(in thousands of dollars, except per share data or unless otherwise indicated)
The following section, referred to as the "MD&A" presents management's discussion and analysis of the Company's financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and the notes thereto contained in this Form 10-K. This section of this Form 10-K generally discusses our financial condition and results of operations as of and for the years ended
December 31, 2021and 2020 and year-to-year comparisons between 2021 and 2020. Discussions of our financial condition and results of operations as of and for the year ended December 31, 2019and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SECon February 19, 2021.
26 -------------------------------------------------------------------------------- We produce and sell caprolactam as a commodity product and produce and sell our Nylon 6 resin as both a commoditized and differentiated resin product. Our results of operations are primarily driven by production volume and the spread between the sales prices of our products and the costs of the underlying raw materials built into market-based and value-based pricing models. 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. Generally, Nylon 6 resin prices track the cyclicality of caprolactam prices, although prices set above the 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, we continue to execute against our strategic focus on developing and commercializing select higher-value, differentiated Nylon 6 products, such as our wire and cable, Post-Industrial Recycled resins and films 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 chemical processes within our integrated supply chain. Most significant is acetone, which is used by our customers in the production of adhesives, paints, coatings and solvents. Prices for acetone are 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 oximes-based EZ-Blox® anti-skinning agent used in paints and Nadone® cyclohexanone, which is a solvent used in various high-value applications. Our ammonium sulfate is used by customers as a fertilizer containing nitrogen and sulfur, two key crop nutrients. 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 the price of crops. Our ammonium sulfate product is positioned with 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 than other fertilizers. 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 several 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. For a description of our principal risks, see "Risk Factors" in Item 1A.
March 2020, the World Health Organizationcategorized the novel coronavirus (COVID-19) as a global pandemic with numerous countries around the world declaring national emergencies, including the United States. Since early 2020, COVID-19 has continued to spread, with confirmed cases worldwide, and with certain jurisdictions experiencing resurgences, including as a result of variant strains. The spread resulted in authorities implementing numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these 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 Statesand global economies. As previously disclosed, 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, and through the end of 2021, demand improved to pre-COVID-19 27 -------------------------------------------------------------------------------- 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 our operational and safety mitigation plans as previously disclosed.
As the situation surrounding COVID-19 remains fluid and unpredictable, the Company cannot reasonably estimate with certainty the future impact that COVID-19 may have on the Company’s results of operations, financial condition and liquidity. .
As announced on
February 18, 2022, the Board declared a quarterly cash dividend of $0.125per share on the Company's common stock, payable on March 15, 2022to stockholders of record as of the close of business on March 1, 2022. As announced on September 28, 2021, the Board declared a quarterly cash dividend of $0.125per share on the Company's common stock, payable on November 23, 2021to stockholders of record as of the close of business on November 9, 2021.
February 18, 2022, the Company announced the signing of a definitive agreement to acquire U.S. Amines, Ltd., a leading North American producer of alkyl and specialty amines serving high-value end markets such as agrochemicals and pharmaceuticals, for an estimated net purchase price of approximately $100 million. The transaction is expected to close in the first quarter of 2022, subject to customary closing conditions. In January 2021, the Company acquired certain assets associated with ammonium sulfate packaging, warehousing and logistics services in Virginiafrom Commonwealth Industrial Services, Inc.for approximately $9.5 million. This acquisition enables the Company to expand its product offerings by directly supplying packaged ammonium sulfate to customers, primarily in North and South America. It diversifies and optimizes our product offerings to include spray-grade adjuvant to support crop protection and products for industrial use.
October 27, 2021, the Company completed a refinancing of its existing senior secured revolving credit facility under that certain Credit Agreement, dated as of September 30, 2016, among the Company, the guarantors, the lenders party thereto and Bank of America, N.A., as administrative agent (as amended by Amendment No. 1 on February 21, 2018and Amendment No. 2 on February 19, 2020), 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"). For a discussion of the Credit Agreement and Revolving Credit Facility, please refer to "Note 9. Long-term Debt and Credit Agreement."
