,850.30 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 (in millions) | Principal Amount | | Unamortized discount and debt issuance cost | | Net Debt | | Weighted average interest rate |
| Senior secured revolving credit facility due 2026 | $ | — | | | $ | — | | | $ | — | | | — | % |
5.25% senior notes due 2023 | 600.0 | | | 2.5 | | | 597.5 | | | 5.25 | % |
5.75% senior notes due 2025 | 650.0 | | | 8.8 | | | 641.2 | | | 5.75 | % |
| Senior secured term loan due 2026 | 618.0 | | | 8.0 | | | 610.0 | | | 2.36 | % |
| Other Debt | 23.9 | | | — | | | 23.9 | | | |
| Total Debt | 1,891.9 | | | 19.3 | | | 1,872.6 | | | |
| Less short-term and current portion of long-term debt | 18.6 | | | — | | | 18.6 | | | |
| Total long-term debt, net of current portion | $ | 1,873.3 | | | $ | 19.3 | | | $ | 1,854.0 | | | |
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 (the ABL Credit Agreement), 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. On June 28, 2019, the Company amended and restated its senior secured revolving credit facility to, among other things, add a European line of credit, up to the euro equivalent of $50.0 million, subject to a borrowing base with advances against certain European accounts receivable. Advances under the U.S. portion of our Revolving Credit Facility bear interest, at the Company’s option, at a Base Rate or a LIBOR Rate plus an applicable margin. The Base Rate is a fluctuating rate equal to the greater of (i) the Federal Funds Rate plus one-half percent, (ii) the prevailing LIBOR Rate plus one percent, and (iii) the prevailing Prime Rate. The applicable margins vary based on the Company’s daily average excess availability during the previous quarter. 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.
On February 28, 2013, the Company entered into an indenture with Wells Fargo Bank National Association, as trustee, relating to the issuance by the Company of $600.0 million aggregate principal amount of senior notes due 2023. The Senior notes bear an interest rate of 5.25% per year, payable semi-annually, in arrears, on March 15 and September 15 of each year, which commenced on September 15, 2013.
On May 13, 2020, the Company entered into an indenture (the Indenture) with U.S. Bank National Association, as trustee (the Trustee), relating to the issuance by the Company of $650 million aggregate principal amount of 5.75% Senior Notes due 2025 (the Notes). The Notes were sold on May 13, 2020 in a private transaction exempt from the registration requirements of the Securities Act of 1933 (the Securities Act), have not been and will not be registered under the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act. The Company received net proceeds of $640.5 million from the Notes offering, net of debt issuance costs, which were recorded on the balance sheet and are being amortized into Interest expense, net over the term of the debt. Also included in Interest expense, net for the year ended December 31, 2020, are costs associated with committed financing of $10.1 million related to the Clariant Color Acquisition.
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 that, among other things, limit our ability to: sell or otherwise transfer assets, including in a spin-off, incur additional debt or liens, consolidate or merge with any entity or transfer or sell all or substantially all of our assets, pay dividends or make certain other restricted payments, make investments, enter into transactions with affiliates, create dividend or other payment restrictions with respect to subsidiaries, make capital investments and alter the business we conduct. As of December 31, 2021, we were in compliance with all covenants.
As of December 31, 2020, the Company maintained a credit line of $12.0 million with Saudi Hollandi Bank. The credit line had an interest rate equal to the Saudi Arabia Interbank Offered Rate plus a fixed rate of 0.85% and is subject to annual renewal. Borrowings under the credit line were primarily used to fund capital expenditures related to the manufacturing facility in Jeddah, Saudi Arabia. As of December 31, 2020, letters of credit under the credit line were immaterial and borrowings were $10.3 million with a weighted average annual interest rate of 1.85%. As of December 31, 2020, there was remaining availability on the credit line of $1.7 million. This credit line was closed in 2021.
The estimated fair value of Avient’s debt instruments at December 31, 2021 and 2020 was $1,917.7 million and $1,955.9 million, respectively, compared to carrying values of $1,858.9 million and $1,872.6 million as of December 31, 2021 and 2020, respectively. The fair value of Avient’s debt instruments was estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities and represent Level 2 measurements within the fair value hierarchy.
Aggregate maturities of the principal amount of debt for the next five years and thereafter are as follows:
| | | | | | | | |
| (In millions) | | |
| 2022 | | $ | 8.6 | |
| 2023 | | 608.6 | |
| 2024 | | 8.6 | |
| 2025 | | 658.7 | |
| 2026 | | 6.9 | |
| Thereafter | | 581.9 | |
| Aggregate maturities | | $ | 1,873.3 | |
Included in Interest expense, net for the years ended December 31, 2021, 2020 and 2019 was interest income of $17.5 million, $19.9 million, and $11.0 million, respectively. Total interest paid on debt, net of the impact of hedging (see Note 16, Derivatives and Hedging), was $72.6 million in 2021, $61.1 million in 2020 and $67.0 million in 2019.
Note 7 — LEASING ARRANGEMENTS
We lease certain manufacturing facilities, warehouse space, machinery and equipment, vehicles and information technology equipment under operating leases. The majority of our leases are operating leases. Finance leases are immaterial to our condensed consolidated financial statements. Operating lease assets and obligations are reflected within Operating lease assets, net, Current operating lease obligations, and Non-current operating lease obligations, respectively.
Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. The components of lease cost from continued operations recognized within our Condensed Consolidated Statements of Income for the twelve months ended December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | |
| | |
| (In millions) | | 2021 | | 2020 |
| | | | |
| Cost of sales | | $ | 22.3 | | | $ | 20.0 | |
| Selling and administrative expense | | 12.1 | | 13.3 | |
| Total Operating lease cost | | $ | 34.4 | | | $ | 33.3 | |
We often have options to renew lease terms for buildings and other assets. The exercise of lease renewal options are generally at our sole discretion. In addition, certain lease arrangements may be terminated prior to their original expiration date at our discretion. We evaluate renewal and termination options at the lease commencement date to determine if we are reasonably certain to exercise the option on the basis of economic factors. The weighted average remaining lease term for our operating leases as of December 31, 2021 and 2020 was 4.7 years and 5.4 years, respectively. The non-cash net increase in operating lease liabilities was $18.3 million and $10.5 million for the years ended December 31, 2021 and 2020, respectively.
The discount rate implicit within our leases is generally not determinable and, therefore, the Company determines the discount rate based on its incremental borrowing rate. The incremental borrowing rate for our leases is determined based on lease term and currency in which lease payments are made, adjusted for impacts of collateral. The weighted average discount rate used to measure our operating lease liabilities as of December 31, 2021 and 2020 were 3.7% and 3.9%, respectively.
