AdvanSix Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative figures are for the three months ended March 31, 2016. AdvanSix manufactures Nylon 6 resin and related products, including caprolactam, ammonium sulfate fertilizers and chemical intermediates. The 2016 comparative statements include pre-spin-off results and Honeywell-allocated costs; AdvanSix separated from Honeywell on October 1, 2016.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $376.7 million | $299.8 million |
| Gross margin | 16.6% | 18.1% |
| Income before taxes | $44.2 million | $43.6 million |
| Net income | $27.3 million | $27.4 million |
| Diluted EPS | $0.88 | $0.90 |
| Operating cash flow | $31.2 million | $4.0 million |
| Capital expenditures paid | $33.2 million | $24.6 million |
- Sales increased 25.6% year over year, reflecting approximately 21.8% higher prices and 3.8% higher volume. Higher raw-material costs, especially benzene and propylene, contributed to higher selling prices. Caprolactam and resin and chemical-intermediate pricing increased, while ammonium sulfate pricing declined.
- Costs of goods sold rose 27.9%. Gross margin declined from 18.1% to 16.6%; management cited the absence of a $15.5 million one-time benefit recorded in Q1 2016 from terminating a long-term supply agreement, as well as pricing relative to raw-material costs. Higher production volumes partly offset these effects.
- SG&A increased to $16.8 million from $11.4 million, primarily due to stand-alone workforce, infrastructure, shared-facility and transition-service costs after the spin-off. The effective tax rate was 38.3%, versus 37.1%.
- Reported non-GAAP EBITDA was $57.1 million versus $53.3 million; Q1 2016 EBITDA excluding the one-time supply-agreement benefit was $37.8 million. EBITDA margin was 15.2%, compared with 17.8% reported and 12.6% excluding that prior-year benefit. The filing cautions that these non-GAAP measures supplement, not replace, GAAP results.
- Operating cash flow increased by $27.2 million year over year. Management attributed the improvement principally to prior-year timing effects in accounts payable and other assets and liabilities, and higher income taxes payable, partly offset by higher receivables associated with sales growth.
- Cash was $12.0 million at March 31, 2017, down from $14.2 million at year-end. Total debt was approximately $264.9 million, including $3.4 million current and $261.6 million long-term. The company had $153 million available under its $425 million credit agreement and was compliant with its covenants. It temporarily borrowed and repaid $167.5 million under the revolving facility during the quarter.
- Total assets were $928.0 million and total liabilities were $683.7 million at quarter-end. Receivables rose to $168.0 million from $131.7 million, attributed to higher sales; inventories declined to $112.0 million from $129.0 million, primarily due to raw-material purchasing timing and post-turnaround finished-goods replenishment.
Outlook, commentary and risks
- Management said operating cash flow, cash on hand and available credit are expected to fund the current annual operating plan and expected financing needs, subject to disclosed risks. No earnings or revenue guidance was provided.
- Full-year 2017 capital expenditures were expected to be approximately $90 million. Planned 2017 pension funding was approximately $20 million; $2.2 million was contributed in January and a further $1.6 million in April.
- Key business sensitivities include cyclical Nylon 6 and caprolactam supply and demand, raw-material prices and product spreads, fertilizer-market and seasonal demand, and plant reliability. Planned turnarounds and unplanned outages can affect production and costs.
- Debt bears floating interest rates. The filing estimates that a 25-basis-point interest-rate change at current borrowing levels would change quarterly interest expense by approximately $0.1 million.
- AdvanSix assumed specified health, safety and environmental liabilities for its current business and locations. Known remediation costs were not expected to be material in 2017. The company reported ordinary-course litigation and disputes, but did not believe outcomes would materially adversely affect its financial position, results or cash flows; loss estimates beyond existing accruals were not considered reasonably estimable.
- Management reported disclosure controls effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to the risk factors in the 2016 Form 10-K.
Important facts for investors to verify
- Whether sales-price gains and volume growth persist, and how product spreads compare with movements in raw-material costs.
- How results trend when compared with Q1 2016 after considering its $15.5 million one-time supply-agreement benefit and Honeywell-allocated costs.
- Whether planned 2017 capital spending and pension contributions are met, and their effects on cash generation and liquidity.
- Debt balances, revolving-credit availability, covenant compliance and exposure to floating interest rates.
- Whether operating, environmental or legal contingencies develop beyond the company’s current expectations or accruals.