asix-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


(Mark One)
☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 1-37774


AdvanSix Inc.
(Exact name of registrant as specified in its charter)


Delaware						81-2525089
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


300 Kimball Drive, Suite 101, Parsippany, New Jersey						07054
(Address of principal executive offices)						(Zip Code)

(973) 526-1800

(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	ASIX	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer ý	Accelerated filer o	Non-accelerated filer o	Smaller reporting company ☐
			Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

The Registrant had 28,030,271 shares of common stock, $0.01 par value, outstanding at October 23, 2020.

ADVANSIX INC.

FORM 10-Q

TABLE OF CONTENTS


Part I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)	4
	Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)	6
	Condensed Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34

Part II.	OTHER INFORMATION	35
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.	Exhibits	38
	Signature	39

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,
	2020		2019		2020		2019
Sales	$	281,910	$	310,633	$	817,644	$	970,743
Costs, expenses and other:
Costs of goods sold	265,758		280,123		736,504		850,131
Selling, general and administrative expenses	16,177		19,261		50,827		58,683
Interest expense, net	1,981		1,293		5,827		3,727
Other non-operating expense (income), net	(334)		522		216		1,144
Total costs, expenses and other	283,582		301,199		793,374		913,685

Income (loss) before taxes	(1,672)		9,434		24,270		57,058
Income tax expense (benefit)	(980)		1,513		4,957		13,617
Net income (loss)	$	(692)	$	7,921	$	19,313	$	43,441

Earnings (loss) per common share
Basic	$	(0.02)	$	0.29	$	0.69	$	1.54
Diluted	$	(0.02)	$	0.28	$	0.69	$	1.49
Weighted average common shares outstanding
Basic	28,079,937		27,608,985		28,037,651		28,192,760
Diluted	28,079,937		28,581,451		28,092,712		29,164,024

See accompanying notes to Condensed Consolidated Financial Statements.

ADVANSIX INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income (loss)	$	(692)	$	7,921	$	19,313	$	43,441
Foreign exchange translation adjustment	(10)		(20)		(67)		(17)

Cash-flow hedges	346		(439)		(1,563)		(1,060)

Other comprehensive income (loss), net of tax	336		(459)		(1,630)		(1,077)
Comprehensive income (loss)	$	(356)	$	7,462	$	17,683	$	42,364

See accompanying notes to Condensed Consolidated Financial Statements.

ADVANSIX INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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


	September 30, 2020		December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	16,686	$	7,050
Accounts and other receivables – net	97,101		104,613
Inventories – net	173,873		171,710
Taxes receivable	13,807		2,047
Other current assets	7,096		5,117
Total current assets	308,563		290,537
Property, plant and equipment – net	765,125		755,881
Operating lease right-of-use assets	110,360		135,985
Goodwill	15,005		15,005

Other assets	36,079		38,561
Total assets	$	1,235,132	$	1,235,969

LIABILITIES
Current liabilities:
Accounts payable	$	179,652	$	205,911
Accrued liabilities	35,610		28,114

Operating lease liabilities – short-term	31,724		38,005
Deferred income and customer advances	6,176		19,696


Total current liabilities	253,162		291,726
Deferred income taxes	121,445		110,071
Operating lease liabilities – long-term	79,085		98,347
Line of credit – long-term	313,000		297,000

Postretirement benefit obligations	36,783		32,410
Other liabilities	10,623		5,537
Total liabilities	814,098		835,091

COMMITMENTS AND CONTINGENCIES (Note 10)

STOCKHOLDERS' EQUITY
Common stock, par value $0.01; 200,000,000 shares authorized; 31,622,910 shares issued and 28,030,271 outstanding at September 30, 2020; 31,423,898 shares issued and 27,914,777 outstanding at December 31, 2019	316		314
Preferred stock, par value $0.01; 50,000,000 shares authorized and 0 shares issued and outstanding at September 30, 2020 and December 31, 2019	—		—
Treasury stock at par (3,592,639 shares at September 30, 2020; 3,509,121 shares at December 31, 2019)	(36)		(35)
Additional paid-in capital	183,356		180,884
Retained earnings	248,479		229,166
Accumulated other comprehensive loss	(11,081)		(9,451)
Total stockholders' equity	421,034		400,878
Total liabilities and stockholders' equity	$	1,235,132	$	1,235,969

See accompanying notes to Condensed Consolidated Financial Statements.

