What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-31 compared with 2020-05-01 · 137 added, 86 removed, 230 unchanged (49% of the section changed)

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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 near- and long-term, including those set forth in, and 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.

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 set forth in, and 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

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general economic and financial conditions in the U.S.

and globally, including the impact of the coronavirus (COVID-19) pandemic;

and globally, including the impact of the coronavirus (COVID-19) pandemic and any resurgences;

the scope and duration of the pandemic and pace of recovery;

the timing of the development and distribution of an effective vaccine or treatment for COVID-19;

governmental, business and individuals’ actions in response to the pandemic, including our business continuity and cash optimization plans that have and may be implemented;

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and any closures of our and our customers’ offices and facilities;

risks associated with our indebtedness including compliance with financial and restrictive covenants, and our ability to access capital on reasonable terms or at all due to economic conditions resulting from COVID-19 or otherwise;

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 resulting from COVID-19 or otherwise;

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 and pandemics including the COVID-19 pandemic;

price fluctuations and supply of raw materials;

price fluctuations, cost increases and supply of raw materials;

our operations and growth projects requiring substantial capital;

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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 2019 Form 10-K, Item 1A of Part II in this Quarterly Report on Form 10-Q and subsequent reports filed with the SEC.

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 2019 Form 10-K, Item 1A of Part II in our Quarterly Report on Form 10-Q filed on May 1, 2020, Item 1A of Part II in this Quarterly Report on Form 10-Q, 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.

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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

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.

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We believe that Nylon 6 end-market growth will continue to generally track global GDP over the long-term.

Applications such as engineering plastics and packaging have potential to grow at faster rates given certain macrotrends.

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 co-polymer offerings, in current and new customer applications.

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In March 2020, the World Health Organization categorized 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 spread rapidly, with most countries and territories worldwide with confirmed cases.

Since early 2020, COVID-19 has continued to spread rapidly, with most countries and territories worldwide having confirmed cases, and with certain jurisdictions experiencing resurgences.

The spread has 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, and are expected to continue to have, a substantial negative impact on businesses around the world and on global, regional and national economies including disruptions to supply chains, reduced demand and production sales across most industries, declines and volatility within global financial markets and decreased workforces causing increased unemployment.

The continuously evolving responses to combat the pandemic, such as governmental restrictions on non-essential business and travel, have had an increasingly negative impact on the United States and global economy.

Department of Homeland Security has designated our industry as "essential critical infrastructure" during the response to COVID-19 for both public health and safety as well as community well-being.

The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses around the world and on global, regional and national economies, including disruptions to supply chains, reduced demand and production sales across most industries, declines and volatility within global financial markets, and decreased workforces causing increased

unemployment.

The continuously evolving nature of this pandemic and the responses to combat the pandemic, such as governmental restrictions on non-essential business and travel, continue to have an increasingly negative impact on the United States and global economies.

While various jurisdictions have ended, or have implemented policies to phase out, these containment measures, increases in new COVID-19 cases have caused certain jurisdictions to re-implement restrictions.

Department of Homeland Security designated our industry as "essential critical infrastructure" during the response to COVID-19 for both public health and safety as well as community well-being.

The Company takes its obligation seriously to produce materials that support the broader population, all while maintaining a prioritized focus on the health and safety of its employees and the communities in which it operates, and assuring the continuity of its business operations.

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In the first quarter of 2020, the Company began executing its business continuity plans with dedicated teams chartered to proactively implement measures to mitigate COVID-19 impacts while continuing to operate all of its manufacturing facilities to meet customer demand.

In connection with COVID-19, the Company took many actions to protect its employees, customers, suppliers, shareholders and surrounding communities including, but not limited to:

(i) 100% thermal screening process at all manufacturing facilities with restrictions on non-essential visitors;

In response to COVID-19, the Company took many actions to protect its employees, customers, suppliers, shareholders and surrounding communities including, but not limited to:

(i) 100% thermal screening process at all manufacturing facilities and restrictions on non-essential visitors;

(ii) telecommuting across all sites, where possible;

(iii) prohibiting all non-essential domestic and international business travel;

(iv) establishing social distancing while limiting the number of employees in control rooms, labs and meetings;

(iv) establishing social distancing while limiting the number of employees in control rooms, labs and in-person meetings;

and (v) maintaining policies and practices consistent with CDC and government guidelines including upgraded personal protective equipment and face coverings at all manufacturing facilities.

