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Income
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Equity
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(Exact name of registrant as specified in its charter)
iDelaware
i81-2525089
(State
or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
i300 Kimball Drive, iSuite
101, iParsippany, iNew Jersey
i07054
(Address
of principal executive offices)
(Zip Code)
(i973) i526-1800
(Registrant’s telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $0.01 per share
iASIX
iNew
York Stock Exchange
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. iYesý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). iYesý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth 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.
iLarge
accelerated filerý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company i☐
Emerging growth company i☐
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 ☐ Noiý
Common stock, par value $ii0.01/;
ii200,000,000/ shares authorized; i31,961,956
shares issued and i28,077,693 outstanding at June 30, 2022; i31,755,430 shares issued and i28,139,954
outstanding at December 31, 2021
i320
i318
Preferred
stock, par value $ii0.01/;
ii50,000,000/ shares authorized
and iiii0///
shares issued and outstanding at June 30, 2022 and December 31, 2021
See
accompanying notes to Condensed Consolidated Financial Statements.
8
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
1. iOrganization,
Operations and Basis of Presentation
Description of Business
AdvanSix Inc. ("AdvanSix," the "Company,""we" or "our") plays a critical role in global supply chains, innovating and delivering essential products for our customers in a wide variety of end markets and applications that touch people’s lives, such as building and construction, fertilizers, agrochemicals, plastics, solvents, packaging, paints, coatings, adhesives and electronics. Our reliable and sustainable supply of quality products emerges from the integrated value chain of our ifive
U.S.-based manufacturing facilities. AdvanSix strives to deliver best-in-class customer experiences and differentiated products in the industries of nylon solutions, chemical intermediates and plant nutrients, guided by our core values of Safety, Integrity, Accountability and Respect.
COVID-19
Since early 2020, the novel coronavirus (COVID-19) has continued to spread, with confirmed cases worldwide, and with certain jurisdictions experiencing resurgences, including as a result of variant strains. The pandemic and related containment measures have had a substantial impact on businesses around the world and on global, regional and national economies, including disruptions to supply chains, volatility in demand, production and sales across most industries, volatility within global financial markets, inflationary pressures
in commodity pricing and an increasingly dynamic workforce environment. The continuously evolving nature of this pandemic and the pace and shape of a full recovery may continue to have an impact on the United States and global economies.
The Company’s Condensed Consolidated Financial Statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and reported amounts of revenue and expenses during the reporting periods presented. The Company continues to consider the impact of COVID-19 on the estimates and assumptions used for the financial statements.
The Company experienced a material impact on its second quarter 2020 results of operations associated with lower demand, particularly in nylon, caprolactam and phenol, and a decrease in overall sales volume related to global markets and the economic impact of COVID-19. Starting in the second half of 2020, demand improved to pre-COVID-19 levels with states, regions and countries in various phases of re-opening and continued administration of vaccines for COVID-19. The Company will continue to monitor developments and execute operational and safety mitigation plans as previously disclosed.
As the situation surrounding COVID-19 remains fluid and unpredictable, the
Company cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s results of operations, financial position, and liquidity.
Basis of Presentation
i
The Condensed Consolidated 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 Financial Statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the Company's financial position as of June 30, 2022, and its results of operations for the three and six months ended June 30, 2022 and 2021 and cash flows for the six months ended June 30, 2022 and 2021.
The year-end Condensed Consolidated Balance Sheet data were derived from audited financial statements but does not include all disclosures required by U.S. GAAP. 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 for the year ended December 31, 2021 (the "2021 Form 10-K"). All intercompany transactions have been eliminated.
Certain prior period amounts have been reclassified for consistency with the current period presentation.
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 have generally not been 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
9
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
comparisons
of quarterly or year-to-date results, we will provide the appropriate disclosures. Our actual closing dates for the three and six months ended June 30, 2022 and 2021 were July 2, 2022 and July 3, 2021, respectively.
Liabilities to creditors to whom we have issued checks that remained outstanding at June 30, 2022 and December 31, 2021 aggregated to $i2.5 million
and $i4.5 million, respectively, and were included in Cash and cash equivalents and Accounts payable in the Condensed Consolidated Balance Sheets.
On May 4, 2018, the Company announced that its Board of Directors (the “Board”) authorized a share repurchase program of up to $i75
million of the Company’s common stock. On February 22, 2019, the Company announced that the Board authorized a share repurchase program of up to an additional $i75 million of the Company's common stock, which was in addition to the remaining
capacity available under the May 2018 share repurchase program. Repurchases may be made from time to time on the open market in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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 share repurchase program has no expiration date and may be modified, suspended or discontinued at any time. 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 June 30, 2022, the
Company has repurchased a total of i3,884,263 shares of common stock, including i592,972
shares withheld to cover tax withholding obligations in connection with the vesting of awards, for an aggregate of $i112.8 million at a weighted average market price of $i29.04
per share. As of June 30, 2022, $i51.8 million remained available for share repurchases under the current authorization. During the period July 1, 2022 through July 29, 2022, the Company repurchased an additional i70,554
shares at a weighted average market price of $i35.30 per share under the current authorized repurchase program.
2. iRecent
Accounting Pronouncements
iRecent Accounting Pronouncements – The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). Any ASUs not currently adopted 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.
3. iRevenues
Revenue Recognition
We serve approximately i400
customers annually in approximately i50 countries across a wide variety of industries. For the three months ended June 30, 2022 and 2021, the Company's ten largest customers accounted for approximately i40%
and i42% of total sales, respectively. For the six months ended June 30, 2022 and 2021, the Company's ten largest customers accounted for approximately i38%
and i40% of total sales, respectively.
iWe typically sell to customers under master service agreements, with primarily one-year terms, or by purchase orders. We have historically
experienced low customer turnover and have long-standing customer relationships, which span decades. Our largest customer is Shaw Industries Group, Inc. (“Shaw”), a significant consumer of caprolactam and Nylon 6 resin, to whom we sell under a long-term agreement. For the three and six months ended June 30, 2022 and 2021, the Company's sales to Shaw were ii10/%
and ii12/% of our total sales, respectively.
iThe
Company's revenue by product line, and related approximate percentage of total sales, for the three and six months ended June 30, 2022 and 2021 were as follows:
10
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
The
Company's revenues by geographic area, and related approximate percentage of total sales, for the three and six months ended June 30, 2022 and 2021 were as follows:
The Company defers revenues when cash payments are received in advance of our performance. iBelow is a roll-forward of Deferred income and customer advances for the six months ended June 30, 2022:
The
Company expects to recognize as revenue the June 30, 2022 ending balance of Deferred income and customer advances within one year or less.
