AdvanSix Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. AdvanSix is an integrated manufacturer of Nylon 6 and also sells caprolactam, ammonium sulfate fertilizer, acetone and other chemical intermediates. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $281.9 | $310.6 | $817.6 | $970.7 |
| Gross margin | 5.7% | 9.8% | 9.9% | 12.4% |
| Net income (loss) | $(0.7) | $7.9 | $19.3 | $43.4 |
| Diluted EPS | $(0.02) | $0.28 | $0.69 | $1.49 |
| EBITDA, non-GAAP | $15.8 | $24.9 | $75.2 | $102.9 |
| EBITDA margin, non-GAAP | 5.6% | 8.0% | 9.2% | 10.6% |
| Operating cash flow | Not separately presented for quarter | $64.1 | $100.5 | |
| Capital expenditures, cash paid | Not separately presented for quarter | $67.6 | $106.4 |
Q3 sales fell 9.2% year over year: volume increased 5.2%, but prices declined 14.4%, principally reflecting lower raw-material-linked formula pricing. Nine-month sales fell 15.8%, with price down 13.5% and volume down 2.3%. Q3 costs of goods sold declined 5.1%, but gross margin contracted amid the planned plant turnaround and unfavorable product mix. SG&A declined $3.1 million in Q3 and $7.9 million year to date, reflecting lower legal, stock-based compensation and IT costs and cost controls.
Nine-month operating cash flow declined $36.4 million year over year. Cash paid for capital expenditures was $67.6 million, exceeding operating cash flow by approximately $3.5 million. Investing cash outflow was $68.5 million; financing cash inflow was $14.0 million. Cash increased $9.6 million to $16.7 million.
Financial position and liquidity
- At September 30, cash was $16.7 million; current assets were $308.6 million and current liabilities $253.2 million, a current ratio of approximately 1.22.
- Revolving credit facility borrowings were $313.0 million, up from $297.0 million at year-end 2019. Approximately $111 million of facility capacity remained available. The facility matures February 2023 and is secured by substantially all company assets.
- The company reported compliance with its credit covenants. The February 2020 amendment temporarily relaxed leverage limits; the September 2020 maximum was 4.25:1, falling to 3.50:1 for December 2020. Interest coverage must remain at least 3.00:1.
- Total liabilities were $814.1 million and stockholders’ equity was $421.0 million. Operating lease liabilities totaled $110.8 million.
Outlook, commentary and risks
- Management said Q3 demand recovered to approximately pre-COVID-19 levels and expected gradual improvement through Q4, while warning that renewed restrictions could undermine recovery. The pandemic’s future effects on results, financial position and liquidity could not be estimated reliably.
- Management expected 2020 capital expenditures of approximately $85 million, about $65 million below 2019, and targeted $20–$25 million of full-year cost reductions versus the prior year. It cited disciplined discretionary spending and cash management.
- The company anticipated approximately $12 million of 2020 cash tax savings and a further approximately $6 million cash benefit from deferred social-security taxes. A $12.2 million tax refund was recorded as a receivable and expected in Q4 2020.
- COVID-19-related demand, supply-chain and operating disruptions, raw-material costs and availability, production downtime, customer concentration, commodity pricing, debt covenant compliance and access to financing remain risks. One customer accounted for 14% of Q3 sales and 13% of nine-month sales; the ten largest customers represented 48% and 43%, respectively.
- The company reported a $3.8 million liability for an uncertain tax position related to an energy credit claimed for Hopewell boiler installations. It also agreed to a $123,082 Virginia civil charge under a consent order addressing alleged Hopewell air-permit monitoring, recordkeeping and emissions requirements.
- Anti-dumping duties on acetone imports from five countries were in effect for five years, subject to annual review; a South Korean importer challenged the determination. The Pottsville plant closure restructuring was complete, with no remaining liability at quarter-end.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether demand and margins continued recovering after Q3, particularly in Nylon 6 and caprolactam, and how pricing and product mix evolved.
- Actual 2020 capital expenditures and cost reductions versus management’s stated targets, and the effect of the planned turnaround on costs and production.
- Cash generation, working-capital needs, remaining revolver availability, and compliance with tightening leverage covenants.
- Receipt and timing of the $12.2 million tax refund, treatment of the disputed energy credit, and the cash effects of deferred payroll taxes and pension funding.
- Any material changes in COVID-19 impacts, acetone duty proceedings, environmental matters, or other contingencies.