What changed in this filing

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Item 1. Financial Statements

2020-10-30 compared with 2020-07-31 · 175 added, 117 removed, 466 unchanged (39% of the section changed)

4 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

6 unchanged sentences

Total costs, expenses and other 283,582 301,199 793,374 913,685

Income before taxes 13,702 20,626 25,943 47,624

Income tax expense 2,273 5,280 5,938 12,104

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

Earnings per common share

Income (loss) before taxes ( 1,672 ) 9,434 24,270 57,058

Income tax expense (benefit) ( 980 ) 1,513 4,957 13,617

Net income (loss) $ ( 692 ) $ 7,921 $ 19,313 $ 43,441

Earnings (loss) per common share

Basic $ ( 0.02 ) $ 0.29 $ 0.69 $ 1.54

8 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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

Net income (loss) $ ( 692 ) $ 7,921 $ 19,313 $ 43,441

Foreign exchange translation adjustment ( 10 ) ( 20 ) ( 67 ) ( 17 )

1 unchanged sentence

Other comprehensive income (loss), net of tax 336 ( 459 ) ( 1,630 ) ( 1,077 )

Comprehensive income $ 11,356 $ 14,921 $ 18,039 $ 34,902

Comprehensive income (loss) $ ( 356 ) $ 7,462 $ 17,683 $ 42,364

See accompanying notes to Condensed Consolidated Financial Statements.

2 unchanged sentences

(Dollars in thousands, except share and per share amounts)

September 30,

2020 December 31,

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200,000,000 shares authorized;

31,622,910 shares issued and 28,030,271 outstanding at June 30, 2020;

31,622,910 shares issued and 28,030,271 outstanding at September 30, 2020;

31,423,898 shares issued and 27,914,777 outstanding at December 31, 2019

Preferred stock, par value $ 0.01 ;

50,000,000 shares authorized and 0 shares issued and outstanding at June 30, 2020 and December 31, 2019

Treasury stock at par ( 3,592,639 shares at June 30, 2020;

50,000,000 shares authorized and 0 shares issued and outstanding at September 30, 2020 and December 31, 2019

Treasury stock at par ( 3,592,639 shares at September 30, 2020;

3,509,121 shares at December 31, 2019)

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(Dollars in thousands)

Six Months Ended

Nine Months Ended

September 30,

Cash flows from operating activities:

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Balance at June 30, 2020 31,622,910 316 182,753 249,171 ( 36 ) ( 11,417 ) 420,787

Net Loss — — — ( 692 ) — — ( 692 )

Comprehensive income

Foreign exchange translation adjustments — — — — — ( 10 ) ( 10 )

Cash-flow Hedges — — — — — 346 346

Pension obligation adjustments — — — — — — —

Other comprehensive income (loss), net of tax — — — — — 336 336

Issuance of common stock — — — — — — —

Purchase of treasury stock ( 0 shares)

— — — — — — —

Stock-based compensation — — 603 — — — 603

Balance at September 30, 2020 31,622,910 $ 316 $ 183,356 $ 248,479 $ ( 36 ) $ ( 11,081 ) $ 421,034

ADVANSIX INC.

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Balance at June 30, 2019 30,591,472 306 200,036 223,339 ( 26 ) ( 3,092 ) 420,563

Net Income — — — 7,921 — — 7,921

Comprehensive income

Foreign exchange translation adjustments — — — — — ( 20 ) ( 20 )

Cash-flow Hedges — — — — — ( 439 ) ( 439 )

Pension obligation adjustments — — — — — — —

Other comprehensive income (loss), net of tax — — — — — ( 459 ) ( 459 )

Issuance of common stock 9,236 — — — — — —

Purchase of treasury stock ( 537,033 shares)

— — ( 12,795 ) — ( 5 ) — ( 12,800 )

Stock-based compensation — — 2,001 — — — 2,001

Balance at September 30, 2019 30,600,708 $ 306 $ 189,242 $ 231,260 $ ( 31 ) $ ( 3,551 ) $ 417,226

See accompanying notes to Condensed Consolidated Financial Statements.

