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UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM i10-Q
(Mark One)
i☒
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Exact name of registrant as specified in its charter)
iDelaware
i81-2525089
(State
or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
i300 Kimball Drive, iSuite
101, iParsippany, iNew Jersey
i07054
(Address
of principal executive offices)
(Zip Code)
(i973) i526-1800
(Registrant’s telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
iCommon Stock, par value $0.01 per share
iASIX
iNew
York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filerý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company i☐
Emerging growth company i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐
Noý
Common stock, par value $0.01; 200,000,000 shares authorized; 30,600,708 shares issued and 27,481,162 outstanding at September 30, 2019; 30,555,715 shares issued and 29,345,001 outstanding at December 31, 2018
i306
i306
Preferred
stock, par value $0.01; 50,000,000 shares authorized and 0 shares issued and outstanding at September 30, 2019 and December 31, 2018
See
accompanying notes to Condensed Consolidated Financial Statements.
8
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
1. iOrganization,
Operations and Basis of Presentation
Description of Business
AdvanSix Inc. (“AdvanSix”, the “Company”, "we" or "our") is an integrated manufacturer of Nylon 6, a polymer resin which is a synthetic material used by our customers to produce engineered plastics, fibers, filaments and films that, in turn, are used in such end-products as automotive and electronic components, carpets, sports apparel, fishing nets and food and industrial packaging. As a result of our backward integration and the configuration of our manufacturing facilities, we also sell a variety of other products, all of which are produced as part of our integrated Nylon 6 resin manufacturing process including caprolactam, ammonium sulfate fertilizers, acetone and other chemical intermediates.
Basis of Presentation
i
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the
accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the Company's financial position as of September 30, 2019, and its results of operations for the three and nine months ended September 30, 2019 and 2018 and cash flows for the nine months ended September 30, 2019 and 2018. The Condensed Consolidated Balance Sheet at December 31, 2018 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements.
The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Form 10-K"). All intercompany transactions have been eliminated.
Certain prior period amounts have been reclassified for consistency with the current period presentation.
It is our practice to establish actual quarterly closing dates using a predetermined fiscal calendar, which requires our businesses to close their books on a Saturday in order to minimize
the potentially disruptive effects of quarterly closing on our business processes. Historically, the effects of this practice were generally not significant to reported results for any quarter and only existed within a reporting year. In the event that differences in actual closing dates are material to year-over-year comparisons of quarterly or year-to-date results, we will provide the appropriate disclosures. Our actual closing dates for the three and nine months ended September 30, 2019 and 2018 were September 28, 2019 and September 29, 2018, respectively.
Liabilities to creditors to whom we have issued checks that remained outstanding
at September 30, 2019 and December 31, 2018 aggregated $i5.4 million and $i7.7
million, respectively, and were included in Cash and cash equivalents and Accounts payable in the Condensed Consolidated Balance Sheets.
The Company submitted a business interruption insurance claim related to the first quarter 2018 weather event and recorded a benefit of $i6.6 million and $i2.3
million to Cost of goods sold in the first and second quarters of 2019, respectively. The business interruption claim was closed during the second quarter of 2019 with a total recorded benefit of approximately of $i12 million.
On May 4, 2018, the Company announced that its Board of Directors (the “Board”) authorized a share repurchase program of up to $i75
million of the Company’s common stock. On February 22, 2019, the Company announced that the Board authorized a share repurchase program of up to an additional $i75 million of the Company's
common stock, which was in addition to the remaining capacity available under the May 2018 share repurchase program. Repurchases may be made from time to time on the open market, including through the use of trading plans intended to qualify under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The size and timing of these repurchases will depend on pricing, market and economic conditions, legal and contractual requirements and other factors. The share repurchase program has no expiration date and may be modified, suspended or discontinued at any time. The par value of the shares repurchased is applied to Treasury stock and the excess of the purchase price over par value is applied to Additional paid-in capital.
9
ADVANSIX
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
As of September 30, 2019, the Company had repurchased i3,089,762
shares of common stock for an aggregate of $i90.4 million at a weighted average market price of $i29.26 per share. As
of September 30, 2019, $i59.6 million remained available for share repurchases under the current authorization.
2. iRecent
Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which permits use of the OIS rate based on SOFR as a U.S. benchmark interest
rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct Treasury obligations of the U.S. government (“UST”), the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate and the SIFMA Municipal Swap Rate. Pursuant to the amendments, SOFR will be an option to replace LIBOR as it is phased out. The amendments of ASU No. 2018-16 are effective for companies that have adopted ASU 2017-12 for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year or at such time a company adopts ASU 2017-12. Early adoption of ASU 2018-16 is not permitted without previous adoption of ASU 2017-12. As the Company elected to early adopt ASU 2017-12 during the fourth quarter of 2018, the
Company adopted ASU 2018-16 effective January 1, 2019, which did not have a material impact on the Company's consolidated financial position or results of operations upon adoption.
i
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases.
The new standard also requires disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning after December 15, 2018 (early adoption is permitted). Initial guidance stated that the new standard be applied under a modified retrospective approach with periods prior to the adoption date being adjusted. During July 2018, however, the FASB issued ASU 2018-11, Leases (Topic 842), providing another transition method allowing a company to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjusting prior periods. The Company adopted the standard effective January 1, 2019 electing the cumulative-effect
adjustment approach made available in ASU 2018-11. The Company has also elected the following practical expedients:
•the package of three expedients which allows the Company not to re-assess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases, and (iii) initial direct costs for any expired or existing leases;
•the short-term lease practical expedient, which allows the Company
to exclude leases with an initial term of 12 months or less (“short-term leases”) from recognition in the unaudited Condensed Consolidated Balance Sheet;
•the bifurcation of lease and non-lease components practical expedients, which did not require the Company to bifurcate lease and non-lease components for our real estate leases; and
•the land easements practical expedient, which allows the Company to carry forward the accounting treatment for land easements on existing agreements.
We have implemented internal controls and key system functionality to enable the preparation
of financial information on adoption. The standard had a material impact to our Condensed Consolidated Balance Sheet but did not have a significant impact in the recognition, measurement or presentation of lease expenses within the Condensed Consolidated Statements of Operations or the Condensed Consolidated Statements of Cash Flows. The most significant impact was the recognition of right-of-use (“ROU”) assets and liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. See "Note 8. Leases" for further information.
3. iRevenues
Revenue
Recognition
We serve approximately i400 customers annually in more than i40 countries and across a wide variety of industries. For the three months
ended September 30, 2019 and 2018, the Company's ten largest customers accounted for approximately i51% and i48%
of total sales, respectively. For the nine months ended September 30, 2019 and 2018, the Company's ten largest customers accounted for approximately i47% and i45%
of total sales, respectively.