Future minimum lease payments under non-cancelable operating leases with initial lease terms longer than one year as of December 31, 2021 and 2020 are as follows:
Maturity Analysis of Lease Liabilities:
| | | | | | | | | | |
| | | | |
| (in millions) | | 2021 | | |
| 2022 | | $ | 26.3 | | | |
| 2023 | | 19.8 | | | |
| 2024 | | 12.6 | | | |
| 2025 | | 7.7 | | | |
| 2026 | | 4.6 | | | |
| Thereafter | | 10.3 | | | |
| Total | | $ | 81.3 | | | |
| Less amount of lease payment representing interest | | (7.0) | | | |
| Total present value of lease payments | | $ | 74.3 | | | |
| | | | | | | | | | |
| | | | |
| (in millions) | | 2020 | | |
| 2021 | | $ | 28.0 | | | |
| 2022 | | 21.4 | | | |
| 2023 | | 15.0 | | | |
| 2024 | | 8.7 | | | |
| 2025 | | 4.7 | | | |
| Thereafter | | 13.3 | | | |
| Total | | $ | 91.1 | | | |
| Less amount of lease payment representing interest | | (10.0) | | | |
| Total present value of lease payments | | $ | 81.1 | | | |
Note 8 — INVENTORIES, NET
Components of Inventories, net as of December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | |
| | |
| (In millions) | | 2021 | | 2020 |
| Finished products | | $ | 244.4 | | | $ | 171.7 | |
| Work in process | | 21.2 | | | 16.6 | |
| Raw materials and supplies | | 195.5 | | | 139.2 | |
| Inventories, net | | $ | 461.1 | | | $ | 327.5 | |
Note 9 — PROPERTY, NET
Components of Property, net as of December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | |
| | |
| (In millions) | | 2021 | | 2020 |
Land and land improvements | | $ | 91.5 | | | $ | 95.7 | |
Buildings | | 350.6 | | | 333.5 | |
| Machinery and equipment | | 972.3 | | | 948.2 | |
| Property, gross | | 1,414.4 | | | 1,377.4 | |
| Less accumulated depreciation | | (738.3) | | | (682.5) | |
| Property, net | | $ | 676.1 | | | $ | 694.9 | |
Depreciation expense from continuing operations was $84.9 million in 2021, $68.2 million in 2020 and $48.6 million in 2019.
Note 10 — OTHER BALANCE SHEET LIABILITIES
Other liabilities at December 31, 2021 and 2020 consist of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Accrued expenses and
other current liabilities | | Other non-current liabilities |
| | | | |
| (in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
| Employment costs | | $ | 187.9 | | | $ | 142.7 | | | $ | 7.6 | | | $ | 6.1 | |
| | | | | | | | |
| | | | | | | | |
| Environmental liabilities | | 25.8 | | | 20.3 | | | 98.7 | | | 99.4 | |
| Accrued taxes | | 56.8 | | | 49.0 | | | — | | — |
| Pension and other post-employment benefits | | 6.9 | | | 6.7 | | | — | | — |
| Accrued interest | | 14.1 | | | 14.1 | | | — | | — |
| Dividends payable | | 21.7 | | | 19.4 | | | — | | — |
| Unrecognized tax benefits | | 0.7 | | | 3.2 | | | 20.0 | | | 7.3 | |
| Derivatives | | 3.1 | | | — | | | — | | | 48.4 | |
| Other | | 36.9 | | | 30.2 | | | 38.8 | | | 31.6 | |
| Total | | $ | 353.9 | | | $ | 285.6 | | | $ | 165.1 | | | $ | 192.8 | |
Note 11 — EMPLOYEE BENEFIT PLANS
All U.S. qualified defined benefit pension plans are frozen, no longer accrue benefits and are closed to new participants. We have foreign pension plans that accrue benefits. The plans generally provide benefit payments using a formula that is based upon employee compensation and length of service.
The following tables present the change in benefit obligation, change in plan assets and components of funded status for defined benefit pension and post-retirement health care benefit plans.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Health Care Benefits |
| (in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
| Change in benefit obligation: | | | | | | | | |
| Projected benefit obligation - beginning of year | | $ | 602.0 | | | $ | 478.0 | | | $ | 18.3 | | | $ | 7.1 | |
| Service cost | | 4.7 | | | 3.0 | | | 0.1 | | | 0.1 | |
| Interest cost | | 14.2 | | | 15.3 | | | 0.5 | | | 0.4 | |
| Actuarial (loss) gain | | (12.1) | | | 24.5 | | | (1.6) | | | — | |
| Benefits paid | | (53.9) | | | (40.9) | | | (1.2) | | | (0.7) | |
| Effect of settlement and/or curtailment | | (1.5) | | | (23.0) | | | (0.3) | | | — | |
| Acquired benefit obligation | | — | | | 137.3 | | | — | | | 11.3 | |
| Other | | (4.1) | | | 7.8 | | | — | | | 0.1 | |
| Projected benefit obligation - end of year | | 549.3 | | | 602.0 | | | 15.8 | | | 18.3 | |
| Projected salary increases | | (7.7) | | | (8.8) | | | — | | | — | |
| Accumulated benefit obligation | | $ | 541.6 | | | $ | 593.2 | | | $ | 15.8 | | | $ | 18.3 | |
| Change in plan assets: | | | | | | | | |
| Plan assets - beginning of year | | $ | 573.6 | | | $ | 469.1 | | | $ | — | | | $ | — | |
| Actual return on plan assets | | 2.9 | | | 60.5 | | | — | | | — | |
| Company contributions | | 8.6 | | | 5.4 | | | 1.2 | | | 0.7 | |
| Benefits paid | | (53.9) | | | (40.9) | | | (1.2) | | | (0.7) | |
| Effect of settlement and curtailment | | (0.9) | | | (16.5) | | | — | | | — | |
| Acquired plan assets | | — | | | 92.4 | | | — | | | — | |
| Other | | (1.0) | | | 3.6 | | | — | | | — | |
| Plan assets - end of year | | $ | 529.3 | | | $ | 573.6 | | | $ | — | | | $ | — | |
| Unfunded status at end of year | | $ | (20.0) | | | $ | (28.4) | | | $ | (15.8) | | | $ | (18.3) | |
Amounts included in the accompanying Consolidated Balance Sheets as of December 31 are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Health Care Benefits |
| (in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
| Non-current assets | | $ | 71.1 | | | $ | 75.0 | | | $ | — | | | $ | — | |
| Accrued expenses and other liabilities | | 5.7 | | | 5.4 | | | 1.2 | | | 1.3 | |
| Pension and other post-retirement benefits | | 85.4 | | | 98.0 | | | 14.6 | | | 17.0 | |
As of December 31, 2021 and 2020, we had plans with total projected and accumulated benefit obligations in excess of the related plan assets as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Health Care Benefits |
| (in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
| Projected benefit obligation | | $ | 116.6 | | | $ | 149.5 | | | $ | 15.8 | | | $ | 18.3 | |
| Fair value of plan assets | | 26.5 | | | 46.7 | | | — | | | — | |
| | | | | | | | |
| Accumulated benefit obligation | | 108.3 | | | 122.8 | | | 15.8 | | | 18.3 | |
| Fair value of plan assets | | 25.4 | | | 28.2 | | | — | | | — | |
Weighted-average assumptions used to determine benefit obligations at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Health Care Benefits |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Discount rate | | 2.69 | % | | 2.47 | % | | 2.85 | % | | 2.66 | % |
| Assumed health care cost trend rates at December 31: | | | | | | | | |
| Health care cost trend rate assumed for next year | | N/A | | N/A | | 6.44 | % | | 5.99 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | N/A | | N/A | | 4.08 | % | | 4.04 | % |
