Business context and reporting period
AdvanSix Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company manufactures nylon, caprolactam, chemical intermediates and ammonium sulfate, operating an integrated manufacturing network of five U.S. facilities. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where indicated.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $583.7 million | $437.7 million | $1,062.8 million | $814.1 million |
| Gross margin | 18.3% | 18.5% | 19.8% | 17.1% |
| Net income | $65.2 million | $44.1 million | $128.2 million | $72.3 million |
| Diluted EPS | $2.23 | $1.53 | $4.37 | $2.51 |
| Adjusted EBITDA margin (non-GAAP) | 18.1% | 18.2% | 19.6% | 16.9% |
For Q2, sales rose 33.4% year over year, driven by higher market pricing, raw-material pass-through pricing and the U.S. Amines acquisition; lower volume partly offset the increase. For the first half, sales rose 30.6%. Ammonium sulfate was the largest Q2 product line at $205.9 million, up from $100.0 million; nylon sales were $132.1 million versus $111.7 million. Chemical-intermediates sales increased to $158.6 million from $144.2 million, while caprolactam sales increased to $87.2 million from $81.8 million.
Q2 gross margin was slightly lower year over year as higher plant costs, lower volume and non-raw-material inflation offset improved pricing. First-half gross margin improved, reflecting market and pass-through pricing and a prior-year LIFO inventory reserve adjustment. Management reported higher raw-material, utility—particularly natural gas—and transportation costs.
For the six months, operating cash flow was $145.1 million, compared with $109.0 million; capital expenditures were $38.8 million. Investing cash outflow was $137.5 million, including $97.5 million for U.S. Amines. Financing cash outflow was $5.4 million, including $7.0 million of dividends and treasury-stock purchases, partly offset by net borrowings. Cash increased $2.2 million to $17.3 million.
At June 30, 2022, the company had $146.5 million outstanding under its $500 million revolving credit facility and reported $352 million of available capacity. Total liabilities were $764.0 million and stockholders’ equity was $719.2 million. The company said it was in compliance with its credit covenants. A $50 million interest-rate swap fixed rates on about 34% of borrowings; management estimated a 25-basis-point rate move would affect six-month interest expense by about $0.2 million at period-end borrowing levels.
Material changes versus the prior comparable period
- Revenue and earnings increased substantially, primarily with higher product pricing and the U.S. Amines acquisition; lower production and sales volumes were an offset.
- In February 2022, AdvanSix acquired U.S. Amines for approximately $97.5 million net of cash acquired. The acquisition added alkyl and specialty amines serving markets including agrochemicals and pharmaceuticals. Purchase accounting remained preliminary at June 30; goodwill from the acquisition was $40.6 million.
- First-half operating cash flow rose, while investing outflows increased materially due to the acquisition and higher capital spending.
- The company began paying dividends in 2021. It paid $0.25 per share in the first half of 2022 and announced a subsequent quarterly dividend of $0.145 per share, payable August 30, 2022.
Outlook, commentary, risks and unusual items
- No full-year revenue or earnings guidance is provided in the filing. Management expected 2022 capital expenditures of approximately $95 million to $105 million, compared with $57 million in 2021, reflecting maintenance and health, safety and environmental spending. Planned 2022 pension contributions were $15 million to $20 million; $10 million had been contributed through June 30.
- Management said cash, operating cash flow and available credit were expected to support operating needs and plans, while noting that cash generation depends on production, working capital, commodity prices and demand. Ammonium sulfate demand and pricing are seasonal, typically stronger in the first half.
- Risks highlighted include inflation and raw-material costs, supply-chain and labor constraints, geopolitical and economic uncertainty, customer demand, production outages, chemical-manufacturing and environmental obligations, interest rates, and the continuing uncertainty around COVID-19. The company reported no material change to the risk factors in its 2021 Form 10-K.
- Substantially all inventories were valued using LIFO. The excess of replacement cost over carrying value for LIFO inventory was $84.1 million at June 30, 2022, compared with $29.4 million at December 31, 2021; the inventory reduction to LIFO cost was $64.8 million versus $6.0 million at year-end. These amounts merit attention when assessing reported inventory and margins.
- The company said it did not expect pending ordinary-course legal matters or known environmental remediation costs to have a material adverse effect, while acknowledging outcomes and costs could change. Disclosure controls were assessed as effective at a reasonable assurance level; no material internal-control changes were reported.
Most important facts for investors to verify
- Whether elevated pricing and the strong first-half margins persist as raw-material, energy and logistics costs change, and whether volumes recover after Q2 production and weather-related weakness.
- How the U.S. Amines acquisition performs and whether its preliminary purchase-price allocation or integration produces material changes.
- How the substantial increase in LIFO replacement-cost excess and inventory reserve affects future reported margins and earnings.
- Whether cash generation covers the $95 million–$105 million capital-spending plan, dividends, pension funding and other obligations without materially increasing borrowing.
- Future availability and cost of credit, floating-rate exposure, covenant compliance, and the company’s ability to maintain dividends and repurchases.