10
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
iWe typically sell to customers
under master service agreements, with one- to two-year terms on average, or by purchase orders. We have historically experienced low customer turnover and have an average customer relationship of approximately i20 years. Our largest customer is Shaw Industries Group Inc. (“Shaw”), one of the world's largest consumers of caprolactam and Nylon 6 resin. We sell Nylon 6 resin and caprolactam to Shaw under a long-term agreement. For the three months ended September 30, 2019 and 2018,
our sales to Shaw were i23% and i22%, respectively, of our total sales. For the nine months ended September 30, 2019 and 2018,
our sales to Shaw were i21% and i22%, respectively, of our total sales.
i
Each
of the Company’s product lines represented the following approximate percentage of total sales for the three and nine months ended September 30, 2019 and 2018:
The Company defers revenues when cash payments are received in advance of our performance. Customer advances relate primarily to sales from the ammonium sulfate business. iBelow is a roll-forward of Deferred income and customer advances for the nine months ended September 30, 2019:
The
Company expects to recognize as revenue the September 30, 2019 ending balance of Deferred income and customer advances within one year or less.
4. iEarnings Per Share
The computation of basic and diluted earnings per share ("EPS") is based on Net income divided by the basic weighted average number of common
shares and diluted weighted average number of common shares, respectively. iThe details of the basic and diluted EPS calculations for the three and nine months ended September 30, 2019 and 2018 were as follows:
11
ADVANSIX
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
Dilutive
effect of equity awards and other stock-based holdings
i972,466
i822,843
i971,264
i813,767
Weighted
average common shares outstanding
i28,581,451
i30,983,834
i29,164,024
i31,189,640
EPS
– Diluted
$
i0.28
$
i0.18
$
i1.49
$
i1.46
Diluted
EPS is computed based upon the weighted average number of common shares outstanding for the period plus the dilutive effect of common stock equivalents (which includes units allocated to the AdvanSix stock unit fund under the AdvanSix Inc. Deferred Compensation Plan) using the treasury stock method and the average market price of our common stock for the year.
The diluted EPS calculations exclude the effect of stock options when the options’ assumed proceeds exceed the average market price of the common shares during the period. iThe
anti-dilutive common stock equivalents outstanding at the three and nine months ended September 30, 2019 and 2018 were as follows:
The
decrease in Total accounts and other receivables – net at September 30, 2019 versus December 31, 2018 was due primarily to lower sales and increased collections related to a trade receivables discount arrangement with a third-party financial institution. The change in the allowance for doubtful accounts relates primarily to an accounts receivable write-off of approximately $i5.1 million related to a customer bankruptcy
as previously reported in the 2018 Form 10-K.
6. iInventories
12
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as
otherwise noted)
The
increase in Total inventories – net at September 30, 2019 compared to the balance at December 31, 2018 was due primarily to increased Work in progress and Finished goods inventory due to sales timing, product mix and buffer inventory build ahead of the Company's planned fourth quarter 2019 turnaround partially offset by lower levels of Raw materials driven by the timing of cumene deliveries.
7. iPostretirement
Benefit Cost
i
The components of Net periodic benefit cost of the Company’s pension plan are as follows:
The
Company made contributions to the defined benefit pension plan of $i4.2 million during the nine months ended September 30, 2019 sufficient to satisfy pension funding requirements for 2019 under the AdvanSix Retirement Earnings Plan. The Company made contributions of $i0
in the first quarter of 2019, $i0.5 million in the second quarter of 2019 and $i3.7 million
in the third quarter of 2019. The Company does inot plan to make additional pension plan contributions during the fourth quarter of 2019, but plans to make additional contributions in future years sufficient to satisfy pension funding requirements in those periods.
The pension plan assets are invested through a master trust fund. The strategic asset allocation
for the trust fund is selected by the Company's Investment Committee reflecting the results of comprehensive asset and liability modeling. The Investment Committee establishes strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk.
8. iiLeases/
We
determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets, Operating lease liabilities – short-term, and Operating lease liabilities – long-term in our Condensed Consolidated Balance Sheets. Finance leases are included in Property, plant and equipment – net, Accounts payable, and Other liabilities in our Condensed Consolidated Balance Sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present
value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease pre-payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease and, when it is reasonably certain that such an option will be exercised, it is included in the determination of the corresponding assets and
13
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
liabilities. Short-term leases
are not recognized on our unaudited Condensed Consolidated Balance Sheets. Lease expense for all lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities. The Company has entered into agreements to lease transportation equipment, storage facilities, office space, dock access and other equipment. The leases have initial terms of up to i20
years with some containing renewal options subject to customary conditions.
The
cumulative effect of the changes made to the Condensed Consolidated Balance Sheets for the adoption of the new leasing standard on January 1, 2019 was as follows:
Balance Sheet accounts prior to new leasing standard adoption adjustments
Adjustments due to the adoption of the new leasing standard
Balance
Sheet accounts after the new leasing standard adoption adjustments
ASSETS
Property, plant and equipment – net
$
i1,032
$
i—
$
i1,032
Operating
lease right-of-use assets
i—
i117,921
i117,921
Total
assets
i1,034,626
$
i117,921
i1,152,547
LIABILITIES
AND EQUITY
Current Liabilities:
Accounts payable
$
i318
$
i—
$
i318
Operating
lease liabilities – short term
i—
i24,794
i24,794
Total
current liabilities
i284,724
i24,794
i309,518
Operating
lease liabilities – long term
i—
i93,127
i93,127
Other
liabilities
i762
i—
i762
Total
liabilities
i614,288
i117,921
i732,209
Total
equity
i420,338
i—
i420,338
Total
liabilities and equity
i1,034,626
$
i117,921
i1,152,547
/
iiMaturities
of lease liabilities were as follows:/
15
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
Year
Ending December 31,
Operating Leases
Finance Leases
2019 (remainder)
$
i10,987
$
i194
2020
i41,576
i708
2021
i29,838
i472
2022
i20,578
i151
2023
i12,391
i—
Thereafter
i70,375
i—
Total
lease payments
i185,745
i1,525
Less
imputed interest
(i49,337)
(i81)
Total
$
i136,408
$
i1,444
ii
As
previously disclosed in our 2018 Form 10-K and under the previous lease accounting standard, future minimum lease payments for leases having initial or remaining non-cancellable lease terms in excess of one year were as follows:
Year Ending December 31,
Operating Leases
Capital Leases
2019
$
i36,110
$
i239
2020
i29,318
i212
2021
i16,111
i131
2022
i11,571
i89
2023
i9,104
i—
Thereafter
i26,627
i—
Total
lease payments
$
i128,841
$
i671
//
9.
iCommitments and Contingencies
The Company is subject to a number of lawsuits, investigations and disputes, some of which involve substantial amounts claimed, arising out of the conduct of the Company or other third-parties in the normal and ordinary course of business. A liability is recognized
for any contingency that is probable of occurrence and reasonably estimable. The Company continually assesses the likelihood of adverse judgments or outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on an analysis of each matter with the assistance of legal counsel and, if applicable, other experts.
