AdvanSix Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company’s financial condition and results of operations, which we refer to as our “MD&A,” should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto contained in this Form 10-Q, as well as the MD&A section included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 19, 2021 (the “2020 Form 10-K”). Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors that can affect our performance in both the near- and long-term, including those incorporated by reference in Item 1A of Part II of this Form 10-Q as such factors may be revised or supplemented in subsequent filings with the SEC, as well as those discussed in the section entitled “Note Regarding Forward-Looking Statements” below. Note Regarding Forward-Looking Statements All statements other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this MD&A regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this Form 10-Q, words such as "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. Such risks and uncertainties include, but are not limited to: general economic and financial conditions in the U.S. and globally, including the impact of the coronavirus (COVID-19) pandemic and any resurgences; the scope, shape and pace of recovery of the pandemic; the timing of the distribution and the efficacy of vaccines or treatments for COVID-19 that are currently available or may be available in the future and related vaccination rates; the severity and transmissibility of newly identified strains of COVID-19; 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; the effect on our customers’ demand for our products and our suppliers’ ability to manufacture and deliver our raw materials, including implications of reduced refinery utilization in the U.S.; our ability to sell and provide our goods and services, including as a result of travel and other COVID-19-related restrictions; the ability of our customers to pay for our products; 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; risks associated with our indebtedness including compliance with financial and restrictive covenants, and our ability to access capital on reasonable terms, at a reasonable cost, or at all, due to economic conditions resulting from COVID-19 or otherwise; the impact of scheduled turnarounds and significant unplanned downtime and interruptions of production or logistics operations as a result of mechanical issues or other unanticipated events such as fires, severe weather conditions, natural disasters and pandemics; price fluctuations, cost increases and supply of raw materials; our operations and growth projects requiring substantial capital; growth rates and cyclicality of the industries we serve including global changes in supply and demand; failure to develop and commercialize new products or technologies; loss of significant customer relationships; adverse trade and tax policies; extensive environmental, health and safety laws that apply to our operations; hazards associated with chemical manufacturing, storage and transportation; litigation associated with chemical manufacturing and our business operations generally; inability to acquire and integrate businesses, assets, products or technologies; protection of our intellectual property and proprietary information; prolonged work stoppages as a result of labor difficulties or otherwise; cybersecurity, data privacy incidents and disruptions to our technology infrastructure; failure to maintain effective internal controls; our ability to declare and pay quarterly cash dividends and the amounts and timing of any future dividends; our ability to repurchase our common stock and the amount and timing of any future repurchases; disruptions in supply chain, transportation and logistics; potential for uncertainty regarding qualification for tax treatment of our spin-off; fluctuations in our stock price; and changes in laws or regulations applicable to our business. Forward-looking statements are not guarantees of future performance and actual results could differ materially from those contemplated by the forward-looking statements as a result of a number of risks, uncertainties and other factors including those noted above and those detailed in Item 1A of Part I and elsewhere in our 2020 Form 10-K, and subsequent reports filed with the SEC. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph. We do not undertake to update or revise any of our forward-looking statements. 