The Company has protocols in place including on-site medical personnel to actively monitor employees and contractors.

Our telecommuting policies have been designed to allow for continued operation of non-production business-critical functions, including financial reporting systems and internal controls.

The Company has protocols in place at all sites, including on-site medical personnel at manufacturing facilities to actively monitor employees and contractors who report symptoms of or exposure to COVID-19.

In addition, the Company has trained a contingent workforce to operate the plants as part of its business continuity planning.

Operations at the Company’s manufacturing locations in Frankford, PA, Hopewell, VA and Chesterfield, VA continued to run at robust production rates through the first quarter 2020.

The Company continued its execution of these measures at all sites through the second quarter of 2020.

We believe our competitive strengths are serving us well during this time including our vertically integrated asset base and global low-cost advantage as well as driving disciplined cost and cash management across the organization with further reductions of capital expenditures and discretionary spending.

Moving into the second quarter of 2020, the Company is supporting safe and stable operations while continuing to serve its customers by adjusting output to changes in mix and demand.

In addition, the previously scheduled second quarter 2020 planned plant turnaround was de-risked with a majority of the work shifted into the third quarter of 2020 in order to limit the number of contractors on site and ensure operational continuity in the current environment.

From an industry perspective, global auto and building and construction demand reductions are expected to impact the nylon and chemical intermediates product lines in the near-term.

Moving into the third quarter of 2020, the Company is supporting safe and stable operations while continuing to serve its customers by adjusting output to changes in mix and demand.

In addition, the previously scheduled second quarter 2020 planned plant turnaround was de-risked with a majority of the work shifted to the end of the third quarter of 2020 in order to limit the number of contractors on site and ensure operational continuity in the current environment.

During the third quarter, the Company plans to implement processes and procedures associated with the execution of the planned plant turnaround to mitigate any potential employee or contractor operational safety risks posed by COVID-19.

From an industry perspective, global auto and building and construction demand reductions are impacting the nylon and chemical intermediates product lines in the near-term.

Textile declines in Asia are also impacting nylon supply and demand conditions, while food packaging demand for nylon remains robust.

Ammonium Sulfate and acetone demand have not been significantly impacted by COVID-19 to date.

Ammonium Sulfate has continued to have steady demand into the domestic planting season, while North American acetone industry supply and demand has improved following affirmative final anti-dumping duties and robust demand into isopropyl alcohol (IPA), used for hand sanitizer and other disinfectants, methyl methacrylate (MMA), and other solvents.

As a result of COVID-19, demand reduction for transportation fuels and resultant inventory builds have reduced refinery utilization rates, which the Company is monitoring as it relates to potential impacts on its supply chain and availability of key raw materials.

Ammonium Sulfate experienced steady demand during the peak second quarter domestic planting season, while North American acetone industry supply and demand continued to improve following affirmative final anti-dumping duties and robust demand for isopropyl alcohol (IPA), used for hand sanitizer and other disinfectants, methyl methacrylate (MMA), and other solvents.

As a result of COVID-19, demand reduction for transportation fuels and resultant inventory builds have reduced refinery utilization rates, which the Company continues to monitor as it relates to potential impacts on its supply chain and availability of key raw materials.

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 considered the impact of COVID-19 on the assumptions and estimates used and determined that there were no material adverse impacts on the Company’s first quarter 2020 results of operations.

The situation surrounding COVID-19 remains fluid and unpredictable, and the potential for a material impact on the Company increases the longer the social and economic restrictions remain in place, which impact the overall level of consumer and business activity in the United States and globally.

The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there has been a material adverse impact on the Company’s second quarter 2020 results of operations.

In the second quarter 2020, the Company experienced lower demand, particularly in nylon, caprolactam and phenol, resulting in a reduction of utilization rates and a decrease in overall sales volume (approximately 19%) compared to the prior year period, primarily related to global markets and the economic impact of COVID-19.

With states, regions and countries in various phases of re-opening, we expect demand to gradually improve throughout the second half of 2020, although there is no assurance demand will recover given the potential for increased restrictions imposed by governments due to a surge in infection rates.

We will continue to monitor developments and execute our operational and safety mitigation plans.

The situation surrounding COVID-19 remains fluid and unpredictable, and the potential for a continued material impact on the Company increases the longer the social and economic restrictions which impact the overall level of consumer and business activity in the United States and globally, remain in place or are reinstituted.

