AdvanSix Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 22, 2019. AdvanSix is an integrated U.S. manufacturer of Nylon 6, caprolactam, ammonium sulfate fertilizer and chemical intermediates, operating as one reportable segment.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Sales | $1,515.0 million | $1,475.2 million |
| Gross profit / margin | $174.5 million / 11.5% | $227.1 million / 15.4% |
| Net income | $66.2 million | $146.7 million |
| Diluted EPS | $2.14 | $4.72 |
| EBITDA / EBITDA margin (non-GAAP) | $146.5 million / 9.7% | $200.8 million / 13.6% |
| Operating cash flow | $173.4 million | $134.6 million |
| Capital expenditures | $109.2 million | $86.4 million |
Sales grew 2.7% year over year: pricing increased 4.7%, while volume declined 2.0%, primarily due to the first-quarter winter-weather disruption. Higher feedstock pass-through pricing and market-based increases in nylon and ammonium sulfate were partly offset by weaker chemical-intermediate pricing, particularly acetone. Net income fell 54.8%; 2017 included a $53.4 million tax benefit from U.S. tax reform. Excluding the disclosed one-time tax benefits, net income was $64.6 million in 2018 versus $93.3 million in 2017.
Fourth-quarter 2018 sales were $386.6 million, gross profit $53.8 million and net income $20.8 million. Fourth-quarter 2017 net income of $72.4 million included the tax-reform benefit.
Liquidity, debt and capital allocation
Cash and cash equivalents were $9.8 million at year-end, down from $55.4 million. Current assets were $311.1 million and current liabilities $284.7 million. Year-end debt was $200 million, all under the revolving credit facility, compared with $265.2 million of term debt at the end of 2017. The $425 million facility matures in February 2023; approximately $1.1 million of letters of credit utilized facility capacity. Substantially all domestic tangible and intangible assets secure the borrowings, which carry variable rates. A $50 million interest-rate swap fixed the rate on approximately 25% of year-end borrowings.
Operating cash flow less reported capital expenditures was approximately $64.2 million. Investing activities used $112.2 million and financing activities used $106.8 million, including $38.5 million of share repurchases and net debt repayments. No dividends were paid in 2018 or 2017.
Material changes and management outlook
- Severe winter weather disrupted Hopewell and Chesterfield production in the first quarter, reducing output and contributing to an estimated $20 million pre-tax operating impact and approximately $10 million of lost sales. A $2.9 million insurance benefit was recorded in the fourth quarter; a further $0.3 million was reported by February 1, 2019.
- Gross margin contracted from 15.4% to 11.5%, reflecting weather-related manufacturing costs, purchased feedstocks and pricing dynamics. SG&A rose 12%, including a $6 million bad-debt charge related to a Brazilian fertilizer customer’s judicial reorganization petition and approximately $3 million in legal costs associated with the Hopewell inquiry.
- Management expects 2019 capital expenditures of approximately $140–$150 million. Planned 2019 pension contributions were estimated at $3–$8 million. The filing provides no specific earnings or revenue guidance.
- Management stated that cash, operating cash flow and credit availability should support operating needs and strategic plans, subject to business and market risks. It continues to pursue cost and reliability improvements and higher-value specialty nylon products.
- In February 2019, the company authorized an additional $75 million share-repurchase program. It also filed U.S. anti-dumping petitions concerning acetone imports from six countries; the investigation was expected to take 12–14 months.
Risks, contingencies and unusual items
- Hopewell air-emissions matters remain under regulatory scrutiny. The U.S. Attorney’s Office closed its investigation with no further action required from the company, but a narrowed EPA/Department of Justice inquiry continued; potential penalties, if any, could not be reasonably estimated. Separate EPA and Virginia DEQ penalty discussions were ongoing. Management did not expect these matters to have a material adverse financial effect; production was reported unaffected.
- Sales are exposed to cyclical pricing, commodity inputs, industry supply and demand, plant reliability and transportation disruption. The ten largest customers represented approximately 45% of 2018 sales; Shaw alone represented 22% and trade receivables were also concentrated.
- A fertilizer customer’s financial reorganization increased the allowance for doubtful accounts to $7.5 million from $1.4 million. The related 2018 charge was approximately $6 million.
- Environmental, health and safety compliance, potential remediation, labor negotiations, trade actions, pension funding and variable-rate debt are additional risks. Approximately 730 employees were covered by collective bargaining agreements expiring from 2019 through 2023.
- The company estimated a $110–$130 million right-of-use asset upon adoption of the new lease standard in 2019, with a significant balance-sheet impact expected but no significant income-statement or cash-flow impact anticipated.
Key facts for investors to verify
- Whether operating performance and margins recover from the 2018 weather-related disruption and higher manufacturing costs.
- Collection and credit-loss developments for the Brazilian fertilizer customer and other concentrated receivables.
- Outcomes, timing and possible costs of the remaining Hopewell environmental inquiries and penalty negotiations.
- Progress and economics under the amended Shaw supply agreement, given Shaw’s 22% share of sales.
- 2019 capital spending, resulting cash generation, debt usage and share repurchases, including compliance with credit-facility covenants.
- Actual lease-accounting adoption impact and the outcome of the acetone anti-dumping petitions.