4. iEarnings 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. iThe details of the basic and diluted EPS calculations for the three and six months ended June 30, 2022 and 2021 were as follows:
Dilutive
effect of equity awards and other stock-based holdings
i1,094,502
i788,196
i1,132,841
i717,749
Weighted
average common shares outstanding
i29,262,709
i28,920,177
i29,316,792
i28,830,727
EPS
– Diluted
$
i2.23
$
i1.53
$
i4.37
$
i2.51
11
ADVANSIX
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
Diluted EPS is computed based upon the weighted average number of common shares outstanding for the period plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the period.
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. iThe
anti-dilutive common stock equivalents outstanding at the three and six months ended June 30, 2022 and 2021 were as follows:
Substantially
all of the Company’s inventories at June 30, 2022 and December 31, 2021 are valued at the lower of cost or market using the last-in, first-out (“LIFO”) method. However, approximately i6% was valued at average cost using the first-in, first-out (“FIFO”) method at June 30, 2022.
The excess
of replacement cost over the carrying value of total inventories subject to LIFO was $i84.1 million and $i29.4
million at June 30, 2022 and December 31, 2021, respectively.
7. iiLeases/
We
determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets ("ROU"), Operating lease liabilities – short-term, and Operating lease liabilities – long-term in our Condensed Consolidated Balance Sheets. Finance leases are included in Property, plant and equipment – net, Accounts payable, and Other liabilities in our Condensed Consolidated Balance Sheets.
12
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
As
of June 30, 2022, we have additional operating and finance leases that have not yet commenced for approximately $i5.2 million and approximately $i0.5
million, respectively. These leases will commence during 2022 with lease terms of up to ii7/ years.
8.
iGoodwill and Intangible Assets
Intangible assets with finite lives acquired through a business combination are recorded at fair value, less accumulated amortization. Customer relationships and trade-names are amortized on a straight-line basis over their expected useful lives of i15
to i20 years and i5 years, respectively.
Goodwill
i
The
change in the carrying amount of goodwill was as follows:
For
the three months ended June 30, 2022 and June 30, 2021, the Company recorded amortization expense on intangible assets of $i0.8 million and $i0.3
million, respectively. For the six months ended June 30, 2022 and 2021, the Company recorded amortization expense on intangible assets of $i1.2 million and $i0.6
million, respectively.
9. iCommitments and Contingencies
The Company is subject to a number of lawsuits, investigations and disputes, some of which may involve substantial amounts
claimed, arising out of the conduct of the Company or other third-parties in the normal and ordinary course of business. A
13
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
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, 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 or results of operations. 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.
We assumed from Honeywell International Inc. ("Honeywell") all health, safety and environmental (“HSE”) liabilities and compliance obligations related to the past and future operations of our current business as of
the spin-off, as well as all HSE liabilities associated with the three manufacturing locations assumed from Honeywell that are 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 have a material adverse effect on the Company's consolidated financial position or results of operations.
10.
iIncome Taxes
The provision for income taxes was $i20.0 million and $i13.8
million for the three months ended June 30, 2022 and 2021, respectively, resulting in an effective tax rate of i23.5% and i23.8%,
respectively.
The Company’s provision for income taxes in interim periods is computed by applying an estimated annual effective tax rate against Income (Loss) before taxes for the period in addition to recording any tax effects of discrete items for the quarter. The Company’s estimated annual effective tax rate applied against the three and six months ended June 30, 2022 and 2021 differed from the U.S. federal statutory rate, due primarily to state taxes and executive compensation deduction limitations which generally increase the tax rate, partially offset by tax credits and the foreign-derived intangible income deduction
which generally decrease the tax rate.
In February 2022, the Company acquired the stock of U.S. Amines Limited. Under purchase accounting rules, a net deferred tax liability of approximately $i12.2 million was recorded in the first quarter related to the adjustment of the acquired assets and liabilities to fair value. There was a $i0.1 million
reduction in the net deferred tax liability recorded in the second quarter. See Note 13 "Acquisitions" for further details.
We are subject to income taxes in the United States and to a lesser extent several foreign jurisdictions. Changes to income tax laws and regulations, or the interpretation of such laws, in any of the jurisdictions in which we operate could increase our effective tax rate and reduce our cash flows from operating activities. The current U.S. administration has released various draft tax reform proposals that, if enacted, would generally increase U.S. federal income taxes on corporations. These proposals, if implemented, could have an unfavorable effect on our business, results of operations and financial condition. As such, we continue to monitor these legislative proposals to evaluate the impact on our business.
11.
iFair Value Measurements
Financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. In July 2019, the Company entered into an interest rate swap transaction related to its credit agreement. The fair value of the interest rate swap at June 30, 2022 was a gain
of approximately $i0.4 million and is considered a Level 2 liability.
The pension plan assets are invested in collective investment trust funds. These investments are measured at fair value using the net asset value per share as a practical expedient. Investments valued using the net asset value method (NAV) (or its equivalent) practical expedient are excluded from the fair value hierarchy disclosure.
14
ADVANSIX
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
The Company’s Condensed Consolidated Balance Sheets also include Cash and cash equivalents, Accounts receivable and Accounts payable all of which are recorded at amounts which approximate fair value.
The Company also has assets that are required to be recorded at fair value on a non-recurring basis. These assets are evaluated when certain
triggering events occur (including a decrease in estimated future cash flows) that indicate the asset should be evaluated for impairment which could result in such assets being measured at fair value. Goodwill must be evaluated at least annually. Our annual evaluation occurred on March 31, 2022 and we concluded that an impairment for goodwill did inot occur.
12.
iDerivative and Hedging Instruments
The specific credit and market, commodity price and interest rate risks to which the Company is exposed in connection with its ongoing business operations are described below. This discussion includes an explanation of the hedging instrument and interest rate swap agreement, used to manage the
Company’s interest rate risk associated with a fixed and floating-rate borrowing.
For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in Other comprehensive income. Those amounts are reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings.
Credit and Market Risk – Financial instruments, including derivatives, expose the Company to counterparty credit risk for non-performance and to market risk related to changes in commodity prices, interest rates and foreign currency exchange rates. The
Company manages its exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. The Company’s counterparties in derivative transactions are substantial investment and commercial banks with significant experience using such derivative instruments. The Company monitors the impact of market risk on the fair value and cash flows of its derivative and other financial instruments considering reasonably possible changes in commodity prices, interest rates and foreign currency exchange rates and restricts the use of derivative financial instruments to hedging activities.
The
Company continually monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. The terms and conditions of credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer. The Company did not have any customers with significant concentrations of trade accounts receivable – net at June 30, 2022 or December 31, 2021. Allowance for doubtful accounts is calculated based upon the Company's estimate of expected credit losses over the life of exposure based upon both historical information as well as future expected losses.
