AdvanSix Inc. — Q2 2020 Form 10-Q
Business context and reporting period
AdvanSix manufactures Nylon 6 and sells caprolactam, ammonium sulfate fertilizer and chemical intermediates. This unaudited report covers the three and six months ended June 30, 2020, compared with the same 2019 periods. The company reported that COVID-19 materially affected Q2 results, chiefly through lower demand and production utilization.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $233.0m | $345.2m | $535.7m | $660.1m |
| Gross margin | 14.7% | 12.2% | 12.1% | 13.6% |
| Net income | $11.4m | $15.3m | $20.0m | $35.5m |
| Diluted EPS | $0.41 | $0.53 | $0.71 | $1.21 |
| EBITDA (non-GAAP) | $30.7m | $35.9m | $59.4m | $77.9m |
For the first six months, operating cash flow was $28.6m, versus $67.4m; capital expenditures were $51.6m, versus $71.2m, resulting in operating cash flow less capital expenditures of negative $23.0m, compared with negative $4.8m. Cash at June 30 was $72.7m, up from $7.1m at year-end 2019. Revolver borrowings were $388m, up from $297m; approximately $36m of facility capacity remained available. Cash less revolver borrowings was approximately negative $315m. The company reported compliance with its credit covenants at June 30.
Material changes versus prior period
- Q2 sales fell 32.5% year over year: volume declined 18.5% and pricing declined 14.0%. The company attributed lower volumes especially to nylon, caprolactam and phenol demand affected by COVID-19; lower input costs and weaker market prices also affected sales.
- First-half sales fell 18.8%, reflecting a 6.7% volume decline and 12.1% lower pricing. Six-month net income declined 43.7%.
- Q2 gross margin improved to 14.7% from 12.2%, helped by lower raw-material costs and the absence of the prior-year Pottsville restructuring charge. First-half gross margin fell to 12.1% from 13.6%, primarily due to weaker market-based pricing and prior-year insurance proceeds.
- Cash from operations declined substantially, with the filing citing lower earnings and a less favorable working-capital cash impact. Net revolver borrowings increased by $91m during the first half.
Outlook, risks and unusual items
- Management expected demand to improve gradually in the second half of 2020, but cautioned that renewed restrictions or a prolonged pandemic could prevent recovery. The company said it could not reliably estimate COVID-19’s future effects on results, financial position or liquidity.
- Management expected approximately $85m of 2020 capital expenditures, about $65m below 2019, and targeted $15m–$20m of full-year cost reductions versus the prior year. It planned to maintain lower cash balances in the second half to reduce gross debt and interest costs.
- The company anticipated approximately $12m of 2020 cash tax savings under the CARES Act and an approximately $6m cash benefit from deferred Social Security taxes. It planned 2020 pension contributions of approximately $7m–$9m, while evaluating possible CARES Act deferral.
- The credit agreement’s leverage covenant was amended in February 2020, including a maximum 4.50:1 ratio for Q2 2020 and 4.25:1 for Q3 2020; the interest coverage minimum remained 3.00:1. Borrowings are secured by substantially all company assets, and covenant failure could permit acceleration of repayment.
- The company estimated an approximately $10m unfavorable 2020 pre-tax impact from the continuing Philadelphia Energy Solutions refinery shutdown, broadly in line with 2019. It had realigned cumene supply and submitted a business interruption insurance claim.
- Anti-dumping duties on acetone imports from five countries were in effect for five years; the South Korean determination was challenged in court. A Virginia environmental consent order agreed in July 2020 required a $123,082 civil charge.
- Management said known environmental remediation costs and pending ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes could change. Disclosure controls were judged effective at a reasonable assurance level; no material change in internal control was reported.
Important facts for investors to verify
- Whether demand, volumes and utilization recovered as management expected in the second half of 2020, particularly in nylon, caprolactam and phenol.
- Liquidity and covenant headroom: revolver availability, debt reduction plans, interest costs and compliance with the amended leverage tests.
- Delivery of the $15m–$20m cost-reduction target and approximately $85m capital spending plan, and the effects on maintenance and reliability.
- Cash conversion and working-capital trends, including the timing of tax refunds, deferred taxes and pension contributions.
- Developments in the PES supply disruption and insurance claim, South Korean acetone-duty challenge, and environmental or other contingencies.
Unless otherwise indicated, financial amounts are in U.S. dollars; millions are rounded. EBITDA is a non-GAAP measure as defined by the company.