Given the uncertainty inherent in such lawsuits, investigations and disputes, the Company does not believe it is possible to develop estimates of reasonably possible loss in excess of current accruals for these matters. Considering the Company’s
past experience and existing accruals, the Company does not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Potential liabilities are subject to change due to new developments, changes in settlement strategy or the impact of evidentiary requirements, which could cause the Company to pay damage awards or settlements (or become subject to equitable remedies) that could have a material adverse effect on the Company’s consolidated results of operations, balance sheet and/or operating
cash flows in the periods recognized or paid.
We assumed from Honeywell all health, safety and environmental (“HSE”) liabilities and compliance obligations related to the past and future operations of our current business, as well as all HSE liabilities associated with our ithree current manufacturing locations and the other locations used in our current operations, including any cleanup or other liabilities related to any contamination that may have occurred at such
locations in the past. Honeywell retained all HSE liabilities related to former business locations or the operation of our former businesses. Although we have ongoing environmental remedial obligations at certain of our facilities, in the past three years, the associated remediation costs have not been material, and we do not expect our known remediation costs to be material for 2019.
10. iIncome Taxes
16
ADVANSIX
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
The Company’s provision for income taxes in interim periods is computed by applying an estimated annual effective tax rate against Income before taxes for the period in addition to recording any tax effects of discrete items for the quarter. The provision for income taxes was $i1.5
million and $i0.2 million for the three months ended September 30, 2019 and 2018, respectively. The provision for income taxes was $i13.6
million and $i13.4 million for the nine months ended September 30, 2019 and 2018, respectively.
In the current period, the Company recorded an income tax benefit of $i0.9 million
in connection with the filing of the 2018 U.S. federal income tax return primarily attributable to additional research tax credits claimed in 2018. This resulted in a i9.9% and i1.6%
decrease to the Company’s effective tax rate for the three and nine months ended September 30, 2019, respectively. In the period ended September 30, 2018, the Company recorded a net $i1.0 million income tax benefit in connection with the
filing of the 2017 U.S. federal income tax return and the accounting under ASC 740 (Staff Accounting Bulletin No. 118) for the Tax Cuts and Jobs Act ("Tax Act") . These adjustments resulted in a i18.2% and i1.8%
decrease to the Company’s effective tax rate for the three and nine months ended September 30, 2018, respectively.
11. iFair Value Measurements
Financial and non-financial assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value measurement. During the fourth quarter of 2018, the Company acquired a royalty stream which has been treated as an asset acquisition. The purchase price of the royalty stream for $i1.0 million approximated its fair value at December 31, 2018 and is considered a Level 3 asset. The fair value measurement is based on the expected future cash
flows and, as there is no reason to believe that the asset is impaired, it is assumed that the valuation remains unchanged at September 30, 2019. In November 2018 and July 2019, the Company entered into two interest rate swap transactions related to its credit agreement. The fair value of the interest rate swaps at September 30, 2019 was a loss of approximately $i2.2
million and is considered a Level 2 liability.
The pension plan assets are invested in collective investment trust funds. These investments are measured at fair value using the net asset value per share as a practical expedient. Investments valued using the net asset value method (NAV) (or its equivalent) practical expedient are excluded from the fair value hierarchy disclosure.
The Company’s Condensed Consolidated Balance Sheets also include Cash and cash equivalents, Accounts receivable and Accounts payable all of which are recorded at amounts which approximate fair value.
The
Company also has assets that are required to be recorded at fair value on a non-recurring basis. These assets are evaluated when certain triggering events occur (including a decrease in estimated future cash flows) that indicate the asset should be evaluated for impairment. Goodwill and indefinite lived intangible assets must be evaluated at least annually.
12. iDerivative and Hedging Instruments
The
specific credit and market, commodity price and interest rate risks to which the Company is exposed in connection with its ongoing business operations are described below. This discussion includes an explanation of the hedging instrument, interest rate swap agreements, used to manage the Company’s interest rate risk associated with a fixed and floating-rate borrowing.
For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in Other comprehensive income. Those amounts are reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects
earnings.
Credit and Market Risk – Financial instruments, including derivatives, expose the Company to counterparty credit risk for non-performance and to market risk related to changes in commodity prices, interest rates and foreign currency exchange rates. The Company manages its exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. The Company’s counterparties in derivative transactions are substantial investment and commercial banks with significant experience using such derivative instruments.
The Company monitors the impact of market risk on the fair value and cash flows of its derivative and other financial instruments considering reasonably possible changes in commodity prices, interest rates and foreign currency exchange rates and restricts the use of derivative financial instruments to hedging activities.
The Company continually monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. The terms and conditions of credit sales are designed to mitigate or eliminate concentrations of credit risk with any
17
ADVANSIX
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
single customer. Although the Company did not have any customers accounting for a significant percentage of trade Accounts receivable - net at September 30, 2019, one customer accounted for approximately i22%
of trade Accounts receivable – net at December 31, 2018.
Commodity Price Risk Management – The Company's exposure to market risk for commodity prices can result in changes in the cost of production. We primarily mitigate our exposure to commodity price risk by using long-term, formula-based price contracts with our suppliers and formula-based price agreements with customers. Our customer agreements provide for price adjustments based on relevant market indices and raw material prices and generally do not include take-or-pay terms. We may also enter into forward commodity contracts
with third-parties designated as hedges of anticipated purchases of several commodities. Forward commodity contracts are marked-to-market, with the resulting gains and losses recognized in earnings, in the same category as the items being hedged, when the hedged transaction is recognized. At September 30, 2019 and 2018, we had no financial contracts related to forward commodity agreements.
