UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One) | |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedSeptember 30, 20172018
or
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____
Commission File Number: 1-37774
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AdvanSix Inc. |
AdvanSix Inc.
(Exact Name of Registrant as Specified in its Charter) |
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Delaware | | 81-2525089 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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300 Kimball Drive, Suite 101, Parsippany, New Jersey | | 07054 |
(Address of Principal Executive Offices) | | (Zip Code) |
(973) 526-1800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer oý | Accelerated filer o | Non-accelerated filer xo | Smaller reporting company o |
| | | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The Registrant had 30,482,96629,802,868 shares of common stock, $0.01 par value, outstanding at November 1, 2017.October 26, 2018.
ADVANSIX INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANSIX INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Sales | $ | 366,660 |
| | $ | 323,953 |
| | $ | 1,104,805 |
| | $ | 932,201 |
| Sales | $ | 368,653 | | $ | 366,660 | | $ | 1,128,350 | | $ | 1,104,805 |
Costs, expenses and other: | |
| | |
| | | | | Costs, expenses and other: | |
Costs of goods sold | 309,629 |
| | 285,091 |
| | 923,268 |
| | 804,471 |
| Costs of goods sold | 343,434 | | 309,408 | | 1,007,712 | | 922,604 |
Selling, general and administrative expenses | 19,086 |
| | 11,695 |
| | 54,022 |
| | 33,949 |
| Selling, general and administrative expenses | 18,057 | | 19,050 | | 55,189 | | 53,914 |
Other non-operating expense (income), net | 2,133 |
| | (635 | ) | | 6,381 |
| | (1,792 | ) | Other non-operating expense (income), net | 1,453 | | 2,390 | | 6,581 | | 7,153 |
| 330,848 |
| | 296,151 |
| | 983,671 |
| | 836,628 |
| |
Total costs, expenses and other | | Total costs, expenses and other | 362,944 | | 330,848 | | 1,069,482 | | 983,671 |
| | | | | | | | |
Income before taxes | 35,812 |
| | 27,802 |
| | 121,134 |
| | 95,573 |
| Income before taxes | 5,709 | | 35,812 | | 58,868 | | 121,134 |
Income taxes | 14,538 |
| | 11,342 |
| | 46,803 |
| | 36,712 |
| Income taxes | 229 | | 14,538 | | 13,385 | | 46,803 |
Net income | $ | 21,274 |
|
| $ | 16,460 |
| | $ | 74,331 |
| | $ | 58,861 |
| Net income | $ | 5,480 | | $ | 21,274 | | $ | 45,483 | | $ | 74,331 |
| Earnings per common share | |
| | |
| | | | | Earnings per common share | |
Basic | $ | 0.70 |
| | $ | 0.54 |
| | $ | 2.44 |
| | $ | 1.93 |
| Basic | $ | 0.18 | | $ | 0.70 | | $ | 1.50 | | $ | 2.44 |
Diluted | $ | 0.68 |
| | $ | 0.54 |
| | $ | 2.40 |
| | $ | 1.93 |
| Diluted | $ | 0.18 | | $ | 0.68 | | $ | 1.46 | | $ | 2.40 |
Weighted average common shares outstanding | |
| | |
| | | | | Weighted average common shares outstanding | |
Basic | 30,482,966 |
| | 30,482,966 |
| | 30,482,966 |
| | 30,482,966 |
| Basic | 30,160,991 | | 30,482,966 | | 30,375,873 | | 30,482,966 |
Diluted | 31,159,710 |
| | 30,482,966 |
| | 31,013,606 |
| | 30,482,966 |
| Diluted | 30,983,834 | | 31,159,710 | | 31,189,640 | | 31,013,606 |
See accompanying notes to Condensed Consolidated and Combined Financial Statements.
ADVANSIX INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 5,480 | | $ | 21,274 | | $ | 45,483 | | $ | 74,331 |
Foreign exchange translation adjustment | (8) | | (12) | | (26) | | (15) |
| | | | | | | |
Pension obligation adjustments | — | | — | | 410 | | — |
Other comprehensive income (loss), net of tax | (8) | | (12) | | 384 | | (15) |
Comprehensive income | $ | 5,472 | | $ | 21,262 | | $ | 45,867 | | $ | 74,316 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 21,274 |
| | $ | 16,460 |
| | $ | 74,331 |
| | $ | 58,861 |
|
Foreign exchange translation adjustment | (12 | ) | | (148 | ) | | (15 | ) | | 284 |
|
Commodity hedges | — |
| | (3,470 | ) | | — |
| | (1,635 | ) |
Other comprehensive income (loss), net of tax | (12 | ) | | (3,618 | ) | | (15 | ) | | (1,351 | ) |
Comprehensive income | $ | 21,262 |
| | $ | 12,842 |
| | $ | 74,316 |
| | $ | 57,510 |
|
See accompanying notes to Condensed Consolidated and Combined Financial Statements.
ADVANSIX INC.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
| | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 20,206 | | $ | 55,432 |
Accounts and other receivables – net | 149,099 | | 196,003 |
Inventories – net | 115,026 | | 129,208 |
Other current assets | 3,900 | | 7,130 |
Total current assets | 288,231 | | 387,773 |
Property, plant and equipment – net | 639,728 | | 612,612 |
Goodwill | 15,005 | | 15,005 |
| | | |
Other assets | 37,312 | | 34,884 |
Total assets | $ | 980,276 | | $ | 1,050,274 |
| | | |
LIABILITIES | | | |
Current liabilities: | | | |
Accounts payable | $ | 209,239 | | $ | 227,712 |
Accrued liabilities | 26,310 | | 35,013 |
| | | |
Deferred income and customer advances | 2,295 | | 17,194 |
Line of credit – short-term | 9,400 | | — |
Current portion of long-term debt | — | | 16,875 |
Total current liabilities | 247,244 | | 296,794 |
Deferred income taxes | 101,092 | | 92,276 |
Line of credit – long-term | 190,600 | | — |
Long-term debt | — | | 248,339 |
Postretirement benefit obligations | 28,145 | | 33,396 |
Other liabilities | 4,350 | | 3,144 |
Total liabilities | 571,431 | | 673,949 |
| | | |
COMMITMENTS AND CONTINGENCIES (Note 9) | | | |
| | | |
STOCKHOLDERS' EQUITY | | | |
Common stock, par value $0.01; 200,000,000 shares authorized; 30,555,715 shares issued and 29,991,468 outstanding at September 30, 2018; 30,482,966 shares issued and outstanding at December 31, 2017 | 306 | | 305 |
Preferred stock, par value $0.01; 50,000,000 shares authorized and 0 shares issued and outstanding at September 30, 2018 and December 31, 2017 | — | | — |
Treasury stock at par (564,247 shares at September 30, 2018; 0 shares at December 31, 2017) | (6) | | — |
Additional paid-in capital | 250,149 | | 263,081 |
Retained earnings | 167,058 | | 121,985 |
Accumulated other comprehensive loss | (8,662) | | (9,046) |
Total stockholders' equity | 408,845 | | 376,325 |
Total liabilities and stockholders' equity | $ | 980,276 | | $ | 1,050,274 |
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| September 30, 2017 | | December 31, 2016 |
ASSETS | |
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Current assets: | |
| | |
|
Cash and cash equivalents | $ | 39,986 |
| | $ | 14,199 |
|
Accounts and other receivables – net | 152,511 |
| | 131,671 |
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Inventories – net | 100,474 |
| | 128,978 |
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Other current assets | 8,684 |
| | 7,690 |
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Total current assets | 301,655 |
| | 282,538 |
|
Property, plant and equipment – net | 597,877 |
| | 575,375 |
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Goodwill | 15,005 |
| | 15,005 |
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Other assets | 35,105 |
| | 32,039 |
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Total assets | $ | 949,642 |
| | $ | 904,957 |
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LIABILITIES | |
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Current liabilities: | |
| | |
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Accounts payable | $ | 177,688 |
| | $ | 222,929 |
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Accrued liabilities | 27,630 |
| | 25,396 |
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Income taxes payable | 18 |
| | 86 |
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Deferred income and customer advances | 801 |
| | 25,567 |
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Current portion of long-term debt | 10,125 |
| | — |
|
Total current liabilities | 216,262 |
| | 273,978 |
|
Deferred income taxes | 147,461 |
| | 114,200 |
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Long-term debt | 254,995 |
| | 264,838 |
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Postretirement benefit obligations | 25,372 |
| | 33,544 |
|
Other liabilities | 2,941 |
| | 3,035 |
|
Total liabilities | 647,031 |
| | 689,595 |
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| | | |
COMMITMENTS AND CONTINGENCIES (Note 8) |
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|
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EQUITY | |
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|
Common stock, par value $0.01; 200,000,000 shares authorized and 30,482,966 shares issued and outstanding | 305 |
| | 305 |
|
Preferred stock, par value $0.01; 50,000,000 shares authorized and 0 shares issued and outstanding | — |
| | — |
|
Additional paid in capital | 255,709 |
| | 242,806 |
|
Retained earnings/(accumulated deficit) | 49,617 |
| | (24,714 | ) |
Accumulated other comprehensive income (loss) | (3,020 | ) | | (3,035 | ) |
Total equity | 302,611 |
| | 215,362 |
|
Total liabilities and equity | $ | 949,642 |
| | $ | 904,957 |
|
See accompanying notes to Condensed Consolidated and Combined Financial Statements.
ADVANSIX INC.