ADVANSIX INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities:
Net income	$	19,313	$	43,441
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	45,061		42,094
Loss on disposal of assets	143		4,967
Deferred income taxes	11,895		9,149
Stock based compensation	3,503		7,575
Accretion of deferred financing fees	412		320
Restructuring charges	—		12,623
Changes in assets and liabilities:
Accounts and other receivables	7,445		51,170
Inventories	(2,163)		(26,739)
Taxes receivable	(11,760)		(34)
Accounts payable	(9,939)		(12,844)

Accrued liabilities	7,776		(4,470)
Deferred income and customer advances	(13,520)		(20,608)
Other assets and liabilities	5,920		(6,108)
Net cash provided by operating activities	64,086		100,536

Cash flows from investing activities:
Expenditures for property, plant and equipment	(67,563)		(106,386)

Other investing activities	(898)		(2,203)
Net cash used for investing activities	(68,461)		(108,589)

Cash flows from financing activities:



Borrowings from line of credit	268,500		316,750
Payments of line of credit	(252,500)		(250,750)
Payment of line of credit facility fees	(425)		—


Principal payments of finance leases	(534)		(4,656)
Purchase of treasury stock	(1,032)		(53,067)
Issuance of common stock	2		16


Net cash provided by financing activities	14,011		8,293

Net change in cash and cash equivalents	9,636		240
Cash and cash equivalents at beginning of period	7,050		9,808
Cash and cash equivalents at the end of period	$	16,686	$	10,048

Supplemental non-cash investing activities:
Capital expenditures included in accounts payable	$	5,802	$	27,344

Supplemental cash activities:
Cash paid for interest	$	4,493	$	3,519
Cash paid for income taxes	$	1,501	$	6,949

See accompanying notes to Condensed Consolidated Financial Statements.

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

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, 2018	30,555,715	$	306	$	234,699	$	187,819	$	(12)	$	(2,474)	$	420,338

Net Income	—	—		—		20,174		—		—		20,174
Comprehensive income
Foreign exchange translation adjustments	—	—		—		—		—		(1)		(1)
Cash-flow Hedges	—	—		—		—		—		(192)		(192)
Pension obligation adjustments	—	—		—		—		—		—		—
Other comprehensive income (loss), net of tax	—	—		—		—		—		(193)		(193)
Issuance of common stock	22,497	—		16		—		—		—		16
Purchase of treasury stock (793,754 shares)	—	—		(23,845)		—		(8)		—		(23,853)
Stock-based compensation	—	—		2,762		—		—		—		2,762
Balance at March 31, 2019	30,578,212	306		213,632		207,993		(20)		(2,667)		419,244

Net Income	—	—		—		15,346		—		—		15,346
Comprehensive income
Foreign exchange translation adjustments	—	—		—		—		—		4		4
Cash-flow Hedges	—	—		—		—		—		(429)		(429)
Pension obligation adjustments	—	—		—		—		—		—		—
Other comprehensive income (loss), net of tax	—	—		—		—		—		(425)		(425)
Issuance of common stock	13,260	—		—		—		—		—		—
Purchase of treasury stock (578,045 shares)	—	—		(16,408)		—		(6)		—		(16,414)
Stock-based compensation	—	—		2,812		—		—		—		2,812
Balance at June 30, 2019	30,591,472	306		200,036		223,339		(26)		(3,092)		420,563

Net Income	—	—		—		7,921		—		—		7,921
Comprehensive income
Foreign exchange translation adjustments	—	—		—		—		—		(20)		(20)
Cash-flow Hedges	—	—		—		—		—		(439)		(439)
Pension obligation adjustments	—	—		—		—		—		—		—
Other comprehensive income (loss), net of tax	—	—		—		—		—		(459)		(459)
Issuance of common stock	9,236	—		—		—		—		—		—
Purchase of treasury stock (537,033 shares)	—	—		(12,795)		—		(5)		—		(12,800)
Stock-based compensation	—	—		2,001		—		—		—		2,001
Balance at September 30, 2019	30,600,708	$	306	$	189,242	$	231,260	$	(31)	$	(3,551)	$	417,226

See accompanying notes to Condensed Consolidated Financial Statements.