| Year that the rate reaches the ultimate trend rate | | N/A | | N/A | | 2065 | | 2065 |
The following table summarizes the components of net periodic benefit cost or gain that was recognized during each of the years in the three-year period ended December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Health Care Benefits |
| (in millions) | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Components of net periodic benefit costs (gains): | | | | | | | | | | | | |
| Service Cost | | $ | 4.7 | | | $ | 3.0 | | | $ | 0.5 | | | $ | 0.1 | | | $ | 0.1 | | | $ | — | |
| Interest Cost | | 14.2 | | | 15.3 | | | 18.2 | | | 0.5 | | | 0.4 | | | 0.2 | |
| Expected return on plan assets | | (26.9) | | | (25.3) | | | (23.7) | | | — | | | — | | | — | |
| Mark-to-market actuarial net losses (gains) | | 11.9 | | | (10.8) | | | (9.7) | | | (1.7) | | | — | | | 0.1 | |
| Curtailment | | (0.6) | | | (6.4) | | | — | | | (0.2) | | | — | | | — | |
| Net periodic cost (benefit) | | $ | 3.3 | | | $ | (24.2) | | | $ | (14.7) | | | $ | (1.3) | | | $ | 0.5 | | | $ | 0.3 | |
In 2021, we recognized a $9.4 million mark-to-market 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%.
In 2020, we recognized a $17.2 million mark-to-market gain that was primarily the result of actual asset returns that were higher than our assumed returns and mortality assumptions. Included in the mark-to-market gain was a $6.4 million gain related to lump sum payments that were offered to certain eligible participants of our US Qualified Pension Plan in the second quarter of 2020 which resulted in a settlement of $1.1 million, and a curtailment gain of $5.3 million related to certain acquired pension plans during the fourth quarter of 2020. Partially offsetting the mark-to-market gain was the decrease in our year end discount rate from 3.19% to 2.47%.
In 2019, we recognized a $9.6 million mark-to-market gain that was primarily a result of actual asset returns that were higher than our assumed returns and mortality assumptions. Partially offsetting the higher asset returns was the decrease in our year end discount rate from 4.11% to 3.19%.
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Health Care Benefits |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Discount rate* | | 2.47 | % | | 3.19 | % | | 4.11 | % | | 2.66 | % | | 3.06 | % | | 3.98 | % |
| Expected long-term return on plan assets* | | 4.86 | % | | 5.05 | % | | 5.68 | % | | — | | | — | | | — | |
| Assumed health care cost trend rates at December 31: | | | | | | | | | | | | |
| Assumed health care cost trend rates at January 1: | | N/A | | N/A | | N/A | | 6.24 | % | | 6.16 | % | | 6.09 | % |
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | | N/A | | N/A | | N/A | | 4.04 | % | | 4.14 | % | | 4.50 | % |
| Year that the rate reaches the ultimate trend rate | | N/A | | N/A | | N/A | | 2066 | | 2054 | | 2027 |
*The mark-to-market component of net periodic costs is determined based on discount rates as of year-end and actual asset returns during the year.
The expected long-term rate of return on pension assets was determined after considering the historical and forward looking long-term asset returns by asset category and the expected investment portfolio mix.
Our pension investment strategy is to diversify the portfolio among asset categories to enhance the portfolio’s risk-adjusted return as well as insulate it from exposure to changes in interest rates. Our asset mix considers the duration of plan liabilities, historical and expected returns of the investments, and the funded status of the plan. The pension asset allocation is reviewed and actively managed based on the funded status of the plan. Based on the current funded status of the plan, our pension asset investment allocation guidelines are to invest 83% in fixed income securities and 17% in equity securities. The plan keeps a minimal amount of cash available to fund benefit payments. These investments may include funds of multiple asset investment strategies and funds of hedge funds.
The fair values of pension plan assets at December 31, 2021 and 2020, by asset category, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value of Plan Assets at December 31, 2021 |
| (In millions) | | Quoted
Prices in
Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total Investments (at Fair Value) |
| Asset category | | | | | | | | |
| Cash | | $ | 6.5 | | | $ | — | | | $ | — | | | $ | 6.5 | |
| Bonds and Notes | | 68.3 | | | — | | | — | | | 68.3 | |
| Global Equity | | 10.6 | | | — | | | — | | | 10.6 | |
| Other | | — | | | 3.1 | | | 15.3 | | | 18.4 | |
| Total | | $ | 85.4 | | | $ | 3.1 | | | $ | 15.3 | | | 103.8 | |
| | | | | | | | |
| Investments measured at NAV: | | | | | | | | |
| Common collective funds: | | | | | | | | |
| United States equity | | | | | | | | 32.7 | |
| International equity | | | | | | | | 32.1 | |
| Global equity | | | | | | | | 16.5 | |
| Fixed income | | | | | | | | 344.2 | |
| Balanced | | | | | | | | — | |
| Total common collective funds | | | | | | | | $ | 425.5 | |
| | | | | | | | |
| Total investments at fair value | | | | | | | | $ | 529.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value of Plan Assets at December 31, 2020 |
| (In millions) | | Quoted
Prices in
Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total Investments (at Fair Value) |
| Asset category | | | | | | | | |
| Cash | | $ | 8.2 | | | $ | — | | | $ | — | | | $ | 8.2 | |
| Bonds and Notes | | 53.4 | | | — | | | — | | | 53.4 | |
| Global Equity | | 4.5 | | | — | | | — | | | 4.5 | |
| Other | | — | | | 3.1 | | | 17.4 | | | 20.5 | |
| Total | | $ | 66.1 | | | $ | 3.1 | | | $ | 17.4 | | | 86.6 | |
| | | | | | | | |
| Investments at NAV | | | | | | | | |
| Common collective funds | | | | | | | | |
| United States equity | | | | | | | | 35.2 | |
| International equity | | | | | | | | 34.0 | |
| Global equity | | | | | | | | 16.3 | |
| Fixed income | | | | | | | | 383.8 | |
| Balanced | | | | | | | | 17.7 | |
| Total common collective funds | | | | | | | | $ | 487.0 | |
| | | | | | | | |
| Total investments at fair value | | | | | | | | $ | 573.6 | |
Pension Plan Assets
Other assets are primarily insurance contracts for international plans. The U.S. equity common collective funds are predominately invested in equity securities actively traded in public markets. The international and global equity common collective funds have broadly diversified investments across economic sectors and focus on low volatility,
long-term investments. The fixed income common collective funds consist primarily of publicly traded United States fixed interest obligations (principally investment grade bonds and government securities).