CONDENSED CONSOLIDATEDAND COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2018 | | 2017 |
Cash flows from operating activities: | | | |
Net income | $ | 45,483 | | $ | 74,331 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 38,905 | | 35,524 |
Loss on disposal of assets | 1,560 | | 1,236 |
Deferred income taxes | 8,816 | | 40,478 |
Stock based compensation | 7,506 | | 5,686 |
Accretion of deferred financing fees | 1,696 | | 444 |
Changes in assets and liabilities: | | | |
Accounts and other receivables | 46,878 | | (20,825) |
Inventories | 14,182 | | 28,504 |
Accounts payable | (10,675) | | (33,893) |
Income taxes payable | — | | (68) |
Accrued liabilities | (9,703) | | 2,234 |
Deferred income and customer advances | (14,899) | | (24,766) |
Other assets and liabilities | (2,014) | | (10,414) |
Net cash provided by operating activities | 127,735 | | 98,471 |
| | | |
Cash flows from investing activities: | | | |
Expenditures for property, plant and equipment | (72,650) | | (67,206) |
Other investing activities | (1,656) | | (5,387) |
Net cash used for investing activities | (74,306) | | (72,593) |
| | | |
Cash flows from financing activities: | | | |
| | | |
Payment of long-term debt | (266,625) | | — |
| | | |
Borrowings from line of credit | 284,500 | | 308,500 |
Payments of line of credit | (84,500) | | (308,500) |
Payment of line of credit fees | (1,362) | | — |
| | | |
Principal payments under capital lease | (225) | | (91) |
| | | |
Purchase of treasury shares | (20,443) | | — |
| | | |
Net cash used for financing activities | (88,655) | | (91) |
| | | |
Net change in cash and cash equivalents | (35,226) | | 25,787 |
Cash and cash equivalents at beginning of period | 55,432 | | 14,199 |
Cash and cash equivalents at the end of period | $ | 20,206 | | $ | 39,986 |
| | | |
Supplemental non-cash investing activities: | | | |
Capital expenditures included in accounts payable | $ | 17,649 | | $ | 17,228 |
| | | |
Supplemental cash investing activities: | | | |
Cash paid for interest | $ | 4,406 | | $ | 7,976 |
Cash paid for income taxes | $ | 7,254 | | $ | 12,695 |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Cash flows from operating activities: | |
| | |
|
Net income | $ | 74,331 |
| | $ | 58,861 |
|
Adjustments to reconcile net income to net cash (used for) provided by operating activities: | | | |
|
Depreciation and amortization | 35,524 |
| | 29,964 |
|
Loss on disposal of assets | 1,236 |
| | 1,246 |
|
Deferred income taxes | 40,478 |
| | 29,206 |
|
Stock based compensation | 5,686 |
| | — |
|
Accretion of deferred financing fees | 444 |
| | — |
|
Changes in assets and liabilities: | | | |
|
Accounts and other receivables | (20,825 | ) | | (20,117 | ) |
Inventories | 28,504 |
| | 13,581 |
|
Accounts payable | (33,893 | ) | | (161 | ) |
Income taxes payable | (68 | ) | | — |
|
Accrued liabilities | 2,234 |
| | (9,690 | ) |
Deferred income and customer advances | (24,766 | ) | | (23,501 | ) |
Other assets and liabilities | (10,414 | ) | | (12,922 | ) |
Net cash provided by operating activities | 98,471 |
| | 66,467 |
|
| | | |
Cash flows from investing activities: | |
| | |
|
Expenditures for property, plant and equipment | (67,206 | ) | | (56,859 | ) |
Other investing activities | (5,387 | ) | | (461 | ) |
Net cash used for investing activities | (72,593 | ) | | (57,320 | ) |
| | | |
Cash flows from financing activities: | |
| | |
|
Proceeds from long term debt | — |
| | 270,000 |
|
Payment of debt issuance costs | — |
| | (1,770 | ) |
Borrowings from revolving credit facility | 308,500 |
| | 40,000 |
|
Payments to revolving credit facility | (308,500 | ) | | — |
|
Payment of revolving credit facility fees | — |
| | (1,016 | ) |
Distribution to Honeywell in connection with the Spin-Off | — |
| | (269,347 | ) |
Principal payments of capital leases | (91 | ) | | — |
|
Net decrease in invested equity | — |
| | (9,050 | ) |
Net cash (used for) provided by financing activities | (91 | ) |
| 28,817 |
|
| | | |
Net increase in cash and cash equivalents | 25,787 |
| | 37,964 |
|
Cash and cash equivalents at beginning of period | 14,199 |
| | — |
|
Cash and cash equivalents at the end of period | $ | 39,986 |
|
| $ | 37,964 |
|
| | | |
Non-Cash Investing Activities: | |
| | |
|
Capital expenditures included in accounts payable | $ | 17,228 |
| | $ | 19,935 |
|
| | | |
Supplemental Disclosure of Cash Flow Information: | |
| | |
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Interest paid | $ | 7,976 |
| | $ | — |
|
Income taxes paid | $ | 12,695 |
| | $ | — |
|
See accompanying notes to Condensed Consolidated and Combined Financial Statements.
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
1. Organization, Operations and Basis of Presentation
Description of Business
AdvanSix Inc. (“AdvanSix”, the “Company”, "we" or the “Company”"our") is an integrated manufacturer of Nylon 6, a polymer resin which is a synthetic material used by our customers to produce engineered plastics, fibers, filaments and films that, in turn, are used in such end-products as automotive and electronic components, carpets, sports apparel, fishing nets and food and industrial packaging. As a result of our backward integration and the configuration of our manufacturing facilities, we also sell a variety of other products, all of which are produced as part of our integrated Nylon 6 integratedresin manufacturing chainprocess including caprolactam, ammonium sulfate fertilizers, acetone and other chemical intermediates. Each of our product lines represented the following approximate percentage of our sales:
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| | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Nylon | 28% | | 29% | | 29% | | 29% |
Caprolactam | 19% | | 16% | | 19% | | 16% |
Ammonium Sulfate Fertilizers | 20% | | 22% | | 20% | | 24% |
Chemical Intermediates | 33% | | 33% | | 32% | | 31% |
Separation from Honeywell
On October 1, 2016, Honeywell International Inc. (“Honeywell”) completed the separation of AdvanSix. The separation was completed by Honeywell distributing (the “Distribution”) all of the then outstanding shares of common stock of AdvanSix on October 1, 2016 (the “Distribution Date”) through a dividend in kind of AdvanSix common stock, par value $0.01, to holders of Honeywell common stock as of the close of business on the record date of September 16, 2016 who held their shares through the Distribution Date (the “Spin-Off”).
Each Honeywell stockholder who held their shares through the Distribution Date received one share of AdvanSix common stock for every 25 shares of Honeywell common stock held at the close of business on the record date of September 16, 2016. The separationWe filed our Form 10 describing the Spin-Off with the Securities and Exchange Commission (the “SEC”), which was completed pursuant to a Separation and Distribution Agreement and other agreements with Honeywell related todeclared effective by the separation, including an Employee Matters Agreement, a Tax Matters Agreement, and Transition Services Agreement as well as Site Sharing and Services Agreements for Chesterfield, Colonial Heights and Pottsville. These agreements govern the relationship between AdvanSix and Honeywell following the separation and provide for the allocation of various assets, liabilities, rights and obligations. These agreements also include arrangements for transition services to be provided by Honeywell to AdvanSix and by AdvanSix to Honeywell.
SEC on September 8, 2016 (the “Form 10”). On October 3, 2016, AdvanSix stock began “regular-way” trading on the New York Stock Exchange under the “ASIX” stock symbol.
Basis of Presentation
Unless the context otherwise requires, references in these Notes to Condensed Consolidated and Combined Financial Statements to “we,” “us,” “our,” “AdvanSix” and the “Company” refer to AdvanSix Inc. and its consolidated subsidiaries after giving effect to the Spin-Off. All significant intercompany balances and transactions have been eliminated.
The Condensed Consolidated and Combined Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Condensed Consolidated and Combined Financial Statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of itsthe Company's financial position as of September 30, 2017,2018, and its results of operations for the three and nine months ended September 30, 20172018 and 2016,2017, and cash flows for the nine months ended September 30, 20172018 and 2016.2017. The Condensed Consolidated and
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
Combined Balance SheetSheets at December 31, 2016 was2017 were derived from audited annual financial statements but doesdo not contain all of the footnote disclosures from the annual financial statements. The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K (the "2017 Form 10-K") for the year ended December 31, 2016.
In preparing these Condensed Consolidated and Combined Financial Statements, the Company has evaluated events and2017. All intercompany transactions for potential recognition or disclosure through the date that the Condensed Consolidated and Combined Financial Statements were issued.have been eliminated.
Certain prior period amounts have been reclassified for consistency with the current period presentation.
We report our quarterly financial information using a calendar convention; prior to the Spin-Off, the first, second and third quarters were consistently reported as ending on March 31, June 30 and September 30 in the financial statements of Honeywell; subsequent to the Spin-Off we continued to follow that convention. It is our practice to establish actual quarterly closing dates using a predetermined fiscal calendar, which requires our businesses to close their books on a Saturday in order to minimize the potentially disruptive effects of quarterly closing on our business processes. Historically, the effects of this practice were generally not significant to reported results for any quarter and only existed within a reporting year. In the event that differences in actual closing dates are material to year-over-year comparisons of quarterly or year-to-date results, we will provide the appropriate disclosures. Our actual closing dates for the three and nine months endingended September 30, 2018 and 2017 were September 29, 2018 and September 30, 2017, and 2016 were September 30, 2017 and October 1, 2016, respectively.respectively.
Liabilities to creditors to whom we have issued checks that remained outstanding at September 30, 20172018, and December 31, 20162017 aggregated $6.4$8.2 million and $12.5$8.5 million, respectively, and were included in Cash and cash equivalents and Accounts payable in the Condensed Consolidated and Combined Balance Sheets.
On May 4, 2018, the Company announced that its Board of Directors authorized a share repurchase program of up to $75 million of the Company’s common stock. Repurchases may be made from time to time on the open market, including through the use of trading plans intended to qualify under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The size and timing of these repurchases will depend on pricing, market and economic conditions, legal and contractual requirements and other factors. The repurchase program has no expiration date and may be modified, suspended or
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
discontinued at any time. The Company had approximately 30 million shares of common stock outstanding as of September 30, 2018. The par value of the shares repurchased is applied to Treasury stock and the excess of the purchase price over par value is applied to Additional paid-in capital.
As of September 30, 2018, the Company had repurchased 545,282 shares of common stock for an aggregate of $19.7 million under the currently authorized program at a weighted average market price of $36.06 per share. As of September 30, 2018, $55.3 million remained available for share repurchases under the currently authorized program.
2. Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates (“ASU”ASUs”). ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
In March 2017,February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that allows companies to reclassify to Retained earnings the stranded tax effects in Accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act (the "Tax Act"). The amendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted, including adoption in any interim period. The Company elected to early adopt this guidance effective January 1, 2018 and to reclassify the stranded tax effects from the Tax Act from Accumulated other comprehensive income to Retained earnings (see Note 10).
