AdvanSix Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 1, 2019. Unaudited interim results. AdvanSix is an integrated Nylon 6 manufacturer that also sells caprolactam, ammonium sulfate fertilizers and chemical intermediates.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Sales | $345.2 million | $400.5 million | $660.1 million | $759.7 million |
| Gross margin | 12.2% | 14.4% | 13.6% | 12.6% |
| Income before taxes | $20.6 million | $38.0 million | $47.6 million | $53.2 million |
| Net income | $15.3 million | $28.4 million | $35.5 million | $40.0 million |
| Diluted EPS | $0.53 | $0.91 | $1.21 | $1.28 |
| EBITDA, non-GAAP | $35.9 million | $53.0 million | $77.9 million | $83.8 million |
Q2 sales fell 13.8% year over year, reflecting lower prices (8.7% impact) and lower volume (5.1%). First-half sales declined 13.1%, with price down 8.9% and volume down 4.2%. The filing attributes lower pricing mainly to formula-based pass-throughs tied to benzene and propylene; volume was affected by acetone market conditions, the phenol force majeure and lower nylon sales. First-half gross margin improved year over year, but Q2 margin declined.
Q2 EBITDA excluding the $12.6 million Pottsville restructuring charge was $48.5 million, with a 14.1% margin, versus $53.0 million and 13.2% in Q2 2018. First-half adjusted EBITDA was $90.6 million versus $83.8 million. These are company-defined non-GAAP measures and are not substitutes for GAAP results.
Cash flow, debt and liquidity
- First-half operating cash flow was $67.4 million, down from $77.2 million. Capital expenditures paid were $71.2 million; investing cash outflow was $72.5 million.
- Cash increased to $17.1 million from $9.8 million at year-end. Financing provided $12.4 million, including net revolver borrowings of $55.0 million; share repurchases used $40.3 million.
- Revolver borrowings were $255 million at June 30 under a $425 million facility, with $169 million available. The company reported compliance with all credit covenants. The debt bears floating rates; a $50 million swap fixed a portion of exposure.
- Current assets were $293.3 million and current liabilities $253.7 million. Adoption of lease accounting added $115.3 million of operating lease liabilities and $115.3 million of right-of-use assets; these are distinct from the revolver debt.
- Share repurchases totaled $77.7 million through June 30; $72.3 million remained authorized at that date. Additional repurchases through July 26 left approximately $67.5 million of authorization.
Material developments, outlook and risks
- The Pottsville, Pennsylvania films plant closure was approved in May; operations ceased in July. Q2 included $12.6 million of restructuring charges. The company stated it did not expect further charges related to the closure and announced a films strategic alliance with Oben.
- Cumene supply disruptions caused a phenol force majeure and reduced production. Management estimated an unfavorable pretax impact from the Philadelphia Energy Solutions refinery fire of approximately $6–8 million in Q3 and $5–7 million in Q4 2019, mainly from higher raw-material and logistics costs and some fixed-cost absorption. The fire did not materially affect Q2 results.
- The company expects 2019 capital expenditures of approximately $150 million and pension contributions of approximately $4–6 million. It stated that cash, operating cash flow and available credit should fund expected needs; no full-year earnings guidance is provided in the filing.
- Business-interruption insurance related to the 2018 weather event benefited cost of goods sold by $2.3 million in Q2 2019; the claim was closed with approximately $12 million of total recorded benefit.
- The federal criminal investigation concerning Hopewell air emissions and compliance with a consent decree concluded with no further action required. The company still has environmental obligations and ordinary-course legal matters; it said known 2019 remediation costs were not expected to be material.
- Acetone anti-dumping investigations continued; preliminary affirmative duty determinations for Singapore and Spain were announced July 30, 2019. The company expected the investigation process to take another 7–9 months.
- Key risks include raw-material availability and pricing, plant downtime and logistics disruptions, cyclical end markets, floating-rate debt and covenants, environmental and process-safety obligations, and customer concentration. Shaw represented 19% of Q2 sales and 21% of first-half sales.
Important facts for investors to verify
- Whether planned cumene sourcing and logistics mitigations limit the disclosed Q3 and Q4 cost impacts and restore normal phenol operations.
- Whether lower sales volumes and pricing, especially in acetone and nylon, persist, and how the Pottsville closure and Oben alliance affect margins.
- Actual capital spending versus the approximately $150 million 2019 expectation, and the resulting impact on cash flow and revolver usage.
- Debt availability, covenant headroom, and interest-rate exposure; a further $50 million interest-rate swap was entered into on July 15, 2019.
- Execution and cost implications of repurchases, including the additional post-quarter purchases, alongside the company’s capital and liquidity needs.
- Developments in acetone trade investigations, environmental obligations and other contingencies; the filing does not quantify reasonably possible losses above recorded accruals.