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.

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On 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.

The petitions allege that dumped acetone imports

into the United States from Belgium, Saudi Arabia, Singapore, South Africa, South Korea, and Spain have caused material injury to the domestic industry.

Department of Commerce ("Commerce").

The petitions allege that dumped acetone imports into the United States from Belgium, Saudi Arabia, Singapore, South Africa, South Korea, and Spain have 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, the U.S.

Department of Commerce announced its preliminary affirmative determination regarding anti-dumping duties for Singapore, Spain, Belgium, South Africa and South Korea.

During the fourth quarter of 2019, the U.S.

Department of Commerce issued final duties on acetone from Singapore and Spain, and the ITC issued final determination of material injury to the industry by reason of imports from Singapore and Spain.

On February 7, 2020, the U.S Department of Commerce issued final duties on acetone from Belgium, South Africa and South Korea.

The ITC completed its investigation process and issued final determination of material injury to the industry by reason of imports from Belgium, South Africa and South Korea on March 17, 2020.

Duties are imposed for five years as of final determination.

During the third quarter of 2019, Commerce announced its preliminary affirmative dumping determination regarding imports from Singapore, Spain, Belgium, South Africa and South Korea.

On October 21, 2019, Commerce published its final affirmative determination of dumping regarding imports from Singapore and Spain, and on December 10, 2019, the ITC issued its final determination of material injury to the industry by reason of imports from Singapore and Spain.

Effective December 20, 2019, Commerce imposed anti-dumping orders and applicable duties on imports of acetone from Singapore and Spain for a five-year period.

On February 13, 2020, Commerce published its final affirmative determination of dumping regarding imports from Belgium, South Africa and South Korea and on March 17, 2020, the ITC issued its final determination of material injury to the industry by reason of imports from Belgium, South Africa and South Korea.

Effective March 31, 2020, Commerce imposed anti-dumping orders and applicable duties on imports of acetone from Belgium, South Africa and South Korea for a five-year period.

The anti-dumping orders are subject to annual administrative review, which may change the applicable level of duties.

On May 26, 2020, LG Chem, Ltd., and LG Chem America, Inc., filed a motion with the U.S.

Court of International Trade contesting 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.

2019 Operational Events

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The Company incurred approximately $4 million and $6 million of unfavorable impact to pre-tax income in the third and fourth quarters, respectively, of 2019, including incremental raw material and logistics costs as well as a modest unfavorable impact from fixed cost absorption.

As the PES refinery remains shutdown, the Company submitted a business interruption insurance claim and is assessing long-term optionality for cumene supply and logistics, while optimizing expected base feedstock and logistics cost increases as it realigns its supply chain into 2020.

The Company anticipates an approximately $5 to $10 million unfavorable impact to pre-tax income in 2020, approximately flat to $5 million favorable compared to full-year 2019.

As the PES refinery remains shutdown, the Company submitted a business interruption insurance claim and has realigned its supply chain to ensure the continuity of cumene supply.

The Company anticipates an approximately $10 million unfavorable impact to pre-tax income in 2020, approximately flat compared to full-year 2019.

On May 2, 2019, the Company approved the closure of its Pottsville, Pennsylvania films plant as part of its broader strategic efforts to improve the Company’s competitive position in providing quality film products and services to its customers.

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The Company ceased operations at the Pottsville, Pennsylvania plant in July 2019.

We recognized a restructuring charge of $11 million during 2019 and do not expect to incur any additional restructuring charges related to the closure.

We recognized a restructuring charge of $12.6 million in the second quarter of 2019 which was reduced to $11 million in the fourth quarter of 2019 and do not expect to incur any additional restructuring charges related to the closure.

See “Note 14.

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Sales $ 233,022 $ 345,215 $ 535,735 $ 660,110

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Three Months Ended

March 31, 2020

June 30, 2020 Six Months Ended

June 30, 2020

Volume (18.5)% (6.7)%

Price (14.0)% (12.1)%

Sales decreased in the three months ended March 31, 2020 compared to the prior year period by $12.2 million (approximately 4%) due primarily to lower sales prices (approximately 10%) driven by market-based pricing decreases (approximately 12% unfavorable impact) across our nylon, caprolactam and ammonium sulfate product lines, partially offset by formula-based pass-through pricing (approximately 1% favorable impact), following a net cost increase in benzene and propylene (inputs to cumene which is a key feedstock material for our products).