In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715), in order to improve the presentation of net periodic pension and postretirement costs. The amendment requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments in this ASU also allow only the service cost component to be eligible for capitalization when applicable. The amendments in this update related to income statement activity should bewere applied retrospectively whereas balance sheet activity should bewas applied prospectively. For public business entities, the effective date for ASU 2017-07 iswas annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted within the first interim period. We expect to adoptThe Company adopted this guidance effective January 1, 2018 and no impact, other than expense classification, on the Company’s consolidated financial position and results of operations is expected upon adoption.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under ASC 350. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The amendment eliminates the requirement to calculate a goodwill impairment charge by comparing the implied fair value of goodwill with its carrying amount (i.e., Step 2 of today’s goodwill impairment test). The standard will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company elected to adopt ASU 2017-04 early beginning in January 2017 and there was no impact on the Company’s consolidated financial position and results of operations upon adoption.adoption other than pension expense reclassifications in the 2017 Consolidated Statement of Operations which reduced Costs of goods sold and Selling, general and administrative expenses and increased Other non-operating expense (income), net.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The new guidance requires an entity to first evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. If the threshold is not met, the entity evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. For public business entities, the effective date for ASU 2017-01 is annual periods beginning after December 15, 2017, including interim periods within those periods. The Company elected to adopt ASU 2017-01 early beginning in January 2017 and there was no impact on the Company’s consolidated financial position and results of operations upon adoption.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718), which simplifies certain aspects of share-based payment transactions including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new guidance requires an entity to record all excess tax benefits / deficiencies as income tax expense / benefit in the income statement. The new guidance also allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. For public business entities, the effective date for ASU 2016-09 is annual periods beginning after December 15, 2016, including interim periods within those periods. The Company adopted this ASU effective January 1, 2017 and has elected to continue to accrue compensation cost for forfeitures based on the number of awards that are expected to vest. There was no impact on the Company’s consolidated financial position and results of operations upon adoption.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning after December 15, 2018 (early adoption is permitted). TheInitial guidance states the new standard should be applied under a modified retrospective approach. During August 2018, however, the FASB issued ASU 2018-11, Leases (Topic 842), providing another transition method allowing a company to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We are evaluatingcontinue to evaluate the impact of the new standard on the Company’s consolidated financial position, and results of operations and related disclosures. Although we have not yet completed our assessment, adoption of this standard will have a significant impact on ourthe Consolidated Balance Sheets. However, we do not expect adoption of this standard to have a significant impact on the recognition, measurement or presentation of lease expenses within the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows. Information about our undiscounted future lease payments and the timing of those payments is provided under “Contractual Obligations” in Management’s Discussion and AnalysisNote 8 of Financial Condition and Results of Operations in our 2016the 2017 Form 10-K. We willThe Company plans to adopt this standard effective January 1, 2019.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which replacesreplaced the existing accounting standards for revenue recognition with a single comprehensive five-step model eliminating industry-specific accounting rules. The core principle is to recognize revenue upon the transfer of goods or services to customers at an amount that reflects the consideration expected to be received. Since its issuance, the FASB has amended several aspects of the new guidance, including provisions that address revenue recognition associated with the licensing of intellectual property. The provisions of ASU 2014-09 will bebecame effective for public business entities for interim and annual periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016. The guidance may be adopted either by restating all years presented in the Company’s financial statements or by recording the impact of adoption as an adjustment to retained earnings at the beginning of the year of adoption. During the three months ended September 30, 2017, the Company continued its assessment of AdvanSix revenue streams by reviewing and documenting customer contracts and related transaction support to determine the impact on revenue recognition under the new standard. The Company has made progress on redrafting its revenue recognition policies, assessing the redesign of internal controls, as well as evaluating the expanded disclosure requirements. The Company plans to adopt the standard effective January 1, 2018 and the impact of adoption, if any, will be reflected as an adjustment to retained earnings at the beginning of the year of adoption. Based on the results of the assessment performed to date, the Company has preliminarily concluded that revenues from the Company's products are expected to remain substantially unchanged from the Company's current revenue recognition model. The Company will continue to assess the new standard and the potential impact on the Company’s consolidated financial position and results of operations and related disclosures upon adoption.
8
3. Related Party Transactions with Honeywell
Prior to consummation of the Spin-Off, the Condensed Consolidated and Combined Financial Statements have been prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of Honeywell.
During the three and nine months ended September 30, 2016, AdvanSix was allocated $10,470 and $31,877, respectively, of general corporate expenses incurred by Honeywell for certain services, such as legal, accounting, information technology, human resources,
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
December 15, 2017. The Company adopted this standard effective January 1, 2018 using the modified retrospective method of transition and there was no cumulative impact adjustment on the Company’s consolidated financial position and results of operations. Under this standard, revenue recognition from the Company's products remained unchanged from the Company's previous revenue recognition model. As a result of adopting this standard, the Company expanded its revenue recognition disclosures (see Note 3).
other infrastructure support
3. Revenues
Revenue Recognition
The Company recognizes revenue upon the transfer of control of goods or services to customers at amounts that reflect the consideration expected to be received. AdvanSix primarily recognizes revenues when title and shared facilities, on behalfcontrol of AdvanSix. These expenses werethe product transfers from the Company to the customer. Outbound shipping costs incurred by the Company are not included in revenues but are reflected withinas freight expense in Costs of goods sold and Selling, general and administrative expenses in the Condensed Consolidated and Combined Statements of Operations.
Sales of our products to customers are made under a purchase order, and in certain cases in accordance with the terms of a master services agreement. These agreements typically contain formula-based pass-through pricing tied to key feedstock materials and volume ranges, but often do not specify the goods, including the quantities thereof, to be transferred. Certain master services agreements (including with respect to our largest customer) may contain minimum purchase volumes which can be satisfied by the customer on a periodic basis by choosing from various products offered by the Company. In these cases, a performance obligation is created when a customer submits a purchase order for a specific product at a specified price, typically providing for delivery within the next 60 days. The Company considers the performance obligation with respect to such purchase order satisfied at the point in time when control of the product is transferred to the customer, which is indicated by shipment of the product and transfer of title and risk of loss to the customer. Variable consideration is estimated for future volume rebates and early pay discounts on certain products and product returns. The Company records variable consideration as an adjustment to the sale transaction price. Since variable consideration is generally settled within one year, the time value of money is not significant.
SalesThe Company applies the practical expedient in Topic 606 and does not include disclosures regarding remaining performance obligations that have original expected durations of one year or less, or amounts for variable consideration allocated to Honeywell duringwholly-unsatisfied performance obligations or wholly-unsatisfied distinct goods that form part of a single performance obligation, if any.
The Company also utilizes the practical expedient in Topic 606 and does not include an adjustment for the effects of a significant financing component given the expected period duration of one year or less.
We serve more than 500 customers annually in more than 40 countries and across a wide variety of industries. For the three months ended September 30, 2018 and 2017, the Company's ten largest customers accounted for approximately 48% and 44% of total sales, respectively. For the nine months ended September 30, 2016 were $3,2742018 and $5,955,2017, the Company’s ten largest customers accounted for approximately 45% and 43% of total sales, respectively. Of these sales, $3,080 and $5,682, respectively, were sold
We typically sell to Honeywell at zero margin. Costs of goods soldcustomers under contracts, with one- to Honeywell during the three and nine months ended September 30, 2016 were $3,157 and $5,842, respectively. Purchases from Honeywell during the three and nine months ended September 30, 2016 were $1,041 and $3,299, respectively. The total net effecttwo-year terms on average, or by purchase orders. We have historically experienced low customer turnover.
Each of the settlementCompany’s product lines represented the following approximate percentage of these inter-company transactions was reflected in the Condensed Consolidated and Combined Statements of Cash Flows as a financing activity identified as Invested equity.
When the Company was owned by Honeywell, a centralized approach was used for cash management and financing of operations. Prior to consummation of the Spin-Off, the Company’s cash was transferred to Honeywell daily and Honeywell funded the Company’s operating and investing activities as needed.
Subsequent to the Spin-Off on October 1, 2016, transactions with Honeywell were not considered related party transactions. Accordingly, no related party transactions with Honeywell were recordedtotal sales for the three and nine months ended September 30, 2017.2018 and 2017:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
Nylon | 28% | | | 28% | | | 28% | | | 29% | |
Caprolactam | 18% | | | 19% | | | 18% | | | 19% | |
Ammonium Sulfate Fertilizers | 19% | | | 20% | | | 20% | | | 20% | |
Chemical Intermediates | 35% | | | 33% | | | 34% | | | 32% | |
| 100% | | | 100% | | | 100% | | | 100% | |
4. Earnings Per Share
ADVANSIX INC.
On October 1, 2016, the date of consummation of the Spin-Off, 30,482,966 shares of the Company’s Common Stock were distributed to Honeywell shareholders of record as of September 16, 2016. ThisNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amount is being utilized for the calculation of basic earningsand per share for all periods presentedamounts and as no Common Stock was outstanding prior to the date of the Spin-Off. In October 2016, the Company issued 908,540 time-based restricted stock units in connection with the Spin-Off with vesting periods ranging from 18 to 42 months. These restricted stock units were not included in the computation of diluted earnings per shareotherwise noted)
The Company's revenues by geographic area for the three and nine months ended September 30, 2016.2018 and 2017 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
United States | $ | 306,050 | | $ | 289,480 | | $ | 946,195 | | $ | 889,515 |
International | 62,603 | | 77,180 | | 182,155 | | 215,290 |
Total | $ | 368,653 | | $ | 366,660 | | $ | 1,128,350 | | $ | 1,104,805 |
Deferred Income and Customer Advances
The Company defers revenues when cash payments are received in advance of our performance. Customer advances relate primarily to sales from the ammonium sulfate business. Below is a roll-forward of Deferred Income and Customer Advances for the nine months ended September 30, 2018:
| | | | | |
| |
Opening balance January 1, 2018 | $ | 17,194 |
| |
Additional cash advances | 2,883 |
| |
Less amounts recognized in revenues | (17,782) |
| |
Ending balance September 30, 2018 | $ | 2,295 |
The Company expects to recognize as revenue the September 30, 2018 ending balance of Deferred Income and Customer Advances within one year or less.
4. Earnings Per Share
The computation of basic and diluted earnings per share ("EPS") is based on net income divided by the basic weighted average number of common shares and diluted weighted average number of common shares, respectively. The details of the earnings per sharebasic and diluted EPS calculations for the three and nine months ended September 30, 2018 and 2017 and 2016 are aswere as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
Basic | | | | | | | |
Net Income | $ | 5,480 | | $ | 21,274 | | $ | 45,483 | | $ | 74,331 |
Weighted average common shares outstanding | 30,160,991 | | 30,482,966 | | 30,375,873 | | 30,482,966 |
EPS – Basic | $ | 0.18 | | $ | 0.70 | | $ | 1.50 | | $ | 2.44 |
Diluted | | | | | | | |
Dilutive effect of unvested equity awards and other stock-based holdings | 822,843 | | 676,744 | | 813,767 | | 530,640 |
Weighted average common shares outstanding | 30,983,834 | | 31,159,710 | | 31,189,640 | | 31,013,606 |
EPS – Diluted | $ | 0.18 | | $ | 0.68 | | $ | 1.46 | | $ | 2.40 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Basic | |
| | |
| | |
| | |
|
Net Income | $ | 21,274 |
| | $ | 16,460 |
| | $ | 74,331 |
| | $ | 58,861 |
|
Weighted average common shares outstanding | 30,482,966 |
| | 30,482,966 |
| | 30,482,966 |
| | 30,482,966 |
|
EPS – Basic | $ | 0.70 |
| | $ | 0.54 |
| | $ | 2.44 |
| | $ | 1.93 |
|
Diluted | |
| | |
| | |
| | |
|
Dilutive effect of unvested equity awards | 676,744 |
| | — |
| | 530,640 |
| | — |
|
Weighted average common shares outstanding | 31,159,710 |
| | 30,482,966 |
| | 31,013,606 |
| | 30,482,966 |
|
EPS – Diluted | $ | 0.68 |
| | $ | 0.54 |
| | $ | 2.40 |
| | $ | 1.93 |
|
The diluted EPS calculations exclude the effect of stock options when the options’ assumed proceeds exceed the average market price of the common shares during the period. For the three months ended September 30, 2018 and 2017, stock options of 135,535 and 70,782, respectively, were anti-dilutive and excluded from the computations of dilutive EPS.
