AdvanSix(ASIX) - 2022 Q4 - Annual Report

PART I Business AdvanSix is a vertically integrated manufacturer of nylon solutions, chemical intermediates, and plant nutrients serving diverse end markets Description of Business and Manufacturing The company operates as a key supplier with vertically integrated manufacturing across four main product lines Sales by Product Line (2020-2022) | Product Line | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Nylon | 25% | 25% | 24% | | Caprolactam | 16% | 19% | 19% | | Chemical Intermediates | 26% | 32% | 32% | | Ammonium Sulfate | 33% | 24% | 25% | - The company's manufacturing process is vertically integrated, starting with cumene to produce phenol and acetone, which are then used to create caprolactam and ammonium sulfate[16] Key Financial Performance (2020-2022) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Sales | $1,946 million | $1,685 million | $1,158 million | | Net Income | $172 million | $140 million | $46 million | | International Sales | $323 million | $302 million | $267 million | - In 2022, AdvanSix acquired U.S. Amines, which added two manufacturing facilities and expanded its product line to include alkyl and specialty amines[9][16] Competitive Strengths and Business Strategies The company's competitive edge lies in its low-cost position, diverse revenues, and global reach, with a focus on operational excellence - The company's low-cost position is attributed to its vertically integrated manufacturing, large scale, and access to low-cost natural gas[19] - Revenue is diversified through the sale of co-products; in 2022, ammonium sulfate sales were $629 million and acetone sales were $227 million[20] - Business strategies focus on operational excellence, enhancing the product portfolio, and disciplined capital deployment including acquisitions and shareholder returns[24][25][26] Industry Overview and Competition The company operates in cyclical industries, competing with large global manufacturers across its Nylon, Chemical, and Plant Nutrient markets - The global market for Nylon 6 and caprolactam is cyclical, influenced by global supply/demand dynamics and raw material costs[28][30] - The U.S. acetone market saw favorable conditions in 2022, with balanced supply and demand supporting industry margins[31] - Ammonium sulfate prices are influenced by the price of urea and general agricultural trends[32] - Key competitors include integrated manufacturers like Highsun Group, BASF, Sinopec, and LANXESS[33] Product and Operations Overview The company's four product lines serve approximately 400 customers, with notable customer concentration and seasonality in its fertilizer business 2022 Sales by Product Line | Product Line | 2022 Sales | % of Total Sales | | :--- | :--- | :--- | | Nylon | $485 million | 25% | | Caprolactam | $320 million | 16% | | Chemical Intermediates | $512 million | 26% | | Ammonium Sulfate | $629 million | 33% | - The company's primary raw material is cumene, and it manages supply through contracts with multiple suppliers[39][40] - Customer concentration is notable, with the 10 largest customers accounting for 39% of total sales in 2022[43] - Ammonium sulfate sales are seasonal, fluctuating with agricultural growing seasons in North and South America[44] Human Capital Management The company prioritizes safety, diversity, and employee development for its workforce of approximately 1,458 people - As of year-end 2022, the company had 1,458 employees, with approximately 744 unionized[55] Total Case Incident Rate (TCIR) | Year | TCIR | | :--- | :--- | | 2022 | 1.15 | | 2021 | 0.48 | | 2020 | 0.91 | - The company demonstrates a commitment to diversity, with 45% of its senior leadership team being women in 2022[65] - AdvanSix supports STEM education and diversity through programs like the Future of STEM Scholars Initiative (FOSSI)[63] Risk Factors The company faces significant risks related to its business operations, indebtedness, regulatory environment, and common stock Risks Relating to Our Business Business risks include economic volatility, industry cyclicality, potential production downtime, and reliance on key customers - The business is subject to volatile economic conditions, including inflation and potential recession, which could reduce demand[79][80] - The industries served are cyclical, which can cause significant fluctuations in operating results and cash flows[81][83] - Significant unplanned downtime at any of the highly integrated production facilities could adversely affect earnings[84][86] - The loss of significant customers could adversely affect results, as the 10 largest customers accounted for 39% of total sales in 2022[102] Risks Relating to Our Indebtedness Indebtedness risks stem from restrictive covenants in its credit facility and the ongoing transition away from LIBOR - The company's credit facility contains restrictive covenants that impose significant operating and financial restrictions[124] - A breach of covenants could result in an event of default, allowing lenders to accelerate repayment[125] - The phase-out of LIBOR could result in an increase in the cost of variable rate