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, 2022 2021 2022 2021 Sales $ 478,769 $ 446,495 $ 1,541,578 $ 1,260,561 Costs, expenses and other: Costs of goods sold 443,646 366,180 1,296,128 1,040,965 Selling, general and administrative expenses 23,069 21,121 65,120 62,112 Interest expense, net 686 1,174 2,017 4,096 Other non-operating (income) expense, net ( 1,394 ) 331 ( 1,825 ) 349 Total costs, expenses and other 466,007 388,806 1,361,440 1,107,522 Income before taxes 12,762 57,689 180,138 153,039 Income tax expense 2,730 13,747 41,876 36,835 Net income $ 10,032 $ 43,942 $ 138,262 $ 116,204 Earnings per common share Basic $ 0.36 $ 1.56 $ 4.92 $ 4.13 Diluted $ 0.35 $ 1.51 $ 4.74 $ 4.02 Weighted average common shares outstanding Basic 27,944,494 28,182,810 28,103,255 28,136,511 Diluted 28,889,658 29,100,276 29,173,537 28,920,832 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, 2022 2021 2022 2021 Net income $ 10,032 $ 43,942 $ 138,262 $ 116,204 Foreign exchange translation adjustment ( 32 ) ( 15 ) ( 10 ) ( 20 ) Cash-flow hedges 57 415 864 1,300 Other comprehensive income (loss), net of tax 25 400 854 1,280 Comprehensive income $ 10,057 $ 44,342 $ 139,116 $ 117,484 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, 2022 December 31, 2021 ASSETS Current assets: Cash and cash equivalents $ 24,694 $ 15,100 Accounts and other receivables – net 185,901 178,140 Inventories – net 158,432 149,570 Taxes receivable 14,930 947 Other current assets 14,399 6,097 Total current assets 398,356 349,854 Property, plant and equipment – net 803,188 767,964 Operating lease right-of-use assets 124,960 136,207 Goodwill 56,192 17,592 Intangible assets 50,004 17,980 Other assets 22,833 22,402 Total assets $ 1,455,533 $ 1,311,999 LIABILITIES Current liabilities: Accounts payable $ 265,090 $ 211,511 Accrued liabilities 44,068 49,712 Income taxes payable 24 9,723 Operating lease liabilities – short-term 38,913 36,127 Deferred income and customer advances 2,561 2,749 Total current liabilities 350,656 309,822 Deferred income taxes 152,412 133,330 Operating lease liabilities – long-term 86,304 100,580 Line of credit – long-term 135,000 135,000 Postretirement benefit obligations 6,868 18,243 Other liabilities 10,016 13,834 Total liabilities 741,256 710,809 COMMITMENTS AND CONTINGENCIES (Note 9) STOCKHOLDERS' EQUITY Common stock, par value $ 0.01 ; 200,000,000 shares authorized; 31,962,466 shares issued and 27,715,594 outstanding at September 30, 2022; 31,755,430 shares issued and 28,139,954 outstanding at December 31, 2021 320 318 Preferred stock, par value $ 0.01 ; 50,000,000 shares authorized and 0 shares issued and outstanding at September 30, 2022 and December 31, 2021 — — Treasury stock at par ( 4,246,872 shares at September 30, 2022; 3,615,476 shares at December 31, 2021) ( 42 ) ( 36 ) Additional paid-in capital 181,628 195,931 Retained earnings 538,056 411,516 Accumulated other comprehensive loss ( 5,685 ) ( 6,539 ) Total stockholders' equity 714,277 601,190 Total liabilities and stockholders' equity $ 1,455,533 $ 1,311,999 5 ADVANSIX INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except share and per share amounts) See accompanying notes to Condensed Consolidated Financial Statements. 6 ADVANSIX INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Nine Months Ended September 30, 2022 2021 Cash flows from operating activities: Net income $ 138,262 $ 116,204 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 51,870 49,058 Loss on disposal of assets 1,303 842 Deferred income taxes 8,696 11,235 Stock-based compensation 7,599 8,606 Accretion of deferred financing fees 464 424 Changes in assets and liabilities, net of business acquisitions: Accounts and other receivables 7,346 ( 46,549 ) Inventories 27 37,885 Taxes receivable ( 13,983 ) 11,952 Accounts payable 43,468 27,047 Income taxes payable ( 9,699 ) — Accrued liabilities ( 7,666 ) 6,418 Deferred income and customer advances ( 188 ) ( 23,241 ) Other assets and liabilities ( 23,512 ) ( 14,358 ) Net cash provided by operating activities 203,987 185,523 Cash flows from investing activities: Expenditures for property, plant and equipment ( 61,010 ) ( 37,471 ) Acquisition of business ( 97,456 ) ( 9,523 ) Other investing activities ( 1,587 ) ( 975 ) Net cash used for investing