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") is an integrated manufacturer of Nylon 6, 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 electronic components, sports apparel, food packaging and other industrial applications. As a result of our backward integration and the configuration of our manufacturing facilities, we also sell a variety of other products, all of which are produced within unit operations across our manufacturing value chain, including caprolactam, ammonium sulfate fertilizers, acetone and other chemical intermediates.

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 rapidly, with most countries and territories worldwide having confirmed cases, and with certain jurisdictions experiencing resurgences. The spread has resulted in authorities implementing numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses around the world and on global, regional and national economies, including disruptions to supply chains, reduced demand and production across most industries, declines and volatility within global financial markets and decreased workforces causing increased unemployment. Although countries and regions are in various phases of re-opening, certain jurisdictions have returned to certain restrictions in light of new COVID-19 cases.

The Company continues to evaluate the potential impact of The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted on March 27, 2020. The CARES Act, and other government stimulus programs are intended to provide economic relief resulting from the COVID-19 pandemic which includes, but is not limited to, provisions for taxes, employment related costs, deferral of pension payments and options for liquidity. See "Note 11. Income Taxes" below for a further discussion of the CARES Act.

The Company’s Condensed Consolidated Financial Statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and reported amounts of revenue and expenses during the periods presented. The Company considered the impact of COVID-19 on the assumptions and estimates used and determined that there was no material impact on the Company’s first quarter 2020 results of operations. In the second quarter of 2020, the Company experienced lower demand, resulting in a reduction of plant utilization rates and a decrease in overall sales volume compared to the prior year period, primarily related to global markets and the economic impact of COVID-19. During the third quarter, the Company experienced an improvement of demand to approximately pre-COVID-19 levels. The situation surrounding COVID-19 remains fluid and unpredictable, and the potential for a continued material impact on the Company increases the longer the social and economic restrictions which impact the overall level of consumer and business activity in the United States and globally, remain in place or are reinstituted. 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.

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, 2020, and its results of operations for the three and nine months ended

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2020 and 2019 and cash flows for the nine months ended September 30, 2020 and 2019. The year-end Condensed Consolidated Balance Sheet data were derived from audited financial statements but does not include all disclosures required by U.S. 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, 2019 (the "2019 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 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, 2020 and 2019 were September 26, 2020 and September 28, 2019, respectively.

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

On May 4, 2018, the Company announced that its Board of Directors (the “Board”) authorized a share repurchase program of up to $75 million of the Company’s common stock. 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, 2020, the Company had repurchased 3,592,639 shares of common stock, including 502,877 shares withheld to cover tax withholding obligations in connection with the vesting of awards, for an aggregate of $101.7 million at a weighted average market price of $28.31 per share. As of September 30, 2020, $59.6 million remained available for share repurchases under the current authorization. During the period October 1, 2020 through October 23, 2020, no additional shares were repurchased under the currently authorized repurchase program.

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.

On August 5, 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The amendments in the ASU remove certain separation models for convertible debt instruments and convertible preferred stock that require the separation of a convertible debt instrument into a debt component and an equity or derivative component. Therefore, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in-capital. This will result in more convertible debt instruments being accounted for as a single liability measured at its amortized cost and more convertible preferred stock being accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. The ASU also amends the derivative scope exception guidance for contracts in an entity’s own equity. The amendments remove three settlement conditions that are required for equity contracts to qualify for the derivative scope exception. The guidance is effective for public business entities for fiscal years, and interim terms within those fiscal years, beginning after December 15, 2021. Early adoption of the amendments in this update is permitted, but no earlier than fiscal years, including interim periods within those fiscal years, beginning after December 15, 2020. The Company is evaluating the impact that the amendments of this standard would have on the Company's consolidated financial position or results of operations upon adoption.

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

In March 2020, the FASB issued ASU No. 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 is evaluating the impact that the amendments of this standard would have on the Company's consolidated financial position or results of operations upon adoption.