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The CARES Act, and other government stimulus programs are intended to provide economic relief resulting from the COVID-19 pandemic which includes, but is not limited to, provisions for taxes, employment related costs, deferral of pension payments and options for liquidity.

See "Note 11.

Income Taxes" below for a further discussion of the CARES Act.

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 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.

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

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

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

During the third quarter, the Company experienced an improvement of demand to approximately pre-COVID-19 levels.

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.

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GAAP for complete financial statements.

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the Company's financial position as of June 30, 2020, and its results of operations for the three and six months ended June 30, 2020 and 2019 and cash flows for the six months ended June 30, 2020 and 2019.

The year-end Condensed Consolidated Balance Sheet data were derived from audited financial statements but does not include all disclosures required by U.S.

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the Company's financial position as of September 30, 2020, and its results of operations for the three and nine months ended

ADVANSIX INC.

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(Dollars in thousands, except share and per share amounts and as otherwise noted)

results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year.

September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019.

The year-end Condensed Consolidated Balance Sheet data were derived from audited financial statements but does not include all disclosures required by U.S.

The results of operations of any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year.

These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Form 10-K").

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In the event that differences in actual closing dates are material to year-over-year comparisons of quarterly or year-to-date results, we will provide the appropriate disclosures.

Our actual closing dates for the three and six months ended June 30, 2020 and 2019 wer e June 27, 2020 and June 29, 2019, respe ctively.

Liabilities to creditors to whom we have issued checks that remained outstanding at June 30, 2020 and December 31, 2019 aggregated $ 2.1 million and $ 1.7 million, respectively, and were included in Cash and cash equivalents and Accounts payable in the Condensed Consolidated Balance Sheets.

Our actual closing dates for the three and nine months ended September 30, 2020 and 2019 wer e September 26, 2020 and September 28, 2019, respe ctively.

Liabilities to creditors to whom we have issued checks that remained outstanding at September 30, 2020 and December 31, 2019 aggregated $ 2.1 million and $ 1.7 million, respectively, and were included in Cash and cash equivalents and Accounts payable in the Condensed Consolidated Balance Sheets.

On May 4, 2018, the Company announced that its Board of Directors (the “Board”) authorized a share repurchase program of up to $ 75 million of the Company’s common stock.

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The par value of the shares repurchased is applied to Treasury stock and the excess of the purchase price over par value is applied to Additional paid-in capital.

As of June 30, 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 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 share repurchases under the current authorization.

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

As of September 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 awards, for an aggregate of $ 101.7 million at a weighted average market price of $ 28.31 per share.

As of September 30, 2020, $ 59.6 million remained available for share repurchases under the current authorization.

During the period October 1, 2020 through October 23, 2020, no additional shares were repurchased under the currently authorized repurchase program.

Recent Accounting Pronouncements

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ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.

On August 5, 2020, the FASB issued ASU No.

2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40).

The amendments in the ASU remove certain separation models for convertible debt instruments and convertible preferred stock that require the separation of a convertible debt instrument into a debt component and an equity or derivative component.

Therefore, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in-capital.

This will result in more convertible debt instruments being accounted for as a single liability measured at its amortized cost and more convertible preferred stock being accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives.

The ASU also amends the derivative scope exception guidance for contracts in an entity’s own equity.

The amendments remove three settlement conditions that are required for equity contracts to qualify for the derivative scope exception.

The guidance is effective for public business entities for fiscal years, and interim terms within those fiscal years, beginning after December 15, 2021.

Early adoption of the amendments in this update is permitted, but no earlier than fiscal years, including interim periods within those fiscal years, beginning after December 15, 2020.

The Company is evaluating the impact that the amendments of this standard would have on the Company's consolidated financial position or results of operations upon adoption.

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

In March 2020, the FASB issued ASU No.

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GAAP when accounting for franchise taxes that are partially based on income, transactions with government resulting in a step-up in tax basis goodwill, separate financial statements of legal entities not subject to tax, and enacted changes in tax laws in interim periods.

Different transition

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

approaches, retrospective, modified retrospective, or prospective, will apply to each income tax simplification provision.

Different transition approaches, retrospective, modified retrospective, or prospective, will apply to each income tax simplification provision.