20 Business Overview AdvanSix 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. Our four key product lines are as follows: • Nylon – We sell our Nylon 6 resin globally, primarily under the Aegis® brand name. Nylon 6 is a polymer resin which is a synthetic material used by our customers to produce fibers, filaments, engineered plastics and films that, in turn, are used in such end-products as carpets, automotive and electric components, sports apparel, food packaging and other industrial applications. In addition, our Nylon 6 resin is used to produce nylon films which we sell to our customers primarily under the Capran® brand name. • Caprolactam – Caprolactam is the key monomer used in the production of Nylon 6 resin. We internally polymerize caprolactam into Aegis® Nylon 6 Resins, and we also market and sell the caprolactam that is not consumed internally to customers who use it to manufacture polymer resins to produce nylon fibers, films and other nylon products. Our Hopewell manufacturing facility is one of the world’s largest single-site producers of caprolactam as of September 30, 2021. • Chemical Intermediates – We manufacture, market and sell a number of other chemical products that are derived from the chemical processes within our integrated supply chain. Most significant is acetone which is used by our customers in the production of adhesives, paints, coatings, solvents, herbicides and engineered plastic resins. Other intermediate chemicals that we manufacture, market and sell include phenol, alpha-methylstyrene (“AMS”), cyclohexanone, oximes (methyl ethyl ketoxime, acetaldehyde oxime and 2-pentanone oxime), cyclohexanol, sulfuric acid, ammonia and carbon dioxide. • Ammonium Sulfate – Our ammonium sulfate is used by customers as a fertilizer containing nitrogen and sulfur, two key plant nutrients. Ammonium sulfate fertilizer is derived from the integrated operations at the Hopewell manufacturing facility. Because of our Hopewell facility’s size, scale and technology design, we are the world’s largest single-site producer of ammonium sulfate fertilizer as of September 30, 2021. We market and sell ammonium sulfate primarily to North American and South American distributors, farm cooperatives and retailers to fertilize crops. Global demand for Nylon 6 resin spans a variety of end-uses such as textiles, engineered plastics, industrial filament, food and industrial films, and carpet. The market growth typically tracks global GDP growth over the long-term but varies by end-use. Generally, prices for Nylon 6 resin and caprolactam reflect supply and demand in the marketplace as well as the value of the basic raw materials used in the production of caprolactam, consisting primarily of benzene and, depending on the manufacturing process utilized, natural gas and sulfur. The global prices for nylon resin typically track a spread over the price of caprolactam, which in turn tracks as a spread over benzene because the key feedstock materials for caprolactam, phenol or cyclohexane, are derived from benzene. This price spread has historically experienced cyclicality as a result of global changes in supply and demand. Nylon 6 resin prices track the cyclicality of caprolactam prices, although prices set above the average commodity spread are achievable when nylon resin manufacturers, like AdvanSix, formulate and produce differentiated nylon resin products. Our differentiated Nylon 6 products are typically valued at a higher level than commodity resin products. We believe that Nylon 6 end-market growth will continue to generally track global GDP over the long-term. Applications such as engineered plastics and packaging have potential to grow at faster rates given certain macrotrends. Additionally, one of our strategies is to continue developing higher-value, differentiated Nylon 6 products, such as our wire and cable and co-polymer offerings, in current and new customer applications. We also manufacture, market and sell a number of chemical intermediate products that are derived from the chemical processes within our integrated supply chain. Most significant is acetone, which is used by our customers in the production of adhesives, paints, coatings and solvents. Prices for acetone are influenced by its own supply and demand dynamics but can also be influenced by the underlying move in propylene input costs. We continue to invest in and grow our differentiated product offerings in high-purity applications and high-value intermediates including our oximes-based EZ-Blox™ anti-skinning agent used in paints and Nadone® cyclohexanone, which is a solvent used in various high-value applications. Global prices for ammonium sulfate fertilizer are influenced by several factors including the price of urea, which is the most widely used source of nitrogen-based fertilizer in the world. Other global factors driving ammonium sulfate fertilizer demand 21 are general agriculture trends, including planted acres and the price of crops. 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 as compared to other fertilizers. We recently expanded our offering to directly supply packaged ammonium sulfate to customers, primarily in North and South America, and diversified and optimized our offerings to include spray-grade adjuvant to support crop protection and products for industrial use. We produce ammonium sulfate fertilizer continuously throughout the year as part of our manufacturing process, but quarterly sales experience seasonality reflecting both geographical and product sales mix considerations based on the timing and length of the growing seasons in North and South America. North America ammonium sulfate prices are typically strongest during second quarter fertilizer application, where we sell a higher mix of granular product domestically, and then typically decline seasonally with new season fill in the third quarter, where we generally drive a higher mix of standard grade product sales into export markets. Due to the ammonium sulfate fertilizer sales cycle, we occasionally