Level 1 assets are valued based on quoted market prices. Level 2 investments are valued based on quoted market prices and/or other market data for the same or comparable instruments and transactions of the underlying fixed income investments. The insurance contracts included in the other asset category are valued at the transacted price. Common collective funds are valued at the net asset value of units held by the fund at year end. The unit value is determined by the total value of fund assets divided by the total number of units of the fund owned.
The estimated future benefit payments for our pension and health care plans are as follows:
| | | | | | | | | | | | | | |
| (In millions) | | Pension Benefits | | Health Care benefits |
| 2022 | | $ | 43.6 | | | $ | 1.2 | |
| 2023 | | 41.8 | | | 1.3 | |
| 2024 | | 39.9 | | | 1.3 | |
| 2025 | | 39.5 | | | 1.3 | |
| 2026 | | 38.8 | | | 1.2 | |
| 2027 through 2031 | | 179.1 | | | 5.2 | |
We currently estimate that employer contributions will be $8.2 million to all qualified and non-qualified pension plans and $1.2 million to all healthcare benefit plans in 2022.
The Company sponsors various voluntary retirement savings plans (RSP). Under the provisions of the plans, eligible employees receive defined Company contributions and are eligible for Company matching contributions based on their eligible earnings contributed to the plan. In addition, we may make discretionary contributions to the plans for eligible employees based on a specific percentage of each employee’s compensation.
Following are our contributions to the RSP:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2021 | | 2020 | | 2019 |
| Retirement savings match | | $ | 10.7 | | | $ | 9.9 | | | $ | 10.4 | |
| Retirement savings contribution | | — | | | 0.6 | | | — | |
| Total contribution | | $ | 10.7 | | | $ | 10.5 | | | $ | 10.4 | |
Note 12 — COMMITMENTS AND CONTINGENCIES
Environmental — We have been notified by federal and state environmental agencies and by private parties that we may be a potentially responsible party (PRP) in connection with the environmental investigation and remediation of certain sites. While government agencies frequently assert that PRPs are jointly and severally liable at these sites, in our experience, the interim and final allocations of liability costs are generally made based on the relative contribution of waste. We may also initiate corrective and preventive environmental projects of our own to ensure safe and lawful activities at our operations. We believe that compliance with current governmental regulations at all levels will not have a material adverse effect on our financial position, results of operations or cash flows.
In September 2007, the United States District Court for the Western District of Kentucky (Court) in the case of Westlake Vinyls, Inc. v. Goodrich Corporation, et al., held that we must pay the remediation costs at the former Goodrich Corporation Calvert City facility (now largely owned and operated by Westlake Vinyls, Inc. (Westlake Vinyls)), together with certain defense costs of Goodrich Corporation. The rulings also provided that we can seek indemnification for contamination attributable to Westlake Vinyls.
Following the rulings, the parties to the litigation agreed to settle all claims regarding past environmental costs incurred at the site. The settlement agreement provides a mechanism to pursue allocation of future remediation costs at the Calvert City site to Westlake Vinyls. We will adjust our accrual, in the future, consistent with any such future allocation of costs. Additionally, we continue to pursue available insurance coverage related to this matter and recognize gains as we receive reimbursement.
The environmental obligation at the site arose as a result of an agreement between The B.F. Goodrich Company (n/k/a Goodrich Corporation) and our predecessor, The Geon Company, at the time of the initial public offering in 1993. Under the agreement, The Geon Company agreed to indemnify Goodrich Corporation for certain environmental costs at the site. Neither the Company nor The Geon Company ever operated the facility.
Since 2009, the Company, along with respondents Westlake Vinyls, and Goodrich Corporation, has worked with the United States Environmental Protection Agency (USEPA) on the remedial activities at the site. The 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 actions at the site. In February 2020, the three companies signed the agreed Consent Decree and remedial action Work Plan, which received Federal Court approval in January 2021. Our current reserve totals $113.2 million for this matter.
Our Consolidated Balance Sheets include accruals totaling $124.5 million and $119.7 million as of December 31, 2021 and 2020, respectively, based on our estimates of probable future environmental expenditures relating to previously contaminated sites. These undiscounted amounts are included in Accrued expenses and other current liabilities and Other non-current liabilities on the accompanying Consolidated Balance Sheets. The accruals represent our best estimate of probable future costs that we can reasonably estimate, based upon currently available information and technology and our view of the most likely remedy. Depending upon the results of future testing, completion and results of remedial investigation and feasibility studies, the ultimate remediation alternatives undertaken, changes in regulations, technology development, new information, newly discovered conditions and other factors, it is reasonably possible that we could incur additional costs in excess of the amount accrued at December 31, 2021. However, such additional costs, if any, cannot be currently estimated.
The following table details the changes in the environmental accrued liabilities:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 |
| Balance at beginning of the year | | $ | 119.7 | | | $ | 112.0 | | | $ | 111.9 | |
| Environmental expenses | | 23.0 | | | 20.4 | | | 10.2 | |
| Net cash payments | | (18.2) | | | (12.7) | | | (10.3) | |
| Currency translation and other | | — | | | — | | | 0.2 | |
| Balance at the end of year | | $ | 124.5 | | | $ | 119.7 | | | $ | 112.0 | |
The environmental expenses noted in the table above are included in Cost of sales as are insurance recoveries received for previously incurred environmental costs. We received insurance recoveries of $4.5 million, $8.7 million, and $4.5 million in 2021, 2020 and 2019, respectively. Such insurance recoveries are recognized as a gain when received.
Other Litigation — Avient is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations, tax audits, product claims, personal injuries, and employment related matters. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes our current reserves are appropriate and these matters will not have a material adverse effect on the condensed consolidated financial statements.
Note 13 — INCOME TAXES
Income from continuing operations, before income taxes is summarized below based on the geographic location of the operation to which such earnings are attributable.