Volume increased by approximately 7% due to higher standard ammonium sulfate exports and improved volume in chemical intermediates, particularly acetone and oximes.

(32.5)% (18.8)%

Sales decreased in the three months ended June 30, 2020 compared to the prior year period by $112.2 million (approximately 33%) due primarily to lower volumes (approximately 19%) due to reduced demand, particularly nylon, caprolactam and phenol primarily related to global markets and the economic impact of COVID-19.

Pricing was lower as well (approximately 14%) driven primarily by (i) lower formula-based pass-through pricing (approximately 11%) following a net decrease in the cost of benzene and propylene (inputs to cumene which is a key feedstock material for our products) and (ii) lower market-based pricing (approximately 3%) in caprolactam, ammonium sulfate and nylon product lines, partially offset by market price increases in chemical intermediates, particularly acetone.

Sales decreased in the six months ended June 30, 2020 compared to the prior year period by $124.4 million (approximately 19%) due primarily to lower sales prices (approximately 12%) driven primarily by lower market-based pricing (approximately 7%) in nylon, ammonium sulfate and caprolactam product lines, partially offset by pricing strength in chemical intermediates, primarily acetone, and lower formula-based pass-through pricing (approximately 5%).

Volume decreased by approximately 7% due primarily to decreases in nylon and caprolactam.

Costs of Goods Sold

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Costs of goods sold $ 198,739 $ 303,128 $ 470,746 $ 570,008

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Gross Margin percentage 14.7% 12.2% 12.1% 13.6%

Costs of goods sold increased in the three months ended March 31, 2020 compared to the prior year period by $5.1 million (approximately 2%) due primarily to (i) increased sales volumes as discussed above (approximately 6%) and (ii) the receipt of approximately $6.6 million of insurance proceeds in the prior year that did not repeat (approximately 2%).

These increases were partially offset by (i) lower prices of raw materials, particularly sulfur and natural gas (approximately 4%) and (ii) improved operational performance, primarily lower spending due to productivity improvements from the installation of more efficient natural gas boilers and the closure of our operations in Pottsville, PA (approximately 2%).

Gross margin percentage decreased by approximately 5% in the three months ended March 31, 2020 compared to the prior year period due primarily to lower market-based pricing (approximately 10%) and insurance proceeds received in the prior year (approximately 2%) partially offset by the impact of formula-based pass-through pricing (approximately 4%) and improved operational performance (approximately 2%) as discussed above.

Costs of goods sold decreased in the three months ended June 30, 2020 compared to the prior year period by $104.4 million (approximately 34%) due primarily to (i) lower sales volumes as discussed above (approximately 17%) and (ii) lower prices of raw materials, particularly benzene and propylene (approximately 15%), and (iii) the absence of a restructuring charge associated with the closure of our operations in Pottsville, PA (approximately 4%).

Costs of goods sold decreased in the six months ended June 30, 2020 compared to the prior year period by $99.3 million (approximately 17%) due primarily to (i) lower prices of raw materials, particularly benzene and propylene, natural gas, and sulfur (approximately 10%), (ii) lower sales volumes as discussed above (approximately 6%) and (iii) the absence of a restructuring charge associated with the closure of operations in Pottsville, PA (approximately 2%).

Gross margin percentage increased by approximately 3% in the three months ended June 30, 2020 compared to the prior year period due primarily to (i) the net impact of formula based pass-through pricing and lower raw material costs (approximately 6%) and (ii) the absence of a restructuring charge associated with the closure of our operations in Pottsville, PA (approximately 5%), partially offset by a decline in market pricing (approximately 4%), lower sales volumes (approximately 2%) and increased raw material and logistics costs related to the PES plant disruption and shutdown (approximately 2%).

Gross margin percentage decreased by approximately 2% in the six months ended June 30, 2020 compared to the prior year period due to (i) unfavorable margin impact of market based pricing (approximately 8%) and (ii) the impact of insurance proceeds received in the prior year (approximately 2%) partially offset by the favorable margin impact of formula based pass-through pricing and lower raw material costs (approximately 5%), and the absence of a restructuring charge associated with the closure of our operations in Pottsville PA (approximately 2%).