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 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 adoption in any interim period. The Company is evaluating these changes and does not anticipate any material impact on the Company’s consolidated financial position or results of operations upon adoption.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments of ASU No. 2018-13 are effective for companies for fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-13 effective January 1, 2020, which did not have a material impact on the Company's consolidated financial position or results of operations upon adoption.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates step 2, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill, from the goodwill impairment test. The amendments of ASU No. 2017-04 are effective for companies for fiscal years beginning after December 15, 2019 and requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. The Company adopted ASU 2017-04 effective January 1, 2020, which did not have a material impact on the Company's consolidated financial position or results of operations upon adoption.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments of ASU No. 2016-13 are effective for companies for fiscal years beginning after December 15, 2019 and modify existing guidance related to the measurement of credit losses on financial instruments, including trade and loan receivables. The new guidance requires impairments to be measured based on expected losses over the life of the asset rather than incurred losses. The Company adopted ASU 2016-13 effective January 1, 2020, using a modified retrospective approach, 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 more than 50 countries and across a wide variety of industries. For the three months ended September 30, 2020 and 2019, the Company's ten largest customers accounted for approximately 48% and 51% of total sales, respectively. For the nine months ended September 30, 2020 and 2019, the Company's ten largest customers accounted for approximately 43% and 47% of total sales, respectively.

We typically sell to customers under master service agreements, with primarily one-year terms, or by purchase orders. We have historically experienced low customer turnover and have long-standing customer relationships, which span decades. Our largest

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

customer is Shaw Industries Group Inc. (“Shaw”), a significant consumer of caprolactam and Nylon 6 resin, to whom we sell under a long-term agreement. For the three months ended September 30, 2020 and 2019, our sales to Shaw were 14% and 23%, respectively, of our total sales. For the nine months ended September 30, 2020 and 2019, our sales to Shaw were 13% and 21%, respectively, of our total sales.

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


	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Nylon	26%	25%	25%	28%
Caprolactam	18%	26%	18%	22%
Ammonium Sulfate Fertilizers	22%	20%	26%	23%
Chemical Intermediates	34%	29%	31%	27%
	100%	100%	100%	100%

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
United States	$	217,062	$	250,056	$	623,817	$	797,249
International	64,848		60,577		193,827		173,494
Total	$	281,910	$	310,633	$	817,644	$	970,743

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, 2020:



Opening balance January 1, 2020	$	19,696

Additions to deferred income and customer advances	9,673

Less amounts recognized in revenues	(23,193)

Ending balance September 30, 2020	$	6,176

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

4. Earnings (Loss) Per Share

The computation of basic and diluted earnings (loss) per share ("EPS") is based on Net income divided by the basic weighted average number of common shares and diluted weighted average number of common shares, respectively. The details of the basic and diluted EPS calculations for the three and nine months ended September 30, 2020 and 2019 were as follows:

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Basic
Net Income (loss)	$	(692)	$	7,921	$	19,313	$	43,441
Weighted average common shares outstanding	28,079,937		27,608,985		28,037,651		28,192,760
EPS – Basic	$	(0.02)	$	0.29	$	0.69	$	1.54
Diluted
Dilutive effect of equity awards and other stock-based holdings	—		972,466		55,061		971,264
Weighted average common shares outstanding	28,079,937		28,581,451		28,092,712		29,164,024
EPS – Diluted	$	(0.02)	$	0.28	$	0.69	$	1.49

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 (which includes units allocated to the AdvanSix stock unit fund under the AdvanSix Inc. Deferred Compensation Plan) using the treasury stock method and the average market price of our common stock for the year.

