AdvanSix Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. AdvanSix manufactures Nylon 6 and related products, including caprolactam, ammonium sulfate fertilizers, and chemical intermediates. The company was spun off from Honeywell on October 1, 2016, so 2016 comparative results are combined predecessor-period results.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales | $361.4 million | $308.4 million | $738.1 million | $608.2 million |
| Gross margin | 17.1% | 11.2% | 16.9% | 14.6% |
| Net income | $25.8 million | $15.0 million | $53.1 million | $42.4 million |
| Diluted EPS | $0.83 | $0.49 | $1.71 | $1.39 |
| EBITDA, non-GAAP | $54.6 million | $34.1 million | $111.7 million | $87.4 million |
| EBITDA margin, non-GAAP | 15.1% | 11.1% | 15.1% | 14.4% |
Sales increased 17.2% in Q2 and 21.4% for the first half. Management attributed the gains to higher prices and increased volumes: Q2 price and volume rose approximately 13.8% and 3.4%, respectively; first-half price and volume rose 17.6% and 3.8%. Higher feedstock costs, particularly benzene and propylene, contributed to sales-price increases through formula pass-throughs. Higher production volumes also improved fixed-cost absorption and gross margin.
SG&A was $18.1 million in Q2 and $34.9 million for the first half, up from $10.9 million and $22.3 million, respectively. The increase primarily reflects stand-alone public-company costs following the Honeywell separation, including workforce, infrastructure, shared-facility, and transition-service costs. The first-half 2016 comparison also included a $15.5 million one-time benefit from termination of a long-term supply agreement; first-half 2017 EBITDA margin was 15.1%, versus 11.8% for 2016 excluding that benefit.
Cash, debt, and liquidity
For the six months, operating cash flow was $60.8 million, investing cash outflow was $51.8 million, and financing cash outflow was $0.1 million. Cash increased $8.9 million to $23.1 million at June 30. Capital expenditures paid were $47.8 million, including amounts settled from prior-period payables.
Total debt was approximately $265.0 million: $6.8 million current and $258.3 million long-term. The company reported $152.8 million available under its $425 million credit agreement and compliance with all covenants. It borrowed and repaid $276 million in aggregate under the revolver during the first half. The filing says operating cash, cash on hand, and credit availability are expected to support the operating plan, subject to stated risks.
Outlook, risks, and contingencies
- Management expected 2017 capital expenditures of approximately $90 million and planned approximately $17 million of pension contributions for the year. Cash needs for the remainder of 2017 included operations, planned plant outages, capital spending, and pension contributions.
- Management described Nylon 6 and caprolactam markets as cyclical, with global supply, demand, raw-material prices, and product/feedstock spreads affecting results. It cited improved North American supply-demand conditions but continuing global market dynamics, and expected challenging agricultural fundamentals through the 2017/2018 planting season.
- Production is capital intensive and integrated; unplanned outages or disruptions at a facility could affect downstream production. Floating-rate debt creates interest-rate exposure; a 25-basis-point rate movement was estimated to change six-month interest expense by approximately $0.3 million.
- AdvanSix assumed specified health, safety, and environmental obligations for current operations and facilities. It reported ongoing remediation obligations, but did not expect known remediation costs to be material in 2017. The company said ordinary-course litigation was not expected to materially harm results or liquidity, while noting potential outcomes remain uncertain.
- No material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
- The company planned to adopt the new revenue-recognition standard on January 1, 2018; its preliminary assessment expected revenue recognition for its products to remain substantially unchanged.
Most important facts for investors to verify
- Whether higher selling prices and improved production volumes persist as feedstock costs and commodity-market conditions change.
- How stand-alone costs after the Honeywell separation develop relative to management’s expectations.
- Delivery of the approximately $90 million 2017 capital-expenditure plan, planned pension funding, and resulting cash generation.
- Debt availability, covenant compliance, and sensitivity to floating interest rates.
- Potential effects of plant outages, environmental obligations, and other contingencies; the filing does not quantify reasonably possible litigation losses beyond recorded accruals.