Selling, General and Administrative Expenses

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Selling, general and administrative expenses $ 17,911 $ 20,009 $ 34,651 $ 39,422

Percent of sales 7.7% 5.8% 6.5% 6.0%

Selling, general and administrative expenses decreased by $2.7 million in the three months ended March 31, 2020 compared to the prior period due primarily to decreased stock-based compensation and IT costs.

Selling, general and administrative expenses decreased by $2.1 million in the three months ended June 30, 2020 compared to the prior period due primarily to decreased legal expenses, stock-based compensation and disciplined cost management including lower functional support costs.

Selling, general and administrative expenses decreased by $4.8 million in the six months ended June 30, 2020 compared to the prior period due primarily to decreased legal expenses, stock-based compensation and IT costs and disciplined cost management including lower functional support costs.

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Tax expense $ 2,273 $ 5,280 $ 5,938 $ 12,104

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As noted in Note 11.

various modifications to current tax law and is intended to provide economic relief in response to the COVID-19 pandemic.

"Income Taxes" to the Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Form 10-Q, The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), enacted on March 27, 2020, includes various modifications to current tax law and is intended to provide economic relief in response to the COVID-19 pandemic.

One provision included in the CARES Act allows for a five-year carryback of Federal net operating losses (NOLs) generated in tax years beginning in 2018, 2019 and 2020.

At this point, the Company anticipates filing its 2019 federal corporate income tax return with a net operating loss, on a tax basis, which now may be carried back to earlier years to request a refund of previously paid taxes.

As such, we have recorded the estimated impact of the federal NOL carryback in the quarterly financial results, which includes an $8.0 million reclassification from Deferred income taxes to Taxes receivable.

However, we have not yet filed our 2019 federal income tax return and continue to evaluate the impact of the CARES Act on our tax positions, which may result in a change to our estimate.

The Company’s effective tax rate for the three months ended March 31, 2020 was higher compared to the U.S.

federal statutory rate, due primarily to state taxes, executive compensation deduction limitations, tax deficiencies on vesting of equity compensation in the quarter and the expected loss of 2018 foreign-derived intangible income tax benefits related to the anticipated Federal NOL carryback claim allowed under the CARES Act, offset partially by the research tax credit.

The Company’s effective tax rate for the three months ended March 31, 2019 was higher compared to the U.S.

federal statutory rate due primarily to state taxes and executive compensation deduction limitations offset partially by excess tax benefits related to vesting of restricted stock units and the research tax credit.

The Company’s effective tax rate for the three months ended March 31, 2020 was higher than the prior year period due primarily to the decrease in the benefits from the vesting of equity compensation in the first quarter of 2020 compared to 2019 and the expected loss of the 2018 foreign-derived intangible income deduction as a result of the anticipated federal NOL carryback claim recorded as discrete items in 2020.

The Company finalized its 2019 U.S.

federal income tax return which reflected a net operating loss, on a tax basis, and certain tax credits which were carried back to earlier years.

This carryback claim reflected a refund of previously paid taxes in the amount of $12.2 million.

As such, in the second quarter, we recorded a true up between the actual impact of the federal carryback compared to the estimated impact which was recorded in the first quarter of 2020.

This true up resulted in an increase of $4.2 million recorded in Taxes receivable compared with the $8.0 million previously recorded in the first quarter.

The Company’s effective tax rate for the three months ended June 30, 2020 was lower compared to the U.S.

federal statutory rate, due primarily to the impact of changes in the Company's geographical sales mix on state tax and additional research tax credits claimed on the Company's 2019 U.S.

federal income tax return.

This decrease was partially offset by tax deficiencies on

vesting of equity compensation in the quarter and executive compensation limitations.

The Company’s effective tax rate for the three months ended June 30, 2019 was higher compared to the U.S.

federal statutory rate due primarily to state taxes and executive compensation deduction limitations offset partially by the research tax credits.

The Company’s effective tax rate for the six months ended June 30, 2020 was higher compared to the U.S.

statutory rate due primarily to tax deficiencies on vesting of equity compensation, executive compensation deduction limitations, and impact of the CARES Act, partially offset by additional research tax credits claimed on the Company’s 2019 U.S.

federal income tax return and the impact of changes in the Company’s geographical sales mix on state tax.

The Company’s effective tax rate for the six months ended June 30, 2019 was higher compared to the U.S.

federal statutory rate due primarily to state taxes and executive compensation deduction limitations offset partially by the research tax credits.