Commodity
Price Risk Management – The Company's exposure to market risk for commodity prices can result in changes in the cost of production. We primarily mitigate our exposure to commodity price risk by using long-term, formula-based price contracts with our suppliers and formula-based price agreements with customers. Our customer agreements provide for price adjustments based on relevant market indices and raw material prices and generally do not include take-or-pay terms. We may also enter into forward commodity contracts with third-parties designated as hedges of anticipated purchases of several commodities. Forward commodity contracts
are marked-to-market, with the resulting gains and losses recognized in earnings, in the same category as the items being hedged, when the hedged transaction is recognized. At June 30, 2022 and 2021, we had no financial contracts related to forward commodity agreements.
Interest Rate Risk Management – The Company has entered into ione
interest rate swap agreement for a total notional amount of $i50 million to exchange floating for fixed rate interest payments for our LIBOR-based borrowings. The interest rate swap had a fair value of iizero/
at inception and was effective July 31, 2019 with a maturity date of February 21, 2023. In accordance with ASC 815, the Company designated the interest rate swap as a cash flow hedge of floating-rate borrowings. The interest rate swap converts the Company’s interest rate payments on the first $i50 million of variable-rate,
1-month LIBOR-based debt to a fixed interest rate. The interest rate swap involves the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the interest rate swap without an exchange of the underlying principal amount.
15
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
The
following table summarizes adjustments related to cash flow hedge included in Cash-flow hedges, in the Condensed Consolidated Statements of Comprehensive Income:
Loss on derivative instruments included in Accumulated other comprehensive loss at December 31,
2021
$
(i708)
Fair value adjustment
i1,058
Gain
on derivative instruments included in Accumulated other comprehensive loss at June 30, 2022
$
i350
/
At June 30,
2022, the Company expects to reclassify approximately $i0.3 million of net gains on derivative instruments from Accumulated other comprehensive income ("AOCI") to earnings during the next 12 months due to the payment of variable interest associated with the floating rate debt with the remainder
recognized in future periods through the expiration date. iThe following table summarizes the reclassification of net (gains) losses on derivative instruments from AOCI into earnings:
In February 2022, the Company acquired the stock of U.S. Amines Limited ("U.S. Amines"), a leading North American producer of alkyl and specialty amines serving high-value end markets such as agrochemicals and pharmaceuticals for an estimated purchase price of approximately $i97 million,
net of cash acquired. U.S. Amines employs approximately i50 people in the United States at manufacturing facilities in Bucks, AL and Portsmouth, VA.
In accordance with ASC 805, this transaction has been accounted for as a business combination. The Company used its best estimates and assumptions for items including, but not limited to, corporate name recognition, strong, long-lasting customer relationships and potential revenue
growth from existing customers to assign fair value to the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date based on the information that was available as of the acquisition date. The transaction resulted in the Company acquiring tangible assets and finite-lived intangible assets, comprised of customer relationships (approximately $i33 million)
and trademarks (approximately $i1 million) which reflect the value of the benefit derived from incremental revenue and related cash flows as a direct result of the customer relationships and name brand. These intangible assets are being amortized on a straight-line basis over their estimated useful lives of i20
years and i5 years, respectively. The residual amount of the purchase price in excess of the value of the tangible and definite-lived intangible assets
16
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
was
allocated to goodwill. Factors considered when identifying goodwill included, but are not limited to, a complementary business model and formula pricing mechanisms with a business that is adjacent to our ammonium sulfate adjuvant and solvent businesses, the enhancement of the Company’s value chain through internal supply of products and raw materials, a new unique platform in the agrochemicals space as well as a number of opportunities to support further penetration into high-value applications. The U.S. Amines acquisition was not significant to our Condensed Consolidated Financial Statements, therefore, pro forma and post-acquisition results of operations have not been presented.
The preliminary measurements of fair value set forth herein are subject to change and such changes could be material. The
Company expects to finalize the valuation as soon as practicable, but no later than one year from the acquisition date.
i
The following table summarizes the allocation of the purchase price consideration as of the acquisition date for the transaction noted above:
Estimated
working capital adjustment due from seller
i878
(i878)
i—
Net
cash paid
$
i98,589
$
(i1,133)
$
i97,456
Goodwill
deductible for tax purposes
$
i—
$
i—
$
i—
/
The
preliminary amounts presented in the table above pertained to the preliminary purchase price allocation reported in the Company's Form 10-Q for the first quarter ended March 31, 2022. The measurement period adjustment was primarily associated with the inventory valuation. The Company does not believe that the measurement period adjustment had a material impact on its consolidated statements of operations, balance sheets or cash flows in the prior period previously reported.
In January 2021, the Company acquired certain assets associated with ammonium sulfate packaging, warehousing
and logistics services in Virginia from Commonwealth Industrial Services, Inc. ("CIS") for approximately $i9.5 million.
14. iSubsequent
Events
As announced on August 5, 2022, the Board declared a quarterly cash dividend of $i0.145 per share on the Company's common stock, an increase of i16%
over the prior dividend, payable on August 30, 2022 to stockholders of record as of the close of business on August 16, 2022.
