AdvanSix Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company’s financial condition and results of operations, which we refer to as our “MD&A,” should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto contained elsewhere in this Form 10-Q, as well as the MD&A section included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on February 21, 2020 (the “2019 Form 10-K”). Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors that can affect our performance in both the near- and long-term, including those 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 All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this MD&A regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this Form 10-Q, words such as “anticipate,” “believe,” “will,” “estimate,” “expect,” “plan,” “intend” and similar expressions identify forward-looking statements. Although we believe forward-looking statements are based upon reasonable assumptions, such statements involve known and unknown risks, uncertainties and other factors, many of which are beyond our control and difficult to predict, which may cause the actual results or performance of the Company to be materially different from any future results or performance expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to: general economic and financial conditions in the U.S. and globally, including the impact of the coronavirus (COVID-19) pandemic and any resurgences; the 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; the impact of social and economic restrictions and other containment measures taken to combat virus transmission; the effect on our customers’ demand for our products and our suppliers’ ability to manufacture and deliver our raw materials, including implications of reduced refinery utilization in the U.S.; our ability to sell and provide our goods and services, including as a result of travel and other COVID-19-related restrictions; the ability of our customers to pay for our products; and any closures of our and our customers’ offices and facilities; 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, cost increases and supply of raw materials; our operations and growth projects requiring substantial capital; growth rates and cyclicality of the industries we serve including global changes in supply and demand; failure to develop and commercialize new products or technologies; loss of significant customer relationships; adverse trade and tax policies; extensive environmental, health and safety laws that apply to our operations; hazards associated with chemical manufacturing, storage and transportation; litigation associated with chemical manufacturing and our business operations generally; inability to acquire and integrate businesses, assets, products or technologies; protection of our intellectual property and proprietary information; prolonged work stoppages as a result of labor difficulties or otherwise; cybersecurity and data privacy incidents; failure to maintain effective internal controls; disruptions in transportation and logistics; our inability to achieve some or all of the anticipated benefits of our spin-off including uncertainty regarding qualification for expected tax treatment; fluctuations in our stock price; and changes in laws or regulations applicable to our business. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those contemplated by the forward-looking statements as a result of a number of risks, uncertainties and other factors including those noted above and those detailed in Item 1A of Part I and elsewhere in our 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. We do not undertake to update or revise any of our forward-looking statements. Business Overview 21 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, 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. 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. We produce ammonium sulfate fertilizer continuously throughout the year as part of our manufacturing process, but quarterly sales experience seasonality based on the timing and length of the growing seasons in North and South America. North America ammonium sulfate prices are typically strongest during second quarter fertilizer application and then typically decline seasonally with new season fill in the third quarter. Due to the ammonium sulfate fertilizer sales cycle, we occasionally build up higher inventory balances because our production is continuous and not tied to seasonal demand for fertilizers. Sales of most of our other products have generally been subject to minimal, or no, seasonality. We 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 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. Recent Developments COVID-19 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 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 22 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. The U.S. 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. As a global provider of products that are key inputs for our customers’ processes serving a variety of end-markets, a pandemic presents obstacles that can adversely affect our supply chain effectiveness and efficiencies, our manufacturing operations and customer demand for our products and, ultimately, our financial results. We believe we are well positioned to respond to and mitigate the potential impacts of the rapidly evolving market dynamics. 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 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 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. 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. 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 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 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 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. 23 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. For further information regarding the impact COVID-19 could have on our business, financial condition, results of operations and liquidity, see below in the MD&A under “Liquidity and Capital Resources” and Part II, Item 1A - “Risk Factors.” Credit Agreement On February 19, 2020, the Company entered into Amendment No. 2 to the Credit Agreement to amend the consolidated leverage ratios in order to provide the Company with additional operating flexibility. For a discussion of Amendment No. 2 to the Credit Agreement, please refer to "Note 8. Long-term Debt and Credit Agreement" to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Anti-Dumping Duty Petitions 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 ("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, 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 On June 24, 2019, the Company announced that it was assessing the potential business impact of the fire that occurred at Philadelphia Energy Solutions' (“PES”) refinery in Philadelphia. PES was one of multiple suppliers to the Company of cumene, a feedstock material used to produce phenol, acetone and other chemical intermediates. The PES disruption did not have a material impact on second quarter 2019 financial results. 