On March 8, 2017,2, 2018, the Company granted equity awards representing 333,719231,162 shares of common stock under the 2016 Stock Incentive Plan of AdvanSix Inc. and its Affiliates (the "2016 Stock Plan") to Company employees consisting of 175,026128,777 stock options, 89,89658,078 performance stock units (at target) and 68,79744,307 restricted stock units. These equity awards have a per share
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
strike price (for stock options) or grant date fair value per share (for performance stock units and restricted stock units) of $26.66$41.97 with vesting periods ranging from 12 to 36 months.
On June 1, 2017,14, 2018, the Company granted equity awards representing 28,85620,760 shares of common stock under the 2016 Stock Incentive Plan of AdvanSix Inc. and its Affiliates to certain Company employees and the Company'sCompany’s Board of Directors consisting of restricted stock units. These equity awards have a grant date fair value per share of $29.25$40.74 with vesting periods ranging from 12 to 36 months.
In September 2017, the Board adopted the AdvanSix Inc. Deferred Compensation Plan (the “DCP”), effective January 1, 2018. Pursuant to the DCP, our directors may elect to defer their cash retainer fees and allocate their deferrals to the AdvanSix stock unit fund. Each unit allocated under the stock unit fund represents the economic equivalent of one share of common stock. Units are paid out in shares of AdvanSix Inc. common stock upon distribution. As of September 30, 2018, a total of 8,570 units were allocated to the AdvanSix stock unit fund under the DCP during 2018.
In the third quarter of 2018, the Company repurchased 475,175 shares of common stock under the share repurchase program and 9,970 shares of common stock covering the tax withholding obligations in connection with the vesting of equity awards for a total of $17.3 million at a weighted average market price of $35.70 per share. The purchase of shares reduces the weighted average number of shares outstanding in the basic and diluted earnings per share calculations.
5. Accounts and Other Receivables – Net
| | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Accounts receivables | $ | 145,444 | | $ | 188,477 |
Other | 5,380 | | 8,936 |
Total accounts and other receivables | 150,824 | | 197,413 |
Less – allowance for doubtful accounts | (1,725) | | (1,410) |
Total accounts and other receivables – net | $ | 149,099 | | $ | 196,003 |
The decrease in Total accounts and other receivables – net at September 30, 2018 versus December 31, 2017 was due primarily to increased collections during the nine months ended September 30, 2018 related to a trade receivables discount arrangement with a third-party financial institution, lower sales and the collection of a Federal income tax refund.
6. Inventories
| | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Raw materials | $ | 34,334 | | $ | 48,502 |
Work in progress | 56,049 | | 50,511 |
Finished goods | 29,063 | | 35,430 |
Spares and other | 24,052 | | 23,091 |
| 143,498 | | 157,534 |
Reduction to LIFO cost basis | (28,472) | | (28,326) |
Total inventories – net | $ | 115,026 | | $ | 129,208 |
The decrease in Total inventories – net as of September 30, 2018 compared to December 31, 2017 is due to lower levels of raw materials driven by the timing of cumene deliveries.
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
7. Long-term Debt and Credit Agreement
Stock compensation expense related
The Company’s debt at September 30, 2018 consisted of the following:
| | | | | |
Total term loan outstanding | $ | — | |
Amounts outstanding under the Revolving Credit Facility | 200,000 | |
Total outstanding indebtedness | 200,000 | |
Less: Line of credit – short-term | (9,400) | |
Line of credit – long-term | $ | 190,600 | |
At September 30, 2018, the Company assessed the amount recorded under the Revolving Credit Facility (defined below) and determined that such amounts approximate fair value. The fair values of the debt are based on quoted inactive market prices and are therefore classified as Level 2 within the valuation hierarchy.
The outstanding balances under the Revolving Credit Agreement are classified as $9.4 million as short-term and $190.6 million as long-term. The amount included in Line of credit - short-term, noted above and included on the accompanying Condensed Consolidated Balance Sheets, represents the outstanding balance the Company anticipates paying within one year.
Credit Agreement
On February 21, 2018 (the “Amendment Date”), the Company entered into Amendment No. 1 (the “Amendment”) to the Credit Agreement, dated September 30, 2016 (the “Original Credit Agreement”), among the Company, the guarantors, the lenders party thereto and Bank of America, N.A., as administrative agent (the Original Credit Agreement, after giving effect to the Amendment, the “Amended and Restated Credit Agreement”).
The credit facilities under the Original Credit Agreement consisted of a senior secured term loan in an aggregate principal amount of $270 million, of which $267 million was outstanding just prior to entering into the Amendment, and a senior secured revolving credit facility in a principal amount of $155 million. Pursuant to the Amendment, (i) the term loan facility under the Original Credit Agreement was terminated and the entire outstanding balance of the term loan facility (the “Term Loan”) thereunder was paid in full and (ii) the maximum aggregate principal amount of the senior secured revolving credit facility (the “Revolving Credit Facility”) was increased to $425 million.
On the Amendment Date, the Company borrowed $242 million under the Revolving Credit Facility. The proceeds of such loans, as well as cash on hand, were used to repay the outstanding Term Loan under the Original Credit Agreement. The Revolving Credit Facility under the Amended and Restated Credit Agreement has a 5-year term with a scheduled maturity date of February 21, 2023. The Amendment resulted in an increase in the Revolving Credit Facility to replace the Term Loan and provides increased borrowing flexibility and reduced overall borrowing costs with an approximate 50 basis point reduction in the interest rate spread.
The Amended and Restated Credit Agreement permits the Company to utilize up to $40 million of the Revolving Credit Facility for the issuance of letters of credit and up to $40 million for swing line loans. The Company has the option to incur incremental term loans and/or increase the amount of the Revolving Credit Facility in an aggregate principal amount for all outstanding equity awards is being ratably recognized oversuch incremental term loans and increases of the vesting periodRevolving Credit Facility of up to the sum of (x) $175 million plus (y) an amount such that the Company’s Consolidated Senior Secured Leverage Ratio (as defined in the Amended and Restated Credit Agreement) would not be greater than 1.75 to 1.00, in each typecase, to the extent that any one or more lenders, whether or not currently party to the Amended and Restated Credit Agreement, commits to be a lender for such amount. Borrowings under the Amended and Restated Credit Agreement bear interest at a rate equal to either the sum of equity award with vesting periodsa base rate plus a margin ranging from 120.50% to 42 months based1.50% or the sum of a Eurodollar rate plus a margin ranging from 1.50% to 2.50%, with either such margin varying according to the Company’s Consolidated Leverage Ratio (as defined in the Amended and Restated Credit Agreement). The Company is also required to pay a commitment fee in respect of unused commitments under the Revolving Credit Facility, if any, at a rate ranging from 0.20% to 0.40% per annum depending on grant date fair value. Stock compensation expense aggregated $2,067the Company’s Consolidated Leverage Ratio. The initial margin under the Amended and $5,686Restated Credit Agreement is 0.75% for base rate loans and 1.75% for Eurodollar rate loans and the threeinitial commitment fee rate is 0.25% per annum. Substantially all domestic tangible and nine months ended September 30, 2017.intangible assets of the Company and its subsidiaries are pledged as collateral to secure the obligations under the Amended and Restated Credit Agreement.
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
5. Accounts and Other Receivables – Net
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Accounts receivables | $ | 151,318 |
| | $ | 119,475 |
|
Other | 1,816 |
| | 15,407 |
|
Total accounts and other receivables | 153,134 |
| | 134,882 |
|
Less – allowance for doubtful accounts | (623 | ) | | (3,211 | ) |
Total accounts and other receivables – net | $ | 152,511 |
| | $ | 131,671 |
|
The Amended and Restated Credit Agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock of the Company, enter into transactions with affiliates, make investments, make capital expenditures, merge or consolidate with others or dispose of assets. The Amended and Restated Credit Agreement also contains financial covenants that require the Company to maintain a Consolidated Interest Coverage Ratio (as defined in the Amended and Restated Credit Agreement) of not less than 3.00 to 1.00 and to maintain a Consolidated Leverage Ratio of (i) 3.50 to 1.00 or less for the fiscal quarter ending March 31, 2018, through and including the fiscal quarter ending December 31, 2019, (ii) 3.25 to 1.00 or less for the fiscal quarter ending March 31, 2020, through and including the fiscal quarter ending December 31, 2020, (iii) 3.00 to 1.00 or less for the fiscal quarter ending March 31, 2021, through and including the fiscal quarter ending December 31, 2021, and (iv) 2.75 to 1.00 or less for the fiscal quarter ending March 31, 2022 and each fiscal quarter thereafter (subject to the Company’s option to elect a consolidated leverage ratio increase in Accounts receivableconnection with certain acquisitions). If the Company does not comply with the covenants in the Amended and Restated Credit Agreement, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding under the Revolving Credit Facility.
In addition to the amount borrowed on the Amendment Date, the Company has since borrowed an incremental $43 million ($4 million in first quarter, $15 million in second quarter and $24 million in the third quarter) for working capital purposes under the Revolving Credit Facility and repaid $85 million ($16 million in first quarter, $35 million in second quarter and $34 million in the third quarter) to bring the balance under the Revolving Credit Facility to $200 million at September 30, 2017 versus December 31, 2016 was due to significantly higher sales during2018.
The Company had approximately $6.6 million of letter of credit agreements outstanding at the end of the third quarter, of 2017 versuswhich $5.5 million are bi-lateral letters of credit outside the fourth quarter of 2016 which was impacted byRevolving Credit Facility with $1.1 million outstanding under the Company's plant turnaround activities. The increase in accounts receivable at September 30, 2017 was partially offset by higher accounts receivable collections related to a trade receivables discount arrangement with a third party financial institution which enhances liquidity and enables the Company to efficiently manage its working capital needs.Revolving Credit Facility.
6. Inventories
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Raw materials | $ | 39,313 |
| | $ | 68,900 |
|
Work in progress | 36,801 |
| | 47,759 |
|
Finished goods | 32,946 |
| | 19,069 |
|
Spares and other | 24,118 |
| | 23,129 |
|
| 133,178 |
| | 158,857 |
|
Reduction to LIFO cost basis | (32,704 | ) | | (29,879 | ) |
Total inventories | $ | 100,474 |
| | $ | 128,978 |
|
The decrease in total inventories as of September 30, 2017 compared to December 31, 2016 is due primarily to lower levels of raw materials driven primarily by cumene delivery delays resulting from hurricane impacts on logistics as well as higher than normal levels of cumene inventory at December 31, 2016. The decrease was partially offset by a buildup of finished goods inventory compared to December 31, 2016 following fourth quarter 2016 plant outages. The overall lower levels of inventories at September 30, 2017 resulted in a change in the LIFO cost basis reserve of $4.4 million (unfavorable pretax income impact) during the three months ended September 30, 2017.
