AdvanSix Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where applicable.
Business context
AdvanSix is an integrated U.S. chemical manufacturer with product lines in nylon, caprolactam, chemical intermediates and ammonium sulfate fertilizer. Its five U.S. manufacturing facilities serve end markets including agriculture, construction, packaging, plastics and pharmaceuticals. In February 2022, the company acquired U.S. Amines, adding alkyl and specialty amines for high-value markets.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $478.8 million | $446.5 million | $1,541.6 million | $1,260.6 million |
| Gross margin | 7.3% | 18.0% | 15.9% | 17.4% |
| Net income | $10.0 million | $43.9 million | $138.3 million | $116.2 million |
| Diluted EPS | $0.35 | $1.51 | $4.74 | $4.02 |
| Adjusted EBITDA (non-GAAP) | $33.3 million | $77.7 million | $241.9 million | $215.0 million |
| Adjusted EBITDA margin (non-GAAP) | 7.0% | 17.4% | 15.7% | 17.1% |
Q3 sales rose 7.2%, as favorable market pricing, raw-material pass-through and the U.S. Amines acquisition more than offset an 18.1% volume decline. Lower production reflected an extended multi-site turnaround and a delayed ramp-up. For the first nine months, sales increased 22.3%, while volume fell 8.8%; pricing and the acquisition drove growth. Ammonium sulfate and nylon pricing were strong, while chemical-intermediate pricing, particularly acetone, was weaker.
Q3 earnings and margins fell sharply year over year as raw-material costs, turnaround spending, natural-gas costs and lower volume weighed on profitability. Nine-month net income rose despite lower gross and adjusted EBITDA margins. Q3 adjusted net income was $12.3 million and adjusted diluted EPS was $0.43, versus $46.1 million and $1.58, respectively, in Q3 2021.
Cash flow, balance sheet and capital allocation
- Operating cash flow: $204.0 million for the first nine months, compared with $185.5 million in 2021.
- Investing cash flow: $160.1 million used, including $97.5 million for U.S. Amines and $61.0 million in cash capital expenditures. Cash used for investing was $48.0 million in the prior-year period.
- Financing cash flow: $34.3 million used, including $11.1 million of dividends and $23.6 million of treasury-stock purchases. Cash and equivalents increased by $9.6 million to $24.7 million.
- Debt and liquidity: $135 million outstanding under the $500 million revolving credit facility, with approximately $364 million available at September 30. The company reported covenant compliance. Current assets were $398.4 million and current liabilities were $350.7 million.
- Capital spending and pension: Management expected 2022 capital expenditures of approximately $95 million, versus $57 million in 2021, and planned approximately $20 million in 2022 pension contributions; $15 million had been contributed through September.
- Shareholder returns: The company paid $11.1 million in dividends during the nine-month period and had $38.6 million remaining under its share-repurchase authorization at September 30. The board declared a $0.145-per-share dividend payable in November.
Outlook, risks and unusual items
The filing provides no specific sales or earnings forecast. Management said cash, operating cash flow and available credit were expected to support operating needs and longer-term plans, subject to business risks. Capital expenditure expectations are approximately $95 million for 2022.
Key risks include volatile raw-material and energy costs, inflation, labor and supply-chain constraints, customer demand and product-price cyclicality, production interruptions and planned turnarounds, seasonality in fertilizer sales, and exposure to floating interest rates. The company’s integrated production network can also magnify the effects of an outage. COVID-19’s future economic and operational effects remained uncertain. A $50 million interest-rate swap hedged part of floating-rate borrowings through February 2023.
The U.S. Amines purchase accounting remained preliminary; a third-quarter measurement-period adjustment reduced goodwill and the deferred tax liability. Management did not expect the Inflation Reduction Act provisions identified in the filing to materially affect results or financial condition. The company reported ordinary-course litigation and environmental obligations, but did not expect known matters to have a material adverse effect; it could not estimate reasonably possible losses beyond recorded accruals. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the post-turnaround production ramp-up restores volumes and margins, given the substantial Q3 decline in profitability.
- Whether favorable pricing can continue to offset raw-material, natural-gas, labor and other operating-cost pressures.
- U.S. Amines’ contribution to sales, earnings and cash generation as integration proceeds and purchase accounting is finalized.
- Execution of the approximately $95 million 2022 capital-spending plan and the resulting effect on liquidity and operating cash flow.
- Revolver covenant headroom and borrowing costs, particularly as the $50 million interest-rate hedge approaches expiration in February 2023.