17
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 Financial Statements and the notes thereto contained in this Quarterly Report on Form 10-Q (this "Form 10-Q"), as well as the MD&A section included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on February 18, 2022 (the “2021 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 that can affect our performance in both the near- and long-term, including those incorporated
by reference in Item 1A of Part II of this Form 10-Q as such factors may be revised or supplemented in subsequent filings with the SEC, 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 Form 10-Q 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 within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this Form 10-Q, words such as "expect,"“anticipate,”"estimate,""outlook,""project,""strategy,""intend,""plan,""target,""goal,""may,""will,""should," and “believe,” and other variations or similar terminology and expressions identify forward-looking statements. Although we believe forward-looking statements are based upon reasonable assumptions, such statements involve known and unknown risks, uncertainties and other factors, many of which are beyond our control and difficult to predict, which may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to: general economic and financial conditions in the U.S. and globally, including the impact of the coronavirus (COVID-19) pandemic and any resurgences;
the potential effects of inflationary pressures, labor market shortages and supply chain issues; instability or volatility in financial markets or other unfavorable economic or business conditions caused by geopolitical concerns, including as a result of the conflict between Russia and Ukraine; the scope, shape and pace of recovery of the pandemic including the impact of social and economic restrictions and other containment measures taken to combat virus transmission; the effect on our customers’ demand for our products and our suppliers’ ability to manufacture and deliver our raw materials, including implications of reduced refinery utilization in the U.S.; our ability to sell and provide our goods and services; the ability of our customers to pay for our products; any closures of our and our customers’ offices and facilities; risks associated with increased phishing, compromised business emails and other cybersecurity attacks and disruptions to our technology infrastructure;
risks associated with employees working remotely or operating with a reduced workforce; risks associated with our indebtedness including compliance with financial and restrictive covenants, and our ability to access capital on reasonable terms, at a reasonable cost, or at all, due to economic conditions; the impact of scheduled turnarounds and significant unplanned downtime and interruptions of production or logistics operations as a result of mechanical issues or other unanticipated events such as fires, severe weather conditions, natural disasters, pandemics and geopolitical conflicts and related events; price fluctuations, cost increases and supply of raw materials; our operations and growth projects requiring substantial capital; growth rates and cyclicality of the industries we serve including global changes in supply and demand; failure to develop and commercialize new products or technologies; loss of significant customer relationships; adverse trade and tax policies;
extensive environmental, health and safety laws that apply to our operations; hazards associated with chemical manufacturing, storage and transportation; litigation associated with chemical manufacturing and our business operations generally; inability to acquire and integrate businesses, assets, products or technologies; protection of our intellectual property and proprietary information; prolonged work stoppages as a result of labor difficulties or otherwise; cybersecurity, data privacy incidents and disruptions to our technology infrastructure; failure to maintain effective internal controls; our ability to declare and pay quarterly cash dividends and the amounts and timing of any future dividends; our ability to repurchase our common stock and the amount and timing of any future repurchases; disruptions in supply chain, transportation and logistics; potential for uncertainty regarding qualification for tax treatment of our spin-off; fluctuations in our stock price;
and changes in laws or regulations applicable to our business. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those contemplated by the forward-looking statements as a result of a number of risks, uncertainties and other factors including those noted above and those detailed in Item 1A of Part I and elsewhere in our 2021 Form 10-K, and subsequent reports filed 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. We do not undertake to update or revise any of our forward-looking statements.
Business Overview
18
AdvanSix
plays a critical role in global supply chains, innovating and delivering essential products for our customers in a wide variety of end markets and applications that touch people’s lives, such as building and construction, fertilizers, agrochemicals, plastics, solvents, packaging, paints, coatings, adhesives and electronics. Our reliable and sustainable supply of quality products emerges from the integrated value chain of our five U.S.-based manufacturing facilities. AdvanSix strives to deliver best-in-class customer experiences and differentiated products in the industries of nylon solutions, chemical intermediates and plant nutrients, guided by our core values of Safety, Integrity, Accountability and Respect. Our four key product lines are as follows:
•Nylon – We sell our Nylon 6 resin globally, primarily under the Aegis® brand name. Nylon
6 is a polymer resin which is a synthetic material used by our customers to produce fibers, filaments, engineered plastics and films that, in turn, are used in such end-products as carpets, automotive and electric components, sports apparel, food packaging and other industrial applications. In addition, our Nylon 6 resin is used to produce nylon films which we sell to our customers primarily under the Capran® brand name.
•Caprolactam – Caprolactam is the key monomer used in the production of Nylon 6 resin. We internally polymerize caprolactam into Aegis® Nylon 6 Resins, and we also market and sell the caprolactam that is not consumed internally to customers who use it to manufacture polymer resins to produce nylon fibers, films and other nylon products. Our Hopewell, VA manufacturing facility is one of the world’s largest single-site producers
of caprolactam as of June 30, 2022.
•Chemical Intermediates – We manufacture, market and sell a number of other chemical intermediate products that are derived from the manufacturing processes within our integrated supply chain. Most significant is acetone which is used by our customers in the production of adhesives, paints, coatings, solvents, herbicides and engineered plastic resins. Other intermediate chemicals that we manufacture, market and sell include phenol, alpha-methylstyrene (“AMS”), cyclohexanone, oximes (methyl ethyl ketoxime, acetaldehyde oxime and 2-pentanone oxime), cyclohexanol, sulfuric acid, ammonia and carbon dioxide. With the acquisition of U.S. Amines Limited (“U.S. Amines”), we now produce alkyl and specialty amines serving high-value end markets such
as agrochemicals and pharmaceuticals.
•Ammonium Sulfate – Our ammonium sulfate is used by customers as a fertilizer containing nitrogen and sulfur, two key plant nutrients. Ammonium sulfate fertilizer is derived from the integrated operations at the Hopewell manufacturing facility. Because of our Hopewell facility’s size, scale and technology design, we are the world’s largest single-site producer of ammonium sulfate fertilizer as of June 30, 2022. We market and sell ammonium sulfate primarily to North American and South American distributors, farm cooperatives and retailers to fertilize crops.
Global demand for Nylon 6 resin spans a variety of end-uses such as textiles, engineered plastics, industrial filament,
food and industrial films, and carpet. The market growth typically tracks global GDP growth over the long-term but varies by end-use. Generally, prices for Nylon 6 resin and caprolactam reflect supply and demand trends in the marketplace as well as the value of the basic raw materials used in the production of caprolactam, consisting primarily of benzene and, depending on the manufacturing process utilized, natural gas and sulfur. 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 derived from benzene. This price spread has historically experienced cyclicality as a result of global changes in supply and demand. Nylon 6 resin prices track the cyclicality of caprolactam prices, although prices set above the average commodity spread are achievable when nylon resin manufacturers, like AdvanSix, formulate and
produce differentiated nylon resin products. Our differentiated Nylon 6 products are typically valued at a higher level than commodity resin products.
We believe that Nylon 6 end-market growth will continue to generally track global GDP over the long-term. Applications such as engineered plastics and packaging have potential to grow at faster rates given certain macrotrends. Additionally, one of our strategies is to continue developing higher-value, differentiated Nylon 6 products, such as our wire and cable and co-polymer offerings, in current and new customer applications.
We also manufacture, market and sell a number of chemical intermediate products that are derived from the manufacturing processes within our integrated supply chain. Most significant is acetone, the price of which is influenced by
its own supply and demand dynamics but can also be influenced by the underlying move in propylene input costs. We continue to invest in and grow our differentiated product offerings in high-purity applications and high-value intermediates including our newly acquired U.S. Amines portfolio as well as our oximes-based EZ-Blox™ anti-skinning agent used in paints and Nadone® cyclohexanone, which is a solvent used in various high-value applications.
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. Other global factors driving ammonium sulfate fertilizer demand are general agriculture trends, including planted acres and the price of crops. Our ammonium sulfate product is positioned with
19
the
added value proposition of sulfur nutrition to increase yields of key crops. In addition, due to its nutrient density, the typical ammonium sulfate product delivers pound for pound the most readily available sulfur and nitrogen to crops as compared to other fertilizers. We recently expanded our offering to directly supply packaged ammonium sulfate to customers, primarily in North and South America, and diversified and optimized our offerings to include spray-grade adjuvants to support crop protection and products for industrial use.