7.8. Postretirement Benefit Cost
The components of net periodic benefit cost of the Company’s pension plan are as follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| 2017 | | 2016 | | 2017 | | 2016 | | | 2018 | | | 2017 | | 2018 | | 2017 |
Service costs | $ | 1,908 |
| | $ | — |
| | $ | 5,724 |
| | $ | — |
| Service costs | | $ | 2,001 | | | $ | 1,908 | | $ | 6,004 | | $ | 5,724 |
Interest costs | 333 |
| | — |
| | 999 |
| | — |
| Interest costs | | 469 | | | 333 | | 1,407 | | 999 |
Expected return on plan assets | (76 | ) | | — |
| | (228 | ) | | — |
| Expected return on plan assets | | (287) | | | (76) | | (862) | | (228) |
Other (1) | — |
| | 1,717 |
| | — |
| | 5,151 |
| |
| Net periodic benefit cost | $ | 2,165 |
| | $ | 1,717 |
| | $ | 6,495 |
| | $ | 5,151 |
| Net periodic benefit cost | | $ | 2,183 | | | $ | 2,165 | | $ | 6,549 | | $ | 6,495 |
| |
(1) | Prior to the Spin-Off, certain of our employees participated in a defined benefit pension plan (“Shared Plan”) sponsored by Honeywell which included participants of other Honeywell subsidiaries and operations. Net periodic benefit cost related to participation in the Shared Plan was $1.7 million and $5.2 million for the three and nine months ended September 30, 2016, respectively. |
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
The Company made pension plan contributions of approximately $12 million during 2017the nine months ended September 30, 2018 sufficient to satisfy pension funding requirements under the AdvanSix Retirement Earnings Plan in an aggregate amount of approximately $17.0 million and will make additional contributions in future years sufficient to satisfy pension funding requirements in those periods. The Company made contributions of $2.2$2.0 million in the first quarter of 2017, $1.62018, $6.6 million in the second quarter of 2017, $11.12018 and $3.3 million in the third quarter of 2017 and $2.0 million in October 2017. 2018. The Company does not plan to make additional pension plan contributions during the fourth quarter of 2018.
The pension plan assets are invested through a master trust fund. The strategic asset allocation for the trust fund is selected by the Company's Investment Committee reflecting the results of comprehensive asset and liability modeling. The Investment Committee establishes strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk.
The approximate target asset allocation for the Company's pension plan assets is summarized
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as follows:otherwise noted)
|
| | | |
| | | September 30, 2017 |
Cash and cash equivalents | | | 2% |
US and non-US equity securities | | | 65% |
Fixed income / other securities | | | 33% |
Total Pension Assets | | | 100% |
Fixed income and other securities include investment grade securities covering the Treasury, agency, asset-backed, mortgage-backed and credit sectors of the U.S. Bond Market, as well as listed real estate companies and real estate investment trusts located in both developed and emerging markets.
8.9. Commitments and Contingencies
The Company is subject to a number of lawsuits, investigations and disputes (some of which involve substantial amounts claimed) arising out of the conduct of the Company or other third parties in the normal and ordinary course of business, including matters relating to commercial transactions.business. A liability is recognized for any contingency that is probable of occurrence and reasonably estimable. The Company continually assesses the likelihood of adverse judgments or outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on an analysis of each matter with the assistance of legal counsel and, if applicable, other experts.
Given the uncertainty inherent in such lawsuits, investigations and disputes, the Company does not believe it is possible to develop estimates of reasonably possible loss in excess of current accruals for these matters. Considering the Company’s past experience and existing accruals, the Company does not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. Potential liabilities are subject to change due to new developments, changes in settlement strategy or the impact of evidentiary requirements, which could cause the Company to pay damage awards or settlements (or become subject to equitable remedies) that could have a material adverse effect on the Company’s consolidated results of operations, balance sheet and/or operating cash flows in the periods recognized or paid.
WeOn March 13, 2018, a federal search warrant was executed at the Company’s Hopewell, Virginia manufacturing facility. On the same date, the Company was separately served with a grand jury subpoena issued by the U.S. District Court for the Eastern District of Virginia, which requested documents related to the Hopewell facility’s air emissions and its compliance with the terms of a previously disclosed 2013 consent decree with the federal government and the Commonwealth of Virginia. The Company continues to cooperate fully with the authorities and is providing information in response to the subpoena. The Company’s production across its sites was not affected by these events and the Company expects to continue operating safely at plan moving forward. While the Company may incur penalties or fines in connection with the federal inquiry, the amount of such penalties or fines, if any, cannot be reasonably estimated at this time.
Following the Spin-Off, the Company assumed from Honeywell all health, safety and environmental (“HSE”) liabilities and compliance obligations related to the past and future operations of our current business, as well as all HSE liabilities associated with our three current manufacturing locations and the other locations used in our current operations, including any cleanup or other liabilities related to any contamination that may have occurred at such locations in the past. Honeywell retained all HSE liabilities related to former business locations or the operation of our former businesses. Although we have ongoing environmental remedial obligations at certain of our facilities, in the past three years, the associated remediation costs have not been material, and we do not expect our known remediation costs to be material for 2017.2018.
9.10. Income Taxes
The Company’s provision for income taxes in interim periods is computed by applying an estimated annual effective tax rate against Income before taxes for the period.period in addition to recording any tax effects of discrete items for the three and nine months ended September 30, 2018. For interim reporting purposes, the Company recorded a benefit to the Income taxes of $0.4 million as a discrete item related to excess tax benefits associated with the vesting of restricted stock units for the nine months ended September 30, 2018. The provision for income taxes was $14.5$0.2 million and $11.3$14.5 million for the three months ended September 30, 2018 and 2017, respectively. The provision for income taxes was $13.4 million and $46.8 million for the nine months ended September 30, 2018 and 2017, respectively.
The Company recorded a $1.0 million immaterial out of period adjustment in connection with the filing of the 2017 U.S. federal income tax return, resulting in an income tax benefit in the third quarter. Additionally, under Staff Accounting Bulletin No. 118 (“SAB 118”), the Company recorded a $0.6 million income tax benefit as a measurement period adjustment for the income tax effects related to the Tax Act for which the accounting under ASC 740 is incomplete and provisional estimates were recorded in the period of enactment. As a result of the total adjustments of $1.6 million, the Company revised the provisional estimate of the deferred income tax benefit attributable to the reduction in the U.S. federal corporate tax rate from 35% to 21% as originally recorded in December 2017. These adjustments decrease the Company’s effective tax rate for the nine months ended September 30, 2018 by 2.8%. The Company has not completed the accounting for the income tax effects of the Tax Act and the amounts recorded under SAB 118 remain provisional. The Company will complete the accounting for the income tax effects of the Tax Act during the quarter ending December 31, 2018.
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
ended September 30, 2017 and 2016, respectively. The provision for income taxes was $46.8 million and $36.7 million forAs a result of the early adoption of ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, during the nine months ended September 30, 2017 and 2016, respectively.
During the three months ended September 30, 2017,2018, the Company adjusted itselected to reclassify $0.4 million from Accumulated other comprehensive income to Retained earnings. The reclassification results from the remeasurement of deferred tax assets and liabilities to account for changestaxes pursuant to the September 30, 2016 deferred tax balancesTax Act related to the separation from Honeywell.Company’s pension plan that was recognized as a component of Income taxes related to continuing operations for the year ended December 31, 2017 which was originally recognized in Other comprehensive income. The changes were attributableCompany elected the optional transition method and recorded the adjustment at the beginning of the period of adoption of ASU 2018-02. The Company’s current accounting policy related to the completion of Honeywell’s 2016stranded tax effects in Accumulated other comprehensive income tax returnis to review and related return to provision adjustment. The current period adjustment resulted in a $7.2 million decrease in Deferred income taxes andreclassify on an increase in Additional paid in capital.item by item basis.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company’s financial condition and results of operations, which we refer to as our “MD&A,” should be read in conjunction with the Condensed Consolidated and Combined Financial Statements and the notes thereto contained elsewhere in this Report, as well as the MD&A section included in our Annual Report on Form 10-K for the year ended December 31, 20162017 filed with the SECSecurities and Exchange Commission ("SEC") on March 6, 2017February 27, 2018 (the “2016“2017 Form 10-K”). Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those incorporated by reference in Item 1A of Part II of this Report, as well as those discussed in the section entitled “Note Regarding Forward-Looking Statements” below.
Note Regarding Forward-Looking Statements
All statements other than statements of historical fact included in this Report including, without limitation, statements in this MD&A regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. When used in this Report, words such as “anticipate,” “believe,” “will,” “estimate,” “expect,” “intend” and similar expressions identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currentlythen available to, our management.management at the time such statements are made. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certaina number of factors including those detailed in our filings with the SEC. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph.
Separation from Honeywell
On October 1, 2016, Honeywell International Inc. (“Honeywell”) completed the separation of AdvanSix Inc. The separation was completed by Honeywell distributing all of the then outstanding shares of common stock of AdvanSix on October 1, 2016 (the “Distribution Date”) through a dividend in kind of AdvanSix common stock, par value $0.01, to holders of Honeywell common stock as of the close of business on the record date of September 16, 2016 who held their shares through the Distribution Date (the “Spin-Off”). Each Honeywell stockholder who held their shares through the Distribution Date received one share of AdvanSix common stock for every 25 shares of Honeywell common stock held at the close of business on the record date of September 16, 2016. We filed our Form 10 describing the Spin-Off with the SEC, which was declared effective by the SEC on September 8, 2016 (the “Form 10”). On October 3, 2016, AdvanSix stock began “regular-way” trading on the New York Stock Exchange under the “ASIX” stock symbol.
Business Overview
We produce and sell our Nylon 6 resin and caprolactam as a commodity productsproduct and also produce and sell our Nylon 6 resin as both a commoditized and specialized resin product. The production of these products is capital intensive, requiring ongoing investments in improvingto improve plant reliability, expandingexpand production capacity and achievingachieve higher quality. Our results of operations are primarily driven by production volume and the spread between the sales prices of our products and the costs of the underlying raw materials built into the market-based pricing models for most of our sales.products. The global prices for nylon resin typically track a spread over the price of caprolactam, which in turn tracks as a spread over benzene because the key feedstock materials for caprolactam, phenol or cyclohexane are ultimately derived from benzene. This price spread has historically experienced cyclicality as a result of global changes in supply and demand. Generally, Nylon 6 resin prices track the cyclicality of caprolactam prices, although prices set above the spread are achievable when nylon resin manufacturers, like AdvanSix, are able to formulate and produce specialized nylon resin products. Our specialized Nylon 6 products are typically valued at a higher level than commodity resin products.
In recent years,Following the peak in 2011 through the first half of 2016, nylon and caprolactam prices have experienced a cyclical period of downturn as the global market has experienced large increases in supply without a commensurate increase in demand. Most of this supply increase has been built by newwas the result of Chinese manufacturers, resulting in margin compression for Nylon 6 resin and caprolactam in recent years to historic lows. OverBeginning in the last year,second half of 2016, capacity reductions by our competitors have occurred in North America and Europe improving supply/demand fundamentals in North America with continued dynamic conditions globally. We believe that, in addition to a potential recovery that has historically followed periods of oversupply and declining prices, Nylon 6 end-market growth will continue to generally track global GDP with certain applications, growing at faster rates including engineered plastics and packaging.packaging, growing at faster rates. Additionally, one of our strategies is to continue developing specialty nylon 6 and nylon 6 based copolymer products that we believe will obtaingenerate higher margins.