Anti-dumping duty petitions
February 19, 2019, the Company announced that it filed anti-dumping duty petitions covering imports of acetone with the International Trade Commission("ITC") and U.S. Department of Commerce("Commerce"). The petitions allege that dumped acetone imports into the United Statesfrom Belgium, Saudi Arabia, Singapore, South Africa, South Korea, and Spainhave caused material injury to the domestic industry. On April 4, 2019, the ITC voted to continue the anti-dumping duty investigations concerning imports of acetone from all such nations other than Saudi Arabia. During the third quarter of 2019, Commerce announced its preliminary affirmative dumping determination regarding imports from Singapore, Spain, Belgium, South Africaand South Korea. On October 21, 2019, Commerce published its final affirmative determination of dumping regarding imports from Singaporeand Spain, and on December 10, 2019, the ITC issued its final determination of material injury to the industry by reason of imports from Singaporeand Spain. Effective December 20, 2019, Commerce imposed anti-dumping orders and applicable duties on imports of acetone from Singaporeand Spainfor a five-year period. On February 13, 2020, Commerce published its final affirmative determination of dumping regarding imports from Belgium, South Africaand South Koreaand on March 17, 2020, the ITC issued its final determination of material injury to the industry by reason of imports from Belgium, South Africaand South Korea. Effective March 31, 2020, Commerce imposed anti-dumping orders and applicable duties on imports of acetone from Belgium, South Africaand South Koreafor a five-year period. The anti-dumping orders are subject to annual administrative review, if requested, which may change the level of duties applicable to imports in future periods. On May 26, 2020, LG Chem, Ltd., and LG Chem America, Inc.filed a motion with the U.S. Court of International Tradecontesting the final determination made by Commerce concerning imports from South Korea, and on June 19, 2020, the Company filed a motion to intervene. The anti-dumping orders applicable to imports from all other sources were not appealed. On August 13, 2021, the U.S. Court of International Tradeaffirmed its final determination and LG Chem did not file any further appeal. 28 --------------------------------------------------------------------------------
January 2017, Commerce published its final affirmative determination in the anti-dumping duty investigation of imports of ammonium sulfate from the People's Republic of China("PRC") and in March 2017, the ITC issued its final determination of material injury by reason of imports from the PRC. Effective March 9, 2017, Commerce imposed anti-dumping and countervailing duty orders and applicable duties on imports of ammonium sulfate from the PRC for a five-year period. The anti-dumping and countervailing duty orders are subject to annual administrative review, if requested, which may change the level of duties applicable to imports in future periods. In February 2022, Commerce and the ITC initiated five-year reviews of the anti-dumping and countervailing duty orders to determine whether to extend the orders for another five years. Determinations are expected in the fourth quarter of 2022.