activities ( 160,053 ) ( 47,969 ) Cash flows from financing activities: Borrowings from line of credit 354,000 133,500 Payments of line of credit ( 354,000 ) ( 273,500 ) Principal payments of finance leases ( 712 ) ( 534 ) Dividend payments ( 11,083 ) — Purchase of treasury stock ( 23,591 ) ( 589 ) Issuance of common stock 1,046 202 Net cash used for financing activities ( 34,340 ) ( 140,921 ) Net change in cash and cash equivalents 9,594 ( 3,367 ) Cash and cash equivalents at beginning of period 15,100 10,606 Cash and cash equivalents at the end of period $ 24,694 $ 7,239 Supplemental non-cash investing activities: Capital expenditures included in accounts payable $ 19,182 $ 6,783 Supplemental cash activities: Cash paid for interest $ 1,580 $ 3,785 Cash paid for income taxes $ 55,840 $ 23,051 See accompanying notes to Condensed Consolidated Financial Statements. 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, 2021 31,755,430 $ 318 $ 195,931 $ 411,516 $ ( 36 ) $ ( 6,539 ) $ 601,190 Net Income — — — 63,073 — — 63,073 Comprehensive income Foreign exchange translation adjustments — — — — — 57 57 Cash-flow hedges — — — — — 512 512 Pension obligation adjustments — — — — — — — Other comprehensive income (loss), net of tax — — — — — 569 569 Issuance of common stock 144,875 1 713 — — — 714 Purchase of treasury stock ( 181,536 shares) — — ( 7,010 ) — ( 2 ) — ( 7,012 ) Stock-based compensation — — 3,374 — — — 3,374 Dividends — — 313 ( 3,830 ) — — ( 3,517 ) Balance at March 31, 2022 31,900,305 319 193,321 470,759 ( 38 ) ( 5,970 ) 658,391 Net Income — — — 65,157 — — 65,157 Comprehensive income Foreign exchange translation adjustments — — — — — ( 35 ) ( 35 ) Cash-flow hedges — — — — — 295 295 Pension obligation adjustments — — — — — — — Other comprehensive income (loss), net of tax — — — — — 260 260 Issuance of common stock 61,651 1 317 — — — 318 Purchase of treasury stock ( 87,251 shares) — — ( 3,406 ) — ( 1 ) — ( 3,407 ) Stock-based compensation — — 2,005 — — — 2,005 Dividends — — 155 ( 3,670 ) — — ( 3,515 ) Balance at June 30, 2022 31,961,956 320 192,392 532,246 ( 39 ) ( 5,710 ) 719,209 Net Income — — — 10,032 — — 10,032 Comprehensive income Foreign exchange translation adjustments — — — — — ( 32 ) ( 32 ) Cash-flow hedges — — — — — 57 57 Pension obligation adjustments — — — — — — — Other comprehensive income (loss), net of tax — — — — — 25 25 Issuance of common stock 510 — 14 — — — 14 Purchase of treasury stock ( 362,609 shares) — — ( 13,169 ) — ( 3 ) — ( 13,172 ) Stock-based compensation — — 2,220 — — — 2,220 Dividends — — 171 ( 4,222 ) — — ( 4,051 ) Balance at September 30, 2022 31,962,466 $ 320 $ 181,628 $ 538,056 $ ( 42 ) $ ( 5,685 ) $ 714,277 8 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 See accompanying notes to Condensed Consolidated Financial Statements. 9 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, agrochemicals, plastics, solvents, packaging, paints, coatings, adhesives and electronics. Our reliable and sustainable supply of quality products emerges from the integrated value chain of our five 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 Since early 2020, the novel coronavirus (COVID-19) has continued to spread, with confirmed cases worldwide, and with certain jurisdictions experiencing resurgences, including as a result of variant strains. The pandemic and related 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. 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, 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 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, 2022, and its results of operations for the three and nine months ended September 30, 2022 and 2021 and cash flows for the nine months ended September 30, 2022 and 2021. 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, 2021 (the "2021 Form 10-K"). All intercompany transactions have been eliminated. Certain prior period amounts have been reclassified for consistency with the current period presentation. 