Our ammonium sulfate is used by customers as a fertilizer containing nitrogen and sulfur, two key crop nutrients. Global prices for ammonium sulfate fertilizer are influenced by several factors including the price of urea, which is the most widely used source of nitrogen-based fertilizer in the world. A secondaryOther global price driver forfactors driving ammonium sulfate fertilizer is the price of future deliveries of crops,demand are general agriculture trends, including corn, wheat and coffee, which are impacted by general trends in the agricultural industry. We expect agriculture fundamentals to remain challenging through the 2017/2018 planting season.crop prices.
We produce ammonium sulfate fertilizer continuously throughout the year as part of our manufacturing process, but quarterly sales experience quarterly cyclicality based on the timing and length of the growing seasons in North and South America. North America ammonium sulfate prices are typically strongest during second quarter fertilizer application and then typically decline seasonally with new season fill in the third quarter. Due to the ammonium sulfate fertilizer sales cycle, we occasionally build up higher inventory balances because our production is continuous and not tied to seasonal demand for fertilizers. Sales of most of our other products have generally been subject to minimal, or no, seasonality.
We also manufacture, market and sell a number of chemical intermediate products that are derived from the chemical processes within our integrated supply chain. Most significant is acetone, which is used by our customers in the production of adhesives, paints, coatings and solvents. Prices for acetone are influenced by its own supply and demand dynamics but can also be influenced by the underlying move in propylene input costs.
We seek to run our production facilities on a nearly continuous basis for maximum efficiency andas several of our intermediate products are key feedstock materials for other products in our integrated manufacturing chain. We schedule several planned outagesturnarounds each year, referred to as plant turnarounds, to conduct routine and major maintenance across our facilities, which are referred to as plant turnarounds.facilities. While we
may experience unplanned interruptions from time to time, we seek to mitigate the risk through regularly scheduled maintenance both for major and minor repairs at all of our production facilities. We also utilize maintenance excellence and mechanical integrity programs and maintain appropriate buffer inventory of intermediate chemicals necessary for our manufacturing process, which are intended to mitigate the extent of any production losses as a result of planned and unplanned downtime.
While our integrated manufacturing, scale and the quantity and range of our product offerings make us one of the most efficient manufacturers in our industry, we areit also exposedexposes us to increased risk associated with unplanned downtime or material disruptions at any one of our production facilities which could impact ourthe supply chain to downstream plants inthroughout our manufacturing process. Should unplanned outages occur, we may not have enough buffer inventory at any given time to offset such production losses. Moreover, taking our production facilities offline for regularly scheduled repairs can be an expensive and time-consuming operation with risk that discoverable items and delays during the repair process may cause unplanned downtime as well.
Recent Developments
On March 13, 2018, a federal search warrant was executed at the Company’s Hopewell, Virginia manufacturing facility. On the same date, the Company was separately served with a grand jury subpoena issued by the U.S. District Court for the Eastern District of Virginia, which requested documents related to the Hopewell facility’s air emissions and its compliance with the terms of a previously disclosed 2013 consent decree with the federal government and the Commonwealth of Virginia. The Company continues to cooperate fully with the authorities and is providing information in response to the subpoena. The Company’s production across its sites was not affected by these events and the Company expects to continue operating safely at plan moving forward. While the Company may incur penalties or fines in connection with the federal inquiry, the amount of such penalties or fines, if any, cannot be reasonably estimated at this time.
On May 4, 2018, the Company announced that its Board of Directors authorized a share repurchase program of up to $75 million of the Company’s common stock. Repurchases may be made from time to time on the open market, including through the use of trading plans intended to qualify under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The size and timing of these repurchases will depend on pricing, market and economic conditions, legal and contractual requirements and other factors. The repurchase program has no expiration date and may be modified, suspended or discontinued at any time. The Company had approximately 30.0 million shares of common stock outstanding as of September 30, 2018. See Part II, Item 2 of this Form 10-Q for information regarding the Company's repurchase activity during the three months ended September 30, 2018.
2018 Operational Events
On January 17, 2018, the Company announced that it had experienced a temporary production issue at its Hopewell, Virginia facility related to the severe winter weather. As a result of this unplanned interruption, caprolactam and resin production had been reduced at the Hopewell and Chesterfield, Virginia facilities. As a result of these events, the Company incurred a $20
million unfavorable impact to pre-tax income in the first quarter of 2018 including the impact of fixed cost absorption, maintenance expense and incremental raw material costs. In addition, the Company incurred an approximately $10 million unfavorable impact to pre-tax income in the first quarter due to lost sales. The Company informed its customers of this force majeure event and actively worked to mitigate the impact of reduced production output on its customers’ operations. As previously disclosed, the required mechanical repair work was completed as expected. The Company has submitted a business interruption insurance claim.
Results of Operations
(Dollars in thousands, unless otherwise noted)
Sales
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Sales | $366,660 | | $323,953 | | $1,104,805 | | $932,201 | Sales | $368,653 | | $366,660 | | $1,128,350 | | $1,104,805 |
% change compared with prior year period | 13.2% | | | | 18.5% | |
| % change compared with prior year period | 0.5% | | | 2.1% | | |
The change in sales compared to the prior year period is attributable to the following:
| | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 | | Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
Volume | 4.9% | | 4.1% | Volume | (9.7)% | | | (4.5)% | |
Price | 8.3% | | 14.4% | Price | 10.2% | | | 6.6% | |
| 13.2% | | 18.5% | | 0.5% | | | 2.1% | |
Sales increased in the three months ended September 30, 20172018 compared to the prior year period by $42.7$2.0 million (approximately 13.2%1%) due primarily to higher sales prices (approximately 8.3%10%) and volume increases (approximately 4.9%) of caprolactam, chemical intermediates, and ammonium sulfate offset partiallydriven by lower nylon volume. Sales prices increased due primarily to (i) higher prices of the raw materials used to manufacture caprolactam, nylon and chemical intermediates impacting formula-based pass-through pricing, (approximately 4.2% favorable impact), particularly for benzene and propylene (inputs to cumene which is a key feedstock material for our products), and (ii) market-based. Market-based pricing was nearly flat due to increases in ammonium sulfate primarily offset by decreases in chemical intermediates, particularly acetone. Volume decreased by approximately 10% due primarily to increases in nylona planned plant turnaround at the Hopewell facility and caprolactam pricing offset partially by lower prices of ammonium sulfate (approximately 4.1% favorable impact).production output versus the prior year.
Sales increased in the nine months ended September 30, 20172018 compared to the prior year period by $172.6$23.5 million or approximately 18.5%(approximately 2%) due primarily to higher sales prices (approximately 14.4%7%) driven by (i) formula-based pass-through pricing (approximately 6% favorable impact), and volume(ii) market-based price increases (approximately 4.1%) ofin ammonium sulfate chemical intermediates and caprolactamnylon (approximately 1% favorable impact), partially offset partially by volume decreases of nylon. Sales prices increased due primarily to (i) higher pricesapproximately 5% associated with the unplanned outage in January 2018 and timing of the raw materials used to manufacture caprolactam, nylon and chemical intermediates impacting formula-based pass-through pricing (approximately 10.5% favorable impact), particularly benzene and propylene, and (ii) market-based pricing due primarily to increasesplanned plant turnaround in nylon, caprolactam and chemical intermediates pricing offset partially by lower pricesthe third quarter of ammonium sulfate (approximately 3.9% favorable impact).2018.
Costs of Goods Sold
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
Costs of goods sold | $343,434 | | $309,408 | | $1,007,712 | | $922,604 |
% change compared with prior year period | 11.0% | | | | | 9.2% | | | |
Gross Margin percentage | 6.8% | | | 15.6% | | | 10.7% | | | 16.5% | |
|
| | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Costs of goods sold | $309,629 | | $285,091 | | $923,268 | | $804,471 |
% change compared with prior year period | 8.6% | | | | 14.8% | | |
Gross Margin percentage | 15.6% | | 12.0% | | 16.4% | | 13.7% |
Costs of goods sold increased in the three months ended September 30, 20172018 compared to the prior year period by $24.5$34 million or approximately 8.6%(approximately 11%) due primarily to (i) higher prices of raw materials, (approximately 5.7%), particularly propylene, benzene and propylene (inputs to cumenesulfur (approximately 13%), and (ii) increased manufacturing costs including the planned plant turnarounds in the third quarter of 2018 and purchases of feedstocks which is a key feedstock material for our products) and higherare normally manufactured by the Company (approximately 10%), partially offset by lower sales volumes (approximately 1.8%10%).
Gross margin percentage increased driven by approximately 3.6%the planned plant turnaround in the three months ended September 30, 2017 compared tothird quarter of 2018 and lower production output and the impact of the prior year period due primarily to higher sales prices net of rising raw materials costsLIFO cost basis charge (approximately 2.1%) and increased sales volumes (approximately 2.1%1%).
Costs of goods sold increased in the nine months ended September 30, 20172018 compared to the prior year period by $118.8$85.1 million or approximately 14.8%(approximately 9%) due primarily to (i) the higher prices of raw materials, (approximately 13.4%), particularly propylene, benzene and propylene,sulfur (approximately 8%), and a one-time prior year benefit related to(ii) the terminationimpact of a long-term supply agreementplanned plant turnarounds and the unplanned outage in January 2018, including fixed cost absorption, maintenance expense and higher costs associated with the purchase of feedstocks which are normally manufactured by the Company (approximately 7%), partially offset by lower sales volumes (approximately 4%).
Gross margin percentage decreased by approximately 9% in the three months ended March 31, 2016September 30, 2018 compared to the prior year period due to (i) increased manufacturing costs including planned plant turnarounds and purchases of feedstocks which are normally manufactured by the Company (approximately 2.0% unfavorable)8%), and (ii) the impact of formula-based pass-through pricing as discussed above (approximately 2%) partially offset by the impact of the prior year LIFO cost basis charge (approximately 1%).
Gross margin percentage increaseddecreased by approximately 2.7%6% in the nine months ended September 30, 20172018 compared to the prior year period due primarily to higher salesthe impact of the unplanned outage in January 2018 and production volumes on a year-over-year basis (approximately 3.7%) offset partially byplanned plant turnarounds (as discussed above) as well as the terminationimpact of a long-term supply agreement in the three months ended March 31, 2016 (approximately 1.4%).formula-based pass-through pricing.
Selling, General and Administrative Expenses
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Selling, general and administrative expenses | $19,086 | | $11,695 | | $54,022 | | $33,949 | Selling, general and administrative expenses | $18,057 | | $19,050 | | $55,189 | | $53,914 |
Percent of sales | 5.2% | | 3.6% | | 4.9% | | 3.6% | Percent of sales | 4.9% | | | 5.2% | | | 4.9% | | | 4.9% | |
Selling, general and administrative expenses decreased by $1.0 million in the three months ended September 30, 2018 compared to the prior year period due to lower IT infrastructure costs associated with the exit of Honeywell transition services, partially offset by legal costs associated with the federal inquiry at the Hopewell facility discussed above.