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 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. The Company has also announced a strategic alliance with Oben Holdings Group S.A. (“Oben”), a third-party producer of films for the flexible packaging industry, leveraging the Company's sales channels and Nylon 6 resin supply with Oben's new state-of-the-art manufacturing facility. The Company ceased operations at the Pottsville, Pennsylvania plant in July 2019. 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. Restructuring” to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further information. 24 On March 11, 2019, the Company announced that it declared force majeure on its phenol product line as a result of shortages and delivery delays of its key raw material, cumene. The Company's cumene deliveries were reduced due to weather related logistics disruptions in the Gulf Coast area and supplier operational constraints. As a result of this force majeure event, phenol production at the Company's Frankford, Pennsylvania facility and caprolactam production at its Hopewell, Virginia facility were reduced. The Company incurred an approximately $6.9 million unfavorable impact to pre-tax income in the first quarter of 2019, including the unfavorable impact of fixed cost absorption and incremental logistics costs. In addition, the Company incurred an approximately $1.4 million unfavorable impact to pre-tax income in the first quarter of 2019 and an approximately $2.3 million unfavorable impact to pre-tax income in the second quarter of 2019 due to lost sales. The Company is no longer on force majeure with phenol customers. Results of Operations (Dollars in thousands, unless otherwise noted) Sales Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Sales $ 233,022 $ 345,215 $ 535,735 $ 660,110 % change compared with prior year period (32.5)% (18.8)% The change in sales compared to the prior year period is attributable to the following: Three Months Ended June 30, 2020 Six Months Ended June 30, 2020 Volume (18.5)% (6.7)% Price (14.0)% (12.1)% (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 June 30, 2020 2019 2020 2019 Costs of goods sold $ 198,739 $ 303,128 $ 470,746 $ 570,008 % change compared with prior year period (34.4)% (17.4)% Gross Margin percentage 14.7% 12.2% 12.1% 13.6% 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%). 25 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 June 30, 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 $2.1 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. Tax Expense Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Tax expense $ 2,273 $ 5,280 $ 5,938 $ 12,104 Effective tax rate 16.6% 25.6% 22.9% 25.4% As noted in Note 11. "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. 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 26 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. Net Income Three Months Ended June 30, Six Months Ended June 30, 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 $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 (Dollars in thousands, unless otherwise noted) 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: 27 Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net income $ 11,429 $ 15,346 $ 20,005 $ 35,520 Interest expense, net 1,887 1,328 3,846 2,434 Income taxes 2,273 5,280 5,938 12,104 Depreciation and amortization 15,132 13,957 29,564 27,872 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 (Dollars in thousands, unless otherwise noted) Liquidity We believe that cash balances and operating cash flows, together with available capacity under our credit agreement, will provide adequate funds to support our current short-term operating objectives as well as our longer-term strategic plans, subject to the risks and uncertainties outlined below, in our "Note Regarding Forward-Looking Statements" above, and in the risk factors previously disclosed in our 2019 Form 10-K, as updated in Part II, Item 1A below. 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. 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. 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, as well as customer demand, which in the second quarter was materially impacted by the circumstances surrounding COVID-19. 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. Our emphasis is primarily on the safety of principal and secondarily on maximizing yield on those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities. On a recurring basis, our primary future cash needs will be centered on operating activities, working capital, capital expenditures 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 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 28 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 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 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. 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. We assumed from Honeywell all health, safety and environmental (“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 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 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. On May 4, 2018, the Company announced that its Board of Directors (the “Board”) authorized a share repurchase program of up to $75 million of the Company’s common stock. On February 22, 2019, the Company announced that the Board authorized a share repurchase program of up to an additional $75 million of the Company’s common stock, which was in addition to the remaining capacity available under the May 2018 share repurchase program. Repurchases may be made from time to time on the open market, 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 repurchase program has no expiration date and may be modified, suspended or discontinued at any time. 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 On February 21, 2018 (the “First Amendment Date”), the Company entered into Amendment No. 1 (the “First Amendment”) to the Credit Agreement among the Company, the guarantors, the lenders party thereto and Bank of America, N.A., as administrative agent (the Original Credit Agreement, after giving effect to the First Amendment, the “First Amended and Restated Credit Agreement”). 