Interest Rate Risk Management – The Company has entered into two interest rate swap agreements for a total
notional amount of $i100 million to exchange floating for fixed rate interest payments for our LIBOR-based borrowings. These interest rate swaps had a fair value of izero
at inception and were effective November 30, 2018 and July 31, 2019 with respective maturity dates of November 30, 2021 and February 21, 2023. In accordance with FASB Accounting Standards Codification (“ASC”) ASC 815, the Company designated the interest rate swaps as cash flow hedges of floating-rate borrowings. The interest rate swaps convert the Company’s interest rate payments on the first $i100
million of variable-rate, 1-month LIBOR-based debt to a fixed interest rate. These interest rate swaps involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the interest rate swap without an exchange of the underlying principal amount.
The
following table summarizes adjustments related to cash flow hedge included in Cash-flow hedges, in the Condensed Consolidated Statements of Comprehensive Income:
Loss on derivative instruments included in Accumulated other comprehensive income at December 31,
2018
$
(i833)
Fair value adjustment
(i1,413)
Loss
on derivative instruments included in Accumulated other comprehensive income at September 30, 2019
$
(i2,246)
/
At
September 30, 2019, the Company expects to reclassify approximately $i0.9 million of net losses on derivative instruments from Accumulated other comprehensive income to earnings during the next 12 months due to the payment of variable interest associated
with the floating rate debt.
13. iRestructuring
On May 2, 2019, the Company approved the closure of its Pottsville, Pennsylvania films plant as part of its broader strategic
efforts to improve the Company’s competitive position in providing quality film products and services to its customers. The Company also announced a strategic alliance with Oben Holding Group S.A. (“Oben”), a third-party producer of films for the flexible packaging industry, leveraging the Company's sales channels and Nylon 6 supply with Oben's new state-of-the-art manufacturing facility. The Company ceased operations at the Pottsville, Pennsylvania plant in July 2019.
18
ADVANSIX
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
Restructuring costs consist of long-lived asset impairments, facility exit costs, employee separations and inventory write-downs. Facility exit costs include demolition, equipment relocation, contract terminations and project management costs. These costs are included in Cost of goods sold in the Condensed Consolidated Statements of Operations. The Company recorded a restructuring charge of $i12.6 million
in the second quarter of 2019 and does not expect to incur any additional restructuring charges related to the closure of its films plant.
i
Restructuring costs for the nine months ended September 30, 2019 were as follows:
The
following table summarizes the components of restructuring activities and the remaining balances of accrued restructuring charges as of September 30, 2019:
The
balance of accrued restructuring charges is expected to be settled within the next twelve months.
/
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and
results of operations, which we refer to as our “MD&A,” should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto contained elsewhere in this Form 10-Q, as well as the MD&A section included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (“SEC”) on February 22, 2019 (the “2018 Form 10-K”). Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors that can affect our performance in both near- and long-term, including those incorporated by reference
in Item 1A of Part II of this Form 10-Q as such factors may be revised or supplemented in subsequent filings with the SEC, as well as those discussed in the section entitled “Note Regarding Forward-Looking Statements” below.
Note Regarding Forward-Looking Statements
All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this MD&A regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this Form 10-Q, words such as “anticipate,”“believe,”“will,”“estimate,”“expect,”“plan,”“intend” and similar expressions identify forward-looking statements. Although we believe forward-looking statements are based upon reasonable assumptions, such statements involve known and unknown risks, uncertainties and other factors, many of which are beyond our control and difficult to predict, which may cause the actual results or performance of the company to be materially different from any future results or performance expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to: the impact of scheduled turnarounds and significant unplanned downtime and interruptions of production or logistics operations as a result of mechanical issues or other unanticipated events such as fires, severe weather conditions, and natural disasters; price fluctuations and supply of raw materials; our operations requiring
substantial capital; general economic and financial conditions in the U.S. and globally; growth rates and cyclicality of the industries we serve including global changes in supply and demand; risks associated with our indebtedness including with respect to restrictive covenants; failure to develop and commercialize new products or technologies; loss of significant customer relationships; adverse trade and tax policies; extensive environmental, health and safety laws that apply to our operations; hazards associated with chemical manufacturing, storage and transportation; litigation associated with chemical manufacturing and our business operations generally; inability to acquire and integrate businesses, assets, products or technologies; protection of our intellectual property and proprietary information; prolonged work stoppages as a result of labor difficulties; cybersecurity and data privacy incidents; failure to maintain effective internal controls; disruptions in
transportation and logistics; our inability to achieve some or all of the anticipated benefits of our spin-off including uncertainty regarding qualification for expected tax treatment; fluctuations in our stock price; and changes in laws or regulations applicable to our business. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those contemplated by the forward-looking statements as a result of a number of risks, uncertainties and other factors including those noted above and those detailed in Item 1A of Part I and elsewhere in our 2018 Form 10-K and subsequent filings with the SEC. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph. We do not undertake to update or revise any of our forward-looking statements.
Business
Overview
We produce and sell caprolactam as a commodity product and produce and sell our Nylon 6 resin as both a commoditized and differentiated resin product. Our results of operations are primarily driven by production volume and the spread between the sales prices of our products and the costs of the underlying raw materials built into market-based and value-based pricing models. The global prices for nylon resin typically track a spread over the price of caprolactam, which in turn tracks as a spread over benzene because the key feedstock materials for caprolactam, phenol or cyclohexane, are derived from benzene. This price spread has historically experienced cyclicality as a result of global changes in supply and demand. Generally, Nylon 6 resin prices track the cyclicality of caprolactam prices, although prices set above the spread are achievable when nylon resin manufacturers,
like AdvanSix, formulate and produce differentiated nylon resin products. Our differentiated Nylon 6 products are typically valued at a higher level than commodity resin products.
We believe that the Nylon 6 end-market growth will continue to generally track global GDP over the long-term; applications such as packaging and engineering plastics have potential to grow at faster rates given certain macrotrends. Additionally, one of
20
our strategies is to continue developing higher-value, differentiated Nylon 6 products, such as our co-polymer offerings, in current and new customer applications.
Our ammonium
sulfate is used by customers as a fertilizer containing nitrogen and sulfur, two key crop nutrients. Global prices for ammonium sulfate fertilizer are influenced by several factors including the price of urea, which is the most widely used source of nitrogen-based fertilizer in the world. Other global factors driving ammonium sulfate fertilizer demand are general agriculture trends, including the price of crops. Our ammonium sulfate product is positioned with the added value proposition of sulfur nutrition to increase yields of key crops.