Selling, general and administrative expenses increased by $7.4 million and $20.1$1.3 million in the three and nine months ended September 30, 2017, respectively2018 compared to the corresponding prior year periodsperiod due primarily to higher stand-alonelegal costs incurred sinceassociated with the Spin-Off on October 1, 2016. These stand-alone costs are related primarily to workforce and other infrastructure and shared facilities including costs for transition services provided by Honeywell which werefederal inquiry at the Hopewell facility partially offset by the elimination oflower IT infrastructure costs allocated in the prior year to the Company from Honeywell on the basis of sales. The incremental one-time and ongoing stand-alone costs to operate our business as an independent public company remain in lineassociated with the Company’s expectations as previously disclosed in our Form 10 filed with the SEC and are expected to exceed the historical allocationsexit of expenses from Honeywell. Honeywell transition services.
Tax Expense
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Tax expense | $14,538 | | $11,342 | | $46,803 | | $36,712 | Tax expense | $229 | | $14,538 | | $13,385 | | $46,803 |
Effective tax rate | 40.6% | | 40.8% | | 38.6% | | 38.4% | Effective tax rate | 4.0% | | | 40.6% | | | 22.7% | | | 38.6% | |
The Company’s effective tax rate for the three months ended September 30, 2018 was lower compared to the U.S. federal statutory rate due primarily to a $1.0 million income tax benefit associated with the filing of the 2017 U.S. federal income tax return as well as $0.2 million of excess tax benefits related to vesting of restricted stock units partially offset by state taxes. The Company's effective tax rate for the nine months ended September 30, 2018 was slightly higher compared to the U.S. federal statutory rate due primarily to state taxes and executive compensation deduction limitations resulting from the Tax Cuts and Jobs Act ("Tax Act"), partially offset by a $1.0 million income tax benefit associated with the filing of the 2017 U.S. federal income tax return as well as excess tax benefits realized upon vesting of restricted stock units. The Company’s effective tax rate for the three and nine months ended September 30, 20172018 was higher compared tolower than the U.S. federal statutory rateprior year period due primarily to state taxes and changes in the Company's domestic manufacturing deduction.
The Company’s effectivepassage of the Tax Act which reduced the corporate tax rate to 21% from 35% for three and nine months ended September 30, 2017 were comparable to the effective tax rates in the same prior year periods.periods beginning after December 31, 2017.
Net Income
|
| | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income | $21,274 | | $16,460 | | $74,331 | | $58,861 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income | $5,480 | | $21,274 | | $45,483 | | $74,331 |
As a result of the factors described above, netNet income was $21.3$5.5 million and $74.3$45.5 million for the three and nine months ended September 30, 2017,2018, respectively, as compared to $16.5$21.3 million and $58.9$74.3 million in the corresponding prior year period.
Non-GAAP Measures
(Dollars in thousands, unless otherwise noted)
The following tables set forth the non-GAAP financial measures of EBITDA and EBITDA Margin, and EBITDA and EBITDA Margin excluding the prior year one-time benefit described below.Margin. EBITDA is defined as Net income before Interest, Income taxes, Depreciation and amortization. EBITDA Margin is equal to EBITDA divided by Sales. The Company believes these non-GAAP financial measures provide meaningful supplemental information as they are used by the Company’s management to evaluate the Company’s operating performance, enhance a reader’s understanding of the financial performance of the Company, and facilitate a better comparison among fiscal periods and performance relative to its competitors, as the non-GAAP measures exclude items that are not considered core to the Company’s operations.
These non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for the financial information presented in accordance with GAAP. Non-GAAP financial measures should be read only in conjunction with the comparable GAAP financial measures. The Company's non-GAAP measures may not be comparable to other companies' non-GAAP measures.
The following is a reconciliation between the non-GAAP financial measures of EBITDA and EBITDA Margin and EBITDA and EBITDA Margin excluding the prior year one-time benefit to their most directly comparable GAAP financial measure:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
| 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 21,274 |
| | $ | 16,460 |
| | $ | 74,331 |
| | $ | 58,861 |
| Net income | $ | 5,480 | | $ | 21,274 | | $ | 45,483 | | $ | 74,331 |
Interest expense (income) | 1,961 |
| | — |
| | 5,373 |
| | — |
| |
Interest expense, net | | Interest expense, net | 1,270 | | 1,961 | | 5,958 | | 5,373 |
Income taxes | 14,538 |
| | 11,342 |
| | 46,803 |
| | 36,712 |
| Income taxes | 229 | | 14,538 | | 13,385 | | 46,803 |
Depreciation and amortization | 12,565 |
| | 10,307 |
| | 35,524 |
| | 29,964 |
| Depreciation and amortization | 12,992 | | 12,565 | | 38,905 | | 35,524 |
EBITDA (non-GAAP) | 50,338 |
| | 38,109 |
| | 162,031 |
|
| 125,537 |
| EBITDA (non-GAAP) | $ | 19,971 | | $ | 50,338 | | $ | 103,731 | | $ | 162,031 |
Prior year one-time benefit (1) | — |
| | — |
| | — |
| | 15,500 |
| |
EBITDA excluding prior year one-time benefit (non-GAAP) | $ | 50,338 |
| | $ | 38,109 |
| | $ | 162,031 |
| | $ | 110,037 |
| |
| | | | | | | | | | | | | | | | |
Sales | $ | 366,660 |
| | $ | 323,953 |
| | $ | 1,104,805 |
| | $ | 932,201 |
| Sales | $ | 368,653 | | $ | 366,660 | | $ | 1,128,350 | | $ | 1,104,805 |
| | | | | | | | | | | | | | | |
EBITDA Margin (non-GAAP) | 13.7% | | 11.8% | | 14.7% | | 13.5% | EBITDA Margin (non-GAAP) | 5.4% | | | 13.7% | | | 9.2% | | | 14.7% | |
| | | | | | | | |
EBITDA Margin excluding prior year one-time benefit (non-GAAP) | 13.7% | | 11.8% | | 14.7% | | 11.8% | |
| |
(1) | Prior year one-time benefit reflects the $15.5 million one-time benefit in the first quarter of 2016 related to the termination of a long-term supply agreement. |
Liquidity and Capital Resources
(Dollars in thousands, unless otherwise noted)
We believe that cash balances and operating cash flows, together with available capacity under our credit agreement, will provide adequate funds to support our current annualshort-term operating and longer termobjectives as well as our longer-term strategic plans, subject to the risks and uncertainties outlined below and in the risk factors as previously disclosed in our 20162017 Form 10-K. Our principal source of liquidity is our cash flow generated from operating activities, which is expected to provide us with the ability to meet the majority of our short-term funding requirements. Our operating cash flows are affected by capital requirements and production volume as well as the prices of our raw materials and general economic and industry trends. We utilize asupply chain financing and trade receivables discount arrangementarrangements with a third party financial institutioninstitutions which enhancesenhance liquidity and enablesenable us to efficiently manage our working capital needs. In addition, we monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on the safety of principal and secondarily on maximizing yield on those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities.
On a recurring basis, our primary future cash needs will be centered on operating activities, working capital, capital expenditures including high return growth and cost savings investments, environmental compliance costs,share repurchases, employee benefit obligations, interest payments, debt repaymentmanagement and strategic acquisitions. We believe that our future cash from operations, together with our access to funds on hand and credit and capital markets, will provide adequate resources to fund our expected operating and financing needs. Our ability to fund our capital needs, however, will depend on our ongoing ability to generate cash from operations and access to credit and capital markets, both of which are subject to the risk factors previously disclosed in our 20162017 Form 10-K and subsequent Quarterly Reports on Form 10-Q, as well as general economic, financial, competitive, regulatory and other factors that are beyond our control.
We assumed from Honeywell all health, safety and environmental (“HSE”) liabilities and compliance obligations related to the past and future operations of our current business, as well as all HSE liabilities associated with our three current manufacturing locations and the other locations used in our current operations including any cleanup or other liabilities related to any contamination that may have occurred at such locations in the past. Honeywell retained all HSE liabilities related to former business locations or the operation of our former businesses. Although we have ongoing environmental remedial obligations at certain of our facilities, in the past three years, the associated remediation costs have not been material, and we do not expect our known remediation costs to be material for 2017.
The Company made contributions during 2017 sufficient to satisfy pension funding requirements under the AdvanSix Retirement Earnings Plan in the aggregate amount of approximately $17 million and will make additional contributions in future years sufficient to satisfy pension funding requirements in those periods. The Company made contributions of $2.2 million in first quarter of 2017, $1.6 million in the second quarter of 2017, $11.1 million in third quarter of 2017 and $2.0 million in October 2017.2018.
We expect that our primary cash requirements for the remainder of 20172018 will be to fund costs associated with ongoing operations, capital expenditures, share repurchases and amounts related to other contractual obligations.
The Company made pension contributions of approximately $12 million during the nine months ended September 30, 2018 sufficient to satisfy pension funding requirements. The Company made contributions of approximately $2.0 million during the first quarter of 2018, $6.6 million in the second quarter of 2018, and $3.3 million in the third quarter of 2018. The Company does not plan to make additional pension plan contributions during the fourth quarter of 2018.
On May 4, 2018, the Company announced that its Board of Directors authorized a share repurchase program of up to $75 million of the Company’s common stock. Repurchases may be made from time to time on the open market, including planned plant outagesthrough the use of trading plans intended to qualify under Rule 10b5-1 of the Exchange Act. The size and capital expenditures.timing of these repurchases will depend on pricing, market and economic conditions, legal and contractual requirements and other factors. The repurchase program has no expiration date and may be modified, suspended or discontinued at any time. The Company had approximately 30.0 million shares of common stock outstanding as of September 30, 2018.
As of September 30, 2018, the Company had repurchased 545,282 shares of common stock for an aggregate of $19.7 million under the share repurchase program at a weighted average market price of $36.06 per share. As of September 30, 2018, $55.3 million remained available for repurchase under the currently authorized program. During the period October 1, 2018 through October 26, 2018, we repurchased an additional 188,600 shares at a weighted average market price of $31.59 per share. After giving effect to these repurchases, we have approximately $49.4 million of remaining capacity authorized under the currently authorized program.
Credit Agreement
On February 21, 2018 (the “Amendment Date”), the Company entered into Amendment No. 1 (the “Amendment”) to the Credit Agreement, dated September 30, 2016 (the “Original Credit Agreement”), among the Company, the guarantors, the lenders party thereto and Bank of America, N.A., as administrative agent (the Original Credit Agreement, after giving effect to the Amendment, the “Amended and Restated Credit Agreement”).
The credit facilities under the Original Credit Agreement we incurred indebtednessconsisted of a senior secured term loan in thean aggregate principal amount of approximately $270.0$270 million, in the form of a term loan, the net proceeds of which were distributed$267 million was outstanding just prior to Honeywell substantially concurrent withentering into the consummation of the Spin-Off,Amendment, and we also entered into a $155.0 millionsenior secured revolving credit facility in a principal amount of $155 million. Pursuant to fund our working capital and other cash needs. For information regarding ourthe Amendment, (i) the term loan facility under the Original Credit Agreement refer to “Note 9-Long-term Debtwas terminated and Credit Agreement” to the Consolidated and Combined Financial Statements in Item 8 of our 2016 Form 10-K. Going forward, cash provided by operating activities will be needed to fund future interest payments on the Company'sentire outstanding indebtedness.