Closing of Philadelphia Energy Solutions
The Company has assessed the business impact of the fire that shut down Philadelphia Energy Solutions' ("PES") refinery in
Philadelphia, Pennsylvania. PES was one of multiple suppliers to the Company of cumene, a feedstock material used to produce phenol, acetone and other chemical intermediates. As of year-end 2021, the Company has incurred an approximately $35 millionunfavorable impact to pre-tax income since the refinery shut down and, during 2020, submitted a business interruption insurance claim, while realigning its supply chain to ensure the continuity of its cumene supply. While the Company has received $3.9 millionof insurance proceeds through December 31, 2021, it continues to pursue the claim, which is ongoing. Consolidated Results of Operations for the Years Ended December 31, 2021, 2020 and 2019 (Dollars in thousands) Sales 2021 2020 2019 Sales $ 1,684,625 $ 1,157,917 $ 1,297,393
Variation in % compared to the previous period 45.5% (10.8)%
The variation in sales is attributable to the following elements:
2021 versus 2020 2020 versus 2019 Volume 7.4 % 0.6 % Price 38.1 % (11.4) % 45.5 % (10.8) % 2021 compared with 2020 Sales increased in 2021 compared to 2020 by
$526.7 million(approximately 45%) due primarily to (i) favorable market-based pricing (approximately 20%), (ii) higher formula-based pass-through pricing (approximately 18%) as a result of net cost increases in benzene and propylene and (iii) higher sales volume (approximately 7%) driven primarily by improved end market demand and tight industry supply conditions across all product lines. Cost of Goods Sold 2021 2020 2019 Cost of goods sold $ 1,410,503 $ 1,024,169 $ 1,161,921
Variation in % compared to the previous period 37.7% (11.9)%
(13.3) % Gross margin % 16.3 % 11.6 % 10.4 % 2021 compared with 2020
Cost of goods sold increased in 2021 compared to 2020 by
(approximately 38%) mainly due to (i) the increase in raw material prices (approximately 31%), (ii) the increase in sales volume (approximately 4%), (iii) the increase plant and selling freight expenses to support increased sales volume (approximately 3%) and (iv) an unfavorable adjustment to non-cash LIFO inventory reserves (approximately 1%). The increase observed was partially offset by the collection of insurance proceeds related to the closure in 2019 of the cumene supplier Philadelphia Energy Solutions (approximately 1%).
29 -------------------------------------------------------------------------------- Gross margin percentage increased by approximately 5% in 2021 compared to 2020 due primarily to (i) the net impact of formula-based pass-through pricing and increased market pricing (approximately 4%) and (ii) higher sales volume (approximately 2%), partially offset by increased plant spend and sales freight to support higher sales volume (approximately 2%).
Selling, general and administrative expenses
Selling, general and administrative expense
$ 82,985 $ 70,870 $ 75,375% of sales 4.9 % 6.1 % 5.8 % 2021 compared with 2020 Selling, general and administrative expenses increased in 2021 compared to 2020 by $12.1 million, or approximately 17%, due primarily to increased incentive and stock-based compensation costs and increased functional support costs, as compared to cost control measures implemented in response to the COVID-19 pandemic in the prior year.
Interest expense, net
2021 2020 2019
Interest expense, net
2021 vs. 2020
Interest expense, net, decreased in 2021 compared to 2020 by
$2.8 million, or approximately 36%, due primarily to lower average borrowings, partially offset by lower amounts of interest capitalized associated with capital projects.
Other non-operating expenses, net
2021 2020 2019
Other non-operating expenses, net
2021 vs. 2020
The increase in Other non-operating expense, net in 2021 compared to 2020 was due primarily to an increase in deferred compensation expense in the current year.
income tax expense
2021 2020 2019
income tax expense
Effective tax rate 24.5% 16.3% 22.5%
Under a provision included in the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, the Company filed a Federal net operating loss (NOL) carryback claim in
July 2020which 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 income tax rate for 2021 was higher compared to the U.S.Federal statutory rate of 21% due primarily to state taxes and executive compensation deduction limitations partially offset by research tax credits and the foreign-derived intangible income deduction. The Company's effective income tax rate for 2020 was lower compared to the U.S.Federal statutory rate of 21% due primarily to the impact of research tax credits as well as an energy tax credit described in more detail in "Note 4. Income Taxes". This was partially offset by state taxes, executive compensation deduction limitations and a shortfall on the vesting of equity compensation. The Company's effective income tax rate for 2019 was slightly higher compared to the U.S.Federal statutory rate of 21% due primarily to state taxes and executive compensation deduction limitations, partially offset by the vesting of restricted stock units and research tax credits. We are subject to income taxes in the United Statesand 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 impact our effective tax rate and cash flows from operating activities. The current U.S.administration has released various draft tax reform proposals and, as such, we continue to monitor these legislative proposals to evaluate the impact on our business. 30 -------------------------------------------------------------------------------- As of December 31, 2021, 2020 and 2019, there were no unrecognized tax benefits recorded by the Company. Although there are no unrecognized income tax benefits, when applicable, the Company's policy is to report interest expense and penalties related to unrecognized income tax benefits in the income tax provision.