We produce ammonium sulfate fertilizer continuously throughout the year as part of our manufacturing process, but quarterly sales experience seasonality based on the timing and length of the growing seasons in North and South America. North America ammonium sulfate prices are typically strongest during second quarter fertilizer application and then
typically decline seasonally with new season fill in the third quarter. Due to the ammonium sulfate fertilizer sales cycle, we occasionally build up higher inventory balances because our production is continuous and not tied to seasonal demand for fertilizers. Sales of most of our other products have generally been subject to minimal, or no, seasonality.
We also manufacture, market and sell a number of chemical intermediate products that are derived from the chemical processes within our integrated supply chain. Most significant is acetone, which is used by our customers in the production of adhesives, paints, coatings and solvents. Prices for acetone are influenced by its own supply and demand dynamics but can also be influenced by the underlying move in propylene input costs.
We seek to run our production
facilities on a nearly continuous basis for maximum efficiency as several of our intermediate products are key feedstock materials for other products in our integrated manufacturing chain. While our integration, scale and range of product offerings make us one of the most efficient manufacturers in our industry, these attributes also expose us to increased risk associated with material disruptions at any one of our production facilities or logistics operations which could impact the overall manufacturing supply chain. Further, although we believe that our sources of supply for our raw materials, including cumene, natural gas and sulfur, are generally robust, it is difficult to predict the impact that shortages, increased costs and related supply chain logistics considerations may have in the future. In order to mitigate the risk of unplanned interruptions, we schedule several planned plant turnarounds each year to conduct routine and major maintenance across our facilities.
We also utilize maintenance excellence and mechanical integrity programs, targeted buffer inventory of intermediate chemicals necessary for our manufacturing process, and co-producer swap arrangements, which are intended to mitigate the extent of any production losses as a result of planned and unplanned downtime; however, the mitigation of all or part of any such production impact cannot be assured.
Recent Developments
On May 2, 2019, the Company approved the closure of its Pottsville, Pennsylvania films plant as part of its broader strategic efforts to improve the
Company’s competitive position in providing quality film products and services to its customers. The Company has also announced a strategic alliance with Oben Holdings Group S.A. (“Oben”), a third-party producer of films for the flexible packaging industry, leveraging the Company's sales channels and Nylon 6 resin supply with Oben's new state-of-the-art manufacturing facility. The Company ceased operations at the Pottsville, Pennsylvania plant in July 2019. We recognized a restructuring charge of $12.6 million during the second quarter of 2019 and do not expect to incur any additional restructuring charges related to the closure. See “Note 13. Restructuring”to the Condensed
Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further information.
On February 19, 2019, the Company announced that it filed anti-dumping duty petitions covering imports of acetone with the International Trade Commission (“ITC”) and U.S. Department of Commerce. The petitions allege that dumped acetone imports into the United States from Belgium, Korea, Saudi Arabia, Singapore, South Africa, and Spain have caused material injury to the domestic industry. On April 4, 2019, the ITC voted to continue the anti-dumping duty investigations concerning imports of acetone from all such nations other than Saudi Arabia. During the third quarter
of 2019, the U.S. Department of Commerce announced its preliminary affirmative determination regarding anti-dumping duties for Singapore, Spain, Belgium, South Africa and South Korea. The Company expects the full investigation process to be completed during the first quarter of 2020.
On March 13, 2018, a federal search warrant was executed at the Company’s Hopewell, Virginia manufacturing facility. On the same date, the Company was separately served with a grand jury subpoena issued by the U.S. District Court for the Eastern District
of Virginia, which requested documents related to the Hopewell facility’s air emissions and its compliance with the terms of a previously disclosed 2013 consent decree with the federal government and the Commonwealth of Virginia. As previously reported in our 2018 Form 10-K, the Company was notified during the first quarter of 2019 that the U.S. Attorney’s Office for the Eastern District of Virginia had closed its investigation and no further action by the Company was required. On
21
May 13, 2019, the
Company announced that the United States government notified the Company that the balance of the criminal investigation concluded with no further action required.
2019 Operational Events
On March 11, 2019, the Company announced that it declared force majeure on its phenol product line as a result of shortages and delivery delays of its key raw material, cumene. The Company's cumene deliveries were reduced due to weather related logistics
disruptions in the Gulf Coast area and supplier operational constraints. As a result of this force majeure event, phenol production at the Company's Frankford, Pennsylvania facility and caprolactam production at its Hopewell, Virginia facility were reduced. The Company incurred an approximately $6.9 million unfavorable impact to pre-tax income in the first quarter of 2019, including the unfavorable impact of fixed cost absorption and incremental logistics costs. In addition, the Company incurred an approximately $1.4 million unfavorable impact to pre-tax income in the first quarter of 2019 and an approximately $2.3 million unfavorable impact to pre-tax income in the second quarter of 2019 due to lost sales. The
Company is no longer on force majeure with phenol customers.
On June 24, 2019, the Company announced that it was assessing the potential business impact of the fire that occurred at Philadelphia Energy Solutions' (“PES”) refinery in Philadelphia. PES is one of multiple suppliers to the Company of cumene, a feedstock material used to produce phenol, acetone and other chemical intermediates. The Company continues to operate its facilities while implementing its mitigation plans, including evaluation of business interruption insurance. The PES fire did not have a material
impact on second quarter 2019 financial results. The Company incurred an approximately $4.3 million unfavorable impact to pre-tax income in the third quarter of 2019 and anticipates an approximately $4 to $6 million unfavorable impact to pre-tax income in the fourth quarter of 2019, including incremental raw material and logistics costs as well as a modest unfavorable impact from fixed cost absorption. The Company continues to assess long-term optionality for cumene supply and logistics, while optimizing expected base feedstock and logistics cost increases as it realigns its supply chain into 2020. The Company anticipates an approximately $10 to $15 million unfavorable impact to pre-tax income in 2020.
2018
Operational Events
On January 17, 2018, the Company announced that it had experienced a temporary production issue at its Hopewell, Virginia facility related to the severe winter weather. As a result of this unplanned interruption, caprolactam and resin production had been reduced at the Hopewell and Chesterfield, Virginia facilities. The Company incurred a $20 million unfavorable impact to pre-tax income in the first quarter of 2018 including the impact of fixed cost absorption, maintenance expense and incremental raw material costs. In addition, the Company incurred an approximately $10
million unfavorable impact to pre-tax income in the first quarter of 2018 due to lost sales. The Company submitted a business interruption insurance claim related to the first quarter 2018 weather event and recorded a benefit of $6.6 million and $2.3 million to Cost of goods sold in the first and second quarters of 2019, respectively. The business interruption claim was closed in the second quarter of 2019 with a total recorded benefit of approximately $12 million.
