AdvanSix Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. AdvanSix manufactures Nylon 6 resin and related products, including caprolactam, ammonium sulfate fertilizers, and chemical intermediates. Amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $310.6 | $368.7 | $970.7 | $1,128.4 |
| Gross margin | 9.8% | 6.8% | 12.4% | 10.7% |
| Net income | $7.9 | $5.5 | $43.4 | $45.5 |
| Diluted EPS | $0.28 | $0.18 | $1.49 | $1.46 |
| EBITDA (non-GAAP) | $24.9 | $20.0 | $102.9 | $103.7 |
| EBITDA margin (non-GAAP) | 8.0% | 5.4% | 10.6% | 9.2% |
Q3 sales fell 15.7% year over year, reflecting lower prices (13.6%) and lower volume (2.1%). Management attributed price declines chiefly to formula-based pass-throughs for lower benzene and propylene costs, plus market-based decreases in acetone and nylon. Lower volumes reflected product mix, operational performance, and challenging chemical-intermediate conditions, partly offset by stronger caprolactam utilization. Year-to-date sales declined 14.0%, with price down 10.4% and volume down 3.6%.
Gross margin improved year over year in both periods, mainly because Q3 2018 had a larger planned turnaround and because raw-material costs were lower. These benefits were partly offset by unfavorable mix, operational performance, and supply-related costs. Nine-month GAAP net income declined despite the improved margin; nine-month EBITDA excluding the $12.6 million Pottsville restructuring charge was $115.5 million, versus $103.7 million in 2018 (non-GAAP).
Cash flow, balance sheet, and liquidity
- Nine-month cash flow: Operating cash flow was $100.5 million, down from $127.7 million. Investing cash outflow was $108.6 million, including $106.4 million of cash capital expenditures. Financing provided $8.3 million; cash increased $0.2 million to $10.0 million.
- Capital spending: Cash capital expenditures were $106.4 million through September. Management expected approximately $150 million for full-year 2019.
- Debt and liquidity: Revolver borrowings were $266 million at September 30, up $66 million from year-end 2018. Of the $425 million facility, $158 million remained available. The company reported compliance with all credit agreement covenants.
- Other balance-sheet items: Current assets were $290.3 million and current liabilities $286.7 million. Inventory was $162.5 million, up from $137.2 million at year-end, partly due to sales timing and buffer inventory ahead of a planned Q4 turnaround. Accounts receivable fell to $109.3 million, primarily due to lower sales and collections through a receivables discount arrangement.
- Leases: Adoption of the lease standard in January 2019 added $136.1 million of operating-lease right-of-use assets and $136.4 million of operating-lease liabilities at September 30; management said the standard did not significantly affect expense recognition or cash flows.
Material changes, outlook, and risks
- The company closed its Pottsville, Pennsylvania films plant in July and recorded $12.6 million in restructuring charges in Q2, including asset write-offs, exit costs, employee separations, and inventory write-downs. Management expected no further charges related to the closure and announced a strategic films alliance with Oben.
- The PES refinery fire disrupted a cumene supply source. AdvanSix reported an approximately $4.3 million unfavorable pretax impact in Q3, expected a further $4–$6 million impact in Q4 2019, and anticipated a $10–$15 million unfavorable impact in 2020. It was assessing supply and logistics alternatives.
- Earlier cumene shortages caused a phenol force majeure and reduced production; the company said it was no longer on force majeure with phenol customers. The reported first-quarter impacts included approximately $6.9 million from production and logistics effects and $1.4 million from lost sales, with a further $2.3 million lost-sales impact in Q2.
- Anti-dumping investigations concerning acetone imports continued; preliminary affirmative determinations were announced for five countries, and the company expected the investigation process to conclude in Q1 2020.
- AdvanSix recorded approximately $8.9 million of business-interruption insurance benefits in Q1 and Q2 2019 related to the 2018 weather event; the claim closed in Q2 with total recorded benefits of approximately $12 million.
- Management stated that cash, operating cash flow, and available credit were expected to support operating and planned funding needs. Key risks cited include raw-material supply and pricing, plant turnarounds and unplanned downtime, cyclical end markets, customer concentration, indebtedness and covenants, environmental and safety obligations, and litigation. The filing reported no material change to previously disclosed risk factors.
Investor verification priorities
- Track the actual Q4 turnaround and whether the projected Q4 and 2020 PES/cumene impacts match management’s estimates.
- Verify full-year capital expenditures against the approximately $150 million expectation and assess the resulting effect on cash and revolver borrowings.
- Monitor sales volumes, product mix, pricing spreads, and the recovery or persistence of weak chemical-intermediate market conditions.
- Review the outcome and timing of acetone anti-dumping proceedings and any resulting commercial or financial effects.
- Assess customer concentration: Shaw represented 23% of Q3 sales, and the ten largest customers represented approximately 51%.
- Consider capital allocation and share dilution: $53.1 million was spent on treasury-stock purchases in the first nine months; $59.6 million remained under the authorization at September 30. The company also withheld 388,530 founder-award shares in October for tax obligations.