For additional information on income taxes and the effective tax rate, see “Note 4. Income Taxes” in the Notes to the Audited Consolidated Financial Statements included in Item 8 of this Form 10-K. .
Net Income 2021 2020 2019 Net income
$ 139,791 $ 46,077 $ 41,3472021 compared with 2020
Due to the factors described above, net profit was
The following tables set forth the non-GAAP financial measures of EBITDA and EBITDA margin. EBITDA is defined as Net income before Interest, Income taxes and Depreciation and amortization. EBITDA margin is equal to EBITDA divided by Sales. The following tables 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 are not considered core to the Company's 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 EBITDA and EBITDA Margin to their most directly comparable U.S.GAAP financial measure:
(in thousands of dollars, except per share amounts or as otherwise indicated)
2021 2020 2019 Net income
$ 139,791 $ 46,077 $ 41,347Interest expense, net 5,023 7,792 5,454 Income tax expense (benefit) 45,325 8,956 12,001 Depreciation and amortization 65,340 60,832 56,826 EBITDA (non-GAAP) 255,479 123,657 115,628 One-time Pottsville restructuring charges (1) - - (11,020) EBITDA excluding one-time Pottsvillerestructuring charges (non-GAAP) $ 255,479 $ 123,657 $ 126,648Sales $ 1,684,625 $ 1,157,917 $ 1,297,393EBITDA margin % (non-GAAP) 15.2 % 10.7 % 8.9 % EBITDA margin % excluding one-time Pottsvillerestructuring charges (non-GAAP) 15.2 % 10.7 % 9.8 %
(1) 2019 single
Cash and capital resources
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 and in the risk factors as previously disclosed in in Item 1A, Risk Factors. 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 for the next twelve months and beyond. Our 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, general economic and industry trends and customer demand. 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 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, and capital expenditures reflecting disciplined capital deployment and following the completion of several high-return growth and cost savings investments. Capital expenditures are deployed for various ongoing investments and initiatives to improve reliability, yield and quality, expand production capacity and comply with HSE regulations. While the COVID-19 pandemic has created and continues to create volatility in funding markets, we expect 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 Item 1A, as well as general economic, financial, competitive, regulatory and other factors that are beyond our control. At
December 31, 2021, the Company had approximately $15 millionof cash on hand with approximately $364 millionof 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 millionof cash with debt. Capital expenditures were approximately $57 millionin 2021 compared to $83 millionin 2020, reflecting efficiencies in project execution in 2021 and the completion of several high-return growth and cost savings investments in 2020. As noted in Note 4. "Income Taxes," the Company filed a Federal net operating loss (NOL) carryback claim under the CARES Act in July 2020which generated a refund of previously paid taxes in the amount of $12.3 millionreceived in the first quarter of 2021. Additionally, the Company deferred approximately $6.5 millionof social security taxes in 2020 under the CARES Act of which 50% was paid on January 3, 2022and the remainder is due by January 3, 2023. We assumed from Honeywell all HSE liabilities and compliance obligations related to the past and future operations of our current business, as well as all HSE liabilities associated with our three current manufacturing locations and the other locations 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 our consolidated financial position and results of operations. We expect that our primary cash requirements for 2022 will be to fund costs associated with ongoing operations, capital expenditures and amounts related to contractual obligations. See below under "Capital Expenditures" for more information regarding our capital expenditures in 2021, 2020 and 2019 and anticipated capital expenditures for 2022. Amounts related to contractual obligations are related to principal repayments and interest payments on leases, long-term debt, purchase obligations, estimated environmental compliance costs, and postretirement benefit obligations. We anticipate that our estimated environmental compliance costs will be approximately $1.7 millionin aggregate for 2022 through 2026. This amount is related to what has been accrued as probable and reasonably estimable as of December 31, 2021. For information regarding material cash requirements from known contractual obligations with respect to lease obligations, long-term debt principal repayments and purchase obligations please refer to "Note 8. Leases", "Note 9. Long-term Debt and Credit Agreement" and "Note 13. Commitments and Contingencies", respectively, to the Consolidated Financial Statements in Item 8 of this Form 10-K. Interest payments are estimated based on the interest rate applicable as of December 31, 2021and approximate $4.1 millionper year, subject to changes in variable interest rates and additional obligations. The Company made contributions to the defined benefit pension plan of $17.5 millionduring the year ended December 31, 2021sufficient to satisfy pension funding requirements for 2021 under the AdvanSix Retirement Earnings Plan. Cash contributions of $1.232 -------------------------------------------------------------------------------- million, $3.6 millionand $12.7 millionwere made in the first three quarters of 2021, respectively. No cash contributions were made in the fourth quarter of 2021. The Company plans to make $10.0 millionto $15.0 millionof cash contributions in 2022 and additional contributions in future years sufficient to satisfy pension funding requirements in those periods.