29 The credit facilities under the Original Credit Agreement consisted of a senior secured term loan in an aggregate principal amount of $270 million, of which $267 million was outstanding just prior to entering into the First Amendment, and a senior secured revolving credit facility in a principal amount of $155 million. Pursuant to the First Amendment, (i) the term loan facility under the Original Credit Agreement was terminated and the entire outstanding balance of the term loan facility (the “Term Loan”) thereunder was paid in full and (ii) the maximum aggregate principal amount of the senior secured revolving credit facility (the “Revolving Credit Facility”) was increased to $425 million. On the First Amendment Date, the Company borrowed $242 million under the Revolving Credit Facility. The proceeds of such loans, as well as cash on hand, were used to repay the outstanding Term Loan under the Original Credit Agreement. The Revolving Credit Facility under the First Amended and Restated Credit Agreement has a 5-year term with a scheduled maturity date of February 21, 2023. The First Amendment resulted in an increase in the Revolving Credit Facility to replace the Term Loan and provided increased borrowing flexibility and reduced overall borrowing costs with an approximate 50 basis point reduction in the interest rate spread. The First Amended and Restated Credit Agreement permits the Company to utilize up to $40 million of the Revolving Credit Facility for the issuance of letters of credit and up to $40 million for swing line loans. The Company has the option to incur incremental term loans and/or increase the amount of the Revolving Credit Facility in an aggregate principal amount for all such incremental term loans and increases of the Revolving Credit Facility of up to the sum of (x) $175 million plus (y) an amount such that the Company’s Consolidated Senior Secured Leverage Ratio (as defined in the First Amended and Restated Credit Agreement) would not be greater than 1.75 to 1.00, in each case, to the extent that any one or more lenders, whether or not currently party to the First Amended and Restated Credit Agreement, commits to be a lender for such amount. Borrowings under the First 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 1.50% or the sum of a Eurodollar rate plus a margin ranging from 1.50% to 2.50%, with either such margin varying according to the Company’s Consolidated Leverage Ratio (as defined in the First Amended and Restated Credit Agreement). The Company was also required to pay a commitment fee in respect of unused commitments under the Revolving Credit Facility, if any, at a rate ranging from 0.20% to 0.40% per annum depending on the Company’s Consolidated Leverage Ratio. The initial margin under the First Amended and Restated Credit Agreement was 0.75% for base rate loans and 1.75% for Eurodollar rate loans and the initial commitment fee rate was 0.25% per annum. The First 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. The First Amended and Restated Credit Agreement also contained financial covenants that required the Company to maintain a Consolidated Interest Coverage Ratio (as defined in the First Amended and Restated Credit Agreement) of not less than 3.00 to 1.00 and to maintain a Consolidated Leverage Ratio of (i) 3.50 to 1.00 or less for the fiscal quarter ending March 31, 2018, through and including the fiscal quarter ending December 31, 2019, (ii) 3.25 to 1.00 or less for the fiscal quarter ending March 31, 2020, through and including the fiscal quarter ending December 31, 2020, (iii) 3.00 to 1.00 or less for the fiscal quarter ending March 31, 2021, through and including the fiscal quarter ending December 31, 2021, and (iv) 2.75 to 1.00 or less for the fiscal quarter ending March 31, 2022 and 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 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 in compliance with all related covenants at December 31, 2019. On February 19, 2020, the Company entered into Amendment No. 2 (the “Second Amendment”) to the First Amended and Restated Credit Agreement (after giving effect to the Second Amendment, the “Second Amended and Restated Credit Agreement”). The Second Amendment amended the Consolidated Leverage Ratio financial covenant of the Credit Agreement and requires 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, 2021 through 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, 2022 and 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 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 30 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). The Company is 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. The initial margin under the Second Amended and Restated Credit Agreement was 1.25% for base rate loans and 2.25% for Eurodollar rate loans and the applicable commitment fee rate was 0.35% per annum. 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). The obligations under the Second Amended and Restated Credit Agreement are secured by a pledge of assets and liens on substantially all of the assets of AdvanSix. The Amended and Restated 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, as well as financial covenants that require the Company to maintain interest coverage and leverage ratios at levels specified in the Amended and Restated Credit Agreement. 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 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. 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 Part II, Item 1A. "Risk Factors." 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 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 Six Months Ended June 30, 2020 2019 Cash provided by (used for): Operating activities $ 28,553 $ 67,363 Investing activities (52,127) (72,486) Financing activities 89,187 12,372 Net change in cash and cash equivalents $ 65,613 $ 7,249 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 31 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 (Dollars in thousands, unless otherwise noted) Our operations are capital intensive, requiring ongoing investments that have consisted, and are expected to continue to consist, primarily of capital expenditures required to maintain and improve equipment reliability, expand production output, further improve mix, yield and cost position, and comply with environmental and safety regulations. The following table summarizes ongoing and expansion capital expenditures: Six Months Ended June 30, 2020 Capital expenditures in Accounts payable at December 31, 2019 $ 21,594 Purchases of property, plant and equipment 36,046 Less: Capital expenditures in Accounts payable at June 30, 2020 (6,038) Cash paid for capital expenditures $ 51,602 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. Critical Accounting Policies The preparation of our Condensed Consolidated Financial Statements in accordance with U.S. GAAP is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider these accounting policies to be critical to the understanding of our Condensed Consolidated Financial Statements. For a full description of our critical accounting policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2019 Form 10-K. While there have been no material changes to our critical accounting policies, or the methodologies or assumptions we apply under them, we continue to monitor such methodologies and assumptions. Off-Balance Sheet Arrangements and Contractual Obligations 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. Recent Accounting Pronouncements See “Note 2. Recent Accounting Pronouncements” to the Condensed Consolidated Financial Statements included in Part I. Item 1 of this Form 10-Q.