The Company’s effective tax rate for the three and six months ended June 30, 2020 was lower than the prior year period due primarily to the impact of changes in the Company’s geographical sales mix on state tax and additional research tax credits claimed on the Company’s 2019 U.S.

federal income tax return, partially offset by tax deficiencies on vesting of equity compensation and impact of the CARES Act.

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Net income $ 11,429 $ 15,346 $ 20,005 $ 35,520

As a result of the factors described above, Net income was $8.6 million for the three months ended March 31, 2020 as compared to $20.2 million in the corresponding prior year period.

As a result of the factors described above, Net income was $11.4 million and $20.0 million for the three and six months ended June 30, 2020 as compared to $15.3 million and $35.5 million in the corresponding prior year period.

Non-GAAP Measures

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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.

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Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Net income $ 11,429 $ 15,346 $ 20,005 $ 35,520

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EBITDA (non-GAAP) 30,721 35,911 59,353 77,930

One-time Pottsville restructuring charges (1)

— 12,623 — 12,623

EBITDA excluding one-time Pottsville restructuring charges (non-GAAP) $ 30,721 $ 48,534 $ 59,353 $ 90,553

Sales $ 233,022 $ 345,215 $ 535,735 $ 660,110

EBITDA margin (non-GAAP) 13.2% 10.4% 11.1% 11.8%

EBITDA margin excluding one-time Pottsville restructuring charges (non-GAAP) 13.2% 14.1% 11.1% 13.7%

(1) Prior year one-time Pottsville restructuring charges reflect the closure of the Company's Pottsville, Pennsylvania films plant.

See “Note 14.

Restructuring” to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further information.

Liquidity and Capital Resources

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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 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.

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 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.

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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 including high return growth and cost savings investments, share repurchases, employee benefit obligations, interest payments, strategic acquisitions and debt management.

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.

On a recurring basis, our primary future cash needs will be centered on operating activities, working capital, capital expenditures including high return growth and cost savings investments, share repurchases, if any, employee benefit obligations, interest payments, strategic acquisitions and debt management.

While the COVID-19 pandemic has created and continues to create significant volatility in funding markets, 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 2019 Form 10-K as updated in Part II, Item 1A below, as well as general economic, financial, competitive, regulatory and other factors that are beyond our control.

As of the end of the first quarter of 2020, the Company had approximately $31 million of cash on hand with approximately $87 million of additional capacity available under the revolving credit facility.

As a precautionary measure in the current environment, the Company is currently maintaining higher cash balances of approximately $75 million, which includes funds from draws in April under the Revolving Credit Facility for its working capital needs and other general corporate purposes.

As of the end of the second quarter of 2020, the Company had approximately $73 million of cash on hand with approximately $36 million of additional capacity available under the revolving credit facility.

Given the uncertain environment in light of the COVID-19 pandemic, the Company maintained higher cash balances as a precautionary measure in the second quarter of 2020

for its working capital needs and other general corporate purposes, but plans to maintain lower cash balances during the remainder of 2020 to reduce gross debt levels and minimize interest cost.

The Company’s Consolidated Leverage Ratio financial covenant of its credit facility allows it to net up to $75 million of cash with debt.

The previously announced Second Amendment to the credit facility also provides leverage ratio covenant flexibility in 2020.

In addition, the Company is evaluating liquidity potential under the credit facility’s uncommitted accordion feature.

The Company continues to evaluate the potential impact of the CARES Act.

The CARES Act is intended to provide economic relief resulting from the COVID-19 pandemic and includes, but is not limited to, provisions for taxes, employment related costs, deferral of pension funding obligations and options for liquidity.

The Second Amendment to the credit facility also provides leverage ratio covenant flexibility in 2020.

In response to the current environment, the Company has taken several actions to improve liquidity and optimize cash flow in 2020.

Capital expenditures are now expected to be $80 million to $90 million in 2020, which represents a reduction of $10 million from our previously announced estimate and a decrease of $60 to $70 million versus 2019, as we continue to assess opportunities to maximize free cash flow in light of current and anticipated economic conditions.

Capital expenditures are expected to be approximately $85 million in 2020, which represents a decrease of approximately $65 million versus 2019, as we continue to assess opportunities to maximize free cash flow by deferring, or reducing, non-critical repair and maintenance capital expenditures in light of current and anticipated economic conditions.

The Company is also driving disciplined cost management across the organization including all discretionary spending.