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 have generally not been significant to reported results for any quarter and 10 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) 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, 2022 and 2021 were October 1, 2022 and October 2, 2021, respectively. Liabilities to creditors to whom we have issued checks that remained outstanding at September 30, 2022 and December 31, 2021 aggregated to $ 2.5 million and $ 4.5 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 in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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 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, 2022, the Company has repurchased a total of 4,246,872 shares of common stock, including 592,976 shares withheld to cover tax withholding obligations in connection with the vesting of awards, for an aggregate of $ 125.9 million at a weighted average market price of $ 29.66 per share. As of September 30, 2022, $ 38.6 million remained available for share repurchases under the current authorization. During the period October 1, 2022 through October 28, 2022, the Company repurchased an additional 148,700 shares at a weighted average market price of $ 33.36 per share under the current authorized repurchase program. 2. Recent Accounting Pronouncements Recent Accounting Pronouncements – The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). Any ASUs not currently adopted 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. 3. Revenues Revenue Recognition We serve approximately 400 customers annually in approximately 50 countries across a wide variety of industries. For the three months ended September 30, 2022 and 2021, the Company's ten largest customers accounted for approximately 43 % and 43 % of total sales, respectively. For the nine months ended September 30, 2022 and 2021, the Company's ten largest customers accounted for approximately 39 % and 41 % 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 and nine months ended September 30, 2022, the Company's sales to Shaw were 16 % and 12 % of our total sales, respectively compared to 13 % and 12 % for the same periods in 2021. The Company's revenue by product line, and related approximate percentage of total sales, for the three and nine months ended September 30, 2022 and 2021 were as follows: 11 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, 2022 2021 2022 2021 Nylon $ 141,017 29 % $ 122,110 27 % $ 391,731 25 % $ 317,608 25 % Caprolactam 90,818 19 % 80,265 18 % 247,992 16 % 242,460 19 % Chemical Intermediates 115,268 24 % 130,920 29 % 409,568 27 % 416,482 33 % Ammonium Sulfate 131,666 28 % 113,200 26 % 492,287 32 % 284,011 23 % $ 478,769 100 % $ 446,495 100 % $ 1,541,578 100 % $ 1,260,561 100 % The Company's revenues by geographic area, and related approximate percentage of total sales, for the three and nine months ended September 30, 2022 and 2021 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 United States $ 393,447 82 % $ 365,210 82 % $ 1,290,621 84 % $ 1,039,291 82 % International 85,322 18 % 81,285 18 % 250,957 16 % 221,270 18 % Total $ 478,769 100 % $ 446,495 100 % $ 1,541,578 100 % $ 1,260,561 100 % Deferred Income and Customer Advances The Company defers revenues when cash payments are received in advance of our performance. Below is a roll-forward of Deferred income and customer advances for the nine months ended September 30, 2022: Opening balance January 1, 2022 $ 2,749 Additional cash advances 2,506 Less amounts recognized in revenues ( 2,694 ) Ending balance September 30, 2022 $ 2,561 The Company expects to recognize as revenue the September 30, 2022 ending balance of Deferred income and customer advances within one year or less. 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, 2022 and 2021 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Basic Net income $ 10,032 $ 43,942 $ 138,262 $ 116,204 Weighted average common shares outstanding 27,944,494 28,182,810 28,103,255 28,136,511 EPS – Basic $ 0.36 $ 1.56 $ 4.92 $ 4.13 Diluted Dilutive effect of equity awards and other stock-based holdings 945,164 917,466 1,070,282 784,321 Weighted average common shares outstanding 28,889,658 29,100,276 29,173,537 28,920,832 EPS – Diluted $ 0.35 $ 1.51 $ 4.74 $ 4.02 12 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) 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, 2022 and 2021 were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Options and stock equivalents 227,144 318,706 156,418 535,299 Dividend activity for the three and nine months ended