AdvanSix Inc. — Q3 2018 Form 10-Q
Business context and reporting period. AdvanSix manufactures Nylon 6 resin and related products, including caprolactam, ammonium sulfate fertilizer and chemical intermediates. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless otherwise noted. Figures below are in millions of dollars except per-share amounts and percentages.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $368.7 | $366.7 | $1,128.4 | $1,104.8 |
| Gross margin | 6.8% | 15.6% | 10.7% | 16.5% |
| Net income | $5.5 | $21.3 | $45.5 | $74.3 |
| Diluted EPS | $0.18 | $0.68 | $1.46 | $2.40 |
| EBITDA margin (non-GAAP) | 5.4% | 13.7% | 9.2% | 14.7% |
Q3 pretax income was $5.7 million versus $35.8 million; nine-month pretax income was $58.9 million versus $121.1 million. Q3 tax expense was $0.2 million (4.0% effective rate), compared with $14.5 million (40.6%); the lower 2018 rate reflected tax-law changes and discrete tax benefits.
Cash flow and investment: Nine-month operating cash flow was $127.7 million, up from $98.5 million, helped by working-capital movements and receivable collections. Investing cash outflow was $74.3 million, including $72.7 million of cash capital expenditures. Financing cash outflow was $88.7 million, primarily reflecting debt repayments and share repurchases. Cash declined to $20.2 million from $55.4 million at year-end 2017.
Debt and liquidity: Debt was $200.0 million at September 30, all under a $425 million revolving facility; $9.4 million was classified as short-term. The company reported $223.9 million of facility availability and compliance with its covenants. Current assets were $288.2 million and current liabilities $247.2 million. The revolving facility matures February 21, 2023 and has floating interest rates.
Material changes and drivers
- Sales rose 0.5% in Q3 and 2.1% year to date, as higher pricing more than offset lower volumes. Q3 volume declined about 10%, primarily due to a planned Hopewell turnaround and lower production; nine-month volume fell about 5%, also reflecting the January outage.
- Costs of goods sold increased 11% in Q3 and 9% year to date. Management cited higher propylene, benzene and sulfur costs, turnaround and outage expenses, and purchases of feedstocks normally produced internally. These pressures drove the substantial gross-margin decline.
- A January 2018 winter-weather production interruption at Hopewell and Chesterfield reduced caprolactam and resin production. The company reported an approximately $20 million unfavorable pretax impact from manufacturing-related costs and an additional approximately $10 million from lost sales in Q1; it submitted a business-interruption insurance claim.
- The company refinanced its term loan in February by replacing it with the expanded revolving facility, reporting greater borrowing flexibility and an approximately 50-basis-point reduction in the interest-rate spread. It repurchased 545,282 shares for $19.7 million through September 30 under its $75 million authorization; $55.3 million remained available at quarter-end.
Outlook, risks and unusual items
- Management expects 2018 capital expenditures of approximately $110 million and stated that cash, operating cash flow and available credit are expected to support operating and financing needs. No earnings or revenue guidance is provided in the filing.
- A federal search warrant was executed at the Hopewell facility in March, and the company received a grand jury subpoena concerning air emissions and compliance with a 2013 consent decree. The company is cooperating; possible fines or penalties cannot currently be estimated. It said production was not affected.
- The company faces ordinary-course legal matters and environmental obligations. It stated known remediation costs were not expected to be material for 2018, while noting potential outcomes may change.
- Manufacturing is capital intensive and exposed to raw-material prices, cyclical product spreads, seasonal fertilizer demand, plant turnarounds and unplanned outages. Floating-rate debt also creates interest-rate exposure; a 25-basis-point change was estimated to affect nine-month interest expense by approximately $0.4 million.
- Accounting for certain Tax Act effects remained provisional, with completion expected in Q4 2018. Adoption of the new lease standard was planned for January 1, 2019 and was expected to significantly affect the balance sheet, but not materially affect lease expense presentation or cash flows.
Important facts for investors to verify
- Whether the reduced margins persist and how input-cost pass-through pricing compares with actual raw-material and manufacturing costs.
- Recovery from the January outage and Q3 turnaround, including the status and potential recovery from the business-interruption insurance claim.
- Developments in the federal inquiry, potential penalties, and any resulting operational or compliance costs.
- Debt levels, revolving-facility availability, covenant headroom and exposure to floating interest rates.
- Subsequent share repurchases: the filing reports an additional 188,600 shares repurchased through October 26, 2018, leaving approximately $49.4 million authorized.
- Final Tax Act accounting adjustments and the balance-sheet impact of adopting the lease standard.