The Company has made cash contributions to the defined contribution plan of
May 4, 2018, the Company announced that the Board authorized a share repurchase program of up to $75 millionof 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 millionof the Company's common stock, which was in addition to the remaining capacity available under the May 2018share repurchase program. Repurchases may be made, from time to time, on the open market, 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 Treasurystock and the excess of the purchase price over par value is applied to Additional paid-in capital. As of December 31, 2021, the Company had repurchased 3,615,476 shares of common stock, including 525,714 shares withheld to cover tax withholding obligations in connection with the vesting of equity awards, for an aggregate of $102.4 millionat a weighted average market price of $28.31per share. As of December 31, 2021, $59.6 millionremained available for repurchase under the currently authorized repurchase program. During 2021 and the period from January 1, 2022through February 4, 2022, no additional shares were repurchased under the currently authorized repurchase program. At December 31, 2021, 2020 and 2019, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K or financing activities with special-purpose entities. The Company has not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets. Dividends As announced on February 18, 2022, the Board declared a quarterly cash dividend of $0.125per share on the Company's common stock, payable on March 15, 2022to stockholders of record as of the close of business on March 1, 2022. As announced on September 28, 2021, the Board declared a quarterly cash dividend of $0.125per share on the Company's common stock, payable on November 23, 2021to stockholders of record as of the close of business on November 9, 2021. Dividends paid to common stockholders were approximately $3.5 millionin 2021 and $0in 2020. We generally expect to declare and pay dividends on a quarterly basis; however, the timing, declaration, amount and payment of future dividends to stockholders, if any, will depend on our financial condition, earnings, capital requirements and debt service obligations and 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. Our credit agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, pay cash dividends. There can be no assurance that payment of a dividend will occur in the future. 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, 2018pursuant to Amendment No. 1 to the Original Credit Agreement (the "First Amended and Restated Credit Agreement"), and further amended on February 19, 2020pursuant 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. The Second Amended and Restated Credit Agreement required the Company to maintain a Consolidated Leverage Ratio (as defined in the Second Amended and Restated Credit Agreement) of (i) 3.50 to 1.00 or less for the fiscal quarter ending March 31, 2020, (ii) 4.50 to 1.00 or less for the fiscal quarter ending June 30, 2020, (iii) 4.25 to 1.00 or less for the fiscal quarter ending September 30, 2020, (iv) 3.50 to 1.00 or less for the fiscal quarter ending December 31, 2020, (v) 3.25 to 1.00 or less for the fiscal quarter ending March 31, 2021through and including the fiscal quarter ending December 31, 2021, and (vi) 3.00 to 1.00 or less for the fiscal quarter ending March 31, 2022and each fiscal quarter thereafter (subject to the Company's option to elect a Consolidated Leverage Ratio increase in connection with certain acquisitions). The Consolidated Interest Coverage Ratio financial covenant required the Company to maintain a Consolidated Interest Coverage Ratio (as defined in the Second Amended and Restated Credit Agreement) of not less than 3.00 to 33 -------------------------------------------------------------------------------- 1.00. If the Company did not comply with the covenants in the Second Amended and Restated Credit Agreement, the lenders could, subject to customary cure rights, require the immediate payment of all amounts outstanding under the Revolving Credit Facility. Borrowings under the Second Amended and Restated Credit Agreement bore interest at a rate equal to either the sum of a base rate plus a margin ranging from 0.50% to 2.00% or the sum of a Eurodollar rate plus a margin ranging from 1.50% to 3.00%, with either such margin varying according to the Company's Consolidated Leverage Ratio (as defined in the Second Amended and Restated Credit Agreement). The Company was also required to pay a commitment fee in respect of unused commitments under the credit facility, if any, at a rate ranging from 0.20% to 0.50% per annum depending on the Company's Consolidated Leverage Ratio. In addition, the Second Amendment also amended certain administrative provisions associated with the LIBOR Successor Rate (as defined in the Second Amended and Restated Credit Agreement).