We produce ammonium sulfate fertilizer continuously throughout the year as part of our manufacturing process, however, quarterly sales experience seasonality reflecting both geographical and product sales mix considerations based on the timing and length of the growing seasons in North and South America. The North America planting season runs from July through
June. The new season fill typically occurs in the third quarter and proceeds sequentially into the following Spring which is the peak period for fertilizer application for key crops in North America. As a result of this typical pattern, North American ammonium sulfate demand and pricing, particularly for our higher-value granular product, are typically the strongest in the first half of the year through application for the Spring crop and then decline in the second half. Our export sales, primarily into South America, are predominantly of the standard grade product. 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 seek to run our production facilities
on a nearly continuous basis for maximum efficiency as several of our intermediate products are key feedstock materials for other products in our integrated manufacturing chain. While our integration, scale and range of product offerings make us one of the most efficient manufacturers in our industry, these attributes also expose us to increased risk associated with material disruptions at any one of our production facilities or logistics operations which could impact the overall manufacturing supply chain. Further, although we believe that our sources of supply for our raw materials, including cumene, natural gas and sulfur, are generally robust, it is difficult to predict the impact that shortages, increased costs and related supply chain logistics considerations may have in the future. In order to mitigate the risk of unplanned interruptions, we schedule planned plant turnarounds each year to conduct routine and major maintenance across our facilities. We also utilize
maintenance excellence and mechanical integrity programs, targeted buffer inventory of intermediate chemicals necessary for our manufacturing process, and co-producer swap arrangements, which are intended to mitigate the extent of any production losses as a result of planned and unplanned downtime; however, the mitigation of all or part of any such production impact cannot be assured.
Recent Developments
COVID-19
Since early 2020, the novel coronavirus (COVID-19) has continued to spread, with confirmed cases worldwide, and with certain jurisdictions experiencing resurgences, including as a result of variant strains.
The pandemic and related containment measures have had a substantial impact on businesses around the world and on global, regional and national economies, including disruptions to supply chains, volatility in demand, production and sales across most industries, volatility within global financial markets, inflationary pressures in commodity pricing and an increasingly dynamic workforce environment. The continuously evolving nature of this pandemic and the pace and shape of a full recovery may continue to have an impact on the United States and global economies.
The Company experienced a material impact on its second quarter 2020 results of operations associated with lower demand, particularly in nylon, caprolactam and phenol, and a decrease in overall sales volume related to global markets and the economic
impact of COVID-19. Starting in the second half of 2020, demand improved to pre-COVID-19 levels with states, regions and countries in various phases of re-opening and continued administration of vaccines for COVID-19. The Company will continue to monitor developments and execute operational and safety mitigation plans as previously disclosed.
As the situation surrounding COVID-19 remains fluid and unpredictable, the Company cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s results of operations, financial position, and liquidity.
Acquisition
In
February 2022, the Company acquired U.S. Amines, a leading North American producer of alkyl and specialty amines serving high-value end markets such as agrochemicals and pharmaceuticals for an estimated purchase price of approximately $97 million, net of cash acquired. U.S. Amines employs approximately 50 people in the United States at manufacturing facilities in Bucks, AL and Portsmouth, VA. The acquisition provides a unique platform in the agrochemicals space as well as a number of opportunities to support further penetration into high-value applications including electronics, pharmaceuticals and
20
water treatment. U.S. Amines has a complementary business model with long-tenured customer
relationships and formula pricing mechanisms with a business that is adjacent to both our ammonium sulfate adjuvant and solvent businesses.
Dividends
During 2022, the Company has declared dividends as follows:
Sales
increased in the three months ended June 30, 2022 compared to the prior year period by $146.1 million (approximately 33%) due primarily to (i) net favorable market-based pricing (approximately 26%) reflecting strength in our ammonium sulfate and nylon product lines partially offset by lower pricing in chemical intermediates (primarily acetone), (ii) favorable raw material pass-through pricing (approximately 6%) as a result of net cost increases in benzene and propylene (inputs to cumene which is a key feedstock to our products) and (iii) the acquisition of U.S. Amines (approximately 5%), partially offset by decreased sales volume (approximately 4%) driven primarily by unfavorable weather conditions driving a reduction of in-season fertilizer demand as well as lower production output limiting supply of nylon resin and chemical intermediates compared to the prior year.
Sales
increased in the six months ended June 30, 2022 compared to the prior year period by $248.7 million (approximately 31%) due primarily to (i) net favorable market-based pricing (approximately 26%) reflecting strength in our ammonium sulfate and nylon product lines partially offset by lower pricing in chemical intermediates (primarily acetone), (ii) favorable raw material pass-through pricing (approximately 5%) as a result of net cost increases in benzene and propylene (inputs to cumene which is a key feedstock to our products) and (iii) the acquisition of U.S. Amines (approximately 3%), partially offset by decreased sales volume (approximately 4%) driven primarily by higher sales in the first quarter of 2021 through a reduction of finished goods inventory in that period to meet a recovery in customer demand and lower production in the second quarter of 2022 compared to the prior year period.
Costs of goods sold increased in the three months ended June 30, 2022 compared to the prior year period by $120.0 million (approximately 34%) due primarily to (i) increased prices of raw materials (approximately 23%), (ii) an increase in plant spend, particularly utilities, driven primarily by natural gas prices (approximately 4%), (iii) the impact of the U.S. Amines acquisition (approximately 5%) and the impact of non-raw material inflation (approximately 2%) primarily on transportation costs.
Costs
of goods sold increased in the six months ended June 30, 2022 compared to the prior year period by $177.7 million (approximately 26%) due primarily to (i) increased prices of raw materials (approximately 21%), (ii) the impact of the U.S. Amines acquisition (approximately 4%), (iii) an increase in plant spend, particularly utilities, driven primarily by natural gas prices (approximately 3%) and (iv) the impact of non-raw material inflation (approximately 2%) primarily on transportation costs. The noted increase was partially offset by lower sales volumes (approximately 2%) across all product lines as discussed above, and an unfavorable non-cash LIFO inventory reserve adjustment in the prior year period (approximately 1%).
Gross margin percentage decreased slightly in the three months ended June
30, 2022 compared to the prior year period due primarily to (i) higher plant spend (approximately 2%), (ii) lower sales volume (approximately 2%) and the impact of non-raw material inflation (approximately 1%), mostly offset by the net impact of formula-based pass-through pricing and increased market pricing (approximately 5%).
Gross margin percentage increased by approximately 3% in the six months ended June 30, 2022 compared to the prior year period due primarily to (i) the net impact of formula-based pass-through pricing and increased market pricing (approximately 6%) and (ii) an unfavorable non-cash LIFO inventory reserve adjustment in the prior year period (approximately 1%) partially offset by (i) higher plant spend (approximately 2%), (ii) lower sales volume as discussed above (approximately 1%) and (iii) the impact of non-raw
material inflation (approximately 1%).