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, 2020 and 2019 were as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Options and stock equivalents	890,484	658,327	1,042,020	509,401

5. Accounts and Other Receivables – Net


	September 30, 2020		December 31, 2019
Accounts receivables	$	96,252	$	105,275
Other	2,291		1,661
Total accounts and other receivables	98,543		106,936
Less – allowance for doubtful accounts	(1,442)		(2,323)
Total accounts and other receivables – net	$	97,101	$	104,613

6. Inventories


	September 30, 2020		December 31, 2019
Raw materials	$	80,038	$	63,644
Work in progress	56,921		56,065
Finished goods	46,218		58,527
Spares and other	26,105		25,035
	209,282		203,271
Reduction to LIFO cost basis	(35,409)		(31,561)
Total inventories – net	$	173,873	$	171,710

7. Postretirement Benefit Cost

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

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Service cost	$	2,005	$	1,714	$	6,016	$	5,141
Interest cost	544		521		1,631		1,563
Expected return on plan assets	(524)		(334)		(1,573)		(1,002)




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

The Company made cash contributions to the defined benefit pension plan of $1.7 million during the nine months ended September 30, 2020 with $1.7 million in the first quarter of 2020 and no contributions in the second or third quarters of 2020. The Company made an additional cash contribution of $6.4 million in the fourth quarter of 2020 for a total of $8.1 million for the full year of 2020. The Company does not anticipate making any further contributions for the remainder of 2020 but anticipates making additional contributions in future years sufficient to satisfy pension funding requirements in those periods.

The pension plan assets are invested through a master trust fund. 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. Long-term Debt and Credit Agreement

At September 30, 2020, the Company assessed the amount recorded under the Revolving Credit Facility (defined below) and determined that such amounts approximate fair value. Since a floating rate interest is applied to all borrowings from our Revolving Credit Facility, the fair value of our debt closely approximates the carrying value and is therefore classified as Level 2 within the valuation hierarchy.

Credit Agreement

On September 30, 2016, in connection with the consummation of the Spin-Off, the Company as the borrower, entered into a Credit Agreement with Bank of America, as administrative agent (the “Original Credit Agreement”). The Original Credit Agreement consisted of a $270 million term loan (the “Original Term Loan”) and a $155 million revolving loan facility (the “Original Revolving Credit Facility”). The Original Revolving Credit Facility included a $25 million letter-of-credit sub-facility and a $20 million Swing-Line Loan sub-facility, issuances against which reduce the available capacity for borrowing.

On February 21, 2018 (the “First Amendment Date”), the Company entered into Amendment No. 1 (the “First Amendment”) to the Credit Agreement among the Company, the guarantors, the lenders party thereto and Bank of America, N.A., as administrative agent (the Original Credit Agreement, after giving effect to the First Amendment, the “First Amended and Restated Credit Agreement”).

As discussed above, the credit facilities under the Original Credit Agreement consisted of a senior secured term loan in an aggregate principal amount of $270 million, of which $267 million was outstanding just prior to entering into the First Amendment, and a senior secured revolving credit facility in a principal amount of $155 million. Pursuant to the First Amendment, (i) the term loan facility under the Original Credit Agreement was terminated and the entire outstanding balance of the term loan facility (the “Term Loan”) thereunder was paid in full and (ii) the maximum aggregate principal amount of the senior secured revolving credit facility (the “Revolving Credit Facility”) was increased to $425 million.

On the First Amendment Date, the Company borrowed $242 million under the Revolving Credit Facility. The proceeds of such loans, as well as cash on hand, were used to repay the outstanding Term Loan under the Original Credit Agreement. The Revolving Credit Facility under the First Amended and Restated Credit Agreement has a 5-year term with a scheduled maturity date of February 21, 2023. The First Amendment resulted in an increase in the Revolving Credit Facility to replace the Term Loan and provided increased borrowing flexibility and reduced overall borrowing costs with an approximate 50 basis point reduction in the interest rate spread.

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

incremental term loans and/or increase the amount of the Revolving Credit Facility in an aggregate principal amount for all such incremental term loans and increases of the Revolving Credit Facility of up to the sum of (x) $175 million plus (y) an amount such that the Company’s Consolidated Senior Secured Leverage Ratio (as defined in the First Amended and Restated Credit Agreement) would not be greater than 1.75 to 1.00, in each case, to the extent that any one or more lenders, whether or not currently party to the First Amended and Restated Credit Agreement, commits to be a lender for such amount. Borrowings under the First Amended and Restated Credit Agreement bore interest at a rate equal to either the sum of a base rate plus a margin ranging from 0.50% to 1.50% or the sum of a Eurodollar rate plus a margin ranging from 1.50% to 2.50%, with either such margin varying according to the Company’s Consolidated Leverage Ratio (as defined in the First Amended and Restated Credit Agreement). The Company was also required to pay a commitment fee in respect of unused commitments under the Revolving Credit Facility, if any, at a rate ranging from 0.20% to 0.40% per annum depending on the Company’s Consolidated Leverage Ratio. The initial margin under the First Amended and Restated Credit Agreement was 0.75% for base rate loans and 1.75% for Eurodollar rate loans and the initial commitment fee rate was 0.25% per annum.

