AdvanSix Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unless otherwise noted, financial figures below are in millions of dollars. AdvanSix is an integrated U.S. chemicals producer with product lines in nylon, caprolactam, chemical intermediates and ammonium sulfate fertilizer.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales | $322.9 | $478.8 | $1,151.4 | $1,541.6 |
| Gross margin | 2.5% | 7.3% | 12.7% | 15.9% |
| Net income (loss) | $(8.0) | $10.0 | $59.7 | $138.3 |
| Diluted EPS | $(0.29) | $0.35 | $2.12 | $4.74 |
| Adjusted EBITDA (non-GAAP) | $7.3 | $33.3 | $138.5 | $241.9 |
| Adjusted EBITDA margin (non-GAAP) | 2.3% | 7.0% | 12.0% | 15.7% |
Sales fell 32.6% in Q3 and 25.3% year to date. Management attributed the declines mainly to lower market-based prices and raw-material pass-through pricing, with lower volumes also contributing. Q3 market-based pricing pressure included ammonium sulfate and nylon. Gross margin contracted as lower selling prices relative to raw-material costs and weaker volume/mix more than offset lower plant-turnaround and utility costs. Q3 SG&A was $21.6 million, down from $23.1 million; year-to-date SG&A rose to $70.7 million from $65.1 million.
Cash flow and investment: Nine-month operating cash flow was $57.4 million, compared with $204.0 million in 2022. Cash used in investing was $71.4 million, including $69.0 million of capital expenditures; the prior-year period included the $97.5 million U.S. Amines acquisition. The company expects 2023 capital expenditures of approximately $115 million, versus $89 million in 2022. Cash declined to $22.1 million from $31.0 million at year-end 2022.
Debt and liquidity: Revolver borrowings were $170 million at September 30, 2023, up from $115 million at December 31, 2022. The company reported approximately $329 million of additional revolving-credit capacity and compliance with its credit covenants. The $500 million facility matures in October 2026; borrowings carry floating rates. A 25-basis-point rate change at reported borrowing levels would change interest expense by approximately $0.4 million for the nine-month period. Net interest expense was $2.1 million in Q3 versus $0.7 million, and $5.3 million year to date versus $2.0 million.
Material changes, outlook and risks
- Q3 included a net pre-tax gain of approximately $4.5 million from three items: an $11.4 million estimated gain on exiting the Oben alliance, a $4.5 million non-cash charge related to a licensee’s planned facility closure, and a $2.4 million non-cash charge to exit certain low-margin oximes products. About 60% of the Oben termination fee estimate is subject to change; the first $4.4 million installment was received in Q4 2023, with later installments expected in 2024 and 2025.
- The Hopewell South labor strike ended after ratification of a five-year agreement; the company said it had no material effect on results. Hopewell North also ratified a five-year agreement.
- The Board declared a quarterly dividend of $0.16 per share payable November 28, 2023. The company repurchased $37.7 million of shares during the first nine months and had $76.6 million of authorization remaining at quarter-end.
- Management said cash, operating cash flow and available credit are expected to support operating needs and strategic plans. The filing provides a 2023 capital-spending estimate but no specific earnings or revenue guidance.
- Key risks include chemical-plant or logistics disruption, raw-material prices and availability, cyclical demand and pricing, customer demand and credit, floating-rate debt, and environmental, safety, geopolitical and cybersecurity exposures. Ammonium sulfate sales are seasonal; production is continuous, so inventory can build ahead of demand. The company reported no material changes to previously disclosed risk factors.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. The company does not expect known environmental remediation costs or the cited ordinary-course legal matters to have a material adverse effect, while noting that outcomes remain uncertain.
Important facts for investors to verify
- Whether market pricing, spreads and sales volumes stabilize, particularly for ammonium sulfate and nylon, and how that affects gross margins.
- Cash generation and working-capital trends, including the unwind of customer advances, against planned 2023 capital expenditures of approximately $115 million.
- Revolver utilization, floating-rate interest costs and continued compliance with credit covenants.
- Collection and final value of the Oben termination installments, and the financial effects of the licensee closure and oximes exit.
- Execution and returns from capital projects, planned plant maintenance, dividends and share repurchases amid weaker earnings.
- Customer concentration: the ten largest customers represented approximately 41% of Q3 sales; Shaw represented 12%.