build up higher inventory balances because our production is continuous and not tied to seasonal demand for fertilizers. Sales of most of our other products have generally been subject to minimal, or no, seasonality. We seek to run our production facilities on a nearly continuous basis for maximum efficiency as several of our intermediate products are key feedstock materials for other products in our integrated manufacturing chain. While our integration, scale and range of product offerings make us one of the most efficient manufacturers in our industry, these attributes also expose us to increased risk associated with material disruptions at any one of our production facilities or logistics operations which could impact the overall manufacturing supply chain. Further, although we believe that our sources of supply for our raw materials, including cumene, natural gas and sulfur, are generally robust, it is difficult to predict the impact that shortages, increased costs and related supply chain logistics considerations may have in the future. In order to mitigate the risk of unplanned interruptions, we schedule planned plant turnarounds each year to conduct routine and major maintenance across our facilities. We also utilize maintenance excellence and mechanical integrity programs, targeted buffer inventory of intermediate chemicals necessary for our manufacturing process, and co-producer swap arrangements, which are intended to mitigate the extent of any production losses as a result of planned and unplanned downtime; however, the mitigation of all or part of any such production impact cannot be assured. Recent Developments COVID-19 In March 2020, the World Health Organization categorized the novel coronavirus (COVID-19) as a global pandemic with numerous countries around the world declaring national emergencies, including the United States. Since early 2020, COVID-19 has continued to spread, 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. 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. 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 22 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”). For a discussion of the Credit Agreement and Revolving Credit Facility, please refer to "Note 14. Subsequent Events." Dividend As announced on September 28, 2021, the Board declared a quarterly cash dividend of $0.125 per share on the Company's common stock, payable on November 23, 2021 to stockholders of record as of the close of business on November 9, 2021. Results of Operations (Dollars in thousands, unless otherwise noted) Sales Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Sales $ 446,495 $ 281,910 $ 1,260,561 $ 817,644 % change compared with prior year period 58.4% 54.2% The change in sales compared to the prior year period is attributable to the following: Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 Volume 7.9% 15.3% Price 50.5% 38.9% 58.4% 54.2% Sales increased in the three months ended September 30, 2021 compared to the prior year period by $164.6 million (approximately 58%) due primarily to higher formula-based pass-through pricing (approximately 22%) as a result of net cost increases in benzene and propylene (inputs to cumene which is a key feedstock to our products), favorable market-based pricing (approximately 28%) and higher sales volume (approximately 8%) driven primarily by improved end market demand across our ammonium sulfate, nylon and caprolactam product lines. Sales increased in the nine months ended September 30, 2021 compared to the prior year period by $442.9 million (approximately 54%) due primarily to higher formula-based pass-through pricing (approximately 21%) as a result of net cost increases in benzene and propylene, favorable market-based pricing (approximately 18%) and higher sales volume (approximately 15%) driven primarily by improved end market demand across all product lines. Costs of Goods Sold Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Costs of goods sold $ 366,180 $ 265,758 $ 1,040,965 $ 736,504 % change compared with prior year period 37.8% 41.3% Gross Margin percentage 18.0% 5.7% 17.4% 9.9% Costs of goods sold increased in the three months ended September 30, 2021 compared to the prior year period by $100.4 million (approximately 38% ) due primarily to increased prices of raw materials (approximately 38%) and higher sales volumes as discussed above (approximately 6%), which was partially offset by a net favorable impact of plant turnarounds year-over-year (approximately 6%). Costs of goods sold increased in the nine months ended September 30, 2021 compared to the prior year period by $304.5 million (approximately 41%) due primarily to (i) increased prices of raw materials (approximately 32%), (ii) higher sales 23 volumes (approximately 10%) and (iii) an unfavorable non-cash LIFO inventory reserve adjustment (approximately 1%). The noted increase was partially offset by a net favorable impact of plant turnarounds year-over-year (approximately 2%). Gross margin percentage increased by approximately 12% in the three months ended September 30, 2021 compared to the prior year period due primarily to the (i) impact of formula-based pass-through pricing and increased market pricing (approximately 7%), (ii) net