AdvanSix Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018. AdvanSix manufactures Nylon 6 and sells caprolactam, ammonium sulfate fertilizers, and chemical intermediates. Dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales | $314.9 | $359.2 |
| Gross profit / gross margin | $48.0 / 15.2% | $37.9 / 10.6% |
| Income before taxes | $27.0 | $15.2 |
| Net income | $20.2 | $11.6 |
| Diluted EPS | $0.68 | $0.37 |
| EBITDA / EBITDA margin (non-GAAP) | $42.0 / 13.3% | $30.8 / 8.6% |
| Operating cash flow | $42.1 | $44.1 |
| Cash capital expenditures | $39.5 | $30.7 |
Sales fell 12.3%, reflecting a 9.1% price decline and 3.2% lower volume. Gross margin improved despite lower revenue. The filing reports no separate operating-income line item. Q1 operating cash flow less cash capital expenditures was approximately $2.6 million.
At March 31, 2019, cash was $7.8 million; current assets were $268.9 million and current liabilities were $256.7 million. The revolving credit facility balance was $220 million, with $204 million available under the $425 million facility. The company reported compliance with all credit covenants. Total assets were $1,123.8 million and stockholders’ equity was $419.2 million. The company repurchased 793,754 shares during the quarter for $23.9 million.
Material changes and operating drivers
- Sales decreased $44.3 million year over year. Lower raw-material pass-through prices, particularly for benzene and propylene, drove much of the price decline; volume was affected by a phenol force majeure and challenging acetone markets.
- Q1 2019 included a $6.6 million insurance benefit in cost of goods sold related to the 2018 weather disruption. The company said the benefit, lower raw-material costs, and lower manufacturing costs versus the prior-year weather-affected quarter supported improved gross margin.
- Cumene supply disruptions led to reduced phenol and caprolactam production. The company estimated a $6.9 million unfavorable pre-tax impact from fixed-cost absorption and incremental logistics, plus $1.4 million from lost sales.
- Operating cash flow was $2.0 million lower than the prior year, while cash used for investing increased $8.4 million, primarily due to higher capital spending.
- Adoption of the new lease standard on January 1, 2019 added operating lease right-of-use assets and liabilities to the balance sheet. At March 31, operating lease liabilities totaled $116.7 million; adoption did not significantly affect lease expense or cash flow presentation.
Outlook, risks, and contingencies
- Management expects 2019 capital expenditures of $140 million to $150 million and pension contributions of approximately $3 million to $8 million. No full-year earnings or sales guidance is provided in the filing.
- Management believes cash, operating cash flow, and available credit will support operating and planned funding needs, while noting dependence on operating performance and access to credit and capital markets.
- On May 2, 2019, after quarter-end, the company approved closure of its Pottsville, Pennsylvania films plant, expected to be completed in Q3 2019, and announced a strategic alliance for flexible-packaging films. It expects a Q2 pre-tax repositioning charge of approximately $10 million to $12 million, including about $6 million of non-cash impairment and approximately $5 million of future cash costs.
- The U.S. Attorney’s Office closed its investigation concerning the Hopewell facility; a narrowed EPA and DOJ inquiry remained ongoing. Potential fines, if any, could not be reasonably estimated. Separately, a Virginia DEQ consent order resulted in a $202,221 civil charge and was terminated after conditions were met.
- AdvanSix filed anti-dumping petitions concerning acetone imports. The ITC continued investigations for imports from all named countries except Saudi Arabia; the company expected the process to take another 10 to 12 months.
- Key business risks include cyclical product and feedstock prices, customer concentration (Shaw represented 22% of Q1 sales), seasonal fertilizer demand, and the possibility of production interruptions at integrated facilities. The company reported no material changes to previously disclosed risk factors.
Investor verification points
- Assess how much of the earnings and margin improvement reflects recurring operations versus the $6.6 million insurance benefit and prior-year weather comparison.
- Track recovery from the cumene-related supply disruption, its effect on production and sales, and any further force majeure impacts.
- Review whether planned 2019 capital expenditures, buybacks, and pension contributions remain consistent with cash generation and facility availability.
- Monitor the Pottsville closure charge, execution of the films alliance, and any subsequent operating or cash-flow effects.
- Follow the remaining environmental inquiry and acetone trade investigations for potential financial or operational consequences.