Income from continuing operations, before income taxes consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2021 | | 2020 | | 2019 |
| Domestic | | $ | 74.2 | | | $ | 19.6 | | | $ | 41.2 | |
| International | | 230.4 | | | 119.4 | | | 68.2 | |
Income from continuing operations, before income taxes | | $ | 304.6 | | | $ | 139.0 | | | $ | 109.4 | |
A summary of income tax expense from continuing operations is as follows: | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2021 | | 2020 | | 2019 |
| Current income tax expense (benefit): | | | | | | |
| | | | | | |
| Domestic | | $ | 49.0 | | | $ | (25.8) | | | $ | 24.8 | |
| International | | 52.3 | | | 32.7 | | | 21.9 | |
| Total current income tax expense | | $ | 101.3 | | | $ | 6.9 | | | $ | 46.7 | |
| Deferred income tax (benefit) expense: | | | | | | |
| | | | | | |
| Domestic | | $ | (31.5) | | | $ | 17.2 | | | $ | (12.5) | |
| International | | 4.2 | | | (18.9) | | | (0.5) | |
| Total deferred income tax benefit | | $ | (27.3) | | | $ | (1.7) | | | $ | (13.0) | |
| Total income tax expense | | $ | 74.0 | | | $ | 5.2 | | | $ | 33.7 | |
We elected to recognize the resulting tax on global intangible low-taxed income (GILTI) and 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 unusual reconciling items is included below for the twelve months ended December 31, 2021, 2020 and 2019.
. | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | 2021 | | 2020 | | 2019 | | |
| Federal statutory income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % | | |
| | | | | | | | |
| International tax rate differential: | | | | | | | | |
| Asia | | 0.3 | | | 0.5 | | | 0.7 | | | |
| Europe | | (1.2) | | | (4.4) | | | (10.3) | | | |
| North and South America | | 0.7 | | | 1.2 | | | 0.7 | | | |
| Total international tax rate differential | | (0.2) | | | (2.7) | | | (8.9) | | | |
| | | | | | | | |
| (Benefit) Tax on GILTI and FDII | | (1.7) | | | 3.1 | | | (0.1) | | | |
| International tax on certain current and prior year earnings | | 1.4 | | | 2.0 | | | 1.6 | | | |
| Net impact of non-deductible acquisition earnouts and transaction cost | | 0.1 | | | 1.8 | | | 2.8 | | | |
| Tax on one-time gain from sale of other assets | | — | | | — | | | 6.0 | | | |
| | | | | | | | |
| | | | | | | | |
| Research and development credit | | (0.8) | | | (2.1) | | | (2.8) | | | |
| | | | | | | | |
| | | | | | | | |
| Carryback of capital losses | | (0.4) | | | (13.1) | | | — | | | |
| State and local tax, net | | 1.4 | | | (3.4) | | | 4.2 | | | |
| International permanent items | | 0.2 | | | (5.2) | | | 7.5 | | | |
| Net impact of uncertain tax positions | | 0.7 | | | 1.0 | | | (2.4) | | | |
| Changes in valuation allowances | | 1.7 | | | 0.5 | | | 1.7 | | | |
| Other | | 0.9 | | | 0.8 | | | 0.2 | | | |
| Effective income tax rate | | 24.3 | % | | 3.7 | % | | 30.8 | % | | |
The effective tax rates for all periods differed from the applicable U.S. federal statutory tax rate as a result of permanent items, state and local income taxes, differences in international tax rates and certain other items. Permanent items primarily consist of income or expense not taxable or deductible. Significant or other items impacting the effective income tax rate are described below.
2021 Significant items
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.
State and local tax, net totaled expense of $4.2 million (1.4%), which resulted from normal operations.
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%).
2020 Significant items
We recognized a tax benefit of $18.2 million (13.1%) from a carryback of capital losses.
State and local tax, net totaled a benefit of $4.7 million (3.4%), which included favorable prior year tax provision adjustments and a state tax benefit from a carryback of capital losses.
International permanent items included the favorable tax effect of notional interest deductions, favorable tax treatment of foreign exchanges losses, 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%).
2019 Significant items
State and local tax, net included the result from an unfavorable state tax audit decision combined with higher domestic earnings in 2019.
International permanent items included the tax effect of non-deductibility of interest expense related to the receipt of tax-exempt dividends, which resulted in an unfavorable tax effect of $10.3 million (9.4%) partially offset by the tax impact of other net favorable permanent items of $2.0 million (1.9%).
Net impact of uncertain tax positions line resulted from the expiration of statute of limitations and favorable tax settlements.
Components of our deferred tax assets (liabilities) as of December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | |
| (In millions) | | 2021 | | 2020 |
| Deferred tax assets: | | | | |
| | | | |
| Employment costs | | 34.2 | | | 24.9 | |
| Environmental reserves | | 30.9 | | | 29.7 | |
| Net operating loss carryforwards | | 52.8 | | | 55.6 | |
| Operating leases | | 16.1 | | | 16.6 | |
| Research and development | | 22.0 | | | 7.6 | |
| Other, net | | 45.7 | | | 36.3 | |
| Gross deferred tax assets | | $ | 201.7 | | | $ | 170.7 | |
| Valuation allowances | | (19.6) | | | (20.7) | |
| Total deferred tax assets, net of valuation allowances | | $ | 182.1 | | | $ | 150.0 | |
| | | | |
| Deferred tax liabilities: | | | | |
| Property, plant and equipment | | $ | (47.4) | | | $ | (47.6) | |
| Goodwill and intangibles | | (130.6) | | | (144.9) | |
| Operating leases | | (16.2) | | | (17.0) | |
| Other, net | | (15.0) | | | (2.4) | |
| Total deferred tax liabilities | | $ | (209.2) | | | $ | (211.9) | |
| | | | |
| Net deferred tax (liabilities) assets | | $ | (27.1) | | | $ | (61.9) | |
| | | | |
| Consolidated Balance Sheets: | | | | |
| Non-current deferred income tax assets | | $ | 73.5 | | | $ | 78.1 | |
| Non-current deferred income tax liabilities | | $ | (100.6) | | | $ | (140.0) | |
As of December 31, 2021, we had gross state net operating loss carryforwards of $17.8 million that expire between 2022 and 2041 or that have indefinite carryforward periods. Various international subsidiaries have gross net operating loss carryforwards totaling $195.4 million that expire between 2022 and 2039 or that have indefinite carryforward periods. Total tax valuation allowances decreased $1.1 million from the prior year primarily due to a decrease in the valuation allowance associated with certain assets acquired in the acquisition of Clariant Color. We have provided valuation allowances of $11.9 million against certain international and state net operating loss carryforwards that, as of this time, are expected to expire prior to utilization.
As of December 31, 2021, no tax provision has been made on approximately $489 million of undistributed earnings of certain non-U.S. subsidiaries as these amounts continue to be indefinitely reinvested consistent with our policy. The ending balance of international tax on certain current and prior year earnings accrual as of December 31, 2021 and 2020 included in the Other, net deferred tax liabilities line in the table above are $10.1 million and $9.2 million, respectively.