favorable impact of plant turnarounds year-over-year (approximately 4%), (iii) higher sales volume (approximately 2%) and (iv) the collection of additional insurance proceeds related to the 2019 shut-down of cumene supplier Philadelphia Energy Solutions (approximately 1%). The noted increase was partially offset by increased plant spend and sales freight to support higher sales volume (approximately 2%). Gross margin percentage increased by approximately 8% in the nine months ended September 30, 2021 compared to the prior year period due primarily to (i) the impact of formula-based pass-through pricing and increased market pricing (approximately 4%), (ii) higher sales volume (approximately 4%) and (iii) net favorable impact of plant turnarounds year-over-year (approximately 1%). The noted increase was partially offset by an unfavorable non-cash LIFO inventory reserve adjustment (approximately 1%). Selling, General and Administrative Expenses Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Selling, general and administrative expenses $ 21,121 $ 16,177 $ 62,112 $ 50,827 Percentage of Sales 4.7% 5.7% 4.9% 6.2% Selling, general and administrative expenses increased by $4.9 million in the three months ended September 30, 2021 compared to the prior year period due primarily to increased incentive and stock-based compensation costs and increased functional support costs as compared to cost control measures implemented in response to the COVID-19 pandemic in the prior year. Selling, general and administrative expenses increased by $11.3 million in the nine months ended September 30, 2021 compared to the prior period due primarily to increased incentive and stock-based compensation costs and increased functional support costs as compared to cost control measure implemented in response to the COVID-19 pandemic in the prior year. Income Tax Expense Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Income tax expense (benefit) $ 13,747 $ (980) $ 36,835 $ 4,957 Effective tax rate 23.8% 58.6% 24.1% 20.4% As noted in Note 10. "Income Taxes", the Company filed a Federal net operating loss (NOL) carryback claim under the CARES Act 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 effective tax rate for the three and nine months ended September 30, 2021 was higher compared to the U.S. federal statutory rate, due primarily to state taxes and executive compensation deduction limitations, partially offset by tax credits and the deduction for foreign-derived intangible income. 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 research tax credits and the 2019 state return-to-provision adjustment recorded in that quarter as discrete tax adjustments which had a larger than normal impact on the quarterly effective tax rate due to the nominal Loss before taxes recorded in that quarter. 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, and state taxes. The Company’s effective tax rate for the three months ended September 30, 2021 was lower than the prior year period due primarily to the Loss before taxes, an increase in 2020 anticipated research tax credits and a discrete 2019 state return-to-provision adjustments recorded in the third quarter of 2020, which resulted in a large increase on the quarterly effective tax rate. 24 The Company’s effective tax rate for the nine months ended September 30, 2021 was higher than the prior year period due primarily to the impact of discrete tax adjustments recorded in 2020 related to changes in the Company's geographical sales mix on state tax and 2019 federal and state return-to-provision adjustments, which decreased the 2020 effective tax rate. 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 US 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. Net Income Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income (loss) $ 43,942 $ (692) $ 116,204 $ 19,313 As a result of the factors described above, Net income (loss) was $43.9 million and $116.2 million for the three and nine months ended September 30, 2021 as compared to $(0.7) million and $19.3 million in the corresponding prior year period. Non-GAAP Measures (Dollars in thousands, unless otherwise noted) The following tables set forth the non-GAAP financial measures of EBITDA and EBITDA Margin. EBITDA is defined as Net income before Interest, Income taxes and Depreciation and amortization. EBITDA Margin is equal to EBITDA divided by Sales. The following tables may also present each of these measures as further adjusted. The Company believes these non-GAAP financial measures provide meaningful supplemental information as they are used by the Company’s management to evaluate the Company’s operating performance, enhance a reader’s understanding of the financial performance of the Company, and facilitate a better comparison among fiscal periods and performance relative to its competitors, as the non-GAAP measures exclude items that management believes do not reflect the Company’s ongoing operations. These non-GAAP results are presented for supplemental informational purposes only and should not be considered a substitute for the financial information presented in accordance with U.S. GAAP. Non-GAAP financial measures should be read only in conjunction with the comparable U.S. GAAP financial