The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

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We serve approximately 400 customers annually in more than 50 countries and across a wide variety of industries.

For the three months ended June 30, 2020 and 2019, the Company's ten largest customers accounted for approximately 50 % and 47 % of total sales, respectively.

For the six months ended June 30, 2020 and 2019, the Company's ten largest customers accounted for approximately 48 % and 46 % of total sales, respectively.

For the three months ended September 30, 2020 and 2019, the Company's ten largest customers accounted for approximately 48 % and 51 % of total sales, respectively.

For the nine months ended September 30, 2020 and 2019, the Company's ten largest customers accounted for approximately 43 % and 47 % of total sales, respectively.

We typically sell to customers under master service agreements, with primarily one-year terms, or by purchase orders.

We have historically experienced low customer turnover and have long-standing customer relationships, which span decades.

Our largest customer is Shaw Industries Group Inc.

(“Shaw”), a significant consumer of caprolactam and Nylon 6 resin.

We sell Nylon 6 resin and caprolactam to Shaw under a long-term agreement.

For the three months ended June 30, 2020 and 2019, our sales to Shaw were 17 % and 19 %, respectively, of our total sales.

For the six months ended June 30, 2020 and 2019, our sales to Shaw were 20 % and 21 %, respectively, of our total sales.

Each of the Company’s product lines represented the following approximate percentage of total sales for the three and six months ended June 30, 2020 and 2019:

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

customer is Shaw Industries Group Inc.

(“Shaw”), a significant consumer of caprolactam and Nylon 6 resin, to whom we sell under a long-term agreement.

For the three months ended September 30, 2020 and 2019, our sales to Shaw were 14 % and 23 %, respectively, of our total sales.

For the nine months ended September 30, 2020 and 2019, our sales to Shaw were 13 % and 21 %, respectively, of our total sales.

Each of the Company’s product lines represented the following approximate percentage of total sales for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

4 unchanged sentences

100 % 100 % 100 % 100 %

The Company's revenues by geographic area for the three and six months ended June 30, 2020 and 2019 were as follows:

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

The Company's revenues by geographic area for the three and nine months ended September 30, 2020 and 2019 were as follows:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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Customer advances relate primarily to sales from the ammonium sulfate business.

Below is a roll-forward of Deferred income and customer advances for the six months ended June 30, 2020:

Below is a roll-forward of Deferred income and customer advances for the nine months ended September 30, 2020:

Opening balance January 1, 2020 $ 19,696

1 unchanged sentence

Less amounts recognized in revenues ( 23,193 )

Ending balance June 30, 2020 $ 5,263

The Company expects to recognize as revenue the June 30, 2020 ending balance of Deferred income and customer advances within one year or less.

Earnings Per Share

The computation of basic and diluted earnings per share ("EPS") is based on Net income divided by the basic weighted average number of common shares and diluted weighted average number of common shares, respectively.

The details of the basic and diluted EPS calculations for the three and six months ended June 30, 2020 and 2019 were a s follows:

Ending balance September 30, 2020 $ 6,176

The Company expects to recognize as revenue the September 30, 2020 ending balance of Deferred income and customer advances within one year or less.

Earnings (Loss) Per Share

The computation of basic and diluted earnings (loss) per share ("EPS") is based on Net income divided by the basic weighted average number of common shares and diluted weighted average number of common shares, respectively.

The details of the basic and diluted EPS calculations for the three and nine months ended September 30, 2020 and 2019 were a s follows:

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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

Net Income (loss) $ ( 692 ) $ 7,921 $ 19,313 $ 43,441

Weighted average common shares outstanding 28,079,937 27,608,985 28,037,651 28,192,760

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The diluted EPS calculations exclude the effect of stock options when the options’ assumed proceeds exceed the average market price of the common shares during the period.

The anti-dilutive common stock equivalents outstanding at the three and six months ended June 30, 2020 and 2019 were as follows:

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

The anti-dilutive common stock equivalents outstanding at the three and nine months ended September 30, 2020 and 2019 were as follows:

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

1 unchanged sentence

Accounts and Other Receivables – Net

September 30,

2020 December 31,

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Total accounts and other receivables – net $ 97,101 $ 104,613

September 30,

2020 December 31,

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The components of Net periodic benefit cost of the Company’s pension plan are as follows:

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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Net periodic benefit cost $ 2,025 $ 1,901 $ 6,074 $ 5,702

The Company made cash 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 and will continue to evaluate options afforded under the CARES Act with respect to the deferral of pension plan contributions for calendar year 2020.