Obligations under the Second Amended and Restated Credit Agreement were secured by a pledge of assets and liens on substantially all of the assets of
The Second Amended and Restated Credit Agreement contained 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, as well as financial covenants that require the Company to maintain interest coverage and leverage ratios at levels specified in the Second Amended and Restated Credit Agreement. These covenants placed limits on how we conduct our business, and in the event of certain defaults, our repayment obligations could be accelerated. 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"). The Revolving Credit Facility has a scheduled maturity date of October 27, 2026. The Credit Agreement permits the Company to utilize up to $40 millionof the Revolving Credit Facility for the issuance of letters of credit and up to $40 millionfor 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 millionplus (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 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 of the tangible and intangible assets of the Company and its national subsidiaries are pledged to secure the obligations under the credit agreement.
October 27, 2021, the Company borrowed $150 millionunder the Revolving Credit Facility. Borrowings under the Revolving Credit Facility will be subject to customary borrowing conditions. 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, 2023and (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 December 31, 2021and through the date of the filing of this Annual Report on Form 10-K. 34 -------------------------------------------------------------------------------- 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. 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 this Annual Report on Form 10-K.
December 31, 2020, we had a balance of $275 millionunder our prior credit facility. During the twelve months ended December 31, 2021, we repaid an incremental net amount of $140 millionto bring the balance under the Revolving Credit Facility to $135 millionas of December 31, 2021. We expect that Cash provided by operating activities will fund future interest payments on the Company's outstanding indebtedness.
The Company had approximately
Summary of cash flows for the years ended
Our cash flows from operating, investing and financing activities for the years ended
December 31, 2021, 2020 and 2019, as reflected in the audited Consolidated Financial Statements included in this Form 10-K, are summarized as follows: Years Ended December 31, 20212020
(Dollars in thousands) Cash provided by (used for): Operating activities
$ 218,849 $ 111,847 $ 120,385Investing activities (67,562) (84,103) (153,125) Financing activities (146,793) (24,188) 29,982
Net change in cash and cash equivalents
2021 compared with 2020 Net cash provided by operating activities increased by
$107.0 millionfor the year ended December 31, 2021versus the prior year due primarily to a $93.7 millionincrease in net income and a $21.6 millioncash improvement from Taxes receivable (including a $12.3 millioncash tax refund received in the first quarter of 2021). These net favorable impacts were partially offset by a $7.7 millionunfavorable cash impact from Other assets and liabilities driven a decrease in pension liability of $10.0 million(primarily reflecting the impact of cash pension contributions) partially offset by a $2.7 millionincrease in prepaid expenses. Cash from working capital (comprised of Accounts and other receivables, Inventories, Accounts payable and Deferred income and customer advances) was relatively neutral year-over-year, with a $20.8 millionunfavorable cash impact for the year ended December 31, 2021compared to a $20.2 millionunfavorable cash impact in the prior year period. Included within the year-over-year neutrality of working capital was a $23.6 millionunfavorable impact due to the strategic absence of our typical ammonium sulfate pre-buy cash advances during the fourth quarter of 2021. Cash used for investing activities decreased by $16.5 millionfor the year ended December 31, 2021versus the prior year period due to a decrease in cash paid for capital expenditures of approximately $26.1 millionreflecting capital project efficiencies and timing of project execution offset by cash paid for the acquisition of Commonwealth Industrial Services, Inc.of approximately $9.5 million. Cash used for financing activities increased by $122.6 millionfor the year ended December 31, 2021versus the prior year due to net payments on the credit facility of $140.0 millionfor the year ended December 31, 2021compared to net payments of $22.0 millionduring the prior year. During the year ended December 31, 2021the Company paid dividends of approximately $3.5 millionand entered into a new Revolving Credit Facility, as described above, with approximately $2.4 millionin fees compared to fee payments of $0.4 millionduring the prior year, both of which are described above.
