AdvanSix Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; filed March 6, 2017. The company was spun off from Honeywell on October 1, 2016 and began regular-way NYSE trading on October 3. FY 2016 results therefore combine the pre-spin business and post-spin company; historical results include allocated Honeywell costs and may not represent standalone economics.
Business context
AdvanSix is an integrated U.S. manufacturer of Nylon 6, caprolactam, ammonium sulfate fertilizer and chemical intermediates, operating three manufacturing sites and serving about 500 customers in more than 40 countries. Its sales depend on production volumes and product spreads over key raw materials. The filing describes industry margins for Nylon 6 and caprolactam as having fallen to historic lows amid increased capacity, particularly from China.
Financial performance and position
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Sales | $1,191.5 million | $1,329.4 million | Down 10.4% |
| Gross profit | $107.6 million | $149.8 million | Down $42.1 million |
| Gross margin | 9.0% | 11.3% | Down 2.3 percentage points |
| Net income | $34.1 million | $63.8 million | Down 46.5% |
| Basic and diluted EPS | $1.12 | $2.09 | Down 46.4% |
| EBITDA, non-GAAP | $96.0 million | $136.6 million | Down $40.7 million |
| EBITDA margin, non-GAAP | 8.1% | 10.3% | Down 2.2 percentage points |
Cash from operations was $113.7 million, versus $101.5 million in 2015. Capital expenditures were $84.0 million, giving approximate operating cash flow less capex of $29.7 million. Cash at year-end was $14.2 million. Current assets were $282.5 million and current liabilities $274.0 million.
Year-end long-term debt was $264.8 million, net of deferred issuance costs; no revolving borrowings were outstanding. The company had a $155 million revolver, with $2.1 million of letters of credit issued. Total assets were $905.0 million, liabilities $689.6 million and equity $215.4 million. No dividend was paid in Q4 2016.
Material changes and unusual items
- Sales fell primarily because lower raw-material costs flowed through formula-based pricing, ammonium sulfate pricing weakened, and market pricing for caprolactam and resin remained under pressure. Volumes declined 1.2%, primarily due to Q4 outages.
- Q4 revenue was $259.3 million; gross loss was $20.1 million and net loss was $24.7 million. Planned and unplanned turnaround/outage impacts reduced Q4 pretax income by approximately $51 million, including $20 million planned and $31 million unplanned charges. The company also estimated approximately $13 million of lost sales.
- The Hopewell ammonia-plant turnaround ran about two weeks beyond its planned 20 days after significant inspection findings at a pressure vessel. A further temporary Hopewell outage reduced caprolactam output and downstream resin production.
- FY 2016 financing included a $270 million term loan used primarily to fund a distribution to Honeywell. The company repaid $3.4 million of term-loan principal by year-end and repaid its $40 million initial revolver draw.
- After the spin-off, the company recorded a $33.9 million pension obligation with no plan assets. It made a $2.2 million pension contribution in January 2017 and expected approximately $20 million of additional 2017 contributions.
Outlook, risks and contingencies
Management expected 2017 capital expenditures of approximately $90 million, including about $25 million for environmental compliance. It stated that cash, operating cash flow and credit availability were expected to fund the next 12 months’ needs. The filing provides no specific revenue, earnings or margin guidance.
Key risks include cyclical pricing and intense competition; raw-material cost and supply volatility; customer concentration (the ten largest customers represented about 40% of 2016 sales and Shaw represented 17%); facility outages and aging equipment; environmental, health and safety obligations; and trade duties affecting exports to China and Mexico. Debt covenants restrict, among other things, additional borrowing, dividends, acquisitions and asset dispositions. Spin-off tax indemnities and restrictions may also constrain strategic actions.
In December 2016, the EPA notified the company of alleged Hopewell violations involving leak detection and emission testing under a 2013 consent decree; negotiations were ongoing. Management did not expect a material adverse effect, but the outcome was uncertain. The company had previously agreed to a $3 million civil penalty and compliance work under the decree, and a separate 2015 Virginia water consent order included a $300,000 penalty and corrective actions.
Most important facts for investors to verify
- Whether production and margins recovered after the Q4 Hopewell outages, and the timing and cost of future turnarounds.
- Actual 2017 cash generation, capital spending, pension contributions and debt repayment compared with management’s stated expectations.
- Debt covenant headroom, revolver availability and the impact of interest costs on liquidity.
- Progress on standalone operations and transition-service costs, given historical Honeywell expense allocations and the post-spin cost structure.
- Developments in the EPA matter, environmental compliance spending, and the potential effect of export duties and customer concentration.
- Whether specialty-product growth can offset continued commodity pricing pressure; FY 2016 specialty contribution or forward targets are not clearly quantified in the filing.