Sales
decreased in the three months ended September 30, 2019 compared to the prior year period by $58.0 million (approximately 16%) due primarily to lower sales prices (approximately 14%) driven by formula-based pass-through pricing (approximately 11% unfavorable impact), particularly for benzene and propylene (inputs to cumene which is a key feedstock material for our products) and market-based pricing decreases (approximately 3% unfavorable impact) in acetone and nylon. Volume decreased by approximately 2% due to unfavorable mix across our nylon and ammonium sulfate product lines, driven in part by operational performance, and continued challenging industry conditions in chemical intermediates, partially offset by improved caprolactam volume due to stronger utilization rates and the larger planned plant turnaround in the prior year period.
Sales
decreased in the nine months ended September 30, 2019 compared to the prior year period by $157.6 million (approximately 14%) due primarily to lower sales prices (approximately 10%) driven by formula-based pass-through pricing, particularly for benzene and propylene. Market-based pricing was nearly flat due primarily to increases in ammonium sulfate offset by decreases in acetone. Volume decreased by approximately 4% due primarily to the phenol force majeure discussed above, challenging acetone industry conditions, unfavorable mix across our nylon and ammonium sulfate product lines, driven in part by operational performance, partially offset by improved caprolactam volume due to stronger utilization rates and the larger planned plant turnaround in the prior period.
Costs
of goods sold decreased in the three months ended September 30, 2019 compared to the prior year period by $63.3 million (approximately 18%) due primarily to (i) lower prices of raw materials, particularly benzene and propylene (approximately 14%) and (ii) higher spend in the prior year driven by the larger planned plant turnaround in the third quarter of 2018 (approximately 7%). These decreases were partially offset by (i) the impact of operational performance in the third quarter of 2019, including fixed cost absorption and unfavorable product mix (approximately 2%) and (ii) the PES cumene supply impact discussed above (approximately 1%).
Costs of goods sold decreased in the nine months ended September 30, 2019 compared to the prior year period by $157.6 million (approximately 16%) due
primarily to (i) lower prices of raw materials, particularly benzene and propylene (approximately 13%), (ii) higher spend in the prior year driven by the timing of planned plant turnarounds (approximately 3%), and (iii) lower manufacturing costs versus higher spend in the prior year as a result of the first quarter 2018 weather event, including purchases of feedstocks which are normally manufactured by the Company (approximately 2%), partially offset by the restructuring charge associated with the closure of our Pottsville films plant (approximately 1%).
Gross margin percentage increased by approximately 3% in the three months ended September 30, 2019 compared to the prior year period due primarily to higher spend in the prior year driven by the larger
planned plant turnaround in the third quarter of 2018 (approximately 8%), partially offset by (i) the impact of operational performance, including fixed cost absorption and unfavorable mix across product lines (approximately 4%) and (ii) the PES cumene supply impact discussed above (approximately 1%). The impact of formula pass-through pricing and market pricing had approximately a net neutral impact on gross margin percentage.
Gross margin percentage increased by approximately 2% in the nine months ended September 30, 2019 compared to the prior year period due to (i) higher spend in the prior year driven by the timing of planned plant turnarounds (approximately 3%), (ii) the favorable impact of lower raw material pricing (approximately 2%) and (iii) lower manufacturing costs versus the impact of the first quarter 2018 weather event (approximately
2%), partially offset by (i) lower sales volume related to challenging industry conditions and phenol force majeure (approximately 4%) and (ii) Pottsville restructuring charge (approximately 1%).
Selling, general and administrative expenses increased by $1.2 million in the three months ended September 30, 2019 compared to the prior period due primarily to the timing of IT costs as well as higher legal costs driven by the anti-dumping duty petitions.
Selling,
general and administrative expenses increased by $3.5 million in the nine months ended September 30, 2019 compared to the prior period due primarily to the timing of IT costs as well as higher legal costs driven by the anti-dumping duty petitions, partially offset by lower costs associated with the exit of Honeywell transition services in 2018.
The Company’s effective tax rate for the three months ended September 30, 2019 was lower compared to the U.S. federal statutory rate, due primarily to additional research tax credits claimed on the
Company's 2018 U.S. federal income tax return affecting the current period results, partially offset by state taxes and executive compensation deduction limitations. The Company’s effective tax rate for the three months ended September 30, 2018 was lower compared to the U.S. federal statutory rate, due primarily to the accounting under ASC 740 for the Tax Act and adjustments resulting from the filing of the 2017 U.S. federal income tax return, partially offset by state taxes. The Company’s effective tax rate for the nine months ended September 30, 2019 and 2018 was higher compared to the U.S. federal statutory rate due primarily to state taxes
and executive compensation deduction limitations partially offset by research tax credits and tax benefits associated with return-to-provision adjustments.
The Company’s effective tax rate for the three months ended September 30, 2019 was higher than the prior year due primarily to the tax benefit associated with accounting under ASC 740 (Staff Accounting Bulletin No 118) for the Tax Act recorded in the period ended September 30, 2018. The Company’s effective tax rate for the nine months ended September 30, 2019 was higher than the prior year due primarily to an increase
in expected non-deductible executive compensation amounts, and a decrease in the benefits from the vesting of restricted stock units, partially offset by additional research tax credits referenced above (see Note 10. Income Taxes).
As
a result of the factors described above, Net income was $7.9 million and $43.4 million for the three and nine months ended September 30, 2019 as compared to $5.5 million and $45.5 million in the corresponding prior year period.
Non-GAAP Measures
(Dollars in thousands, unless otherwise noted)
The following tables set forth the non-GAAP financial measures of EBITDA and EBITDA Margin, and EBITDA and EBITDA Margin excluding the one-time Pottsville restructuring charges described below. EBITDA is defined as Net income before Interest, Income taxes and Depreciation and amortization. EBITDA Margin is equal to EBITDA divided by Sales. The
Company believes these non-GAAP financial measures provide meaningful supplemental information as they are used by the
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Company’s management to evaluate the Company’s operating performance, enhance a reader’s understanding of the financial performance of the Company, and facilitate a better comparison among fiscal periods and performance relative to its competitors, as the non-GAAP measures exclude items that are not considered core to the Company’s operations.
These
non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for the financial information presented in accordance with GAAP. Non-GAAP financial measures should be read only in conjunction with the comparable GAAP financial measures. The Company's non-GAAP measures may not be comparable to other companies' non-GAAP measures.
The following is a reconciliation between the non-GAAP financial measures of EBITDA and EBITDA Margin, and EBITDA and EBITDA Margin excluding the one-time Pottsville restructuring charges, to their most directly comparable GAAP financial measure:
(1)
Current year one-time Pottsville restructuring charges reflect the closure of the Company's Pottsville, Pennsylvania films plant. See “Note 13. Restructuring”to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further information.
