What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-30 compared with 2020-07-31 · 110 added, 98 removed, 269 unchanged (44% of the section changed)

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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.

When used in this Form 10-Q, words such as "expect," “anticipate,” "estimate," "outlook," "project," "strategy," "intend," "plan," "target," "goal," "may," "will," "should," and “believe,” and other variations or similar terminology and 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.

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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;

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

the impact of social and economic restrictions and other containment measures taken to combat virus transmission;

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

risks associated with increased phishing, compromised business emails and other cybersecurity attacks and disruptions to our technology infrastructure;

risks associated with employees working remotely or operating with a reduced workforce;

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prolonged work stoppages as a result of labor difficulties or otherwise;

cybersecurity and data privacy incidents;

cybersecurity, data privacy incidents and disruptions to our technology infrastructure;

failure to maintain effective internal controls;

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and changes in laws or regulations applicable to our business.

Forward-looking statements are not guarantees of future performance and actual results could differ materially from those contemplated by the forward-looking statements as a result of a number of risks, uncertainties and other factors including those noted above and those detailed in Item 1A of Part I and elsewhere in our 2019 Form 10-K, Item 1A of Part II in 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.

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 Reports on Form 10-Q filed on May 1, 2020 and July 31, 2020, Item 1A of Part II in this Quarterly Report on Form 10-Q, and subsequent reports filed with the SEC.

All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph.

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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.

Additionally, one of our strategies is to continue developing higher-value, differentiated Nylon 6 products, such as our wire and cable and 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.

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Our ammonium sulfate product is positioned with the added value proposition of sulfur nutrition to increase yields of key crops.

In addition, due to its nutrient density, the typical ammonium sulfate product delivers pound for pound the most readily available sulfur and nitrogen to crops than other fertilizers.

We 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.

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The spread has resulted in authorities implementing numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns.

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

unemployment.

The continuously evolving 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.

The pandemic and these

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

The continuously evolving nature of this pandemic and the responses to combat the pandemic, such as governmental restrictions on non-essential business and travel, continue to have a 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.

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(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.

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

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

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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.

The Company continued its execution of these measures at all sites through the third 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.

During the third quarter of 2020 and moving into the fourth quarter of 2020, the Company continues to support safe and stable operations while serving its customers by adjusting output to changes in mix and demand.

During the third quarter, the Company executed processes and procedures associated with the planned plant turnaround, which was rescheduled from the second quarter 2020, mitigating any potential employee or contractor operational safety risks posed by COVID-19.

From an industry perspective, building and construction demand has improved, particularly in residential applications, however, commercial construction remains soft.

Auto demand has also been improving through the third quarter with the U.S.

and Europe experiencing a slower recovery, in contrast to a faster rebound in China and other Asia markets.

Export demand for textiles out of Asia has been soft, which has also impacted 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.

Ammonium Sulfate has experienced steady demand through the peak second quarter domestic planting season and into the new season fill, while North American acetone industry supply and demand balance has continued to be favorable following the affirmative final anti-dumping duties and robust demand for isopropyl alcohol (IPA), used for hand sanitizer and other disinfectants, methyl methacrylate (MMA), used for acrylic screens, 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.

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

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

During the third quarter of 2020, the Company has experienced an

improvement of demand to approximately pre-COVID-19 levels.

With states, regions and countries in various phases of re-opening, we expect demand to gradually improve through the fourth quarter 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.

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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.

The Company incurred an approximately $10 million unfavorable impact to pre-tax income in the second half 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.

The Company anticipates the unfavorable impact to pre-tax income in 2020, associated with its realigned supply chain, to be 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.

The Company 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.

We recognized a restructuring charge of $12.6 million in the second quarter of 2019 which was reduced to $11 million in the fourth quarter of

2019 and do not expect to incur any additional restructuring charges related to the closure.

See “Note 14.

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Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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Three Months Ended

June 30, 2020 Six Months Ended

June 30, 2020

September 30, 2020 Nine Months Ended

September 30, 2020

Volume 5.2% (2.3)%

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(9.2)% (15.8)%

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.

Sales decreased in the three months ended September 30, 2020 compared to the prior year period by $28.7 million (approximately 9%) due primarily to lower pricing (approximately 14%) driven primarily by (i) lower formula-based pass-through pricing (approximately 13%) 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 1%) in nylon, ammonium sulfate and caprolactam product lines, partially offset by market price increases in chemical intermediates, particularly acetone.

The price decrease was partially offset by higher volume (approximately 5%) due to increases in nylon and ammonium sulfate, partially offset by lower volumes in caprolactam.