Selling, general and administrative expenses decreased by $0.8 million in the three months ended June 30, 2022 compared to the prior year period due primarily to (i) decreased stock-based compensation costs and (ii) a reduction in bad debt expense associated with a cash collection of a previously reserved customer receivable partially offset by increased functional support costs.
Selling, general and administrative
expenses increased by $1.1 million in the six months ended June 30, 2022 compared to the prior period due primarily to increased functional support costs partially offset by a reduction in bad debt expense associated with a cash collection of a previously reserved customer receivable.
The Company filed a Federal net operating loss (NOL) carryback claim under the CARES Act in July 2020 which generated a refund of previously paid taxes in the amount of $12.3 million. The refund was received in the first quarter of 2021.
The
Company’s effective tax rate for the three and six months ended June 30, 2022 and 2021 was higher compared to the U.S. federal statutory rate, due primarily to state taxes and executive compensation deduction limitations, partially offset by tax credits and the deduction for foreign-derived intangible income.
The Company’s effective tax rate for the three and six months ended June 30, 2022 was slightly lower than the prior year periods due primarily to a state rate change recorded as a discrete tax adjustment in the second quarter of 2021.
In February 2022, the
Company acquired the stock of U.S. Amines. Under purchase accounting rules, a net deferred tax liability of approximately $12.2 million was recorded in the first quarter related to the adjustment of the acquired assets and liabilities to fair value. There was a $0.1 million reduction in the net deferred tax liability recorded in the second quarter. See Note 13 "Acquisitions" for further details.
We are subject to income taxes in the United States and to a lesser extent several foreign jurisdictions. Changes to income tax laws and regulations, or the interpretation of such laws, in any of the jurisdictions in which we operate could increase our effective tax rate and reduce our cash flows from operating activities. The current U.S. administration has released various draft tax reform proposals that, if enacted, would generally increase U.S. federal income taxes on corporations.
These proposals, if implemented, could have an unfavorable effect on our business, results of operations and financial condition. As such, we continue to monitor these legislative proposals to evaluate the impact on our business.
As
a result of the factors described above, Net income was $65.2 million and $128.2 million for the three and six months ended June 30, 2022 as compared to $44.1 million and $72.3 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 Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Earnings Per Share. Adjusted EBITDA is defined as Net income before Interest, Income taxes, Depreciation and amortization, Non-cash stock-based compensation, Non-recurring,
unusual or extraordinary expenses, Non-cash amortization from acquisitions and One-time merger and acquisition costs. Adjusted EBITDA Margin is equal to Adjusted EBITDA divided by Sales. The following tables may also present each of these measures as further adjusted. 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 management believes do not reflect the Company’s ongoing 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 U.S. GAAP. Non-GAAP financial measures should be read only in conjunction with the comparable U.S. 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 Adjusted Net Income, Adjusted EBITDA and Adjusted
EBITDA Margin to their most directly comparable U.S. GAAP financial measure:
Benefit from income taxes relating to reconciling items
(439)
(578)
(995)
(986)
Adjusted
Net Income (non-GAAP)
67,274
47,362
133,643
77,664
Interest expense, net
769
1,379
1,332
2,923
Income
tax expense - adjusted
20,401
14,395
40,141
24,074
Depreciation and amortization - adjusted
16,982
16,564
33,474
32,624
Adjusted
EBITDA (non-GAAP)
105,426
79,700
208,590
137,285
Sales
$
583,736
$
437,682
$
1,062,809
$
814,065
Adjusted
EBITDA Margin* (non-GAAP)
18.1%
18.2%
19.6%
16.9%
*Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by Sales
The
following is a reconciliation between the non-GAAP financial measures of Adjusted Earnings Per Share to its most directly comparable U.S. GAAP financial measure:
Weighted-average
number of common shares outstanding - basic
28,168,207
28,131,981
28,183,951
28,112,978
Dilutive effect of equity awards and other stock-based holdings
1,094,502
788,196
1,132,841
717,749
Weighted-average
number of common shares outstanding - diluted
29,262,709
28,920,177
29,316,792
28,830,727
EPS - Basic
$
2.31
$
1.57
$
4.55
$
2.57
EPS
- Diluted
$
2.23
$
1.53
$
4.37
$
2.51
Adjusted EPS - Basic (non-GAAP)
$
2.39
$
1.68
$
4.74
$
2.76
Adjusted
EPS - Diluted (non-GAAP)
$
2.30
$
1.64
$
4.56
$
2.69
Liquidity and Capital Resources
(Dollars in thousands, unless otherwise noted)
Liquidity
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 short-term operating objectives as well as our longer-term strategic plans, subject to the risks and uncertainties outlined below, in our "Note Regarding Forward-Looking Statements" above, and in the risk factors previously disclosed in our 2021 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
24
cash flows are affected by capital requirements and production volume, which may be materially impacted by unanticipated events such as unplanned downtime,
material disruptions at our production facilities as well as the prices of our raw materials and general economic and industry trends, as well as customer demand, which in the second quarter of 2020, was materially impacted by the circumstances surrounding COVID-19. The Company applies a proactive and disciplined approach to working capital management to optimize cash flow and to enable capital allocation options in support of the Company’s strategy. We utilize supply chain financing and trade receivables discount arrangements with third-party financial institutions which optimize terms and conditions related to accounts receivable and accounts payable in order to enhance liquidity and enable us to efficiently manage our working capital needs. Although we continue to optimize supply chain financing
and trade receivable programs in the ordinary course, our utilization of these arrangements, both prior to and during the COVID-19 pandemic, has not had a material impact on our liquidity. 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, dividends and liquidity reflecting disciplined capital deployment. Capital expenditures are deployed for various ongoing investments and initiatives to improve reliability, yield and quality, expand production capacity and comply with health, safety
and environmental ("HSE") regulations. We believe that our future cash from operations, together with cash on hand and our access to credit and capital markets, will provide adequate resources to fund our expected operating and financing needs and obligations. 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 2021 Form 10-K, as well as general economic, financial, competitive, regulatory and other factors that are beyond our control.
As of the end of the second quarter of 2022, the Company had approximately $17.3 million of cash on hand with approximately $352 million of additional capacity available under the revolving
credit facility. The Company’s Consolidated Leverage Ratio financial covenant of its credit facility allows it to net up to $75 million of cash with debt. Capital expenditures are expected to be approximately $95 million to $105 million in 2022 compared to $57 million in 2021, reflecting the timing of maintenance and HSE spend.