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. 35 -------------------------------------------------------------------------------- The following table summarizes ongoing and expansion capital expenditures for the periods indicated. Years Ended December 31, 2021 2020 2019
(in thousands of dollars) Purchases of property, plant and equipment
Capital expenditures decreased
For 2022, we expect our total capital expenditures to be approximately
$95 millionto $105 million. 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 (in thousands of dollars, unless otherwise indicated)
The Company's significant accounting policies are more fully described in "Note 2. Summary of Significant Accounting Policies" to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Management believes that the application of these policies on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information about the Company's operating results and financial condition. The preparation of our Consolidated Financial Statements in conformity with
U.S.GAAP is based on the selection and application of accounting policies that require management to make significant estimates and assumptions about the effects of matters that are inherently uncertain and that affect the reported amounts, including, but not limited to, inventory valuations, impairment of goodwill, stock-based compensation, long-term employee benefit obligations, income taxes and environmental matters. Management's estimates are based on historical experience, facts and circumstances available at the time and various other assumptions that are believed to be reasonable. The Company reviews these matters and reflects changes in estimates as appropriate. Management believes that the following represents some of the more critical judgment areas in the applications of the Company's accounting policies which could have a material effect on the Company's financial position, results of operations or cash flows. Inventories - Substantially all of the Company's inventories are valued at the lower of cost or market using the last-in, first-out ("LIFO") method. The Company includes spare and other parts in inventory which are used in support of production or production facilities operations and are valued based on weighted average cost.
Inventories valued at LIFO amount to
Goodwill- The Company had goodwill of $17.6 millionand $15.0 millionas of December 31, 2021and 2020, respectively. Goodwillis subject to impairment testing annually as of March 31, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Management first assesses qualitative factors as described in ASC 350 to determine whether it is necessary to perform the quantitative goodwill impairment test. The Company completed its annual goodwill impairment test as of March 31, 2021and, based on the results of the Company's assessment of qualitative factors, it was determined that it was not necessary to perform the quantitative goodwill impairment test. Revenue Recognition - The Company recognizes revenue upon the transfer of control of goods or services to customers at amounts that reflect the consideration expected to be received. AdvanSixprimarily recognizes revenues when title and control of the product transfers from the Company to the customer. Outbound shipping costs incurred by the Company are not included in revenues but are reflected as freight expense in Costs of goods sold in the Consolidated Statements of Operations. Sales of our products to customers are made under a purchase order, and in certain cases in accordance with the terms of a master services agreement. These agreements typically contain formula-based pass-through pricing tied to key feedstock materials and volume ranges, but often do not specify the goods, including the quantities thereof, to be transferred. Certain master services agreements (including with respect to our largest customer) may contain minimum purchase volumes which can be satisfied by the customer on a periodic basis by choosing from various products offered by the Company. In these cases, a performance obligation is created when a customer submits a purchase order for a specific product at a specified price, typically providing for delivery within the next 60 days. Management considers the performance obligation with respect to such purchase order satisfied at the point in time when control of the product is transferred to the customer, which is indicated by shipment of the product and transfer of title and risk of loss to the customer. Transfer of control to the customer occurs through various modes of shipment, including trucks, railcars, and vessels, and follows a variety of commercially acceptable shipping or destination point terms pursuant to the arrangement with the 36 -------------------------------------------------------------------------------- customer. Variable consideration is estimated for future volume rebates and early pay discounts on certain products and product returns. The Company records variable consideration as an adjustment to the sale transaction price. Since variable consideration is generally settled within one year, the time value of money is not significant. The Company applies the practical expedient in Topic 606 and does not include disclosures regarding remaining performance obligations that have original expected durations of one year or less, or amounts for variable consideration allocated to wholly-unsatisfied performance obligations or wholly-unsatisfied distinct goods that form part of a single performance obligation, if any.
