AdvanSix Inc. — Q2 2021 Form 10-Q
Business and period. AdvanSix is a vertically integrated U.S. chemicals and materials producer with product lines in nylon, caprolactam, chemical intermediates and ammonium sulfate fertilizer. This unaudited report covers the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Sales | $437.7 million | $233.0 million | $814.1 million | $535.7 million |
| Gross margin | 18.5% | 14.7% | 17.1% | 12.1% |
| Net income | $44.1 million | $11.4 million | $72.3 million | $20.0 million |
| Diluted EPS | $1.53 | $0.41 | $2.51 | $0.71 |
| EBITDA margin (non-GAAP) | 17.4% | 13.2% | 16.1% | 11.1% |
Q2 sales rose 87.8% year over year; first-half sales rose 52.0%. Management attributed growth to higher formula-based pass-through and market pricing, plus stronger volume across all product lines. In Q2, reported drivers were approximately 32% volume and 56% price; for the first half, approximately 19% volume and 33% price. Higher raw-material costs partly offset revenue gains. Q2 gross margin also benefited from initial insurance proceeds related to the 2019 shutdown of a cumene supplier, Philadelphia Energy Solutions.
Cash flow and balance sheet. First-half operating cash flow was $109.0 million, versus $28.6 million a year earlier. Investing used $34.5 million, including $24.5 million of capital expenditures and $9.5 million for an acquisition. Financing used $80.9 million, chiefly reflecting $80.0 million of net revolver repayments. Cash declined by $6.4 million to $4.3 million. At June 30, total assets were $1.245 billion, total liabilities $722.5 million and stockholders’ equity $522.8 million. Revolver debt was $195 million, down from $275 million at year-end; approximately $229 million of the $425 million facility remained available. The company reported compliance with its debt covenants.
Material changes and notable items
- Compared with the pandemic-affected Q2 2020, demand had recovered to pre-COVID levels by Q2 2021, according to management. The filing cautions that recovery may not persist.
- First-half working capital cash effects were less unfavorable than in the prior-year period. The $12.3 million CARES Act tax refund was received in Q1 2021.
- In January 2021, AdvanSix acquired ammonium sulfate packaging, warehousing and logistics assets in Virginia for approximately $9.5 million to expand packaged-product offerings and logistics capabilities.
- Inventory was $140.1 million at June 30, versus $180.1 million at December 31, 2020. Receivables increased to $165.4 million from $123.6 million.
- The company had repurchased no shares under its public repurchase program during Q2; $59.6 million remained authorized. Share withholding for equity-award taxes continued.
Outlook, risks and contingencies
- Management expects 2021 capital expenditures of approximately $65–70 million, compared with $83 million in 2020. It expects cash, operating cash flow and available credit to support operating needs and strategic plans, subject to risks.
- Planned 2021 pension contributions are approximately $11–13 million; $4.8 million had been contributed in the first half.
- COVID-19 resurgence, variants and uncertain recovery could affect demand, supply chains, operations, liquidity and covenant compliance. Management says the future financial impact cannot be estimated with certainty.
- Other disclosed risks include volatile raw-material and product prices, supply or logistics disruptions, unplanned downtime and scheduled plant turnarounds, customer concentration, fertilizer seasonality, environmental and safety obligations, and debt covenants. The ten largest customers accounted for about 42% of Q2 sales; Shaw represented 12%.
- AdvanSix reported ordinary-course litigation and environmental remediation obligations, but did not expect known matters or remediation costs to materially adversely affect results or financial position. Potential legal losses beyond accruals could not be reasonably estimated.
- Interest-rate swaps fixed the rate on $100 million of floating-rate debt; about 51% of borrowings were swapped to fixed rates at quarter-end. A 25-basis-point rate change was estimated to affect six-month interest expense by about $0.2 million.
Investor verification points
- Assess how much of the sharp sales and earnings improvement reflects sustainable volume and market pricing versus input-cost pass-through and the low pandemic-affected comparison.
- Verify cash conversion and working-capital trends, including receivables, customer advances and the one-time tax refund.
- Monitor raw-material costs, product spreads, planned turnarounds, logistics reliability and seasonal ammonium sulfate inventory and pricing.
- Track debt repayment, revolving-credit availability, covenant headroom and the February 2023 credit-facility maturity.
- Review the durability of the demand recovery and any further developments in COVID-19, customer concentration, environmental matters and the Virginia acquisition.