The Company filed a Federal net operating loss (NOL) carryback claim under the CARES Act in July 2020 which generated a refund of previously paid taxes in the amount of $12.3 million received in the first quarter of 2021. Additionally, the Company deferred approximately $6.5 million of social security taxes
in 2020 under the CARES Act of which 50% was paid on January 3, 2022 and the remainder is due by January 3, 2023.
We assumed from Honeywell International Inc. ("Honeywell") all health, safety and environmental (“HSE”) liabilities and compliance obligations related to the past and future operations of our current business as of the spin-off, as well as all HSE liabilities associated with the three manufacturing locations assumed from Honeywell that are 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 have a material adverse effect on the Company's consolidated financial position or results of operations.
We expect that our primary cash requirements for the remainder of 2022 will be to fund costs associated with ongoing operations, capital expenditures, and amounts related to other contractual obligations.
The Company made cash contributions to the defined benefit pension plan of $10 million during the six months ended June
30, 2022 with no contributions made in the first quarter of 2022 and $10 million in the second quarter of 2022. The Company currently plans to make pension plan contributions during 2022 sufficient to satisfy funding requirements under the AdvanSix Retirement Earnings Plan in an aggregate amount of $15 million to $20 million. We anticipate making contributions in future years sufficient to satisfy pension funding requirements, if any, in those periods.
On May 4, 2018, the Company announced that its Board of Directors (the “Board”) authorized a share repurchase program of up to $75 million of the
Company’s common stock. On February 22, 2019, the Company announced that the Board authorized a share repurchase program of up to an additional $75 million of the Company’s common stock, which was in addition to the remaining capacity available under the May 2018 share repurchase program. Repurchases may be made from time to time on the open market in accordance with Rule 10b-18 of the Exchange Act, 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
25
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.
As of June 30, 2022, the Company has repurchased a total of 3,884,263 shares of common stock, including 592,972 shares withheld to cover tax withholding obligations in connection with the vesting of awards, for an aggregate of $112.8 million at a weighted average market price of $29.04 per share. As of June 30, 2022, $51.8 million remained available for share repurchases under the current authorization. During the period from July 1, 2022 through July
29, 2022, we repurchased an additional 70,554 shares at a weighted average market price of $35.30 per share under the currently authorized repurchase program.
As of June 30, 2022, the Company did not have any off-balance sheet arrangements as described in Instruction 8 to Item 303(b) of Regulation S-K and did not have any material changes in the commitments or contractual obligations detailed in the Company's 2021 Form 10-K (see Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" under "Liquidity and Capital Resources - Liquidity"). The
Company has not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Since commencement of dividends, the Company has declared dividends as follows:
Date
of Announcement
Date of Record
Date Payable
Dividend per Share
Total Approximate Dividend Amount
8/5/2022
8/16/2022
8/30/2022
$0.145
$
4.1
million
5/6/2022
5/17/2022
5/31/2022
$0.125
$
3.5
million
2/18/2022
3/1/2022
3/15/2022
$0.125
$
3.5
million
9/28/2021
11/9/2021
11/23/2021
$0.125
$
3.5
million
The
timing, declaration, amount and payment of future dividends to stockholders, if any, will fall within the discretion of our Board. Holders of shares of our common stock will be entitled to receive dividends when, and if, declared by our Board at its discretion out of funds legally available for that purpose, subject to the terms of our indebtedness, the preferential rights of any preferred stock that may be outstanding, legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant.
Credit Agreement
On September 30, 2016, the
Company as the borrower, entered into a Credit Agreement with Bank of America, as administrative agent (the "Original Credit Agreement"), which was amended on February 21, 2018 pursuant to Amendment No. 1 to the Original Credit Agreement (the "First Amended and Restated Credit Agreement"), and further amended on February 19, 2020 pursuant to, Amendment No. 2 to the First Amended and Restated Credit Agreement (after giving effect to the Second Amendment, the “Second Amended and Restated Credit Agreement”). The Second Amended and Restated Credit Agreement had a five-year term with a scheduled maturity date of February 21, 2023.
On October 27, 2021, the
Company completed a refinancing of the Second Amended and Restated Credit Agreement by entering into a new Credit Agreement (the “Credit Agreement”), among the Company, the lenders party thereto, the swing line lenders party thereto, the letter of credit issuers party thereto and Truist Bank, as administrative agent, which provides for a new senior secured revolving credit facility in an aggregate principal amount of $500 million (the “Revolving Credit Facility”).
As of October 27, 2021, the Company borrowed $150 million under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility will be subject to customary borrowing conditions.
The
Revolving Credit Facility has a scheduled maturity date of October 27, 2026. The 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 establish a new class of term loans and/or increase the amount of the Revolving Credit Facility in an aggregate principal amount for all such incremental term loans and increases of the Revolving Credit Facility of up to the sum of (x) $175 million plus (y) an amount such that the Company’s Consolidated First Lien Secured Leverage Ratio (as defined in the Credit Agreement) would
not be greater than 2.75 to 1.00, in each case, to the extent that any
26
one or more lenders, whether or not currently party to the Credit Agreement, commits to be a lender for such amount or any portion thereof.
Borrowings under the Credit Agreement bear interest at a rate equal to either the sum of a base rate plus a margin ranging from 0.25% to 1.25% or the sum of a Eurodollar rate plus a margin ranging from 1.25% to 2.25%, with either such margin varying according to the Company’s Consolidated Leverage Ratio (as defined in the 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 0.15% to 0.35% per annum depending on the Company’s Consolidated Leverage Ratio. As of October 27, 2021, the applicable margin under the Credit Agreement was 0.375% for base rate loans and 1.375% for Eurodollar loans and the applicable commitment fee rate was 0.175% per annum. The Revolving Credit Facility also contains certain administrative provisions regarding alternative rates of interest for LIBOR, as applicable.
Substantially all tangible and intangible assets of the Company and its domestic subsidiaries
are pledged as collateral to secure the obligations under the Credit Agreement.
The 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 Credit Agreement also contains financial covenants that require the Company to maintain a Consolidated
Interest Coverage Ratio (as defined in the Credit Agreement) of not less than 3.00 to 1.00 and to maintain a Consolidated Leverage Ratio of (i) 4.00 to 1.00 or less for the fiscal quarter ending December 31, 2021, through and including the fiscal quarter ending September 30, 2023 and (ii) 3.75 to 1.00 or less for each fiscal quarter thereafter (subject to the Company’s option to elect a consolidated leverage ratio increase in connection with certain acquisitions). If the Company does not comply with the covenants in the Credit Agreement, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding under the Revolving Credit Facility. We were in compliance
with all of our covenants at June 30, 2022 and through the date of the filing of this Form 10-Q.