We made worldwide income tax payments of $102.1 million, $188.8 million, and $45.7 million in 2021, 2020, and 2019, respectively. We received refunds of $12.6 million, $9.9 million, and $20.0 million in 2021, 2020, and 2019, respectively.
The Company records tax provisions for uncertain tax positions in accordance with FASB ASC Topic 740, Income Taxes. A reconciliation of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Unrecognized Tax Benefits |
| (In millions) | | 2021 | | 2020 | | 2019 |
| Balance as of January 1, | | $ | 9.5 | | | $ | 11.2 | | | $ | 16.4 | |
| Increases as a result of positions taken during current year | | 6.2 | | | 0.6 | | | 1.1 | |
| Increases as a result of positions taken for prior years | | 0.2 | | | 0.6 | | | 0.4 | |
| Balance related to acquired businesses | | 5.4 | | | — | | | — | |
| Reductions for tax positions of prior years | | — | | | — | | | (0.7) | |
| Decreases as a result of lapse of statute of limitations | | (1.5) | | | (0.5) | | | (5.0) | |
| Decreases relating to settlements with taxing authorities | | (0.1) | | | (2.8) | | | — | |
| Other, net | | 0.4 | | | 0.4 | | | (1.0) | |
| Balance as of December 31, | | $ | 20.1 | | | $ | 9.5 | | | $ | 11.2 | |
We recognize interest and penalties related to uncertain tax positions in the tax provision. As of December 31, 2021 and 2020, we had $1.2 million and $1.1 million accrued for interest and penalties, respectively.
Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next twelve months a reduction in unrecognized tax benefits may occur up to $0.7 million based on the outcome of tax examinations and the expiration of statutes of limitations.
If all unrecognized tax benefits were recognized, the net impact on the tax provision would be a benefit of $10.9 million.
The Company is currently being audited by state and international taxing jurisdictions. With limited exceptions, we are no longer subject to U.S. federal, state and international tax examinations for periods preceding 2017.
For the income tax impact associated with PP&S, refer to Note 3, Discontinued Operations.
Note 14 — SHARE-BASED COMPENSATION
Share-based compensation cost is based on the value of the portion of share-based payment awards that are ultimately expected to vest during the period. Share-based compensation cost recognized in the accompanying Consolidated Statements of Income includes compensation cost for share-based payment awards based on the grant date fair value estimated in accordance with the provision of FASB ASC Topic 718, Compensation — Stock Compensation. Share-based compensation expense is based on awards expected to vest and therefore has been reduced for estimated forfeitures.
Equity and Performance Incentive Plans
In May 2020, our shareholders approved the Avient Corporation 2020 Equity and Incentive Compensation Plan (2020 EICP). This plan reserved 2.5 million common shares for the award of a variety of share-based compensation alternatives, including non-qualified stock options, incentive stock options, restricted stock, restricted stock units (RSUs), performance shares, performance units and stock appreciation rights (SARs). It is anticipated that all share-based grants and awards that are earned and exercised will be issued from Avient common shares that are held in treasury.
Share-based compensation is included in Selling and administrative expense. A summary of compensation expense by type of award follows:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2021 | | 2020 | | 2019 |
| Stock appreciation rights | | $ | 5.2 | | | $ | 4.4 | | | $ | 4.8 | |
| Performance shares | | 0.2 | | | 0.2 | | | 0.3 | |
| Restricted stock units | | 5.8 | | | 6.7 | | | 6.5 | |
| Total share-based compensation | | $ | 11.2 | | | $ | 11.3 | | | $ | 11.6 | |
Stock Appreciation Rights
During the years ended December 31, 2021, 2020 and 2019, the total number of SARs granted was 0.5 million, 0.5 million and 0.6 million, respectively. Awards vest in one-third increments upon the later of the attainment of time-based vesting over a three-year service period and stock price targets. Awards granted in 2021, 2020 and 2019 are subject to an appreciation cap of 200% of the base price. SARs have contractual terms of ten years from the date of the grant.
The SARs were valued using a Monte Carlo simulation method as the vesting is dependent on the achievement of certain stock price targets. The SARs have time and market-based vesting conditions but vest no earlier than their three year graded vesting schedule. The expected term is an output from the Monte Carlo model and is derived from employee exercise assumptions that are based on Avient historical exercise experience. The expected volatility was determined based on the average weekly volatility for our common shares for the contractual life of the awards. The expected dividend assumption was determined based upon Avient's dividend yield at the time of grant. The risk-free rate of return was based on available yields on U.S. Treasury bills of the same duration as the contractual life of the awards. Forfeitures were estimated at 3% per year based on our historical experience.
The following is a summary of the weighted average assumptions related to the grants issued during 2021, 2020 and 2019: | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Expected volatility | | 34.0% | | 33.0% | | 40.0% |
| Expected dividends | | 2.01% | | 2.57% | | 2.47% |
| Expected term (in years) | | 6.9 | | 6.9 | | 6.6 |
| Risk-free rate | | 1.19% | | 1.56% | | 2.78% |
| Value of SARs granted | | $11.72 | | $8.11 | | $10.13 |
A summary of SAR activity for 2021 is presented below: | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions, except per share data) | | Shares | | Weighted-Average Exercise Price per Share | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic value |
| Outstanding as of January 1, 2021 | | 2.6 | | | $ | 32.43 | | | 6.4 | | $ | 20.7 | |
| Granted | | 0.5 | | | 42.27 | | | | | |
| Exercised | | (1.2) | | | 30.00 | | | | | |
| Forfeited or expired | | — | | | 30.43 | | | | | |
| Outstanding as of December 31, 2021 | | 1.9 | | | $ | 35.64 | | | 7.1 | | $ | 39.1 | |
| Vested and exercisable as of December 31, 2021 | | 0.9 | | | $ | 33.86 | | | 5.4 | | $ | 19.6 | |
| | | | | | | | |
The total intrinsic value of SARs exercised during 2021, 2020 and 2019 was $22.9 million, $1.8 million and $0.4 million, respectively. As of December 31, 2021, there was $3.3 million of total unrecognized compensation cost related to SARs, which is expected to be recognized over the weighted average remaining vesting period of 23 months.
Restricted Stock Units
RSUs represent contingent rights to receive one common share at a future date provided certain vesting criteria are met.
During 2021, 2020 and 2019, the total number of RSUs granted was 0.2 million, 0.3 million and 0.2 million, respectively. In 2021, 0.2 million RSUs vested. These RSUs, which generally vest on the third anniversary of the
grant date, were granted to executives and other key employees. Compensation expense is measured on the grant date using the quoted market price of our common shares and is recognized on a straight-line basis over the requisite service period.
