AdvanSix Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2017. AdvanSix manufactures Nylon 6 and related products, including caprolactam, ammonium sulfate fertilizer and chemical intermediates. The 2016 comparison is partly a pre-spin-off combined period; AdvanSix separated from Honeywell on October 1, 2016.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $366.7 million | $324.0 million | $1,104.8 million | $932.2 million |
| Gross margin | 15.6% | 12.0% | 16.4% | 13.7% |
| Net income | $21.3 million | $16.5 million | $74.3 million | $58.9 million |
| Diluted EPS | $0.68 | $0.54 | $2.40 | $1.93 |
| EBITDA, non-GAAP | $50.3 million | $38.1 million | $162.0 million | $125.5 million |
| EBITDA margin, non-GAAP | 13.7% | 11.8% | 14.7% | 13.5% |
Quarterly sales rose 13.2% year over year, reflecting higher prices (8.3%) and volume (4.9%). Nine-month sales rose 18.5%, with price contributing 14.4% and volume 4.1%. Price increases included raw-material pass-through and stronger market pricing; higher volumes were concentrated in caprolactam, chemical intermediates and ammonium sulfate, partly offset by lower Nylon volume. Net income increased about 29% in Q3 and 26% year to date.
SG&A was $19.1 million in Q3 and $54.0 million year to date, up from $11.7 million and $33.9 million, respectively, mainly because of stand-alone costs following the Honeywell separation. The effective tax rate was 40.6% for Q3 and 38.6% year to date.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $98.5 million, compared with $66.5 million in 2016; investing cash use was $72.6 million, mainly capital expenditures, versus $57.3 million. Financing cash use was $0.1 million. Cash increased $25.8 million to $40.0 million.
- Cash capital expenditures were $67.2 million through September; management expected full-year 2017 capital expenditures of approximately $90 million.
- At September 30, cash was $40.0 million and total debt was $265.1 million, including $10.1 million current and $255.0 million long term. Net debt was approximately $225.1 million.
- Available capacity under the $425 million credit facility was $152.9 million. The company reported compliance with all debt covenants and said cash, operating cash flow and credit availability should adequately fund planned needs.
- Accounts receivable was $152.5 million; inventory was $100.5 million, down from $129.0 million at year-end 2016. The company uses a third-party receivables discount arrangement to manage working capital.
Changes, outlook and risks
- Management attributed improved margins to higher sales prices net of raw-material costs and higher volumes. Benzene and propylene prices raised input costs; pass-through pricing and market prices also supported sales.
- Management described Nylon and caprolactam markets as cyclical, with global conditions still dynamic despite improved North American supply-demand fundamentals. It expected agricultural fundamentals to remain challenging through the 2017/2018 planting season.
- Production depends on integrated facilities operating reliably; planned outages, unplanned downtime and supply disruptions may affect output. Cumene delivery delays caused by hurricane-related logistics affected inventory during the period.
- Floating-rate debt exposes earnings and cash flow to interest-rate changes; the filing estimated a 25-basis-point rate move would change interest expense by about $0.5 million based on current borrowings. Debt covenants restrict certain actions.
- The company 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. It did not expect ordinary-course legal matters to materially affect results or liquidity, while noting outcomes remain uncertain.
- Unusual items included a $4.4 million unfavorable pretax impact from the LIFO reserve change in Q3 and a $7.2 million deferred-tax balance adjustment related to the Honeywell separation, recorded with an increase to additional paid-in capital. The 2016 nine-month comparison includes a $15.5 million one-time benefit from termination of a long-term supply agreement.
- No earnings or sales guidance was provided in the supplied filing text; the stated full-year outlook was approximately $90 million of capital expenditures.
Key facts for investors to verify
- Whether higher prices and volumes, and the resulting margin improvement, persist as raw-material costs and market supply-demand conditions change.
- Whether stand-alone costs after the spin-off, capital spending and pension contributions affect future cash generation and liquidity as expected.
- Debt balance, revolver availability, covenant compliance and sensitivity to floating interest rates.
- Potential effects of plant reliability, hurricane-related or other supply disruptions, environmental obligations and litigation.
- Adoption effects of new accounting standards, particularly the expected balance-sheet impact of lease accounting and the final impact of revenue-recognition adoption.