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

The Company made cash contributions to the defined benefit pension plan of $ 1.7 million during the nine months ended September 30, 2020 with $ 1.7 million in the first quarter of 2020 and no contributions in the second or third quarters of 2020.

The Company made an additional cash contribution of $ 6.4 million in the fourth quarter of 2020 for a total of $ 8.1 million for the full year of 2020.

The Company does not anticipate making any further contributions for the remainder of 2020 but anticipates making additional contributions in future years sufficient to satisfy pension funding requirements in those periods.

The pension plan assets are invested through a master trust fund.

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Long-term Debt and Credit Agreement

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

At June 30, 2020, the Company assessed the amount recorded under the Revolving Credit Facility (defined below) and determined that such amounts approximate fair value.

At September 30, 2020, the Company assessed the amount recorded under the Revolving Credit Facility (defined below) and determined that such amounts approximate fair value.

Since a floating rate interest is applied to all borrowings from our Revolving Credit Facility, the fair value of our debt closely approximates the carrying value and is therefore classified as Level 2 within the valuation hierarchy.

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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.

The Company has the option to incur

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

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).

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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

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

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.

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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.

The Company was in compliance with all related covenants at September 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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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.

Since the start of 2020, the Company has borrowed an incremental $ 219.5 million for liquidity and working capital purposes under the Revolving Credit Facility and repaid $ 128.5 million to bring the balance under the Revolving Credit Facility to $ 388.0 million at June 30, 2020.

The Company had approximately $ 1.0 million of letter of credit agreements outstanding under the Revolving Credit Facility at June 30, 2020, as well as an immaterial amount associated with bilateral letters of credit outside the Revolving Credit Facility.

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

Since the start of 2020, the Company has borrowed an incremental $ 268.5 million for liquidity and working capital purposes under the Revolving Credit Facility and repaid $ 252.5 million to bring the balance under the Revolving Credit Facility to $ 313.0 million at September 30, 2020.

The Company had approximately $ 1.0 million of letter of credit agreements outstanding under the Revolving Credit Facility at September 30, 2020, as well as an immaterial amount associated with bilateral letters of credit outside the Revolving Credit Facility.

We determine if an arrangement is a lease at inception.

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The operating lease ROU asset also includes any lease pre-payments made and excludes lease incentives.

Our lease terms may include options to extend or terminate the lease and, when it

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

is reasonably certain that such an option will be exercised, it is included in the determination of the corresponding assets and liabilities.

Our lease terms may include options to extend or terminate the lease and, when it is reasonably certain that such an option will be exercised, it is included in the determination of the corresponding assets and liabilities.

Short-term leases are not recognized on our unaudited Condensed Consolidated Balance Sheets.

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The leases have initial terms of up to 20 years with some containing renewal options subject to customary conditions.

The term and length of the various agreements, as well as the timing of any renewals, will impact the ROU asset calculation and related liability.

The components of lease expense were as follows:

Three Months Ended June 30, 2020 Six Months Ended June 30, 2020

Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020

Finance lease cost:

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Supplemental cash flow information related to leases was as follows:

Six Months Ended June 30, 2020

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

Nine Months Ended September 30, 2020

Cash paid for amounts included in the measurement of lease liabilities:

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Supplemental balance sheet information related to leases was as follows:

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

September 30,

Operating Leases

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Total $ 110,809 $ 901

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

Commitments and Contingencies

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Considering the Company’s past experience and existing accruals, the Company does not expect the outcome of these matters, either individually or in the aggregate, to have a material adverse effect on the Company’s consolidated financial position or results of operations.

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

that could have a material adverse effect on the Company’s consolidated results of operations, balance sheet and/or operating cash flows in the periods recognized or paid.

We assumed from Honeywell 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.