Liquidity and Capital Resources
(Dollars in thousands, unless otherwise noted)
We believe that cash balances and operating cash flows, together with available capacity under our credit agreement, will provide adequate funds to support our current short-term operating objectives as well as our longer-term
strategic plans, subject to the risks and uncertainties outlined below, in our "Note Regarding Forward-Looking Statements" above, and in the risk factors previously disclosed in our 2018 Form 10-K. Our principal source of liquidity is our cash flow generated from operating activities, which is expected to provide us with the ability to meet the majority of our short-term funding requirements. Our cash flows are affected by capital requirements and production volume, which may be materially impacted by unanticipated events such as unplanned downtime, material disruptions at our production facilities as well as the prices of our raw materials and general economic and industry trends. We utilize supply chain financing and trade receivables discount arrangements with third-party financial institutions which enhance liquidity and enable us to efficiently manage our working capital needs. In addition, we monitor the third-party depository institutions that hold our
cash and cash equivalents. Our emphasis is primarily on the safety of principal and secondarily on maximizing yield on those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities.
On a recurring basis, our primary future cash needs will be centered on operating activities, working capital, capital expenditures including high return growth and cost savings investments, share repurchases, employee benefit obligations, interest payments, strategic acquisitions and debt management. We believe that our future cash from operations, together with cash on hand and our access to credit and capital markets, will provide adequate resources to fund our expected operating and
25
financing
needs. Our ability to fund our capital needs, however, will depend on our ongoing ability to generate cash from operations and access to credit and capital markets, both of which are subject to the risk factors previously disclosed in our 2018 Form 10-K, as well as general economic, financial, competitive, regulatory and other factors that are beyond our control.
We assumed from Honeywell all health, safety and environmental (“HSE”) liabilities and compliance obligations related to the past and future operations of our current business, as well as all HSE liabilities associated with our three current manufacturing locations and the other locations used in our current operations including any cleanup or other liabilities related to any contamination that may have occurred at such locations in the past. Honeywell retained all HSE liabilities related to former business locations or
the operation of our former businesses. Although we have ongoing environmental remedial obligations at certain of our facilities, in the past three years, the associated remediation costs have not been material, and we do not expect our known remediation costs to be material for 2019.
We expect that our primary cash requirements for the remainder of 2019 will be to fund costs associated with ongoing operations, capital expenditures, share repurchases and amounts related to other contractual obligations.
The Company made contributions to the defined benefit pension plan of $4.2 million during the nine months ended September 30, 2019 sufficient to satisfy pension funding
requirements for 2019 under the AdvanSix Retirement Earnings Plan. The Company made contributions of $0 in the first quarter of 2019, $0.5 million in the second quarter of 2019 and $3.7 million in the third quarter of 2019. The Company does not plan to make pension plan contributions during the fourth quarter of 2019, but plans to make additional contributions in future years sufficient to satisfy pension funding requirements in those periods.
On May 4, 2018, the Company announced that its Board of Directors (the “Board”) authorized a share repurchase program of up to $75
million of the Company’s common stock. On February 22, 2019, the Company announced that the Board authorized a share repurchase program of up to an additional $75 million of the Company’s common stock, which was in addition to the remaining capacity available under the May 2018 share repurchase program. Repurchases may be made from time to time on the open market, including through the use of trading plans intended to qualify under Rule 10b5-1 of the Exchange Act. The size and timing of these repurchases will depend on pricing, market and economic conditions, legal and contractual requirements and other factors. The
repurchase program has no expiration date and may be modified, suspended or discontinued at any time.
As of September 30, 2019, the Company had repurchased 3,089,762 shares of common stock for an aggregate of $90.4 million at a weighted average market price of $29.26 per share. As of September 30, 2019, $59.6 million remained available for repurchase under the current authorization. During the period from October 1, 2019 through October 25, 2019, no additional shares were repurchased under the currently authorized repurchase program. On October 3, 2019,
the Company withheld 388,530 shares covering tax withholding obligations in connection with the vesting of founders' grant equity awards for an aggregate purchase amount of approximately $9.1 million, reducing the number of shares outstanding.
Credit Agreement
On February 21, 2018 (the “Amendment Date”), the Company entered into Amendment No. 1 (the “Amendment”) to the Credit Agreement, dated September 30, 2016 (the “Original Credit Agreement”), among
the Company, the guarantors, the lenders party thereto and Bank of America, N.A., as administrative agent (the Original Credit Agreement, after giving effect to the Amendment, the “Amended and Restated Credit Agreement”).
The credit facilities under the Original Credit Agreement consisted of a senior secured term loan in an aggregate principal amount of $270 million, of which $267 million was outstanding just prior to entering into the Amendment, and a senior secured revolving credit facility in a principal amount of $155 million. Pursuant to the Amendment, (i) the term loan facility under the Original Credit Agreement was terminated and the entire outstanding balance of the term loan facility (the “Term Loan”) thereunder was paid in full, and (ii) the maximum aggregate principal amount
of the senior secured revolving credit facility (the “Revolving Credit Facility”) was increased to $425 million.
On the Amendment Date, the Company borrowed $242 million under the Revolving Credit Facility. The proceeds of such loans, as well as cash on hand, were used to repay the outstanding Term Loan under the Original Credit Agreement. The Revolving Credit Facility under the Amended and Restated Credit Agreement has a 5-year term with a scheduled maturity date of February 21, 2023. The Amendment resulted in an increase in the Revolving Credit Facility to replace the Term Loan and provides increased borrowing flexibility and reduced overall borrowing costs with an approximate 50 basis point reduction in the interest rate spread.
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The
Amended and Restated Credit Agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock of the Company, enter into transactions with affiliates, make investments, make capital expenditures, merge or consolidate with others or dispose of assets, as well as financial covenants that require the Company to maintain interest coverage and leverage ratios at levels specified in the Amended and Restated Credit Agreement. These covenants may limit how we conduct our business, and in the event of certain
defaults, our repayment obligations may be accelerated. We were in compliance with all of our covenants at September 30, 2019. As of September 30, 2019, $158 million is available for use out of the total of $425 million under the Revolving Credit Facility.
As of December 31, 2018, we had a balance of $200 million under the Revolving Credit Facility.During the first nine months of 2019, we borrowed an incremental net amount of $66 million to bring the balance under the Revolving Credit Facility to $266 million as of September 30, 2019. Going forward, we expect that cash provided by operating activities will fund future interest payments on
the Company's outstanding indebtedness.
