AdvanSix Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; compared with the three months ended March 31, 2019. AdvanSix manufactures Nylon 6 and related products, including caprolactam, ammonium sulfate fertilizers and chemical intermediates. Amounts below are in millions unless otherwise indicated.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Sales | $302.7 | $314.9 |
| Gross margin | 10.1% | 15.2% |
| Income before taxes | $12.2 | $27.0 |
| Net income | $8.6 | $20.2 |
| Diluted EPS | $0.31 | $0.68 |
| EBITDA (non-GAAP) | $28.6 | $42.0 |
| EBITDA margin (non-GAAP) | 9.5% | 13.3% |
| Operating cash flow | $19.7 | $42.1 |
| Capital expenditures paid | $34.1 | $39.5 |
Sales declined 3.9%: volume rose approximately 6.5%, but lower prices reduced sales by approximately 10.4%. Lower market-based pricing across nylon, caprolactam and ammonium sulfate was the main pressure on results. Gross profit was also affected by the absence of $6.6 million of insurance proceeds recognized in Q1 2019. SG&A decreased $2.7 million, primarily from lower stock-based compensation and IT costs, but this did not offset weaker gross margin.
Cash, debt and liquidity
- Cash and equivalents were $30.8 million at March 31, 2020, versus $7.1 million at year-end 2019. Cash increased $23.7 million during the quarter.
- Operating cash flow fell $22.4 million year over year, reflecting lower earnings and less favorable working-capital movements, partly offset by payment timing for accrued liabilities.
- Revolving credit borrowings were $337 million, up from $297 million at December 31, 2019. The $425 million facility had approximately $87 million available at quarter-end; approximately $1 million of letters of credit was outstanding.
- In April, the company said it was maintaining approximately $75 million of cash, including additional facility draws. It also reported covenant compliance at March 31. Actual consolidated leverage and interest-coverage ratios are not provided in the filing text.
- The February 2020 credit amendment relaxed the leverage covenant schedule, including a 4.50:1 maximum for Q2 2020 and 4.25:1 for Q3 2020; the minimum interest-coverage covenant remains 3.00:1. The facility is secured by substantially all company assets and matures February 2023.
Material changes and notable items
- U.S. sales fell to $230.4 million from $257.6 million, while international sales increased to $72.3 million from $57.3 million. The product mix of sales was 26% Nylon, 22% caprolactam, 23% ammonium sulfate and 29% chemical intermediates.
- The ten largest customers accounted for approximately 43% of sales, down from 48%; Shaw Industries represented 17%, versus 22% a year earlier.
- Income tax expense was $3.7 million and the effective tax rate was 29.9%, compared with 25.3%. The company recorded an estimated $8 million reclassification from deferred taxes to taxes receivable related to an anticipated federal NOL carryback under the CARES Act; its 2019 federal return had not yet been filed.
- Cash-flow hedge losses reduced other comprehensive income by $1.8 million. Interest-rate swaps had a $4.2 million liability at quarter-end; approximately $2 million of net hedge losses were expected to be reclassified to earnings over the following 12 months.
- Q1 2020 results did not include a material adverse impact attributed to COVID-19, and manufacturing facilities continued operating. The company shifted most planned Q2 turnaround work to Q3.
Outlook, risks and contingencies
- The company said the impact of COVID-19 could become material and could not be estimated reliably. It cited possible reductions in nylon and chemical-intermediate demand from automotive, construction and textiles, supply-chain and raw-material risks, customer payment risk, and potential pressure on liquidity and covenant compliance. Food-packaging nylon and ammonium sulfate demand remained comparatively resilient; acetone demand and industry conditions had improved, according to management.
- 2020 capital expenditures were expected to be $80–$90 million, $10 million below the prior estimate and $60–$70 million below 2019. Management targeted $10–$15 million of full-year cost reductions versus 2019, approximately $8 million in cash tax savings, and approximately $6 million in 2020 cash benefit from deferring Social Security taxes.
- The company expected 2020 pension contributions of approximately $5–$10 million, subject to evaluation of CARES Act deferral options. It anticipated a $5–$10 million unfavorable 2020 pretax impact from the continuing PES refinery shutdown and associated cumene supply and logistics costs.
- Final U.S. anti-dumping duties on acetone imports from five countries were imposed for five years. The Pottsville films plant closure was completed in 2019; its $11 million restructuring charge was recorded that year, and related liabilities were fully paid by March 31, 2020.
- Environmental matters include ongoing negotiations with the EPA and Virginia DEQ concerning self-reported alleged violations at the Hopewell, Virginia facility. Management did not expect these matters or other disclosed litigation to have a material adverse effect, but outcomes remain uncertain.
Important facts for investors to verify
- Subsequent-quarter sales, margins and operating cash flow as COVID-19 effects on end-market demand and raw-material supply develop.
- Cash levels, revolver availability, actual covenant ratios and compliance headroom, especially under the amended 2020 leverage limits.
- Whether the anticipated NOL carryback is realized and whether the estimated CARES Act tax benefit changes.
- Delivery of the stated capex and cost-reduction plans, along with pension funding needs and the expected PES-related costs.
- Developments in Hopewell environmental proceedings and any material change in the company’s litigation or remediation exposure.