measures. The Company's non-GAAP measures may not be comparable to other companies' non-GAAP measures. The following is a reconciliation between the non-GAAP financial measures of EBITDA and EBITDA Margin to their most directly comparable U.S. GAAP financial measure: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income (loss) $ 43,942 $ (692) $ 116,204 $ 19,313 Interest expense, net 1,174 1,981 4,096 5,827 Income tax expense (benefit) 13,747 (980) 36,835 4,957 Depreciation and amortization 16,325 15,497 49,058 45,061 EBITDA (non-GAAP) 75,188 15,806 206,193 75,158 Sales $ 446,495 $ 281,910 $ 1,260,561 $ 817,644 EBITDA Margin* (non-GAAP) 16.8% 5.6% 16.4% 9.2% *EBITDA Margin is defined as EBITDA divided by Sales Liquidity and Capital Resources (Dollars in thousands, unless otherwise noted) 25 Liquidity We believe that cash balances and operating cash flows, together with available capacity under our credit agreement, will provide adequate funds to support our current short-term operating objectives as well as our longer-term strategic plans, subject to the risks and uncertainties outlined below, in our "Note Regarding Forward-Looking Statements" above, and in the risk factors previously disclosed in our 2020 Form 10-K. Our principal source of liquidity is our cash flow generated from operating activities, which is expected to provide us with the ability to meet the majority of our short-term funding requirements. Our cash flows are affected by capital requirements and production volume, which may be materially impacted by unanticipated events such as unplanned downtime, material disruptions at our production facilities as well as the prices of our raw materials and general economic and industry trends, as well as customer demand, which in the second quarter of 2020, was materially impacted by the circumstances surrounding COVID-19. 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. Our emphasis is primarily on the safety of principal and secondarily on maximizing yield on those funds. We diversify our cash and cash equivalents among counterparties to minimize exposure to any one of these entities. On a recurring basis, our primary future cash needs will be centered on operating activities, working capital, dividends, liquidity, and capital expenditures reflecting disciplined capital deployment. 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 2020 Form 10-K, as well as general economic, financial, competitive, regulatory and other factors that are beyond our control. As of the end of the third quarter of 2021, the Company had approximately $7.2 million of cash on hand with approximately $289 million of additional capacity available under the revolving credit facility. 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 provided leverage ratio covenant flexibility through the maturity date of the credit facility. Capital expenditures are expected to be approximately $63 million in 2021 compared to $83 million in 2020, reflecting efficiencies in project execution and following the completion of several high-return growth and cost savings investments. See Note 14. “Subsequent Events,” for information regarding the Company’s Credit Agreement, entered into on October 27, 2021, which replaces and supersedes the Company’s existing credit facility. As noted in Note 10. "Income Taxes," the Company filed a Federal net operating loss (NOL) carryback claim under the CARES Act in July 2020 which generated a refund of previously paid taxes in the amount of $12.3 million received in the first quarter of 2021. Additionally, the Company deferred approximately $6.5 million of social security taxes in 2020 under the CARES Act of which 50% is due by December 31, 2021 and the remainder is due by December 31, 2022. We assumed from Honeywell all health, safety and environmental (“HSE”) liabilities and compliance obligations related to the past and future operations of our current business, as well as all HSE liabilities associated with our three current manufacturing locations and the other locations used in our current operations including any cleanup or other liabilities related to any contamination that may have occurred at such locations in the past. Honeywell retained all HSE liabilities related to former business locations or the operation of our former businesses. Although we have ongoing environmental remedial obligations at certain of our facilities, in the past three years, the associated remediation costs have not been material, and we do not expect our known remediation costs to have a material adverse effect on our consolidated financial position and results of operations. We expect that our primary cash requirements for the remainder of 2021 will be to fund costs associated with ongoing operations, capital expenditures, and amounts related to other contractual obligations. 