September 30, 2022 and 2021 was as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Cash dividends declared per share $ 0.145 $ 0.125 $ 0.395 $ 0.125 Aggregate dividends paid to shareholders $ 4,051 $ — $ 11,083 $ — 5. Accounts and Other Receivables – Net September 30, 2022 December 31, 2021 Accounts receivables $ 182,179 $ 175,584 Other 4,203 4,051 Total accounts and other receivables 186,382 179,635 Less – allowance for doubtful accounts ( 481 ) ( 1,495 ) Total accounts and other receivables – net $ 185,901 $ 178,140 6. Inventories September 30, 2022 December 31, 2021 Raw materials $ 108,682 $ 56,961 Work in progress 34,413 43,526 Finished goods 51,925 27,961 Spares and other 28,242 27,150 223,262 155,598 Reduction to LIFO cost basis ( 64,830 ) ( 6,028 ) Total inventories $ 158,432 $ 149,570 Substantially all of the Company’s inventories at September 30, 2022 and December 31, 2021 are valued at the lower of cost or market using the last-in, first-out (“LIFO”) method. However, approximately 9 % was valued at average cost using the first-in, first-out (“FIFO”) method at September 30, 2022. The excess of replacement cost over the carrying value of total inventories subject to LIFO was $ 69.9 million and $ 29.4 million at September 30, 2022 and December 31, 2021, respectively. 7. 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. 13 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) The components of lease expense were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Finance lease cost: Amortization of right-of-use asset $ 229 $ 185 $ 703 $ 527 Interest on lease liabilities 15 8 37 24 Total finance lease cost 244 193 740 551 Operating lease cost 11,711 10,072 32,321 30,142 Short-term lease cost 1,541 2,743 4,091 9,379 Total lease cost $ 13,496 $ 13,008 $ 37,152 $ 40,072 As of September 30, 2022, we have additional operating and finance leases that have not yet commenced for approximately $ 5.5 million and approximately $ 0.5 million, respectively. These leases will commence during 2022 with lease terms of up to 7 years. 8. Goodwill and Intangible Assets Intangible assets with finite lives acquired through a business combination are recorded at fair value, less accumulated amortization. Customer relationships and trade-names are amortized on a straight-line basis over their expected useful lives of 15 to 20 years and 5 years, respectively. Goodwill The change in the carrying amount of goodwill was as follows: Total Balance at December 31, 2021 $ 17,592 Acquisition of U.S. Amines 38,600 Balance at September 30, 2022 $ 56,192 Finite-Lived Intangible Assets Intangible assets subject to amortization were as follows: September 30, 2022 December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Book Value Gross Carrying Amount Accumulated Amortization Net Book Value Customer relationships $ 36,820 $ ( 1,377 ) $ 35,443 $ 3,920 $ ( 240 ) $ 3,680 Licenses 18,451 ( 4,843 ) 13,608 18,451 ( 4,151 ) 14,300 Trade names 1,100 ( 147 ) 953 — — — Total $ 56,371 $ ( 6,367 ) $ 50,004 $ 22,371 $ ( 4,391 ) $ 17,980 For the three months ended September 30, 2022 and September 30, 2021, the Company recorded amortization expense on intangible assets of $ 0.8 million and $ 0.9 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company recorded amortization expense on intangible assets of $ 2.0 million and $ 1.4 million, respectively. 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 14 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) 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 International Inc. ("Honeywell") all health, safety and environmental (“HSE”) liabilities and compliance obligations related to the past and future operations of our current business as of the spin-off, as well as all HSE liabilities associated with the three manufacturing locations assumed from Honeywell that are 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 $ 2.7 million and $ 13.7 million for the three months ended September 30, 2022 and 2021, respectively, resulting in an effective tax rate of 21.4 % and 23.8 %, respectively. The provision for income taxes was $41.9 million and $36.8 million for the nine months ended September 30, 2022 and 2021, respectively, resulting in an effective tax rate of 23.2 % and 24.1 %, respectively. 