Sales decreased in the nine months ended September 30, 2020 compared to the prior year period by $153.1 million (approximately 16%) due primarily to lower sales prices (approximately 14%) d riven primarily by (i) lower formula-based pass-through pricing (approximately 8%) and (ii) lower market-based pricing (approximately 6%) in nylon, ammonium sulfate and caprolactam product lines, partially offset by pricing strength in chemical intermediates, primarily acetone.

Volume decreased by approximately 2% due primarily to decreases in nylon and caprolactam related to global markets and the economic impact of COVID-19.

Costs of Goods Sold

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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Gross Margin percentage 5.7% 9.8% 9.9% 12.4%

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

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

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

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

Costs of goods sold decreased in the three months ended September 30, 2020 compared to the prior year period by $14.4 million (approximately 5%) due primarily to (i) lower prices of raw materials, particularly benzene and propylene (approximately 16%), (ii) decreased costs related to the PES shutdown (approximately 1%) and (iii) reduction in R&D and other expenses (approximately 1%).

This was partially offset by (i) higher volumes as discussed above (approximately 8%) and (ii) higher plant spending (approximately 6%) in the third quarter of 2020 due to the planned plant turnaround.

Costs of goods sold decreased in the nine months ended September 30, 2020 compared to the prior year period by $113.6 million (approximately 13%) due primarily to (i) lower prices of raw materials, particularly benzene and propylene, (approximately 12%) and (ii) lower sales volumes as discussed above (approximately 1%) and (iii) the absence of the restructuring charge from the closure of the Pottsville films plant in 2019 (approximately 1%), which was partially offset by higher plant spending primarily due to the timing of the planned plant turnaround as discussed above (approximately 1%).

Gross margin percentage decreased by approximately 4% in the three months ended September 30, 2020 compared to the prior year period due primarily to the spend and production impact of the planned plant turnaround (approximately 6%) and unfavorable product mix (approximately 3%).

This was partially offset by the net favorable margin impact of lower formula based pass-through pricing (driven by decreased raw material costs) and market pricing impacts (approximately 2%) as well as decreased costs related to the PES shutdown (approximately 1%) and reduction of other expenses (approximately 2%).

Gross margin percentage decreased by approximately 3% in the nine months ended September 30, 2020 compared to the prior year period due to (i) net unfavorable margin impact of market based pricing and formula based pass-through pricing driven by lower raw material pricing (approximately 2%), (ii) net unfavorable impact of lower production and reduced plant costs (approximately 1%) and (iii) the impact of insurance proceeds received in the prior year (approximately 1%), partially offset by the absence of a restructuring charge associated with the closure of our operations in Pottsville (approximately 2%).

Selling, General and Administrative Expenses

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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Percent of sales 5.7% 6.2% 6.2% 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.

Selling, general and administrative expenses decreased by $3.1 million and $7.9 million in the three and nine months ended September 30, 2020, respectively, compared to the prior period due primarily to decreased legal expenses, stock-based compensation and IT costs and disciplined cost management including lower functional support costs.

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

2020 2019 2020 2019

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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 years.

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

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

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

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

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

federal income tax return.

This decrease was partially offset by tax deficiencies on

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

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

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

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

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

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

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

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

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

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

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 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 effective tax rate for the three months ended September 30, 2020 was higher compared to the U.S.

federal statutory rate primarily due to the Loss before taxes incurred in the third quarter, an increase in 2020 anticipated research tax

credits and 2019 state return-to-provision adjustments recorded in the quarter.

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

federal statutory rate, due primarily to additional research tax credits claimed on the Company's 2018 U.S.

federal income tax return, partially offset by state taxes and executive compensation deduction limitations.

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

federal statutory rate due primarily to research tax credits and the impact of changes in the Company’s geographical sales mix on state tax, partially offset by tax deficiencies on vesting of equity compensation, executive compensation deduction limitations, the impact of the CARES Act and state taxes.

The Company’s effective tax rate for the nine months ended September 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 research tax credits.

The Company’s effective tax rate for the nine months ended September 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 partially offset by the impact of the CARES Act.

The Company’s effective tax rate for the three months ended September 30, 2020 was higher than the prior year period primarily due to the Loss before taxes incurred in the quarter which resulted in a higher income tax benefit, and 2019 state return-to-provision adjustments recorded in the quarter.

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

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.

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

As a result of the factors described above, Net income (loss) was $(0.7) million and $19.3 million for the three and nine months ended September 30, 2020 as compared to $7.9 million and $43.4 million in the corresponding prior year period.

Non-GAAP Measures

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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

Interest expense, net 1,981 1,293 5,827 3,727

Income taxes 2,273 5,280 5,938 12,104

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

Depreciation and amortization 15,497 14,222 45,061 42,094

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One-time Pottsville restructuring charges (1)

— 12,623 — 12,623

EBITDA excluding one-time Pottsville restructuring charges (non-GAAP) $ 15,806 $ 24,949 $ 75,158 $ 115,502

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Our principal source of liquidity is our cash flow generated from operating activities, which is expected to provide us with the ability to meet the majority of our short-term funding requirements.