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 26 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. On May 4, 2018, the Company announced that its Board of Directors (the “Board”) authorized a share repurchase program of up to $75 million of the Company’s common stock. On February 22, 2019, the Company announced that the Board authorized a share repurchase program of up to an additional $75 million of the Company’s common stock, which was in addition to the remaining capacity available under the May 2018 share repurchase program. Repurchases may be made from time to time on the open market, including through the use of trading plans intended to qualify under Rule 10b5-1 of the Exchange Act. The size and timing of these repurchases will depend on pricing, market and economic conditions, legal and contractual requirements and other factors. The repurchase program has no expiration date and may be modified, suspended or discontinued at any time. As of 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 third quarter of 2021 and the period from October 1, 2021 through October 22, 2021, no additional shares were repurchased under the currently authorized repurchase program. Dividend As announced on September 28, 2021, the Board declared a quarterly cash dividend of $0.125 per share on the Company's common stock, payable on November 23, 2021 to stockholders of record as of the close of business on November 9, 2021. The timing, declaration, amount and payment of future dividends to stockholders, if any, will fall within the discretion of our Board. Holders of shares of our common stock will be entitled to receive dividends when, and if, declared by our Board at its discretion out of funds legally available for that purpose, subject to the terms of our indebtedness, the preferential rights of any preferred stock that may be outstanding, legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. Credit Agreement On September 30, 2016, the Company as the borrower, entered into a Credit Agreement with Bank of America, as administrative agent (the "Original Credit Agreement"), which was amended on February 21, 2018 pursuant to Amendment No. 1 to the Original Credit Agreement (the "First Amended and Restated Credit Agreement"), and further amended on February 19, 2020 pursuant to, Amendment No. 2 to the First Amended and Restated Credit Agreement (after giving effect to the Second Amendment, the “Second Amended and Restated Credit Agreement”). The Second Amended and Restated Credit Agreement had a five year term with a scheduled maturity date of February 21, 2023. The Second Amended and Restated Credit Agreement required 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 required 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 did not comply with the covenants in the Second Amended and Restated Credit Agreement, the lenders could, 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, 2021. Borrowings under the Second Amended and Restated Credit Agreement bore interest at a rate equal to either the sum of a base rate plus a margin ranging from 0.50% to 2.00% or the sum of a Eurodollar rate plus a margin ranging from 1.50% to 3.00%, with either such margin varying according to the Company’s Consolidated Leverage Ratio (as defined in the Second Amended and Restated Credit Agreement). The Company was also required to pay a commitment fee in respect of unused commitments 27 under the credit facility, if any, at a rate ranging from 0.20% to 0.50% per annum depending on the Company’s Consolidated Leverage Ratio. In addition, the Second Amendment also amended certain administrative provisions associated with the LIBOR Successor Rate (as defined in the Second Amended and Restated Credit Agreement). The obligations under the Second Amended and Restated Credit Agreement were secured by a pledge of assets and liens on substantially all of the assets of AdvanSix. The Second Amended and Restated Credit Agreement contained customary covenants limiting the ability of the Company and its subsidiaries to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock of the Company, enter into transactions with affiliates, make investments, make capital expenditures, merge or consolidate with others or dispose of assets, as well as financial covenants that require the Company to maintain interest coverage and leverage ratios at levels specified in the Second Amended and Restated Credit Agreement. These covenants placed limits on how we conduct our business, and in the event of certain defaults, our repayment obligations could be accelerated. We were in compliance with all of our covenants at September 30, 2021 and through the date of the filing of this Quarterly Report on Form 10-Q. On October 27, 2021, the Company completed a refinancing of its existing senior secured revolving credit facility under the Second Amended and Restated Credit Agreement, 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”). For a discussion of the Credit Agreement and Revolving Credit Facility, please refer to Note 14. "Subsequent Events". The situation surrounding COVID-19 remains fluid and unpredictable, and the potential for a material impact on the Company increases the longer the social and economic restrictions remain in place or are reinstituted, which impacts the overall level of consumer and business activity in the United States and globally. For this reason, the Company cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s results of operations, financial position, and liquidity. For further information regarding risk and the impact COVID-19 could have on our business, financial condition, results of operations