As of December 31, 2021, 0.6 million RSUs remain unvested with a weighted-average grant date fair value of $33.23. Unrecognized compensation cost for RSUs at December 31, 2021 was $7.4 million, which is expected to be recognized over the weighted average remaining vesting period of 21 months.
Note 15 — SEGMENT INFORMATION
Operating income is the primary measure that is reported to our chief operating decision maker (CODM) for purposes of allocating resources to the segments and assessing their performance. Operating income at the segment level does not include: corporate general and administrative expenses that are not allocated to segments; intersegment sales and profit eliminations; charges related to specific strategic initiatives such as the consolidation of operations; restructuring activities, including employee separation costs resulting from personnel reduction programs, plant closure and phase-in costs; executive separation agreements; share-based compensation costs; asset impairments; environmental remediation costs, along with related gains from insurance recoveries, and other liabilities for facilities no longer owned or closed in prior years; gains and losses on the divestiture of joint ventures and equity investments; 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 and eliminations.
Segment assets are primarily customer receivables, inventories, net property, plant and equipment, intangible assets and goodwill. Intersegment sales are generally accounted for at prices that approximate those for similar transactions with unaffiliated customers. Corporate and eliminations assets and liabilities primarily include cash, debt, pension and other employee benefits, environmental liabilities, retained assets and liabilities of discontinued operations, and other unallocated corporate assets and liabilities. The accounting policies of each segment are consistent with those described in Note 1, Description of Business and Summary of Significant Accounting Policies.
Avient has three reportable segments. The following is a description of each reportable segment.
Color, Additives and Inks
Color, Additives and Inks is a leading formulator of specialized custom color and additive concentrates in solid and liquid form for thermoplastics, dispersions for thermosets, as well as specialty inks. Color and additive solutions include an innovative array of colors, special effects and performance-enhancing and sustainable solutions. When combined with polymer resins, our solutions help customers achieve differentiated specialized colors and effects targeted at the demands of today’s highly design-oriented consumer and industrial end markets. Our additive concentrates encompass a wide variety of performance and process enhancing characteristics and are commonly categorized by the function that they perform, including UV light stabilization and blocking, antimicrobial, anti-static, blowing or foaming, antioxidant, lubricant, oxygen and visible light blocking and productivity enhancement. Of growing importance is our portfolio of additives that enable our customers to achieve their sustainability goals, including improved recyclability, reduced energy use, light weighting, and renewable energy applications. Our colorant and additives concentrates are used in a broad range of polymers, including those used in medical and pharmaceutical devices, food packaging, personal care and cosmetics, transportation, building products, wire and cable markets. We also provide custom-formulated liquid systems that meet a variety of customer needs and chemistries, including polyester, vinyl, natural rubber and latex, polyurethane and silicone. Our offerings also include proprietary inks and latexes for diversified markets such as recreational and athletic apparel, construction and filtration, outdoor furniture and healthcare. Our liquid polymer coatings and additives are largely based on vinyl and are used in a variety of markets, including consumer, packaging, healthcare, industrial, transportation, building and construction, wire and cable, textiles and appliances. Color, Additives and Inks has manufacturing, sales and service facilities located throughout North America, South America, Asia, Europe, Middle East, and Africa.
Specialty Engineered Materials
Specialty Engineered Materials is a leading formulator of specialty and sustainable polymer formulations, services and solutions for designers, assemblers and processors of thermoplastic materials across a wide variety of markets and end-use applications. Our product portfolio, which we believe to be one of the most diverse in our industry, includes specialty formulated high-performance polymer materials that are manufactured using thermoplastic resins and elastomers, which are then combined with advanced polymer additives, reinforcement, filler, colorant and/or biomaterial technologies. We also have what we believe is the broadest composite platform of solutions, which include a full range of products from long glass and carbon fiber technology to thermoset and thermoplastic composites. These solutions meet a wide variety of unique customer requirements for sustainability, in particular
light weighting. Our technical and market expertise enables us to expand the performance range and structural properties of traditional engineering-grade thermoplastic resins to meet evolving customer needs. Specialty Engineered Materials has manufacturing, sales and service facilities located throughout North America, Europe, and Asia. Our product development and application reach is further enhanced by the capabilities of our Innovation Centers in the United States, Germany and China, which produce and evaluate prototype and sample parts to help assess end-use performance and guide product development. Our manufacturing capabilities are targeted at meeting our customers’ demand for speed, flexibility and critical quality.
Distribution
The Distribution business distributes more than 4,000 grades of engineering and commodity grade resins, including Avient-produced solutions, principally to the North American, Central American and Asian markets. These products are sold to over 6,500 custom injection molders and extruders who, in turn, convert them into plastic parts that are sold to end-users in a wide range of industries. Representing over 25 major suppliers, we offer our customers a broad product portfolio, just-in-time delivery from multiple stocking locations and local technical support. Expansion in Central America and Asia have bolstered Distribution's ability to serve the specialized needs of customers globally.
