AdvanSix Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. AdvanSix is a diversified chemistry company with four principal product lines: Nylon, caprolactam, chemical intermediates and ammonium sulfate. Amounts below are in millions of dollars unless otherwise indicated.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales | $427.9 | $583.7 | $828.5 | $1,062.8 |
| Gross profit / gross margin | $67.9 / 15.9% | $106.9 / 18.3% | $138.4 / 16.7% | $210.3 / 19.8% |
| Net income | $32.7 | $65.2 | $67.7 | $128.2 |
| Diluted EPS | $1.16 | $2.23 | $2.39 | $4.37 |
| Adjusted EBITDA (non-GAAP) | $65.8 | $105.4 | $131.1 | $208.6 |
| Adjusted EBITDA margin (non-GAAP) | 15.4% | 18.1% | 15.8% | 19.6% |
Q2 selling, general and administrative expense was $24.0 million versus $20.8 million; net interest expense was $2.0 million versus $0.8 million. The Q2 effective tax rate was 24.4%, compared with 23.5%. For the first half, the effective tax rate was 22.7%, versus 23.4%.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $36.6 million, down from $145.1 million. Capital spending cash outflow was $43.9 million, making operating cash flow less capital spending approximately negative $7.3 million.
- First-half investing cash outflow was $45.9 million, versus $137.5 million, which included the prior-year $97.5 million U.S. Amines acquisition. Financing cash outflow was $11.1 million, including $28.4 million of share repurchases and $8.0 million of dividends.
- Cash was $10.5 million at June 30, 2023, down from $31.0 million at year-end 2022. The company reported $140 million drawn on its revolving credit facility and approximately $359 million of additional available capacity.
- Total assets were $1.467 billion and total liabilities were $692.7 million. Current assets were $411.2 million and current liabilities $300.1 million. Inventory was $226.0 million, up from $215.5 million at year-end.
- The company was in compliance with its credit-facility covenants at June 30 and through the filing date. Its facility has a $500 million commitment and matures October 27, 2026. Interest rates are floating; management estimated a 25-basis-point rate change would affect interest expense by about $0.4 million for the six-month period.
Material changes and management commentary
- Sales fell 26.7% in Q2 and 22.0% in the first half. Management attributed the declines primarily to lower market-based pricing and lower raw-material pass-through pricing, with reduced sales volumes also contributing. Q2 volume declined 1.5%; first-half volume declined 4.6%.
- Lower pricing across ammonium sulfate and nylon was a principal headwind. First-half volume weakness was largely in chemical intermediates, partly offset by the U.S. Amines acquisition. Lower raw-material costs reduced cost of goods sold, but gross margin percentage declined in both comparison periods.
- First-half operating cash flow declined mainly due to lower net income and an unfavorable working-capital impact, including changes in receivables, inventory, payables and customer advances.
- SG&A rose, reflecting ERP-system upgrades and other functional support costs, among other factors. Interest expense also increased.
Outlook, risks and unusual items
- No revenue or earnings guidance is provided in the supplied filing text. Management expects 2023 capital expenditures of approximately $110–$120 million, versus $89 million in 2022, for infrastructure, maintenance, growth and cost-savings projects.
- Management stated that cash, operating cash flows and available credit are expected to support operating needs and plans, subject to business and economic risks. It expects pension contributions of up to $5 million in 2023.
- A Hopewell, Virginia labor strike affecting approximately 340 workers ended after ratification of a five-year collective bargaining agreement; the company said the strike did not materially affect results.
- The company reported ongoing environmental obligations. It is implementing an EPA-approved work plan related to alleged risk-management-program violations at Hopewell and is discussing alleged stormwater and other discharge violations with the EPA; potential penalties are possible. Management does not expect the matter to have a material adverse effect, but the outcome is uncertain. A separate Philadelphia matter was settled for a $62,000 civil penalty.
- Other principal risks identified include cyclical customer demand and product pricing, raw-material availability and costs, plant or logistics disruptions, planned turnarounds, indebtedness and covenant compliance, interest rates, environmental and safety regulation, and litigation. The filing reports no material change to previously disclosed risk factors.
- The board declared a subsequent quarterly dividend of $0.16 per share, payable August 29, 2023. The company had $85.6 million remaining under share-repurchase authorizations at June 30 and repurchased additional shares after quarter-end.
Most important facts for investors to verify
- Whether pricing, volumes and gross margins stabilize, particularly in ammonium sulfate, nylon and chemical intermediates.
- Whether working-capital movements and lower earnings continue to constrain operating cash flow relative to capital spending and shareholder returns.
- Availability and cost of revolving-credit borrowings, covenant headroom and exposure to floating interest rates.
- Execution and funding of the $110–$120 million 2023 capital-spending plan, alongside dividends and repurchases.
- Developments in the Hopewell EPA matters and any resulting penalties, operating requirements or costs.