debt[127] Risks Relating to Legal and Regulatory Matters The company is subject to extensive environmental, health, and safety regulations that can result in substantial costs and liabilities - The company is subject to extensive EHS laws which may result in substantial costs, fines, and operational interruptions[128][129][130] - Climate change poses significant risks, including more stringent regulations on greenhouse gas emissions and physical risks from extreme weather[131][132] - Operations are dependent on numerous governmental permits, and a delay or denial could adversely affect the ability to operate[137] - The company faces risks from adverse international trade policies, including tariffs and anti-dumping duties[138] Risks Relating to Our Common Stock Investment in the company's common stock carries risks including price volatility and uncertainty regarding future dividends - The market price of the company's common stock may fluctuate significantly due to a variety of factors[146] - There is no guarantee of the timing, amount, or payment of future dividends, which may be limited by the terms of the company's indebtedness[149] - Certain provisions in the company's corporate governance documents and Delaware law may discourage, delay, or prevent a merger or acquisition[151] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[152] Properties The company owns five manufacturing sites and leases its principal executive offices in New Jersey - The company owns five manufacturing sites in Pennsylvania, Virginia, and Alabama, and leases its principal executive offices in New Jersey[152] Legal Proceedings The company is involved in ordinary course litigation and regulatory negotiations not expected to have a material adverse effect - The company is in ongoing negotiations with the EPA regarding alleged violations at its Hopewell, Virginia facility, which were self-reported[153][154] - The company is also in negotiations with Philadelphia Air Management Services (PAMS) to resolve alleged violations at its Philadelphia, Pennsylvania facility[155] Mine Safety Disclosures This item is not applicable to the company - Not applicable[156] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, with active share repurchase and dividend programs in place Share Repurchases (Q4 2022) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Dollar Value Remaining Under Plan (as of end of month) | | :--- | :--- | :--- | :--- | | October 2022 | 155,500 | $33.50 | $33,394,158 | | November 2022 | 111,403 | $38.07 | $29,153,293 | | December 2022 | 17,298 | $40.56 | $28,451,601 | - On February 17, 2023, the Board authorized an additional $75 million for the share repurchase program[158] Declared Dividends per Share (2022-2023) | Announcement Date | Dividend per Share | | :--- | :--- | | 2/17/2023 | $0.145 | | 11/4/2022 | $0.145 | | 8/5/2022 | $0.145 | | 5/6/2022 | $0.125 | | 2/18/2022 | $0.125 | Management's Discussion and Analysis of Financial Condition and Results of Operations Sales and net income grew in 2022, driven by favorable pricing and an acquisition, alongside strong cash flow and shareholder returns Recent Developments Key developments include the U.S. Amines acquisition, the extension of anti-dumping duties, and an ongoing insurance claim - In February 2022, the company acquired U.S. Amines for approximately $97 million net of cash acquired[177] - Anti-dumping and countervailing duty orders on ammonium sulfate imports from China were extended for another five years[178] - The company continues to pursue a business interruption insurance claim related to the 2019 shutdown of the Philadelphia Energy Solutions (PES) refinery[179] Consolidated Results of Operations Sales increased 15.5% in 2022 due to higher pricing and an acquisition, which offset lower volumes and led to higher net income Sales Change Attribution (2022 vs. 2021) | Factor | Contribution to Sales Change | | :--- | :--- | | Volume | (10.2)% | | Price | 22.2% | | Acquisition | 3.5% | | Total | 15.5% | Key Financial Metrics (2021-2022) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Sales | $1,945.6 M | $1,684.6 M | | Gross Margin % | 16.2% | 16.3% | | Net Income | $171.9 M | $139.8 M | | Adjusted EBITDA | $308.5 M | $267.0 M | | Adjusted EBITDA Margin | 15.9% | 15.8% | | Diluted EPS | $5.92 | $4.81 | | Adjusted Diluted EPS | $6.28 | $5.15 | - The increase in Cost of Goods Sold was driven by higher raw material prices, the U.S. Amines acquisition, and increased plant spend[187] Liquidity and Capital Resources The company maintains a strong liquidity position with significant cash from operations and availability under its credit facility Cash Flow Summary (2021-2022) | (In thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Cash from Operating Activities | $273,601 | $218,849 | | Cash for Investing Activities | ($189,273) | ($67,562) | | Cash for Financing Activities | ($68,443) | ($146,793) | - As of December 31, 2022, the company had $31 million in cash and $384 million of available capacity under its revolving credit facility[206] - Capital expenditures were $89.4 million in 2022, with a forecast for 2023 of approximately $110 