Financial information by reportable segment is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions)
Year Ended December 31, 2021 | | Sales to External Customers | | Intersegment Sales | | Total Sales | | Operating Income | | Depreciation and Amortization | | Capital Expenditures |
| Color, Additives and Inks | | $ | 2,392.3 | | | $ | 9.3 | | | $ | 2,401.6 | | | $ | 303.1 | | | $ | 105.7 | | | $ | 40.5 | |
| Specialty Engineered Materials | | 833.2 | | | 85.7 | | | 918.9 | | | 132.0 | | | 31.7 | | | 26.4 | |
| Distribution | | 1,587.3 | | | 43.6 | | | 1,630.9 | | | 93.2 | | | 0.8 | | | 0.8 | |
| Corporate and eliminations | | 6.0 | | | (138.6) | | | (132.6) | | | (147.1) | | | 7.7 | | | 32.9 | |
| Total | | $ | 4,818.8 | | | $ | — | | | $ | 4,818.8 | | | $ | 381.2 | | | $ | 145.9 | | | $ | 100.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 | | Sales to External Customers | | Intersegment Sales | | Total Sales | | Operating Income | | Depreciation and Amortization | | Capital Expenditures |
| Color, Additives and Inks | | $ | 1,497.0 | | | $ | 5.9 | | | $ | 1,502.9 | | | $ | 180.8 | | | $ | 75.1 | | | $ | 30.5 | |
| Specialty Engineered Materials | | 644.1 | | | 64.7 | | | 708.8 | | | 94.4 | | | 30.0 | | | 14.2 | |
| Distribution | | 1,087.4 | | | 22.9 | | | 1,110.3 | | | 69.5 | | | 0.7 | | | 1.4 | |
| Corporate and eliminations | | 13.6 | | | (93.5) | | | (79.9) | | | (155.4) | | | 9.2 | | | 17.6 | |
| Total | | $ | 3,242.1 | | | $ | — | | | $ | 3,242.1 | | | $ | 189.3 | | | $ | 115.0 | | | $ | 63.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | Sales to External Customers | | Intersegment Sales | | Total Sales | | Operating Income | | Depreciation and Amortization | | Capital Expenditures |
| Color, Additives and Inks | | $ | 998.2 | | | $ | 5.6 | | | $ | 1,003.8 | | | $ | 147.4 | | | $ | 42.7 | | | $ | 21.5 | |
| Specialty Engineered Materials | | 689.6 | | | 56.1 | | | 745.7 | | | 83.7 | | | 29.5 | | | 23.3 | |
| Distribution | | 1,172.9 | | | 19.3 | | | 1,192.2 | | | 75.4 | | | 0.5 | | | 1.6 | |
| Corporate and eliminations | | 2.0 | | | (81.0) | | | (79.0) | | | (149.7) | | | 5.4 | | | 21.2 | |
| Total | | $ | 2,862.7 | | | $ | — | | | $ | 2,862.7 | | | $ | 156.8 | | | $ | 78.1 | | | $ | 67.6 | |
Our sales are primarily to customers in the United States, Canada, Mexico, Europe, South America and Asia, and the majority of our assets are located in these same geographic areas. The following is a summary of sales and long-lived assets based on the geographic areas where the sales originated and where the assets are located:
| | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2021 | | 2020 | | 2019 |
| Sales: | | | | | | |
| United States | | $ | 2,281.2 | | | $ | 1,619.7 | | | $ | 1,560.4 | |
| Canada | | 151.8 | | | 107.6 | | | 140.6 | |
| Mexico | | 348.2 | | | 236.2 | | | 261.2 | |
| South America | | 85.8 | | | 51.4 | | | 27.8 | |
| Europe | | 1,195.6 | | | 729.8 | | | 556.2 | |
| Asia | | 756.2 | | | 497.4 | | | 316.5 | |
| Total Sales | | $ | 4,818.8 | | | $ | 3,242.1 | | | $ | 2,862.7 | |
| | | | | | |
| | 2021 | | 2020 | | |
| Total Assets: | | | | | | |
| Color, Additives and Inks | | $ | 2,965.2 | | | $ | 3,018.7 | | | |
| Specialty Engineered Materials | | 771.0 | | | 728.1 | | | |
| Distribution | | 384.9 | | | 244.9 | | | |
| Corporate and eliminations | | 876.1 | | | 878.8 | | | |
| Total | | $ | 4,997.2 | | | $ | 4,870.5 | | | |
| | | | | | |
| | 2021 | | 2020 | | |
| Property, net: | | | | | | |
| United States | | $ | 276.2 | | | $ | 261.8 | | | |
| Canada | | 1.3 | | | 1.4 | | | |
| Mexico | | 8.3 | | | 8.9 | | | |
| South America | | 19.6 | | | 20.1 | | | |
| Europe | | 172.4 | | | 224.5 | | | |
| Asia | | 198.3 | | | 178.2 | | | |
| Total Long lived assets | | $ | 676.1 | | | $ | 694.9 | | | |
Note 16 — 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. We formally assess, designate and document, as a hedge of an underlying exposure, the qualifying derivative instrument that will be accounted for as an accounting hedge at inception. Additionally, we assess both at inception and at least quarterly thereafter, whether the financial instruments used in the hedging transaction are effective at offsetting changes in either the fair values or cash flows of the underlying exposures and that ongoing assessment will be done qualitatively for highly effective relationships.
Net Investment Hedge
During October and December 2018, as a means of mitigating the impact of currency fluctuations on our Euro investments in foreign entities, we executed a total of six cross currency swaps, in which we will pay fixed-rate interest in Euros and receive fixed-rate interest in U.S. dollars with a combined notional amount of 250.0 million Euros and which mature in March 2023. In August and September 2020, we executed an additional five cross currency swaps, which are structured similarly to those executed in 2018. These swaps have a combined notional amount of 677.0 million Euros, which were set to mature in May 2025. In September 2021, we executed five cross currency swap transactions that extended the length of the 2020 swaps agreements through 2028. Additionally, we entered into three new cross currency swaps with a combine notional amount of 338.7 million euros that also mature in 2028. These effectively convert a portion of our U.S. Dollar denominated fixed-rate debt to Euro
denominated fixed-rate debt. That conversion resulted in gains of $16.4 million and $10.4 million for the years ended December 31, 2021 and 2020, respectively, which was recognized within Interest expense, net.
We designated the swaps as net investment hedges of our net investment in our European operations and applied the spot method to these hedges. The changes in fair value of the derivative instruments that are designated and qualify as hedges of net investments in foreign operations are recognized within Accumulated Other Comprehensive Income (Loss) (AOCI) to offset the changes in the values of the net investment being hedged. For the years ended December 31, 2021 and 2020, a gain of $52.5 million and a loss of $41.7 million, respectively, were recognized within translation adjustments in AOCI, net of tax.
Derivatives Designated as Cash Flow Hedging Instruments
In August 2018, we entered into two interest rate swaps with a combined notional amount of $150.0 million to manage the variability of cash flows in the interest rate payments associated with our existing LIBOR-based interest payments, effectively converting $150.0 million of our floating rate debt to a fixed rate. We began to receive floating rate interest payments based upon one month U.S. dollar LIBOR and in return are obligated to pay interest at a fixed rate of 2.732% until November 2022. The net interest payments accrued each month for these highly effective hedges are reflected in net income as adjustments of interest expense and the remaining change in the fair value of the derivatives is recorded as a component of AOCI. The amount of expense recognized within Interest expense, net, associated with interest rate swaps was $4.0 million and $3.2 million for the years ending December 31, 2021 and 2020, respectively. The amount recognized in AOCI, net of tax was a gain of $3.2 million and loss of $1.6 million for the years ended December 31, 2021 and 2020, respectively.
All of our derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy. We determine the fair value of our derivatives based on valuation methods, which project future cash flows and discount the future amounts present value using market based observable inputs, including interest rate curves and foreign currency rates. The fair value of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets as of December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | |
| (In millions) | Balance Sheet Location | | 2021 | | 2020 |
| Assets | | | | | |
Cross Currency Swaps (Net Investment Hedge) | Other non-current assets | | $ | 31.7 | | | $ | — | |
| Liabilities | | | | | |
Cross Currency Swaps (Net Investment Hedge) | Other non-current liabilities | | $ | — | | | $ | 41.1 | |
| Interest Rate Swap (Fair Value Hedge) | Other current liabilities | | $ | 3.1 | | | $ | — | |
Interest Rate Swap (Fair Value Hedge) | Other non-current liabilities | | $ | — | | | $ | 7.3 | |