The situation surrounding COVID-19 remains fluid and unpredictable, and the potential for a material impact on the Company increases if social and economic restrictions are reinstituted or if related economic impacts such as supply chain issues, labor market volatility and inflationary pressures persist. For this reason, the Company cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s results of operations, financial position, and
liquidity. For further information regarding risk and the impact COVID-19 could have on our business, financial condition, results of operations and liquidity, including our ability to comply with financial covenants in our credit facility and our access to, and cost of, capital, see "Risk Factors" in Item 1A of Part I of the 2021 Form 10-K.
As of December 31, 2021, we had a balance of $135 million under the Revolving Credit Facility. During the six months ended June 30, 2022, we borrowed an incremental net amount of $12 million to bring the balance under the Revolving Credit Facility to $147 million as of June 30, 2022. As of June 30, 2022, $352 million was available for use out of
the total of $500 million under the Revolving Credit Facility. We expect that Cash provided by operating activities will fund future interest payments on the Company's outstanding indebtedness.
Cash provided by operating activities increased by $36.0 million for the six months ended June 30, 2022 versus the prior year period due primarily to a $56.0 million increase in net income and a $16.8 million favorable cash impact from working capital (comprised of Accounts and other receivables, Inventories, Accounts payable and Deferred income and customer advances) year-over-year with a $11.9 million favorable cash impact from working capital for the six months ended June 30, 2022 compared
to a $5.0 million unfavorable cash impact in the prior year period, which included a $12.3 million cash tax refund. These net favorable impacts for the six months ended June 30, 2022 were partially offset by a $13.4 million unfavorable cash
27
impact from Accrued liabilities driven by the timing of payments, a $9.7 million unfavorable cash impact from Income taxes payable, a $5.3 million unfavorable impact from Deferred taxes and a $9.6 million unfavorable impact from Other assets and liabilities compared to the prior year period driven primarily by a reduction in the net pension liability due to cash contributions to the defined benefit pension plan.
Cash
used for investing activities increased by $103.0 million for the six months ended June 30, 2022 versus the prior year period due primarily to cash paid for the acquisition of U.S. Amines for approximately $97 million compared to cash paid of approximately $9.5 million for the acquisition of Commonwealth Industrial Services, and increased cash payments for capital expenditures of approximately $14.3 million reflecting timing of project execution.
Cash provided by financing activities increased by $75.5 million for the six months ended June 30, 2022 versus the prior year period due primarily to net borrowings of $11.5 million for the six months ended June 30, 2022 compared to net repayments of $80.0 million during the prior year period partially
offset by payments for share repurchases of $9.8 million and cash paid for dividends of approximately $7.0 million 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 output, further improve mix, yield and cost position, and comply with environmental and safety regulations.
The following
table summarizes ongoing and expansion capital expenditures:
Less: Capital expenditures in Accounts payable at June 30,
2022
(9,207)
Cash paid for capital expenditures
$
38,779
For 2022, we expect our total capital expenditures to be approximately $95 million to $105 million compared to $57 million in 2021, reflecting the timing of maintenance and HSE spend. Capital expenditures are deployed for various ongoing investments and initiatives to improve reliability, yield and quality, expand production capacity and comply with HSE regulations.
Critical
Accounting Policies and Estimates
The preparation of our Condensed Consolidated 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 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 our 2021 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.
Recent
Accounting Pronouncements
See “Note 2. Recent Accounting Pronouncements” to the Condensed Consolidated 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 during the six-month period ended June 30, 2022 relates primarily to the Revolving Credit Facility. The Revolving Credit Facility 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
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future earnings and cash flows. Accordingly, we may be exposed to interest rate risk on borrowings under the Credit Agreement.
As of June 30, 2022, the Company had one interest rate swap agreement outstanding for a total notional amount of $50 million to exchange floating for fixed rate interest payments for our LIBOR-based borrowings. The interest rate swap had a fair value
of zero at inception and was effective July 31, 2019 with a maturity date of February 21, 2023. The interest rate swap has been designated as a cash flow hedge and converts the Company's interest rate payments on the first $50 million of variable-rate, 1-month LIBOR-based debt to a fixed interest rate. As a result of this interest rate swap, interest payments on approximately 34% of our borrowings, as of June 30, 2022, have been swapped from floating rate to fixed rate for the life of the swap, without an exchange of the underlying principal amount.
A hedge effectiveness assessment was completed by comparing the critical terms of the hedged items with
the hedging instruments, and also by reviewing the credit standing of the counterparties. As of June 30, 2022, it was determined that the critical terms continued to exactly match, and that the counterparties still had the ability to honor their obligations. As a result, the hedges continue to be deemed effective.
Based on current borrowing levels at June 30, 2022, net of the interest rate swap, a 25-basis point fluctuation in interest rates for the six months ended June 30, 2022 would have resulted in an increase or decrease to our interest expense of approximately $0.2 million.
See “Note 12. Derivative and Hedging Instruments” to the Condensed Consolidated
Financial Statements, included in Part I. Item 1 of this Form 10-Q, for a discussion relating to credit and market, commodity price and interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under 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, including the Chief Executive Officer and Chief Financial Officer, as appropriate, 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 June 30, 2022, 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 June 30,
2022 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 outside of the ordinary course of our business operations. We are not a party to, and, to our knowledge, there are no pending
claims or actions against us, the ultimate disposition of which could be expected to have a material adverse effect on our consolidated financial position, results of operations or operating cash flows.
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ITEM 1A. RISK FACTORS
There have been no material changes to our risk factors as previously disclosed in Item 1A of Part I of the Company’s 2021 Form 10-K, which are hereby incorporated by reference.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 4, 2018, the Company announced that the Board authorized a share repurchase program of up to $75 million of the Company’s common stock. On February 22, 2019, the Company announced that the Board authorized a share repurchase program of up to an additional $75 million of the Company's common stock, which was in addition to the remaining capacity authorized under the May 2018 share
repurchase program. Repurchases may be made from time to time on the open market in accordance with Rule 10b-18 of the Exchange Act, 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 share 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 June 30, 2022. During the quarter ended June 30, 2022, 77,961 shares were purchased under our share repurchase program and 9,290 shares were withheld
to cover tax withholding obligations in connection with the vesting of equity awards.
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
April 2022
—
$
—
—
$
54,835,540
May 2022
—
—
—
54,835,540
June
2022
(1)
87,251
39.04
77,961
51,767,206
Total
87,251
$
39.04
77,961
(1)
Total number of shares purchased includes 9,290 shares covering tax withholding obligations in connection with the vesting of equity awards
During the period July 1, 2022 through July 29, 2022, we repurchased an additional 70,554 shares at a weighted average market price of $35.30 per share under the currently authorized repurchase program.
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Cover
Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101)
† Indicates management contract or compensatory plan.
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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.