As a result of its actions, the Company is targeting an approximately $15 to $20 million full-year cost reduction versus the prior year.

While it continues to evaluate benefits of the CARES Act, the Company

anticipates approximately $8 million of cash tax savings in 2020 and an approximately $6 million cash benefit in 2020 from the deferral of social security taxes.

The CARES Act is intended to provide economic relief resulting from the COVID-19 pandemic and includes, but is not limited to provisions for taxes, employment related costs, deferral of pension funding obligations and options for liquidity.

While we continue to evaluate the impact and benefits of the CARES Act, the Company anticipates approximately $12 million of cash tax savings in 2020 and an approximately $6 million cash benefit in 2020 from the deferral of social security taxes.

For social security taxes that have been deferred, 50% will be due by December 31, 2021 with the remainder due by December 31, 2022.

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We expect that our primary cash requirements for the remainder of 2020 will be to fund costs associated with ongoing operations, capital expenditures, and amounts related to other contractual obligations.

The Company made contributions to the defined benefit pension plan of $1.7 million during the three months ended March 31, 2020.

The Company currently plans to make pension plan contributions during 2020 sufficient to satisfy pension funding requirements under the AdvanSix Retirement Earnings Plan in an aggregate amount of approximately $5 to $10 million but will continue to evaluate provisions of the CARES Act regarding deferral of pension funding obligations.

The Company made contributions to the defined benefit pension plan of $1.7 million during the six months ended June 30, 2020 with $1.7 million in the first quarter of 2020 and no contributions in the second quarter of 2020.

The Company currently plans to make pension plan contributions during 2020 sufficient to satisfy pension funding requirements under the AdvanSix Retirement Earnings Plan in an aggregate amount of approximately $7 million to $9 million but will continue to evaluate provisions of the CARES Act regarding deferral of pension funding obligations.

We anticipate making additional contributions in future years sufficient to satisfy pension funding requirements in those periods.

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The repurchase program has no expiration date and may be modified, suspended or discontinued at any time.

As of March 31, 2020, the Company had repurchased 3,582,278 shares of common stock including 492,516 shares withheld to cover tax withholding obligations in connection with the vesting of equity awards, for an aggregate of $101.6 million at a weighted average market price of $28.36 per share.

As of March 31, 2020, $59.6 million remained available for repurchase under the current authorization.

During the period from April 1, 2020 through April 24, 2020, no additional shares were repurchased under the currently authorized repurchase program.

As of June 30, 2020, the Company had repurchased 3,592,639 shares of common stock including 502,877 shares withheld to cover tax withholding obligations in connection with the vesting of equity awards, for an aggregate of $101.7 million at a weighted average market price of $28.31 per share.

As of June 30, 2020, $59.6 million remained available for repurchase under the currently authorized repurchase program.

During the second quarter and the period from July 1, 2020 through July 24, 2020, no additional shares were repurchased under the currently authorized repurchase program.

Credit Agreement

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If the Company did not comply with the covenants in the First Amended and Restated Credit Agreement, the lenders could have, subject to customary cure rights, required the immediate payment of all amounts outstanding under the Revolving Credit Facility.

The Company was compliant with all related covenants at December 31, 2019.

The Company was in compliance with all related covenants at December 31, 2019.

On February 19, 2020, the Company entered into Amendment No.

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The Consolidated Interest Coverage Ratio financial covenant of the First Amended and Restated Credit Agreement was not changed and continues to require 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 1.00.

If the Company does not comply with the covenants in the Second Amended and Restated Credit Agreement, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding under the Revolving Credit Facility.

If the Company does not comply

with the covenants in the Second Amended and Restated Credit Agreement, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding under the Revolving Credit Facility.

The Company was in compliance with all related covenants at June 30, 2020.

Borrowings under the Second Amended and Restated Credit Agreement bear 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).

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These covenants may limit how we conduct our business, and in the event of certain defaults, our repayment obligations may be accelerated.

We were in compliance with all of our covenants at March 31, 2020.

We were in compliance with all of our covenants at June 30, 2020 and through the date of the filing of this Quarterly Report on Form 10-Q.

The situation surrounding COVID-19 remains fluid and unpredictable, and the potential for a material impact on the Company increases the longer the social and economic restrictions remain in place or are reinstituted, which impacts the overall level of consumer and business activity in the United States and globally.

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.

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"Risk Factors."