Potential liabilities are subject to change due to new developments, changes in settlement strategy or the impact of evidentiary requirements, which could cause the Company to pay damage awards or settlements (or become subject to equitable remedies) that could have a material adverse effect on the Company’s consolidated results of operations, balance sheet and/or operating cash flows in the periods recognized or paid.

We assumed from Honeywell 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 manufacturing 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.

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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 tax 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.

federal income tax return in July 2020 which reflected a net operating loss, on a tax basis, and certain tax credits which were carried back to earlier tax years.

This carryback claim generated a refund of previously paid taxes in the amount of $ 12.2 million which is currently reflected in Taxes receivable.

We anticipate receiving the refund in the fourth quarter of 2020.

The Company’s provision for income taxes in interim periods is computed by applying an estimated annual effective tax rate against Income before taxes for the period in addition to recording any tax effects of discrete items for the quarter.

The Company recorded a net Income tax benefit of $ 1.1 million as discrete items for the quarter ended June 30, 2020, and a net Income tax benefit of $ 0.6 million as discrete items for the six months ended June 30, 2020.

The year to date discrete items relate to the impact of the CARES Act, additional research tax credits claimed on the Company's 2019 U.S.

federal income tax return affecting the current period results, tax deficiencies on vesting of equity compensation and the impact of changes in the Company's geographical sales mix on state tax.

Additionally, in the quarter ended June 30, 2020, we recorded a liability for unrecognized tax benefits, in the amount of $ 3.8 million, all of which, if recognized, would impact our effective tax rate.

As of June 30, 2020, we have not recorded any interest and penalties associated with uncertain tax positions.

The provision for income taxes was $ 2.3 million and $ 5.3 million for the three months ended June 30, 2020 and 2019, respectively.

The Company recorded a net Income tax benefit of $ 0.2 million as a discrete item for the quarter ended September 30, 2020 related to 2019 state return-to-provision adjustments, and a net Income tax benefit of $ 0.8 million as discrete items for the nine months ended September 30, 2020.

The year to date discrete items primarily relate to the impact of the CARES Act, additional research tax credits claimed on the Company's 2019 U.S.

federal income tax return, tax deficiencies on vesting of equity compensation and the impact of changes in the Company's geographical sales mix on state tax.

In the quarter ended June 30, 2020, we recorded a liability for unrecognized tax benefits ("UTB"), in the amount of $ 3.8 million, all of which, if recognized, would impact our effective tax rate.

The UTB relates to an energy credit claimed on the Company's 2019 U.S.

federal income tax return associated with the installation of natural gas boilers at our Hopewell manufacturing plant.

As of September 30, 2020, we have not recorded any interest and penalties associated with uncertain tax positions.

The benefit from income taxes was $( 1.0 ) million for the three months ended September 30, 2020 and the provision for income taxes was $ 1.5 million for the three months ended September 30, 2019, respectively.

Fair Value Measurements

2 unchanged sentences

The purchase price of the royalty stream for $ 1.0 million approximated its fair value at December 31, 2018 and is considered a Level 3 asset.

The fair value measurement is based on the expected future cash flows and, as there is no reason to believe that the asset is impaired, it is assumed that the valuation remains unchanged at June 30, 2020.

The fair value measurement is based on the expected future cash flows and, as there is no reason to believe that the asset is impaired, it is assumed that the valuation remains unchanged at

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

September 30, 2020.

In November 2018 and July 2019, the Company entered into two interest rate swap transactions related to its credit agreement.

The fair value of the interest rate swaps at June 30, 2020 was a loss of approximately $ 4.3 million and is considered a Level 2 liability.

The fair value of the interest rate swaps at September 30, 2020 was a loss of approximately $ 3.8 million and is considered a Level 2 liability.

The pension plan assets are invested in collective investment trust funds.

6 unchanged sentences

Our annual evaluation occurred on March 31, 2020 and we have concluded that an impairment for goodwill did no t occur.

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

Derivative and Hedging Instruments

9 unchanged sentences

The terms and conditions of credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer.

The Company did not have any customers accounting for a significant percentage of trade accounts receivable - net at June 30, 2020, or December 31, 2019.

The Company had one customer that accounted for approximately 13 % of trade accounts receivable - net at September 30, 2020, and did not have any customers accounting for a significant percentage of trade accounts receivable - net at December 31, 2019.