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.

The Company applies a proactive and disciplined approach to working capital management to optimize cash flow and to enable capital allocation options in support of the Company’s strategy.

We utilize supply chain financing and trade receivables discount arrangements with third-party financial institutions which optimize terms and conditions related to accounts receivable and accounts payable in order to enhance liquidity and enable us to efficiently manage our working capital needs.

Although we continue to optimize supply chain financing and trade receivable programs in the ordinary course, our utilization of these arrangements, both prior to and during the COVID-19 pandemic, has not had a material impact on our liquidity.

In addition, we monitor the third-party depository institutions that hold our cash and cash equivalents.

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We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities.

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

On a recurring basis, our primary future cash needs will be centered on operating activities, working capital, and capital expenditures reflecting disciplined capital deployment and following the completion of several high-return growth and cost savings investments.

Capital expenditures are deployed for various ongoing investments and initiatives to improve reliability, yield and quality, expand production capacity and comply with HSE regulations.

While the COVID-19 pandemic has created and continues to create 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

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.

As of the end of the third quarter of 2020, the Company had approximately $17 million of cash on hand with approximately $111 million of additional capacity available under the revolving credit facility.

Given the uncertain environment in light of the COVID-19 pandemic, the Company maintained higher cash balances as a precautionary measure in the second quarter of 2020 for its working capital needs and other general corporate purposes.

Cash balances were reduced in the third quarter of 2020 in order to decrease 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.

In response to the current environment, the Company has taken certain 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.

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

The Company made contributions to the defined benefit pension plan of $1.7 million during the 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.

The Company made 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 quarter 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.

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 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.

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 equity 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 repurchase under the currently authorized repurchase program.

During the third quarter and the period from October 1, 2020 through October 23, 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”).

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”).

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.

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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.

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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

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.

defined in the Second Amended and Restated Credit Agreement) of not less than 3.00 to 1.00.

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

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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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.

We were in compliance with all of our covenants at September 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.

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"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 September 30, 2020, $111 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.

During the first nine months of 2020, we borrowed an incremental net amount of $16 million to bring the balance under the Revolving Credit Facility to $313 million as of September 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

Nine Months Ended

September 30,

Cash provided by (used for):

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Net change in cash and cash equivalents $ 9,636 $ 240

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

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

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

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

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

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

Cash provided by operating activities decreased by $36.4 million for the nine months ended September 30, 2020 versus the prior year period due primarily to a $24.1 million decrease in net income, a $18.2 million unfavorable cash impact from working capital (comprised of Accounts receivables, Inventories, Accounts payable and Deferred income) for the nine months

ended September 30, 2020 versus a $9.0 million unfavorable cash impact from working capital in the prior year period and a $11.7 million unfavorable cash impact from taxes receivable.

These decreases were partially offset by an increase in Other assets and liabilities driven by a $3.8 million increase in income tax reserve, a $2.9 million increase in pension liabilities, and a $2.6 million increase in Prepaid expenses as well as a change in the timing of payments for Accrued liabilities of $12.2 million versus the same period in the prior year.

The Pottsville restructuring charge had a net neutral impact on operational cash flow during the nine months ended September 30, 2019.

Cash used for investing activities decreased by $40.1 million for the nine months ended September 30, 2020 versus the prior year period due to a decrease in cash paid for capital expenditures.

Cash provided by financing activities increased by $5.7 million for the nine months ended September 30, 2020 versus the prior year period due primarily to net borrowings of $16.0 million for the nine months ended September 30, 2020 compared to net borrowings of $66.0 million during the prior year period, offset by $1.0 million in cash outflows for share repurchases during the nine months ended September 30, 2020 compared to $53.1 million in cash outflows during the prior year period, both of which are described above.

Capital Expenditures

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The following table summarizes ongoing and expansion capital expenditures:

Six Months Ended

June 30, 2020

Nine Months Ended

September 30, 2020

Capital expenditures in Accounts payable at December 31, 2019

Purchases of property, plant and equipment 51,771

Capital expenditures in Accounts payable at June 30, 2020

Capital expenditures in Accounts payable at September 30, 2020

Cash paid for capital expenditures $ 67,563

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.

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 following the completion of several high-return growth and cost savings investments.

Capital expenditures are deployed for various ongoing investments and initiatives to improve reliability, yield and quality, expand production capacity and comply with HSE regulations.

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Off-Balance Sheet Arrangements and Contractual Obligations

As of 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.

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

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis