AdvanSix Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. AdvanSix manufactures Nylon 6 resin and related products, including caprolactam, ammonium sulfate fertilizers and chemical intermediates.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales | $359.2 million | $376.7 million |
| Gross margin | 10.6% | 16.7% |
| Income before taxes | $15.2 million | $44.2 million |
| Net income | $11.6 million | $27.3 million |
| Diluted EPS | $0.37 | $0.88 |
| EBITDA (non-GAAP) | $30.8 million | $57.1 million |
| EBITDA margin (non-GAAP) | 8.6% | 15.2% |
| Operating cash flow | $44.1 million | $31.2 million |
| Cash capital expenditures | $30.7 million | $33.2 million |
Sales declined 4.6%: volume fell 7.7%, partly offset by a 3.1% increase in price. Costs of goods sold rose 2.4% despite lower volume. The effective tax rate was 23.5%, down from 38.3%, primarily reflecting the lower federal corporate tax rate under the Tax Act.
Liquidity, debt and balance sheet
- Cash was $29.4 million at March 31, down from $55.4 million at year-end. Operating cash flow was partly offset by $31.7 million of investing outflows and $38.4 million of financing outflows; cash decreased $26.1 million during the quarter.
- At quarter-end, revolving-credit borrowings were $230 million, classified as $37.6 million short-term and $192.4 million long-term. The company reported $193.7 million available under its $425 million facility and compliance with its covenants.
- In February, AdvanSix replaced its term loan with an expanded five-year revolving facility maturing February 21, 2023. The company cited increased borrowing flexibility and an approximately 50-basis-point reduction in the interest-rate spread. Borrowings have floating rates.
- Total assets were $990.5 million and total liabilities were $600.7 million at March 31, 2018. The company said cash, operating cash flow and available credit were expected to support operating and strategic needs.
Material changes, outlook and risks
- Winter-weather production interruption: A January issue at Hopewell reduced caprolactam and resin production at Hopewell and Chesterfield. The company attributed approximately $20 million of unfavorable pretax impact to fixed-cost absorption, maintenance and incremental raw-material costs, plus approximately $10 million of unfavorable pretax impact from lost sales. Repairs were completed in about two to three weeks; the company was evaluating a business-interruption insurance claim.
- Capital spending: Full-year 2018 capital expenditures were expected to be $110–$120 million. Planned spending supports maintenance, reliability, capacity, cost improvements, and environmental and safety compliance.
- Share repurchases: On May 4, 2018, the board authorized repurchases of up to $75 million of common stock. Timing and amount depend on market, legal and contractual conditions; the program may be changed or discontinued.
- Federal inquiry: A search warrant was executed at the Hopewell facility on March 13, and the company received a grand jury subpoena concerning air emissions and compliance with a 2013 consent decree. AdvanSix said it was cooperating, operations were unaffected, and potential penalties or fines could not be reasonably estimated.
- Management cited challenging fertilizer fundamentals through the 2018 spring planting season, commodity-price and supply-demand cyclicality, and the risk that unplanned outages or maintenance could disrupt its integrated operations. The company also assumed specified health, safety and environmental obligations associated with its current business; known remediation costs were not expected to be material in 2018.
- The company planned approximately $8 million of 2018 pension contributions, including $2.0 million in Q1 and $1.6 million in April. It provided no specific earnings or sales guidance in this filing.
Important facts for investors to verify
- Whether production and sales recovered after the January outage, and whether any insurance proceeds are recognized.
- Developments in the Hopewell federal inquiry, including any penalties, required remediation or operational consequences.
- Progress on the $110–$120 million capital program, cash generation, working-capital trends and use of the revolving facility.
- Compliance with leverage and interest-coverage covenants, and exposure to floating-rate borrowing costs.
- Whether the $75 million repurchase authorization is used and how repurchases affect liquidity and share count.