Under the termsbalance of the term loan facility (the “Term Loan”) thereunder was paid in full and (ii) the maximum aggregate principal amount of the senior secured revolving credit facility (the “Revolving Credit Facility”) was increased to $425 million.
On the Amendment Date, the Company borrowed $242 million under the Revolving Credit Facility. The proceeds of such loans, as well as cash on hand, were used to repay the outstanding Term Loan under the Original Credit Agreement. The Revolving Credit Facility under the Amended and Restated Credit Agreement we are subjecthas a 5-year term with a scheduled maturity date of February 21, 2023. The Amendment resulted in an increase in the Revolving Credit Facility to restrictivereplace the Term Loan and provides
increased borrowing flexibility and reduced overall borrowing costs with an approximate 50 basis point reduction in the interest rate spread.
The Amended and Restated Credit Agreement contains customary covenants that limit ourlimiting the ability of the Company and its subsidiaries to, among other things, topay cash dividends, incur additional indebtedness, pay dividendsdebt or liens, redeem or repurchase stock of the Company, enter into transactions with affiliates, make other distributions, andinvestments, make capital expenditures, merge or consolidate merge, sellwith others or otherwise dispose of assets, as well as financial covenants that require usthe Company to maintain interest coverage and leverage ratios at levels specified in the Amended and Restated Credit Agreement. These covenants may limit how we conduct our business, and in the event of certain defaults, our repayment obligations may be accelerated. We were in compliance with all of our covenants at September 30, 2017.2018. As of September 30, 2017, $152.92018, $223.9 million is available for use out of the total credit facility of $425.0$425 million is available to be drawn under the Revolving Credit Agreement.Facility.
DuringIn addition to the three months ended September 30, 2017, weamount borrowed $32.5on the Amendment Date, the Company borrowed an incremental $43 million ($4 million in first quarter, $15 million in second quarter and $24 million in the aggregate from our revolving credit facilitythird quarter) for our working capital purposes under the Revolving Credit Facility and other cash needsrepaid $85 million ($16 million in first quarter, $35 million in second quarter and these borrowings were fully repaid by September 30, 2017. During the nine months ended September 30, 2017, we borrowed $308.5$34 million in the aggregate from our revolving credit facility for our working capital and other cash needs and these borrowings were fully repaid bythird quarter) to bring the balance under the Revolving Credit Facility to $200 million at September 30, 2017.2018. Going forward, we expect that cash provided by operating activities will fund future interest payments on the Company's outstanding indebtedness.
For additional details regarding the Amended and Restated Credit Agreement, refer to “Note 7. Long-term Debt and Credit Agreement” to the Condensed Consolidated Financial Statements.
Cash Flow Summary
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Cash provided by (used for): | |
| | |
|
Operating activities | $ | 98,471 |
| | $ | 66,467 |
|
Investing activities | (72,593 | ) | | (57,320 | ) |
Financing activities | (91 | ) | | 28,817 |
|
Net increase in cash and cash equivalents | $ | 25,787 |
| | $ | 37,964 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2018 | | 2017 |
Cash provided by (used for): | | | |
Operating activities | $ | 127,735 | | $ | 98,471 |
Investing activities | (74,306) | | (72,593) |
Financing activities | (88,655) | | (91) |
Net change in cash and cash equivalents | $ | (35,226) | | $ | 25,787 |
Cash provided by operating activities increased by $32.0$29.3 million for the nine months ended September 30, 20172018 versus the prior year period due primarily to an $86.5 million improvement in working capital (comprised of Accounts receivables, Inventories, Accounts payable and Deferred income and customer advances) with higher collections providing $46.9 million of cash from Accounts and other receivables during the nine months ended September 30, 2018 compared to a $20.8 million unfavorable cash impact in the prior year period, and a $23.2 million favorable cash impact in Accounts payable due to the timing of payments, with cash outflows of $10.7 million during the nine months ended September 30, 2018 compared to larger outflows of $33.9 million during the prior year period, partially offset by (i) a $15.5$28.8 million increasedecrease in Net income versus the prior year period due to significantly higher sales for the nine months ended September 2017, (ii) a $14.9 million larger decrease in Inventory during the nine months ended September 30, 2017 versus the prior year period due primarily to the timingJanuary 2018 unplanned outage and the planned plant turnaround in the third quarter of cumene purchases, (iii)2018, and (ii) a $11.9$31.7 million increaseless favorable cash impact from changes in Accrued liabilities due to the timing of payments during the nine months ended September 30, 2017 versus the same period last year and (iv) a $11.3 million increase in deferredDeferred income taxes versus the prior year period due primarily to lower cashthe utilization of net operating losses in 2017 and the reduction in the U.S. federal corporate tax payments relativerate from 35% to the income tax provision. This activity was offset partially by a net $33.8 million unfavorable cash impact from Accounts payable due primarily to the timing of payments during the nine months ended September 30, 2017 versus the prior year period.21%.
Cash used for investing activities increased by $15.3$1.7 million for the nine months ended September 30, 20172018 versus the prior year period due primarily to an increase in cash paid for capital expenditures of $10.3 million.expenditures.
Cash fromused for financing activities decreasedincreased by $28.9$88.6 million for the nine months ended September 30, 20172018 versus the prior year period. Cash provided by operating activities was sufficientperiod primarily due to repay all current periodthe repayment of borrowings underand the revolving credit facility whereas revolver borrowings fromimpact of the prior year period were not repaid and remained outstanding during that period.share repurchase program, both of which are described above. During the nine months ended September 30, 2018, the Company amended its Credit Facility, as described above.
Capital Expenditures
(Dollars in thousands, unless otherwise noted)
Our operations are capital intensive, requiring ongoing investments that have consisted, and are expected to continue to consist, primarily of capital expenditures required to maintain and improve equipment reliability, expand production capacity,output, further improve mix, yield throughput, and cost position, and comply with environmental and safety regulations.
The following table summarizes ongoing and expansion capital expenditures:
|
| | | |
| Nine Months Ended September 30, 2017 |
Capital expenditures in Accounts payable at December 31, 2016 | $ | 28,485 |
|
Purchases of property, plant and equipment | 55,949 |
|
Capital expenditures in Accounts payable at September 30, 2017 | (17,228 | ) |
Cash paid for capital expenditures | $ | 67,206 |
|
| | | | | |
| Nine Months Ended September 30, 2018 |
Capital expenditures in Accounts payable at December 31, 2017 | $ | 25,222 |
Purchases of property, plant and equipment | 65,077 |
Less: Capital expenditures in Accounts payable at September 30, 2018 | (17,649) |
Cash paid for capital expenditures | $ | 72,650 |
For the full year 2017,2018, we expect the Company’s total capital expenditures to be approximately $90$110 million.
Critical Accounting Policies
The preparation of our Condensed Consolidated and Combined Financial Statements in accordance with U.S. GAAP is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider these accounting policies to be critical to the understanding of our Condensed Consolidated and Combined Financial Statements. For a full description of our critical accounting policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the 2016our 2017 Form 10-K. While there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them, we continue to monitor such methodologies and assumptions.
Off-Balance Sheet Arrangements and Contractual Obligations
As of September 30, 2017, we2018, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any material changes in the commitments or contractual obligations other than those detailed in our 2016the Company's 2017 Form 10-K. We haveThe Company has not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Recent Accounting Pronouncements
See “Note 22. Recent Accounting Pronouncements” to the Condensed Consolidated and Combined Financial Statements included in Part I, Item 1 of this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to risk based on changes in interest rates relates primarily to our Amended and Restated Credit Agreement. We have not used derivative financial instruments in our investment portfolio. The Amended and Restated Credit Agreement bears interest at floating rates. For variable rate debt, interest rate changes generally do not affect the fair market value of such debt assuming all other factors remain constant but do impact future earnings and cash flows. Accordingly, we may be exposed to interest rate risk on borrowings under the Amended and Restated Credit Agreement. Based on current borrowing levels, a 25 basis25-basis point fluctuation in interest rates for the nine months ended September 30, 20172018 would result in an increase or decrease to our interest expense of approximately $0.5$0.4 million.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains a system of disclosure controls and procedures designed to give reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.
Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud have been or will be detected.
Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our management, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of the end of the period covered by this quarterly report.
Changes in Internal Control over Financial Reporting
Management has not identified any change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 20172018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are involved in litigation relating to claims arising out of the ordinary course of our business operations. We are not a party to, and, to our knowledge, there are not threats of any claims or actions against us, the ultimate disposition of which would have a material adverse effect on our consolidated results of operations or liquidity.
On March 13, 2018, a federal search warrant was executed at the Company’s Hopewell, Virginia manufacturing facility. On the same date, the Company was separately served with a grand jury subpoena issued by the U.S. District Court for the Eastern District of Virginia, which requested documents related to the Hopewell facility’s air emissions and its compliance with the terms of a previously disclosed 2013 consent decree with the federal government and the Commonwealth of Virginia. The Company continues to cooperate fully with the authorities and is providing information in response to the subpoena. The Company’s production across its sites was not affected by these events and the Company expects to continue operating safely at plan moving forward. While the Company may incur penalties or fines in connection with the federal inquiry, the amount of such penalties or fines, if any, cannot be reasonably estimated at this time.
ITEM 1A. RISK FACTORS
There have been no material changes to our risk factors as previously disclosed in the Company’s 20162017 Form 10-K. 10-K and the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 4, 2018, the Company announced that its Board of Directors authorized a share repurchase program of up to $75 million of the Company’s common stock. Repurchases may be made from time to time on the open market, including through the use of trading plans intended to qualify under Rule 10b5-1 of the Exchange Act. The size and timing of these repurchases will depend on pricing, market and economic conditions, legal and contractual requirements and other factors. The repurchase program has no expiration date and may be modified, suspended or discontinued at any time.
The below table sets forth the repurchases of Company common stock, by month, for the quarter ended September 30, 2018:
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plan | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan |
July 2018 | | 124,767 | | $ | 38.32 | | 124,767 | | $ | 67,478,054 |
August 2018 | (1) | 196,878 | | 34.92 | | 186,908 | | 61,001,676 |
September 2018 | | 163,500 | | 34.66 | | 163,500 | | 55,335,379 |
Total | | 485,145 | | $ | 35.70 | | 475,175 | | $ | — |
(1) Includes 9,970 shares covering the tax withholding obligations in connection with the vesting of equity awards.
During the period October 1, 2018 through October 26, 2018, we repurchased an additional 188,600 shares at a weighted average market price of $31.59 per share. After giving effect to these repurchases, we have approximately $49.4 million of remaining capacity authorized under the currently authorized program.
ITEM 6. EXHIBITS
|
| | | | | | | |
Exhibit | | Description |
3.1 | | |
3.2 | | |
10.131.1 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
101.INS | | XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| ADVANSIX INC. | | |
| | | |
| ADVANSIX INC. |
| |
Date: November 7, 20172, 2018 | By: | | /s/ Michael Preston |
| | | Michael Preston |
| | | Senior Vice President and Chief Financial Officer |