AdvanSix Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. AdvanSix manufactures Nylon 6 resin and related products, including caprolactam, ammonium sulfate fertilizer and chemical intermediates. Amounts below are in millions of dollars unless otherwise stated.
Financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Sales | $400.5 | $361.4 | $759.7 | $738.1 |
| Gross margin | 14.4% | 17.2% | 12.6% | 16.9% |
| Net income | $28.4 | $25.8 | $40.0 | $53.1 |
| Diluted EPS | $0.91 | $0.83 | $1.28 | $1.71 |
| EBITDA, non-GAAP | $53.0 | $54.6 | $83.8 | $111.7 |
| EBITDA margin, non-GAAP | 13.2% | 15.1% | 11.0% | 15.1% |
Q2 sales rose 10.8%, from 4.0% higher volume and 6.8% higher prices, principally formula-based feedstock pass-through pricing. First-half sales increased 2.9% as pricing gains were partly offset by a 1.9% volume decline. Q2 net income improved year over year, but first-half net income fell 24.6%; the filing attributes the first-half decline principally to the January outage and related costs.
Cash flow, balance sheet and debt
- First-half operating cash flow was $77.2 million, versus $60.8 million a year earlier. Capital expenditures were $53.4 million, giving approximate operating-cash-flow less capex of $23.8 million. Investing cash outflow was $54.7 million; financing cash outflow was $61.3 million. Cash declined $38.7 million to $16.7 million.
- At June 30, cash was $16.7 million, current assets $300.4 million and current liabilities $228.8 million. Total assets were $971.2 million and stockholders’ equity $418.1 million.
- Debt was $210.0 million outstanding under the revolving credit facility: $18.3 million classified as short-term and $191.7 million long-term. The facility limit is $425 million, matures February 21, 2023, and had $213.9 million available at quarter-end. The company reported compliance with its covenants.
- In February, AdvanSix repaid its approximately $267 million term loan using revolving-facility borrowings and cash, replacing it with an expanded revolver. Management said the amendment reduced the interest-rate spread by approximately 50 basis points and increased borrowing flexibility.
Material developments, outlook and risks
- January weather-related outage: The Hopewell production issue reduced caprolactam and resin production at Hopewell and Chesterfield. The company reported approximately $20 million of first-quarter pretax cost impact from fixed-cost absorption, maintenance and higher feedstock costs, plus approximately $10 million of pretax impact from lost sales. Repairs were completed; a business interruption insurance claim was submitted.
- Capital spending and pension: Management expected full-year 2018 capital expenditures of $110–$115 million and pension contributions of approximately $10–$15 million. It had contributed $8.6 million to the pension plan through June 30.
- Share repurchases: The board authorized a program of up to $75 million. By June 30, 70,107 shares had been repurchased for $2.7 million, with $72.3 million remaining. Through July 31, an additional 124,767 shares were repurchased; reported remaining authorization was approximately $67.5 million.
- Federal inquiry: A search warrant was executed at the Hopewell facility and a grand jury subpoena sought records concerning air emissions and compliance with a 2013 consent decree. The company said it was cooperating and operations were unaffected. Potential fines or penalties could not be reasonably estimated.
- Other risks: The business is exposed to cyclical product/feedstock spreads, raw-material prices, seasonal fertilizer demand and disruption risk from planned or unplanned plant downtime. The company also identified data privacy and cybersecurity risks. It said known environmental remediation costs were not expected to be material in 2018; ordinary-course legal matters were not expected to have a material adverse effect, though outcomes remain uncertain.
- Accounting and controls: Adoption of the new revenue standard had no cumulative financial-statement impact. The company expected the new lease standard, planned for adoption January 1, 2019, to materially affect the balance sheet. Management concluded disclosure controls were effective at a reasonable assurance level.
Most important facts to verify
- Whether the Hopewell federal inquiry results in penalties, operating restrictions or other material consequences.
- How much of the January outage’s stated cost and lost-sales impact may be recovered through insurance, and the timing of any recovery.
- Whether margins and earnings recover after the first-half decline, given higher feedstock costs and the company’s product/feedstock spread exposure.
- Revolver utilization, borrowing costs, covenant headroom and cash needs alongside planned capital spending and repurchases.
- Actual full-year capital expenditures and pension contributions compared with management’s stated ranges.