and liquidity, including our ability to comply with financial covenants in our credit facility and our access to, and cost of, capital, see "Risk Factors" in Item 1A of Part I of the 2020 Form 10-K. As of September 30, 2021, $289 million was available for use out of the total of $425 million under the Revolving Credit Facility. As of December 31, 2020, we had a balance of $275 million under the Revolving Credit Facility. During the nine months ended September 30, 2021, we repaid an incremental net amount of $140 million to bring the balance under the Revolving Credit Facility to $135 million as of September 30, 2021. We expect that Cash provided by operating activities will fund future interest payments on the Company's outstanding indebtedness. Cash Flow Summary Nine Months Ended September 30, 2021 2020 Cash provided by (used for): Operating activities $ 185,523 $ 64,086 Investing activities (47,969) (68,461) Financing activities (140,921) 14,011 Net change in cash and cash equivalents $ (3,367) $ 9,636 Cash provided by operating activities increased by $121.4 million for the nine months ended September 30, 2021 versus the prior year period due primarily to a $96.9 million increase in net income, a $23.7 million cash improvement from Taxes receivable (including a $12.3 million cash tax refund received in the first quarter of 2021) and a $13.3 million favorable cash impact from working capital (comprised of Accounts and other receivables, Inventories, Accounts payable and Deferred income and customer advances) year-over-year with a $4.9 million unfavorable cash impact from working capital for the nine months ended September 30, 2021 compared to a $18.2 million unfavorable cash impact in the prior year period. These net favorable 28 impacts for the nine months ended September 30, 2021 were partially offset by a $20.3 million unfavorable cash impact from Other assets and liabilities driven by a $2.7 million increase in prepaid insurance and a decrease in the pension liability of $16.4 million (primarily reflecting the impact of cash pension contributions), compared to the prior year period. Cash used for investing activities decreased by $20.5 million for the nine months ended September 30, 2021 versus the prior year period due to lower cash payments for capital expenditures of approximately $30.1 million reflecting capital project efficiencies and timing of project execution offset by cash paid for the acquisition of Commonwealth Industrial Services for approximately $9.5 million. Cash used for financing activities increased by $154.9 million for the nine months ended September 30, 2021 versus the prior year period due primarily to net repayments of $140.0 million for the nine months ended September 30, 2021 compared to net borrowings of $16.0 million during the prior year period as described above. Capital Expenditures (Dollars in thousands, unless otherwise noted) Our operations are capital intensive, requiring ongoing investments that have consisted, and are expected to continue to consist, primarily of capital expenditures required to maintain and improve equipment reliability, expand production output, further improve mix, yield and cost position, and comply with environmental and safety regulations. The following table summarizes ongoing and expansion capital expenditures: Nine Months Ended September 30, 2021 Capital expenditures in Accounts payable at December 31, 2020 $ 6,178 Purchases of property, plant and equipment 38,076 Less: Capital expenditures in Accounts payable at September 30, 2021 (6,783) Cash paid for capital expenditures $ 37,471 For 2021, we expect our total capital expenditures to be approximately $63 million compared to $83 million in 2020, reflecting process and execution efficiencies, as well as timing and scope of replacement maintenance and high-return growth and cost savings projects. Capital expenditures are deployed for various ongoing investments and initiatives to improve reliability, yield and quality, expand production capacity and comply with HSE regulations. Critical Accounting Policies The preparation of our Condensed Consolidated Financial Statements in accordance with U.S. GAAP is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider these accounting policies to be critical to the understanding of our Condensed Consolidated Financial Statements. For a full description of our critical accounting policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our 2020 Form 10-K. While there have been no material changes to our critical accounting policies, or the methodologies or assumptions we apply under them, we continue to monitor such methodologies and assumptions. Off-Balance Sheet Arrangements and Contractual Obligations As of September 30, 2021, the Company did not have any off-balance sheet arrangements as described in Instruction 8 to Item 303(b) of Regulation S-K and did not have any material changes in the commitments or contractual obligations detailed in the Company's 2020 Form 10-K. The Company has not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets. Recent Accounting Pronouncements See “Note 2. Recent Accounting Pronouncements” to the Condensed Consolidated Financial Statements included in Part I. Item 1 of this Form 10-Q.