Cash provided by operating activities decreased by $27.2 million for the nine months ended September 30, 2019 versus the prior year period due primarily to a $9.1 million reduction in cash flow from working capital (comprised of Accounts receivables, Inventories, Accounts payable and Deferred income and customer advances) for the first nine months ended September 30, 2019 versus a $35.5 million improvement in the prior year period, partially
offset by a favorable impact from the timing of cash payments on Accrued liabilities of $5.2 million versus the prior year period. The Pottsville restructuring charge had a minor impact on operational cash flows for the nine months ended September 30, 2019. See “Note 13. Restructuring”to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further information.
Cash used for investing activities increased by $34.3 million for the nine months ended September 30, 2019 versus the prior year period due to an increase in cash paid for capital expenditures.
Cash provided by financing activities increased by $96.9 million for
the nine months ended September 30, 2019 versus the prior year period due to net borrowings of $66.0 million for the nine months ended September 30, 2019 compared to net repayments of $66.6 million during the prior year period, offset by $53.1 million in cash outflows for share repurchases during the nine months ended September 30, 2019 compared to $20.4 million in cash outflows during the prior year period, both of which are described above.
Capital Expenditures
(Dollars in thousands, unless otherwise noted)
Our operations are capital intensive,
requiring ongoing investments that have consisted, and are expected to continue to consist, primarily of capital expenditures required to maintain and improve equipment reliability, expand production output, further improve mix, yield and cost position, and comply with environmental and safety regulations.
The following table summarizes ongoing and expansion capital expenditures:
For
the full year 2019, we expect the Company’s cash paid for capital expenditures to be approximately $150 million.
Critical Accounting Policies
The preparation of our Condensed Consolidated Financial Statements in accordance with U.S. GAAP is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider these accounting policies to be critical to the understanding of our Condensed Consolidated Financial Statements. For a full description of our critical accounting policies, refer to Management’s Discussion and Analysis of
Financial Condition and Results of Operations contained in our 2018 Form 10-K. While there have been no material changes to our critical accounting policies, or the methodologies or assumptions we apply under them, during the first quarter of 2019, as described in “Note 2. Recent Accounting Pronouncements,”the Company changed the manner in which it accounts for leases under guidance that became effective January 1, 2019.
Off-Balance Sheet Arrangements and Contractual Obligations
As of September 30, 2019, the
Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any material changes in the commitments or contractual obligations detailed in the Company's 2018 Form 10-K. The Company has not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Recent Accounting Pronouncements
See “Note 2. Recent Accounting Pronouncements” to the Condensed Consolidated Financial Statements included in Part I. Item 1 of this Form 10-Q.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to risk based on changes in interest rates relates primarily to our Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement bears interest at floating rates. For variable rate debt, interest rate changes generally do not affect the fair market value of such debt assuming all other factors remain constant, but do impact future earnings and cash flows. Accordingly, we may be exposed to interest rate risk on borrowings under the Amended and Restated Credit Agreement.
The Company has entered into two interest
rate swap agreements for a total notional amount of $100 million to exchange floating for fixed rate interest payments for our LIBOR-based borrowings.
These interest rate swaps had a fair value of zero at inception, were effective November 30, 2018 and July 31, 2019 with respective maturity dates of November 30, 2021 and February 21, 2023. These interest rate swaps have been designated as cash flow hedges and convert the Company’s interest rate payments on the first $100 million of variable-rate, 1-month LIBOR-based debt to a fixed interest rate. As a result of these interest rate swaps, approximately
38% of our total borrowings as of September 30, 2019 are at a fixed interest rate. These interest rate swaps involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the swaps without an exchange of the underlying principal amount.
A hedge effectiveness assessment was completed by comparing the critical terms of the hedged items with the hedging instruments, and also by reviewing the credit standing of the counterparties. As of September 30, 2019, it was determined that the critical terms continued to exactly match, and that the counterparties still had the ability to honor their obligations. As a result, the hedges continue to be deemed effective.
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Based
on current borrowing levels at September 30, 2019, net of the interest rate swap, a 25-basis point fluctuation in interest rates for the nine months ended September 30, 2019 would have resulted in an increase or decrease to our interest expense of approximately $0.4 million.
See “Note 12. Derivative and Hedging Instruments” to the Condensed Consolidated Financial Statements, included in Part I. Item 1 of this Form 10-Q, for a discussion relating to credit and market, commodity price and interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
their objectives. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud have been, or will be, detected.
Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our management, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of September 30,
2019, the end of the period covered by this quarterly report.
Changes in Internal Control over Financial Reporting
Management has not identified any change in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
From time to time, we are involved in litigation relating to claims arising outside of the ordinary course of our business operations. We are not a party to, and, to our knowledge, there are not threats of any claims or actions against us, the ultimate disposition of which would have a material adverse effect on our consolidated financial position, results of operations or operating cash flows.
ITEM 1A. RISK FACTORS
There have been no material changes to our risk factors as previously disclosed in Item 1A of Part I of the
Company’s 2018 Form 10-K, which are hereby incorporated by reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 4, 2018, the Company announced that the Board authorized a share repurchase program of up to $75 million of the Company’s common stock. On February 22, 2019, the Company announced
that the Board authorized a share repurchase program of up to an additional $75 million of the Company's common stock, which authorization was in addition to the remaining capacity authorized under the May 2018 share repurchase program. Repurchases may be made from time to time on the open market, including through the use of trading plans intended to qualify under Rule 10b5-1 of the Exchange Act. The size and timing of these repurchases will depend on pricing, market and economic conditions, legal and contractual requirements and other factors. The share repurchase program has no expiration date and may be modified, suspended or discontinued at any time.
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The
below table sets forth the repurchases of Company common stock, by month, for the quarter ended September 30, 2019:
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total
Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan
July 2019
(1)
226,011
$
24.96
223,027
$
66,730,746
August
2019
242,699
22.95
242,699
61,160,234
September 2019
68,323
23.10
68,323
59,581,679
Total
537,033
$
23.82
534,049
(1)
Total number of shares purchased includes 2,984 shares withheld to cover tax withholding obligations in connection with the vesting of equity awards.
During the period from October 1, 2019 through October 25, 2019, no additional shares were repurchased under the currently authorized repurchase program.On October 3, 2019, the Company withheld 388,530 shares covering tax withholding obligations in connection with the vesting of founders’ grant equity awards for an aggregate purchase amount of approximately $9.1 million, reducing the number of shares outstanding.
Inline
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Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101)
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SIGNATURE
Pursuant to the requirements
of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