As of March 31, 2020, $87 million was available for use out of the total of $425 million under the Revolving Credit Facility.

As of June 30, 2020, $36 million was available for use out of the total of $425 million under the Revolving Credit Facility.

As of December 31, 2019, we had a balance of $297 million under the Revolving Credit Facility.

During the first three months of 2020, we borrowed an incremental net amount of $40 million to bring the balance under the Revolving Credit Facility to $337 million as of March 31, 2020.

During the first six months of 2020, we borrowed an incremental net amount of $91 million to bring the balance under the Revolving Credit Facility to $388 million as of June 30, 2020.

Going forward, we expect that Cash provided by operating activities will fund future interest payments on the Company's outstanding indebtedness.

Cash Flow Summary

Three Months Ended

Six Months Ended

Cash provided by (used for):

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Net change in cash and cash equivalents $ 65,613 $ 7,249

Cash provided by operating activities decreased by $22.4 million for the three months ended March 31, 2020 versus the prior year period due primarily to a $11.6 million decrease in net income, an $11.5 million unfavorable cash impact from working capital (comprised of Accounts receivables, Inventories, Accounts payable and Deferred income) for the three months ended March 31, 2020 versus a $6.7 million favorable cash impact from working capital in the prior year period, offset by a change in the timing of payments for Accrued liabilities of $10.1 million versus the same period in the prior year.

Cash used for investing activities decreased by $5.6 million for the three months ended March 31, 2020 versus the prior year period due to a decrease in cash paid for capital expenditures.

Cash provided by financing activities increased by $42.5 million for the three months ended March 31, 2020 versus the prior year period due primarily to net borrowings of $40.0 million for the three months ended March 31, 2020 compared to net borrowings of $20.0 million during the prior year period, offset by $0.9 million in cash outflows for share repurchases during the three months ended March 31, 2020 compared to $23.9 million in cash outflows during the prior year period, both of which are described above.

Cash provided by operating activities decreased by $38.8 million for the six months ended June 30, 2020 versus the prior year period due primarily to a $15.5 million decrease in net income, a $37.8 million unfavorable cash impact from working capital (comprised of Accounts receivables, Inventories, Accounts payable and Deferred income) for the six months ended June 30, 2020 versus a $17.7 million unfavorable cash impact from working capital in the prior year period and a $6.1 million unfavorable cash impact from taxes receivable.

These decreases were partially offset by an increase in Other assets and

liabilities driven by a $6.2 million increase in Prepaid expenses and a $3.8 million increase in income tax reserve as well as a change in the timing of payments for Accrued liabilities of $7.7 million versus the same period in the prior year.

The Pottsville restructuring charge had a net neutral impact on operational cash flow during the second quarter of 2019.

Cash used for investing activities decreased by $20.4 million for the six months ended June 30, 2020 versus the prior year period due to a decrease in cash paid for capital expenditures.

Cash provided by financing activities increased by $76.8 million for the six months ended June 30, 2020 versus the prior year period due primarily to net borrowings of $91.0 million for the six months ended June 30, 2020 compared to net borrowings of $55.0 million during the prior year period, offset by $1.0 million in cash outflows for share repurchases during the six months ended June 30, 2020 compared to $40.3 million in cash outflows during the prior year period, both of which are described above.

Capital Expenditures

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The following table summarizes ongoing and expansion capital expenditures:

Three Months Ended

March 31, 2020

Six Months Ended

June 30, 2020

Capital expenditures in Accounts payable at December 31, 2019

Purchases of property, plant and equipment 36,046

Capital expenditures in Accounts payable at March 31, 2020

Capital expenditures in Accounts payable at June 30, 2020

Cash paid for capital expenditures $ 51,602

For 2020, we expect our total capital expenditures to be approximately $80 million to $90 million, which represents a reduction of $10 million from our previously announced estimate and a decrease of $60 to $70 million versus 2019, as we continue to assess opportunities to maximize free cash flow in light of current and anticipated economic conditions.

For 2020, we expect our total capital expenditures to be approximately $85 million, which represents a decrease of approximately $65 million versus 2019 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.

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Off-Balance Sheet Arrangements and Contractual Obligations

As of March 31, 2020, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any material changes in the commitments or contractual obligations detailed in the Company's 2019 Form 10-K.

As of June 30, 2020, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any material changes in the commitments or contractual obligations detailed in the Company's 2019 Form 10-K.

The Company has not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis