AdvanSix Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS ADVANSIX INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands, except share and per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Sales $ 446,495 $ 281,910 $ 1,260,561 $ 817,644 Costs, expenses and other: Costs of goods sold 366,180 265,758 1,040,965 736,504 Selling, general and administrative expenses 21,121 16,177 62,112 50,827 Interest expense, net 1,174 1,981 4,096 5,827 Other non-operating expense (income), net 331 ( 334 ) 349 216 Total costs, expenses and other 388,806 283,582 1,107,522 793,374 Income (loss) before taxes 57,689 ( 1,672 ) 153,039 24,270 Income tax expense (benefit) 13,747 ( 980 ) 36,835 4,957 Net income (loss) $ 43,942 $ ( 692 ) $ 116,204 $ 19,313 Earnings (loss) per common share Basic $ 1.56 $ ( 0.02 ) $ 4.13 $ 0.69 Diluted $ 1.51 $ ( 0.02 ) $ 4.02 $ 0.69 Weighted average common shares outstanding Basic 28,182,810 28,079,937 28,136,511 28,037,651 Diluted 29,100,276 28,079,937 28,920,832 28,092,712 See accompanying notes to Condensed Consolidated Financial Statements. 3 ADVANSIX INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income (loss) $ 43,942 $ ( 692 ) $ 116,204 $ 19,313 Foreign exchange translation adjustment ( 15 ) ( 10 ) ( 20 ) ( 67 ) Cash-flow hedges 415 346 1,300 ( 1,563 ) Other comprehensive income (loss), net of tax 400 336 1,280 ( 1,630 ) Comprehensive income $ 44,342 $ ( 356 ) $ 117,484 $ 17,683 See accompanying notes to Condensed Consolidated Financial Statements. 4 ADVANSIX INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except share and per share amounts) September 30, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 7,239 $ 10,606 Accounts and other receivables – net 170,941 123,554 Inventories – net 142,911 180,085 Taxes receivable 337 12,289 Other current assets 11,654 6,969 Total current assets 333,082 333,503 Property, plant and equipment – net 759,373 765,469 Operating lease right-of-use assets 142,931 114,484 Goodwill 17,592 15,005 Other assets 37,384 34,946 Total assets $ 1,290,362 $ 1,263,407 LIABILITIES Current liabilities: Accounts payable $ 217,993 $ 190,227 Accrued liabilities 48,315 41,152 Operating lease liabilities – short-term 36,694 29,279 Deferred income and customer advances 3,138 26,379 Total current liabilities 306,140 287,037 Deferred income taxes 137,241 125,575 Operating lease liabilities – long-term 106,773 85,605 Line of credit – long-term 135,000 275,000 Postretirement benefit obligations 27,119 39,168 Other liabilities 11,778 6,899 Total liabilities 724,051 819,284 COMMITMENTS AND CONTINGENCIES (Note 9) STOCKHOLDERS' EQUITY Common stock, par value $ 0.01 ; 200,000,000 shares authorized; 31,738,648 shares issued and 28,124,446 outstanding at September 30, 2021; 31,627,139 shares issued and 28,033,227 outstanding at December 31, 2020 317 316 Preferred stock, par value $ 0.01 ; 50,000,000 shares authorized and 0 shares issued and outstanding at September 30, 2021 and December 31, 2020 — — Treasury stock at par ( 3,614,202 shares at September 30, 2021; 3,593,912 shares at December 31, 2020) ( 36 ) ( 36 ) Additional paid-in capital 192,950 184,732 Retained earnings 387,932 275,243 Accumulated other comprehensive loss ( 14,852 ) ( 16,132 ) Total stockholders' equity 566,311 444,123 Total liabilities and stockholders' equity $ 1,290,362 $ 1,263,407 See accompanying notes to Condensed Consolidated Financial Statements. 5 ADVANSIX INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Nine Months Ended September 30, 2021 2020 Cash flows from operating activities: Net income $ 116,204 $ 19,313 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 49,058 45,061 Loss on disposal of assets 842 143 Deferred income taxes 11,235 11,895 Stock-based compensation 8,606 3,503 Accretion of deferred financing fees 424 412 Changes in assets and liabilities, net of business acquisitions: Accounts and other receivables ( 46,549 ) 7,445 Inventories 37,885 ( 2,163 ) Taxes receivable 11,952 ( 11,760 ) Accounts payable 27,047 ( 9,939 ) Accrued liabilities 6,418 7,776 Deferred income and customer advances ( 23,241 ) ( 13,520 ) Other assets and liabilities ( 14,358 ) 5,920 Net cash provided by operating activities 185,523 64,086 Cash flows from investing activities: Expenditures for property, plant and equipment ( 37,471 ) ( 67,563 ) Acquisition of business ( 9,523 ) — Other investing activities ( 975 ) ( 898 ) Net cash used for investing activities ( 47,969 ) ( 68,461 ) Cash flows from financing activities: Borrowings from line of credit 133,500 268,500 Payments of line of credit ( 273,500 ) ( 252,500 ) Payment of line of credit facility fees — ( 425 ) Principal payments of finance leases ( 534 ) ( 534 ) Purchase of treasury stock ( 589 ) ( 1,032 ) Issuance of common stock 202 2 Net cash provided by (used for) financing activities ( 140,921 ) 14,011 Net change in cash and cash equivalents ( 3,367 ) 9,636 Cash and cash equivalents at beginning of period 10,606 7,050 Cash and cash equivalents at the end of period $ 7,239 $ 16,686 Supplemental non-cash investing activities: Capital expenditures included in accounts payable $ 6,783 $ 5,802 Supplemental cash activities: Cash paid for interest $ 3,785 $ 4,493 Cash paid for income taxes $ 23,051 $ 1,501 See accompanying notes to Condensed Consolidated Financial Statements. 6 ADVANSIX INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Dollars in thousands) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Equity Shares Amount Balance at December 31, 2020 31,627,139 $ 316 $ 184,732 $ 275,243 $ ( 36 ) $ ( 16,132 ) $ 444,123 Net Income — — — 28,131 — — 28,131 Comprehensive income Foreign exchange translation adjustments — — — — — ( 70 ) ( 70 ) Cash-flow hedges — — — — — 483 483 Pension obligation adjustments — — — — — — — Other comprehensive income (loss), net of tax — — — — — 413 413 Issuance of common stock 33,200 1 — — — — 1 Purchase of treasury stock ( 15,371 shares) — — ( 443 ) — — — ( 443 ) Stock-based compensation — — 2,363 — — — 2,363 Balance at March 31, 2021 31,660,339 317 186,652 303,374 ( 36 ) ( 15,719 ) 474,588 Net Income — — — 44,131 — — 44,131 Comprehensive income Foreign exchange translation adjustments — — — — — 65 65 Cash-flow hedges — — — — — 402 402 Pension obligation adjustments — — — — — — — Other comprehensive income (loss), net of tax — — — — — 467 467 Issuance of common stock 72,450 — 45 — — — 45 Purchase of treasury stock ( 4,919 shares) — — ( 146 ) — — — ( 146 ) Stock-based compensation — — 3,744 — — — 3,744 Balance at June 30, 2021 31,732,789 317 190,295 347,505 ( 36 ) ( 15,252 ) 522,829 Net Income — — — 43,942 — — 43,942 Comprehensive income Foreign exchange translation adjustments — — — — — ( 15 ) ( 15 ) Cash-flow hedges — — — — — 415 415 Pension obligation adjustments — — — — — — — Other comprehensive income (loss), net of tax — — — — — 400 400 Issuance of common stock 5,859 — 156 — — — 156 Purchase of treasury stock ( 0 shares) — — — — — — — Stock-based compensation — — 2,499 — — — 2,499 Dividends — — — ( 3,515 ) — — ( 3,515 ) Balance at September 30, 2021 31,738,648 $ 317 $ 192,950 $ 387,932 $ ( 36 ) $ ( 14,852 ) $ 566,311 7 ADVANSIX INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) (Dollars in thousands) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Equity Shares Amount Balance at December 31, 2019 31,423,898 $ 314 $ 180,884 $ 229,166 $ ( 35 ) $ ( 9,451 ) $ 400,878 Net Income — — — 8,576 — — 8,576 Comprehensive income Foreign exchange translation adjustments — — — — — ( 57 ) ( 57 ) Cash-flow hedges — — — — — ( 1,836 ) ( 1,836 ) Pension obligation adjustments — — — — — — — Other comprehensive income (loss), net of tax — — — — — ( 1,893 ) ( 1,893 ) Issuance of common stock 154,495 2 — — — — 2 Purchase of treasury stock ( 73,157 shares) — — ( 924 ) — ( 1 ) — ( 925 ) Stock-based compensation — — 1,198 — — — 1,198 Balance at March 31, 2020 31,578,393 316 181,158 237,742 ( 36 ) ( 11,344 ) 407,836 Net Income — — — 11,429 — — 11,429 Comprehensive income Foreign exchange translation adjustments — — — — — — — Cash-flow hedges — — — — — ( 73 ) ( 73 ) Pension obligation adjustments — — — — — — — Other comprehensive income (loss), net of tax — — — — — ( 73 ) ( 73 ) Issuance of common stock 44,517 — — — — — — Purchase of treasury stock ( 10,361 shares) — — ( 107 ) — — — ( 107 ) Stock-based compensation — — 1,702 — — — 1,702 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 See accompanying notes to Condensed Consolidated Financial Statements. 8 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) 1. Organization, Operations and Basis of Presentation Description of Business AdvanSix Inc. ("AdvanSix," the "Company," "we" or "our") plays a critical role in global supply chains, innovating and delivering essential products for our customers in a wide variety of end markets and applications that touch people’s lives, such as building and construction, fertilizers, plastics, solvents, packaging, paints, coatings, adhesives and electronics. Our reliable and sustainable supply of quality products emerges from the vertically integrated value chain of our three U.S.-based manufacturing facilities. AdvanSix strives to deliver best-in-class customer experiences and differentiated products in the industries of nylon solutions, chemical intermediates, and plant nutrients, guided by our core values of Safety, Integrity, Accountability and Respect. COVID-19 In March 2020, the World Health Organization categorized the novel coronavirus (COVID-19) as a global pandemic with numerous countries around the world declaring national emergencies, including the United States. Since early 2020, COVID-19 has continued to spread, with confirmed cases worldwide, and with certain jurisdictions experiencing resurgences, including as a result of variant strains. The spread resulted in authorities implementing numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had a substantial impact on businesses around the world and on global, regional and national economies, including disruptions to supply chains, volatility in demand, production and sales across most industries, volatility within global financial markets, inflationary pressures in commodity pricing and an increasingly dynamic workforce environment. The continuously evolving nature of this pandemic and the pace and shape of a full recovery may continue to have an impact on the United States and global economies. 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 continues to consider the impact of COVID-19 on the estimates and assumptions used for the financial statements. As previously disclosed, the Company experienced a material impact on its second quarter 2020 results of operations associated with lower demand, particularly in nylon, caprolactam and phenol, and a decrease in overall sales volume related to global markets and the economic impact of COVID-19. Starting in the second half of 2020, and through the third quarter of 2021, demand improved to pre-COVID-19 levels with states, regions and countries in various phases of re-opening and continued administration of vaccines for COVID-19. The Company will continue to monitor developments and execute our operational and safety mitigation plans as previously disclosed. As the situation surrounding COVID-19 remains fluid and unpredictable, the Company cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s results of operations, financial position, and liquidity. Basis of Presentation The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. 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 September 30, 2021, and its results of operations for the three and nine months ended September 30, 2021 and 2020 and cash flows for the nine months ended September 30, 2021 and 2020. The year-end Condensed Consolidated Balance Sheet data were derived from audited financial statements but does not include all disclosures required by U.S. GAAP. 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, 2020 (the "2020 Form 10-K"). All intercompany transactions have been eliminated. Certain prior period amounts have been reclassified for consistency with the current period presentation. 9 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) It is our practice to establish actual quarterly closing dates using a predetermined fiscal calendar, which requires our businesses to close their books on a Saturday in order to minimize the potentially disruptive effects of quarterly closing on our business processes. Historically, the effects of this practice were generally not significant to reported results for any quarter and only existed within a reporting year. 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 nine months ended September 30, 2021 and 2020 wer e October 2, 2021 and September 26, 2020, respe ctively. Liabilities to creditors to whom we have issued checks that remained outstanding at September 30, 2021 and December 31, 2020 aggregated to $ 2.3 million and $ 7.2 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. On February 22, 2019, the Company announced that the Board authorized a share repurchase program of up to an additional $ 75 million of the Company's common stock , which was in addition to the remaining capacity available under the May 2018 share repurchase program. Repurchases may be made from time to time on the open market, including through the use of trading plans intended to qualify under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The size and timing of these repurchases will depend on pricing, market and economic conditions, legal and contractual requirements and other factors. The share repurchase program has no expiration date and may be modified, suspended or discontinued at any time. The par value of the shares repurchased is applied to Treasury stock and the excess of the purchase price over par value is applied to Additional paid-in capital. As of September 30, 2021, the Company had repurchased 3,614,202 shares of common stock, including 524,440 shares withheld to cover tax withholding obligations in connection with the vesting of awards, for an aggregate of $ 102.3 million at a weighted average market price of $ 28.31 per share. As of September 30, 2021, $ 59.6 million remained available for share repurchases under the current authorization. During the period October 1, 2021 through October 22, 2021, no additional shares were repurchased under the currently authorized repurchase program. 2. Recent Accounting Pronouncements The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). 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. In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments of ASU No. 2020-04 are effective for companies as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The amendments in this update apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The Company adopted ASU 2020-04 effective September 30, 2021, which did not have a material impact on the Company's consolidated financial position or results of operations upon adoption. On December 18, 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU removes the exception to the general principles in FASB Accounting Standards Codification ("ASC") 740, Income Taxes, associated with the incremental approach for intra-period tax allocation, accounting for basis differences when there are ownership changes in foreign investments and interim-period income tax accounting for year-to-date losses that exceed anticipated losses. In addition, the ASU improves the application of income tax related guidance and simplifies U.S. 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 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. Early adoption of the amendments in this update is permitted, including 10 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) adoption in any interim period. The Company adopted ASU 2019-12 effective January 1, 2021, which did not have a material impact on the Company’s consolidated financial position or results of operations upon adoption. 3. Revenues Revenue Recognition We serve approximately 400 customers annually in approximately 50 countries and across a wide variety of industries. For the three months ended September 30, 2021 and 2020, the Company's ten largest customers accounted for approximately 43 % and 48 % of total sales, respectively. For the nine months ended September 30, 2021 and 2020, the Company's ten largest customers accounted for approximately 41 % and 43 % 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, to whom we sell under a long-term agreement. For the three months ended September 30, 2021 and 2020, our sales to Shaw were 13 % and 14 %, respectively, of our total sales. For the nine months ended September 30, 2021 and 2020, our sales to Shaw were 12 % and 13 %, respectively, of our total sales. The Company's revenue by product line, and related approximate percentage of total sales, for the three and nine months ended September 30, 2021 and 2020 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Nylon $ 122,110 27 % $ 73,555 26 % $ 317,608 25 % $ 204,742 25 % Caprolactam 80,265 18 % 52,409 18 % 242,460 19 % 152,594 18 % Chemical Intermediates 130,920 29 % 94,770 34 % 416,482 33 % 250,299 31 % Ammonium Sulfate 113,200 26 % 61,176 22 % 284,011 23 % 210,009 26 % $ 446,495 100 % $ 281,910 100 % $ 1,260,561 100 % $ 817,644 100 % The Company's revenues by geographic area, and related approximate percentage of total sales, for the three and nine months ended September 30, 2021 and 2020 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 United States $ 365,210 82 % $ 217,062 77 % $ 1,039,291 82 % $ 623,817 76 % International 81,285 18 % 64,848 23 % 221,270 18 % 193,827 24 % Total $ 446,495 100 % $ 281,910 100 % $ 1,260,561 100 % $ 817,644 100 % Deferred Income and Customer Advances The Company defers revenues when cash payments are received in advance of our performance. Customer advances relate primarily to sales from the ammonium sulfate business. Below is a roll-forward of Deferred income and customer advances for the nine months ended September 30, 2021: Opening balance January 1, 2021 $ 26,379 Additional cash advances 3,734 Less amounts recognized in revenues ( 26,975 ) Ending balance September 30, 2021 $ 3,138 The Company expects to recognize as revenue the September 30, 2021 ending balance of Deferred income and customer advances within one year or less. 11 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) 4. 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 nine months ended September 30, 2021 and 2020 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Basic Net income (loss) $ 43,942 $ ( 692 ) $ 116,204 $ 19,313 Weighted average common shares outstanding 28,182,810 28,079,937 28,136,511 28,037,651 EPS – Basic $ 1.56 $ ( 0.02 ) $ 4.13 $ 0.69 Diluted Dilutive effect of equity awards and other stock-based holdings 917,466 — 784,321 55,061 Weighted average common shares outstanding 29,100,276 28,079,937 28,920,832 28,092,712 EPS – Diluted $ 1.51 $ ( 0.02 ) $ 4.02 $ 0.69 Diluted EPS is computed based upon the weighted average number of common shares outstanding for the period plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the period. 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 nine months ended September 30, 2021 and 2020 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Options and stock equivalents 318,706 890,484 535,299 1,042,020 Dividend activity for the three and nine months ended September 30, 2021 and 2020 was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Cash dividends declared per share $ 0.125 $ — $ 0.125 $ — Aggregate dividends paid to shareholders $ — $ — $ — $ — 5. Accounts and Other Receivables – Net September 30, 2021 December 31, 2020 Accounts receivables $ 168,096 $ 122,357 Other 4,389 2,668 Total accounts and other receivables 172,485 125,025 Less – allowance for doubtful accounts ( 1,544 ) ( 1,471 ) Total accounts and other receivables – net $ 170,941 $ 123,554 6. Inventories 12 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) September 30, 2021 December 31, 2020 Raw materials $ 45,969 $ 88,612 Work in progress 44,155 54,291 Finished goods 32,533 45,345 Spares and other 27,793 27,198 150,450 215,446 Reduction to LIFO cost basis ( 7,539 ) ( 35,361 ) Total inventories $ 142,911 $ 180,085 7. Postretirement Benefit Cost The components of Net periodic benefit cost of the Company’s pension plan are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Service cost $ 1,954 $ 2,005 $ 5,863 $ 6,016 Interest cost 518 544 1,553 1,631 Expected return on plan assets ( 731 ) ( 524 ) ( 2,193 ) ( 1,573 ) Amortization of actuarial net losses 86 — 259 — Net periodic benefit cost $ 1,827 $ 2,025 $ 5,482 $ 6,074 The Company made cash contributions to the defined benefit pension plan of $ 17.5 million during the nine months ended September 30, 2021 with $ 1.2 million in the first quarter of 2021, $ 3.6 million in the second quarter of 2021 and $ 12.7 million in the third quarter of 2021. The Company currently plans to make pension plan contributions during 2021 sufficient to satisfy funding requirements under the AdvanSix Retirement Earnings Plan in an aggregate amount of approximately $ 18 million to $ 23 million. We anticipate 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. The strategic asset allocation for the trust fund is selected by the Company's Investment Committee reflecting the results of comprehensive asset and liability modeling. The Investment Committee establishes strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk. 8. Leases We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets ("ROU"), Operating lease liabilities – short-term, and Operating lease liabilities – long-term in our Condensed Consolidated Balance Sheets. Finance leases are included in Property, plant and equipment – net, Accounts payable, and Other liabilities in our Condensed Consolidated Balance Sheets. The components of lease expense were as follows: 13 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Finance lease cost: Amortization of right-of-use asset $ 185 $ 172 $ 527 $ 527 Interest on lease liabilities 8 11 24 39 Total finance lease cost 193 183 551 566 Operating lease cost 10,072 11,087 30,142 33,157 Short-term lease cost 2,743 2,126 9,379 5,846 Total lease cost $ 13,008 $ 13,396 $ 40,072 $ 39,569 As of September 30, 2021, we have additional operating leases that have not yet commenced for approximately $ 3.7 million. These leases commence during 2021 with lease terms of up to 5 years. 9. Commitments and Contingencies The Company is subject to a number of lawsuits, investigations and disputes, some of which may involve substantial amounts claimed, arising out of the conduct of the Company or other third-parties in the normal and ordinary course of business. A liability is recognized for any contingency that is probable of occurrence and reasonably estimable. The Company continually assesses the likelihood of adverse judgments or outcomes in these matters, as well as potential ranges of possible losses, based on an analysis of each matter with the assistance of legal counsel and, if applicable, other experts. Given the uncertainty inherent in such lawsuits, investigations and disputes, the Company does not believe it is possible to develop estimates of reasonably possible loss in excess of current accruals for these matters. 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. 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. Although we have ongoing environmental remedial obligations at certain of our facilities, in the past three years, the associated remediation costs have not been material, and we do not expect our known remediation costs to have a material adverse effect on the Company's consolidated financial position or results of operations. 10. Income Taxes The provision for income taxes was $ 13.7 million and $( 1.0 ) million for the three months ended September 30, 2021 and 2020, respectively, resulting in an effective tax rate of 23.8 % and 58.6 %, respectively. The provision for income taxes was $ 36.8 million and $ 5.0 million for the nine months ended September 30, 2021 and 2020, respectively, resulting in an effective tax rate of 24.1 % and 20.4 %, respectively. Under a provision included in the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, the Company filed a Federal net operating loss (NOL) carryback claim in July 2020 which generated a refund of previously paid taxes in the amount of $ 12.3 million. The refund was received in the first quarter of 2021. The Company’s provision for income taxes in interim periods is computed by applying an estimated annual effective tax rate against Income (Loss) before taxes for the period in addition to recording any tax effects of discrete items for the quarter. The Company’s estimated annual effective tax rate applied against the three and nine months ended September 30, 2021 and 2020 differed from the U.S. federal statutory rate, due primarily to state taxes and executive compensation deduction limitations 14 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) which generally increase the tax rate, partially offset by tax credits which generally decrease the tax rate. Additionally, the deduction for foreign-derived intangible income further decreased the tax rate for the three and nine months ended September 30, 2021. The Company’s effective tax rate for the nine months ended September 30, 2020 was also further decreased by discrete tax adjustments related to 2019 return-to-provision tax credits and the impact of changes in the Company’s geographical sales mix on state tax. The Company's effective tax rate of 58.6 % recorded in the third quarter of 2020 was mainly driven by research tax credits and the 2019 state return-to-provision adjustments which increased the effective tax rate by approximately 30 % mainly due to the nominal Loss before taxes recorded in that quarter which resulted in these adjustments having a larger than normal impact on the effective tax rate. On March 11, 2021, the American Rescue Plan Act ("ARPA") was signed into law. The ARPA is aimed at addressing the continuing economic and health impacts of the COVID-19 pandemic. This legislative relief, along with the previous governmental relief packages, provide for numerous changes to current tax law. The ARPA did not have a material impact on our financial statements for the three and nine months ended September 30, 2021, and we do not anticipate that it will have a material impact on our financial statements throughout the remainder of 2021. We are subject to income taxes in the United States and to a lesser extent several foreign jurisdictions. Changes to income tax laws and regulations, or the interpretation of such laws, in any of the jurisdictions in which we operate could increase our effective tax rate and reduce our cash flows from operating activities. The current U.S. administration has released various draft tax reform proposals that, if enacted, would generally increase U.S. federal income taxes on corporations. These proposals, if implemented, could have an unfavorable effect on our business, results of operations and financial condition. As such, we continue to monitor these legislative proposals to evaluate the impact on our business. 11. Fair Value Measurements Financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. 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 September 30, 2021 was a loss of approximately $ 1.3 million and is considered a Level 2 liability. The pension plan assets are invested in collective investment trust funds. These investments are measured at fair value using the net asset value per share as a practical expedient. Investments valued using the net asset value method (NAV) (or its equivalent) practical expedient are excluded from the fair value hierarchy disclosure. The Company’s Condensed Consolidated Balance Sheets also include Cash and cash equivalents, Accounts receivable and Accounts payable all of which are recorded at amounts which approximate fair value. The Company also has assets that are required to be recorded at fair value on a non-recurring basis. These assets are evaluated when certain triggering events occur (including a decrease in estimated future cash flows) that indicate the asset should be evaluated for impairment which could result in such assets being measured at fair value. Goodwill must be evaluated at least annually. Our annual evaluation occurred on March 31, 2021 and we concluded that an impairment for goodwill did no t occur. 12. Derivative and Hedging Instruments The specific credit and market, commodity price and interest rate risks to which the Company is exposed in connection with its ongoing business operations are described below. This discussion includes an explanation of the hedging instrument, interest rate swap agreements, used to manage the Company’s interest rate risk associated with a fixed and floating-rate borrowing. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in Other comprehensive income. Those amounts are reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings. Credit and Market Risk – Financial instruments, including derivatives, expose the Company to counterparty credit risk for non-performance and to market risk related to changes in commodity prices, interest rates and foreign currency exchange rates. The Company manages its exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. The Company’s counterparties in derivative transactions are substantial investment and commercial banks with significant experience using such derivative instruments. The Company monitors the impact of market risk on the fair value and cash flows of its derivative and other financial instruments considering 15 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) reasonably possible changes in commodity prices, interest rates and foreign currency exchange rates and restricts the use of derivative financial instruments to hedging activities. The Company continually monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. 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 with significant concentrations of trade accounts receivable – net at September 30, 2021 or December 31, 2020. 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. Commodity Price Risk Management – The Company's exposure to market risk for commodity prices can result in changes in the cost of production. We primarily mitigate our exposure to commodity price risk by using long-term, formula-based price contracts with our suppliers and formula-based price agreements with customers. Our customer agreements provide for price adjustments based on relevant market indices and raw material prices and generally do not include take-or-pay terms. We may also enter into forward commodity contracts with third-parties designated as hedges of anticipated purchases of several commodities. 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 September 30, 2021 and 2020, 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. These interest rate swaps had a fair value of zero at inception and were effective November 30, 2018 and July 31, 2019 with respective maturity dates of November 30, 2021 and February 21, 2023. In accordance with 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. 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 September 30, 2021 December 31, 2020 Balance Sheet Classification Fair Value Balance Sheet Classification Fair Value Derivatives designated as hedging instruments under ASC 815: Interest Rate Contracts Accrued liabilities and Other liabilities $ ( 1,332 ) Accrued liabilities and Other liabilities $ ( 3,063 ) Total Derivatives $ ( 1,332 ) $ ( 3,063 ) The following table summarizes adjustments related to cash flow hedge included in Cash-flow hedges, in the Condensed Consolidated Statements of Comprehensive Income: September 30, 2021 Loss on derivative instruments included in Accumulated other comprehensive loss at December 31, 2020 $ ( 3,063 ) Fair value adjustment 1,731 Loss on derivative instruments included in Accumulated other comprehensive loss at September 30, 2021 $ ( 1,332 ) At September 30, 2021, the Company expects to reclassify approximately $ 1.0 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: 16 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) Amount of Loss Recognized in Earnings Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Derivatives: Interest Rate Contracts $ 565 $ 595 $ 1,684 $ 1,675 Total Derivatives $ 565 $ 595 $ 1,684 $ 1,675 13. Acquisitions We actively target potential acquisitions that build on our competitive advantage and core capabilities and create opportunities for broader expansion, value chain integration, portfolio diversification, increased exposure to attractive end markets and the potential for long-term value creation. In January 2021, the Company acquired certain assets associated with ammonium sulfate packaging, warehousing and logistics services in Virginia from Commonwealth Industrial Services, Inc. for approximately $ 9.5 million. This acquisition enables the Company to expand its product offerings by directly supplying packaged ammonium sulfate to customers, primarily in North and South America. It diversifies and optimizes our product offerings to include spray-grade adjuvant to support crop protection and products for industrial use. The Company also expects the addition of packaging and warehousing capabilities to bolster logistics and operational efficiency across its Richmond, Virginia area plants. The Company did not make any acquisitions during the three or nine months ended September 30, 2020. In accordance with ASC 805, this transaction has been accounted for as a business combination. The Company used its best estimates and assumptions to assign fair value to the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date based on the information that was available as of the acquisition date. The transaction resulted in the Company acquiring tangible assets and a finite-lived intangible asset, comprised of customer relationships which reflects the value of the benefit derived from incremental revenue and related cash flows as a direct result of the customer relationships. This intangible asset is being amortized on a straight-line basis over its estimated useful life of 15 years. The residual amount of the purchase price in excess of the value of the tangible and definite-lived intangible assets was allocated to goodwill. Pro forma financial information related to the acquisition has not been included as the impact on the Company's consolidated results of operations was below the reporting thresholds of the significance test. Although the Company believes the measurements of fair value set forth herein to be substantially complete, they are subject to change within one year from the acquisition date. The following table summarizes the allocation of the purchase price consideration as of the acquisition date: 17 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, 2021 Accounts receivable $ 858 Inventories 712 Property, plant and equipment 1,875 Intangible assets 3,920 Accounts payable and accrued liabilities ( 429 ) Net tangible and intangible assets 6,936 Goodwill 2,587 Total purchase price $ 9,523 Cash paid to date $ 9,523 Due to seller — Total purchase price $ 9,523 Goodwill deductible for tax purposes $ 2,587 14. Subsequent Events Credit Agreement On October 27, 2021, the Company completed a refinancing of its existing senior secured revolving credit facility under that certain Credit Agreement, dated as of September 30, 2016, among the Company, the guarantors, the lenders party thereto and Bank of America, N.A., as administrative agent (as amended by Amendment No. 1 on February 21, 2018 and Amendment No. 2 on February 19, 2020), by entering into a new Credit Agreement (the “Credit Agreement”), among the Company, the lenders party thereto, the swing line lenders party thereto, the letter of credit issuers party thereto and Truist Bank, as administrative agent, which provides for a new senior secured revolving credit facility in an aggregate principal amount of $ 500 million (the “Revolving Credit Facility”). The Revolving Credit Facility has a scheduled maturity date of October 27, 2026. The 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 establish a new class of term loans and/or increase the amount of the Revolving Credit Facility in an aggregate principal amount for all such incremental term loans and increases of the Revolving Credit Facility of up to the sum of (x) $ 175 million plus (y) an amount such that the Company’s Consolidated First Lien Secured Leverage Ratio (as defined in the Credit Agreement) would not be greater than 2.75 to 1.00, in each case, to the extent that any one or more lenders, whether or not currently party to the Credit Agreement, commits to be a lender for such amount or any portion thereof. Borrowings under the Credit Agreement bear interest at a rate equal to either the sum of a base rate plus a margin ranging from 0.250 % to 1.25 % or the sum of a LIBOR plus a margin ranging from 1.25 % to 2.25 %, with either such margin varying according to the Company’s Consolidated Leverage Ratio (as defined in the Credit Agreement). The Company is also required to pay a commitment fee in respect of unused commitments under the Revolving Credit Facility, if any, at a rate ranging from 0.15 % to 0.35 % per annum depending on the Company’s Consolidated Leverage Ratio. As of October 27, 2021, the applicable margin under the Credit Agreement is 0.375 % for base rate loans and 1.375 % for LIBOR loans and the applicable commitment fee rate is 0.175 % per annum. Substantially all tangible and intangible assets of the Company and its domestic subsidiaries are pledged as collateral to secure the obligations under the Credit Agreement. As of October 27, 2021, the Company has borrowed $ 150 million under the Revolving Credit Facility. The Company expects to use the Revolving Credit Facility to meet any ongoing cash needs in excess of internally generated or available cash flows and to issue letters of credit in the ordinary course of its business. Future borrowings under the Revolving Credit Facility will be subject to customary borrowing conditions. 18 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) The Credit Agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock of the Company, enter into transactions with affiliates, make investments, make capital expenditures, merge or consolidate with others or dispose of assets. The Credit Agreement also contains financial covenants that require the Company to maintain a Consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of not less than 3.00 to 1.00 and to maintain a Consolidated Leverage Ratio of (i) 4.00 to 1.00 or less for the fiscal quarter ending December 31, 2021, through and including the fiscal quarter ending September 30, 2023 and (ii) 3.75 to 1.00 or less for each fiscal quarter thereafter (subject to the Company’s option to elect a consolidated leverage ratio increase in connection with certain acquisitions). If the Company does not comply with the covenants in the Credit Agreement, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding under the Revolving Credit Facility. 19