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, 2022 and 2021 differed from the U.S. federal statutory rate, due primarily to state taxes and executive compensation deduction limitations which generally increase the tax rate, partially offset by tax credits and the foreign-derived intangible income deduction which generally decrease the tax rate. In February 2022, the Company acquired the stock of U.S. Amines Limited. Under purchase accounting rules, during the first and second quarter of 2022, a net deferred tax liability of approximately $ 12.1 million was recorded related to the adjustment of the acquired assets and liabilities to fair value. In the third quarter, the Company recorded a measurement period adjustment which resulted in a $ 2.0 million reduction to the net deferred tax liability with a corresponding reduction to Goodwill acquired. See Note 13 "Acquisitions" for further details. On August 16, 2022, the Inflation Reduction Act of 2022 (the "IRA") was signed into law. This legislation includes significant changes relating to tax, climate change, energy and health care. Among other provisions, the IRA introduces a book minimum tax assessed on financial statement income of certain large corporations and an excise tax on share repurchases. The Company does not anticipate these provisions will have a material impact on our results of operations or financial condition, when effective. The IRA also includes significant extensions, expansions and enhancements related to climate and energy tax credits designed to encourage investment in the adoption and expansion of renewable and alternative energy sources. The Company is evaluating these provisions of the law. 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 July 2019, the Company entered into an interest rate swap transaction related to its credit agreement. The fair value of the interest rate swap at September 30, 2022 was a gain of approximately $ 0.4 million and is considered a Level 2 liability. 15 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) 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, 2022 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 and interest rate swap agreement, 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 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, 2022 or December 31, 2021. 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, 2022 and 2021, we had no financial contracts related to forward commodity agreements. Interest Rate Risk Management – The Company has entered into one interest rate swap agreement for a total notional amount of $ 50 million to exchange floating for fixed rate interest payments for our LIBOR-based borrowings. The interest rate swap had a fair value of zero at inception and was effective July 31, 2019 with a maturity date of February 21, 2023. In accordance with ASC 815, the Company designated the interest rate swap as a cash flow hedge of floating-rate borrowings. The interest rate swap converts the Company’s interest rate payments on the first $ 50 million of variable-rate, 1-month LIBOR-based debt to a fixed interest rate. The interest rate swap involves 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. 16 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) Asset (Liability) Derivatives September 30, 2022 December 31, 2021 Balance Sheet Classification Fair Value Balance Sheet Classification Fair Value Derivatives designated as hedging instruments under ASC 815: Interest Rate Contracts Accounts and other receivables, net $ 426 Accrued liabilities and Other liabilities $ ( 708 ) Total Derivatives $ 426 $ ( 708 ) 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, 2022 Loss on derivative instruments included in Accumulated other comprehensive loss at December 31, 2021 $ ( 708 ) Fair value adjustment 1,134 Gain on derivative instruments included in Accumulated other comprehensive loss at September 30, 2022 $ 426 At September 30, 2022, the Company expects to reclassify approximately $ 0.4 million of net gains 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 (gains) losses on derivative instruments from AOCI into earnings: Amount of (Gain) Loss Recognized in Earnings Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Derivatives: Interest Rate Contracts $ ( 256 ) $ 565 $ ( 375 ) $ 1,684 Total Derivatives $ ( 256 ) $ 565 $ ( 375 ) $ 1,684 13. Acquisitions In February 2022, the Company acquired the stock of U.S. Amines Limited ("U.S. Amines"), a leading North American producer of alkyl and specialty amines serving high-value end markets such as agrochemicals and pharmaceuticals for an estimated purchase price of approximately $ 97 million, net of cash acquired. U.S. Amines employs approximately 50 people in the United States at manufacturing facilities in Bucks, AL and Portsmouth, VA. In accordance with ASC 805, this transaction has been accounted for as a business combination. The Company used its best estimates and assumptions for items including, but not limited to, corporate name recognition, strong, long-lasting customer relationships and potential revenue growth from existing customers 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 finite-lived intangible assets, comprised of customer relationships (approximately $ 33 million) and trademarks (approximately $ 1 million) which reflect the value of the benefit derived from incremental revenue and related cash flows as a direct result of the customer relationships and name brand. These intangible assets are being amortized on a straight-line basis over their estimated useful lives of 20 years and 5 years, 17 ADVANSIX INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts and as otherwise noted) respectively. The residual amount of the purchase price in excess of the value of the tangible and definite-lived intangible assets was allocated to goodwill. Factors considered when identifying goodwill included, but are not limited to, a complementary business model and formula pricing mechanisms with a business that is adjacent to our ammonium sulfate adjuvant and solvent businesses, the enhancement of the Company’s value chain through internal supply of products and raw materials, a new unique platform in the agrochemicals space as well as a number of opportunities to support further penetration into high-value applications. The U.S. Amines acquisition was not significant to our Condensed Consolidated Financial Statements, therefore, pro forma and post-acquisition results of operations have not been presented. 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 for the transaction noted above: Initially Reported as of March 31, 2022 (Preliminary) Measurement Period Adjustment September 30, 2022 (Preliminary) Cash $ 22,887 $ — $ 22,887 Accounts receivable 15,117 — 15,117 Inventories 11,937 ( 3,048 ) 8,889 Other current assets 1,876 ( 167 ) 1,709 Property, plant and equipment 13,600 ( 8 ) 13,592 Intangible assets 31,400 2,600 34,000 Accounts payable ( 1,487 ) ( 88 ) ( 1,575 ) Accrued liabilities ( 2,760 ) — ( 2,760 ) Deferred income taxes ( 12,243 ) 2,127 ( 10,116 ) Net tangible and intangible assets 80,327 1,416 81,743 Goodwill 40,271 ( 1,671 ) 38,600 Total purchase price $ 120,598 $ ( 255 ) $ 120,343 Total purchase price $ 120,598 $ ( 255 ) $ 120,343 Less: Cash acquired ( 22,887 ) — ( 22,887 ) Total purchase price, net of cash received 97,711 ( 255 ) 97,456 Estimated working capital adjustment due from seller 878 ( 878 ) — Net cash paid $ 98,589 $ ( 1,133 ) $ 97,456 Goodwill deductible for tax purposes $ — $ — $ — The preliminary amounts presented in the table above pertained to the preliminary purchase price allocation reported in the Company's Form 10-Q for the first quarter ended March 31, 2022. The measurement period adjustment was primarily associated with the inventory valuation and a change to the deferred income tax liability. The Company does not believe that the measurement period adjustment had a material impact on its consolidated statements of operations, balance sheets or cash flows in the prior period previously reported. In January 2021, the Company acquired certain assets associated with ammonium sulfate packaging, warehousing and logistics services in Virginia from Commonwealth Industrial Services, Inc. ("CIS") for approximately $ 9.5 million. 14. Subsequent Events As announced on November 4, 2022, the Board declared a quarterly cash dividend of $ 0.145 per share on the Company's common stock, payable on November 29, 2022 to stockholders of record as of the close of business on November 15, 2022. 18