million to $120 million[227] - The company made cash contributions of $20.0 million to its defined benefit pension plan in 2022[209] Critical Accounting Policies and Estimates Management identifies several critical accounting policies requiring significant estimates, including inventory valuation, goodwill, and pensions - Inventories are primarily valued using the LIFO method; at year-end 2022, the carrying value was $64.8 million lower than current costs[230] - Goodwill stood at $56.2 million as of December 31, 2022, primarily due to the U.S. Amines acquisition[231] - The U.S. Amines acquisition added $34 million in intangible assets, primarily customer relationships[232] - Pension benefit calculations rely on actuarial assumptions, where a 25 basis point change in the discount rate would impact the pension benefit obligation by about $2.6-$2.7 million[238] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate changes on its variable-rate debt, which is partially hedged with an interest rate swap - The company's main market risk is from interest rate fluctuations on its floating-rate Revolving Credit Facility[245] - AdvanSix utilizes a $50 million notional value interest rate swap to hedge its interest rate risk on approximately 43% of its borrowings[246] - A 25-basis point fluctuation in interest rates would change the company's annual interest expense by approximately $0.2 million[247] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and the independent auditor's unqualified opinion Consolidated Financial Statements The financial statements present the company's performance, showing sales of $1.95 billion and net income of $171.9 million for 2022 Consolidated Statement of Operations Highlights (Year Ended Dec 31, 2022) | Metric | Amount (in thousands) | | :--- | :--- | | Sales | $1,945,640 | | Cost of Goods Sold | $1,631,161 | | Gross Profit | $314,479 | | Income Before Taxes | $225,791 | | Net Income | $171,886 | | Diluted EPS | $5.92 | Consolidated Balance Sheet Highlights (As of Dec 31, 2022) | Metric | Amount (in thousands) | | :--- | :--- | | Total Current Assets | $440,928 | | Total Assets | $1,495,331 | | Total Current Liabilities | $393,492 | | Total Liabilities | $757,151 | | Total Stockholders' Equity | $738,180 | Consolidated Statement of Cash Flows Highlights (Year Ended Dec 31, 2022) | Metric | Amount (in thousands) | | :--- | :--- | | Net cash provided by operating activities | $273,601 | | Net cash used for investing activities | ($189,273) | | Net cash used for financing activities | ($68,443) | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, customer concentration, debt, taxes, and the U.S. Amines acquisition - The company's largest customer, Shaw Industries Group Inc., accounted for 12% of total sales in 2022[323] - The effective income tax rate was 23.9% in 2022, compared to 24.5% in 2021[332] - As of December 31, 2022, the company had $115 million outstanding under its $500 million Revolving Credit Facility[353][358] - The acquisition of U.S. Amines resulted in the recognition of $38.6 million in goodwill and $34.0 million in intangible assets[421][422][425] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable, indicating no changes in or disagreements with the company's accountants - Not Applicable[429] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[430] - Management determined that the company maintained effective internal control over financial reporting as of December 31, 2022[433][434] - The assessment of internal control over financial reporting excluded the recently acquired U.S. Amines[431] Other Information The company reports no other information for this item - None[436] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[436] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Required information regarding directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2023 Proxy Statement[438] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement - Required information on executive compensation is incorporated by reference from the forthcoming 2023 Proxy Statement[441] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2023 Proxy Statement - Required information on security ownership is incorporated by reference from the forthcoming 2023 Proxy Statement[442] Certain Relationships and Related Transactions and Director Independence Information regarding related transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Required information on related transactions and director independence is incorporated by reference from the forthcoming 2023 Proxy Statement[443] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2023 Proxy Statement - Required information on principal accounting fees and services is incorporated by reference from the forthcoming 2023 Proxy Statement[444] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and provides an index of all exhibits filed with the Form 10-K - This section provides an index of the financial statements and exhibits filed with the Form 10-K[446][449] Form 10-K Summary The company has elected not to include a Form 10-K summary - The Company has elected not to include a Form 10-K summary[447]