Allowance for doubtful accounts is calculated based upon the Company's estimate of expected credit losses over the life of exposure based upon both historical information as well as future expected losses.

4 unchanged sentences

Forward commodity contracts are marked-to-market, with the resulting gains and losses recognized in earnings, in the same category as the items being hedged, when the hedged transaction is recognized.

At June 30, 2020 and 2019, we had no financial contracts related to forward commodity agreements.

At September 30, 2020 and 2019, we had no financial contracts related to forward commodity agreements.

Interest Rate Risk Management – The Company has entered into two interest rate swap agreements for a total notional amount of $ 100 million to exchange floating for fixed rate interest payments for our LIBOR-based borrowings.

1 unchanged sentence

In accordance with FASB Accounting Standards Codification (“ASC”) ASC 815, the Company designated the interest rate swaps as cash flow hedges of floating-rate borrowings.

The interest rate swaps convert the Company’s interest rate payments on the first $ 100 million of variable-rate, 1-month LIBOR-based debt to a fixed interest rate.

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

interest rate swaps convert the Company’s interest rate payments on the first $ 100 million of variable-rate, 1-month LIBOR-based debt to a fixed interest rate.

These interest rate swaps involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the interest rate swap without an exchange of the underlying principal amount.

Liability Derivatives

June 30, 2020 December 31, 2019

September 30, 2020 December 31, 2019

Balance Sheet Classification Fair Value Balance Sheet Classification Fair Value

2 unchanged sentences

Total Derivatives $ ( 3,801 ) $ ( 1,718 )

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

The following table summarizes adjustments related to cash flow hedge included in Cash-flow hedges, in the Condensed Consolidated Statements of Comprehensive Income:

Loss on derivative instruments included in Accumulated other comprehensive income at December 31, 2019 $ ( 1,718 )

September 30,

Loss on derivative instruments included in Accumulated other comprehensive income (loss) at December 31, 2019 $ ( 1,718 )

Fair value adjustment ( 2,083 )

Loss on derivative instruments included in Accumulated other comprehensive income at June 30, 2020 $ ( 4,263 )

At June 30, 2020, the Company expects to reclassify approximately $ 2.3 million of net losses on derivative instruments from Accumulated other comprehensive income to earnings during the next 12 months due to the payment of variable interest associated with the floating rate debt.

Loss on derivative instruments included in Accumulated other comprehensive income (loss) at September 30, 2020 $ ( 3,801 )

At September 30, 2020, the Company expects to reclassify approximately $ 2.4 million of net losses on derivative instruments from Accumulated other comprehensive income ("AOCI") to earnings during the next 12 months due to the payment of variable interest associated with the floating rate debt with the remainder recognized in future periods through the expiration date.

The following table summarizes the reclassification of net losses on derivative instruments from AOCI into earnings:

Amount of Loss Recognized in Earnings

Three Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

Interest Rate Contracts $ 595 $ 223 $ 1,675 $ 497

Total Derivatives $ 595 $ 223 $ 1,675 $ 497

Restructuring

5 unchanged sentences

Facility exit costs include demolition, equipment relocation, contract terminations and project management costs.

These costs are included in Costs of goods sold in the Condensed Consolidated Statements of Operations.

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts and as otherwise noted)

costs are included in Costs of goods sold in the Condensed Consolidated Statements of Operations.

The Company recorded a restructuring charge of $ 12.6 million in the second quarter of 2019 which was reduced to $ 11.0 million in the fourth quarter of 2019.

As of June 30, 2020, all related restructuring liabilities have been paid.

The following table summarizes the components of restructuring activities and the remaining balances of accrued restructuring charges as of June 30, 2020:

As of September 30, 2020, all related restructuring liabilities have been paid.

The following table summarizes the components of restructuring activities and the remaining balances of accrued restructuring charges as of September 30, 2020:

Employee Separation Benefits Facility Exit Costs Total

2 unchanged sentences

Cash payments ( 127 ) ( 410 ) ( 537 )

Accrual balance at June 30, 2020

Accrual balance at September 30, 2020

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 1. Financial Statements