The Company also uses the practical expedient of Topic 606 and does not include an adjustment for the effects of a significant financing item given the expected duration of the period of one year or less.
Stock-Based Compensation Plans - The principal awards issued under our stock-based compensation plans, which are described in "Note 16. Stock-Based Compensation Plans" to the Consolidated Financial Statements included in Item 8 of this Form 10-K, are non-qualified stock options, performance stock units and restricted stock units. The cost for such awards is measured at the grant date based on the fair value of the award. The value of the portion of the award that is ultimately expected to vest, including the impact of the Company's anticipated performance against certain metrics for performance stock units, is recognized as expense over the requisite service periods (generally the vesting period of the equity award) and is included in selling, general and administrative expenses. Estimates of future performance are utilized to determine the underlying expense for shares expected to vest. Forfeitures are estimated at the time of grant to recognize expense for those awards that are expected to vest and are based on our historical forfeiture rates. Pension Benefits - We have a defined benefit plan covering certain employees primarily in the
U.S.The benefits are accrued over the employees' service periods. We use actuarial methods and assumptions in the valuation of defined benefit obligations and the determination of net periodic pension income or expense. Differences between actual and expected results or changes in the value of defined benefit obligations and fair value of plan assets, if any, are not recognized in earnings as they occur but rather systematically over subsequent periods when net actuarial gains or losses are in excess of 10% of the greater of the fair value of plan assets or the plan's projected benefit obligation. A 25 basis point increase in the discount rate would result in a decrease of approximately $0.1 millionto the net periodic benefit cost for 2022, while a 25 basis point decrease in the discount rate would result in an increase of approximately $0.1 millionto the net periodic benefit cost for 2022. The resulting impact on the pension benefit obligation would be a decrease of $3.5 millionand an increase of $3.7 million, respectively. Income Taxes - We account for income taxes pursuant to the asset and liability method which requires us to recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. We adopted the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise's consolidated financial statements. ASC 740 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The benefit of tax positions taken or expected to be taken in our income tax returns are recognized in the financial statements if such positions are more likely than not of being sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as "unrecognized benefits". A liability is recognized (or amount of net operating loss carryover or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise's potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740. Interest costs and related penalties related to unrecognized tax benefits are required to be calculated, if applicable. Our policy is to classify tax related interest and penalties, if any, as a component of income tax expense. No interest or penalties related to unrecognized income tax benefits were recorded during the years ended December 31, 2021, 2020 and 2019. As of December 31, 2021and 2020, no liability for unrecognized tax benefits was required to be reported. We do not expect any significant changes in our unrecognized tax benefits in the next year. Use of Estimates - The preparation of the Consolidated Financial Statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect the reported amounts in the Consolidated Financial Statements and related disclosures in 37 -------------------------------------------------------------------------------- the accompanying Notes. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of changes are reflected in the Consolidated Financial Statements in the period they are determined to be necessary.
Recent accounting pronouncements
See “Note 2. Summary of Significant Accounting Policies” to the consolidated financial statements included in Item 8 of this Form 10-K.
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