The First Amended and Restated Credit Agreement contained customary covenants limiting the ability of the Company and its subsidiaries to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock of the Company, enter into transactions with affiliates, make investments, make capital expenditures, merge or consolidate with others or dispose of assets. The First Amended and Restated Credit Agreement also contained financial covenants that required the Company to maintain a Consolidated Interest Coverage Ratio (as defined in the First Amended and Restated Credit Agreement) of not less than 3.00 to 1.00 and to maintain a Consolidated Leverage Ratio of (i) 3.50 to 1.00 or less for the fiscal quarter ending March 31, 2018, through and including the fiscal quarter ending December 31, 2019, (ii) 3.25 to 1.00 or less for the fiscal quarter ending March 31, 2020, through and including the fiscal quarter ending December 31, 2020, (iii) 3.00 to 1.00 or less for the fiscal quarter ending March 31, 2021, through and including the fiscal quarter ending December 31, 2021, and (iv) 2.75 to 1.00 or less for the fiscal quarter ending March 31, 2022 and each fiscal quarter thereafter (subject to the Company’s option to elect a consolidated leverage ratio increase in connection with certain acquisitions). The Company was in compliance with all related covenants at December 31, 2019.

On February 19, 2020, the Company entered into Amendment No. 2 (the “Second Amendment”) to the First Amended and Restated Credit Agreement (after giving effect to the Second Amendment, the “Second Amended and Restated Credit Agreement”).

The Second Amendment amended the Consolidated Leverage Ratio financial covenant of the Credit Agreement and requires the Company to maintain a Consolidated Leverage Ratio (as defined in the Second Amended and Restated Credit Agreement) of (i) 3.50 to 1.00 or less for the fiscal quarter ended March 31, 2020, (ii) 4.50 to 1.00 or less for the fiscal quarter ending June 30, 2020, (iii) 4.25 to 1.00 or less for the fiscal quarter ending September 30, 2020, (iv) 3.50 to 1.00 or less for the fiscal quarter ending December 31, 2020, (v) 3.25 to 1.00 or less for the fiscal quarter ending March 31, 2021 through and including the fiscal quarter ending December 31, 2021, and (vi) 3.00 to 1.00 or less for the fiscal quarter ending March 31, 2022 and each fiscal quarter thereafter (subject to the Company’s option to elect a consolidated leverage ratio increase in connection with certain acquisitions). The Consolidated Interest Coverage Ratio financial covenant of the First Amended and Restated Credit Agreement was not changed and continues to require the Company to maintain a Consolidated Interest Coverage Ratio (as defined in the Second Amended and Restated Credit Agreement) of not less than 3.00 to 1.00. If the Company does not comply with the covenants in the Second Amended and Restated Credit Agreement, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding under the Revolving Credit Facility. The Company was in compliance with all related covenants at September 30, 2020.

Borrowings under the Second Amended and Restated Credit Agreement bear interest at a rate equal to either the sum of a base rate plus a margin ranging from 0.50% to 2.00% or the sum of a Eurodollar rate plus a margin ranging from 1.50% to 3.00%, with either such margin varying according to the Company’s Consolidated Leverage Ratio (as defined in the Second Amended and Restated Credit Agreement). The Company is also required to pay a commitment fee in respect of unused commitments 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. The initial margin under the Second Amended and Restated Credit Agreement was 1.25% for base rate loans and 2.25% for Eurodollar rate loans and the applicable commitment fee rate was 0.35% per annum.

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 are secured by a pledge of assets and liens on substantially all of the assets of AdvanSix.

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

9. 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.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease pre-payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease and, when it is reasonably certain that such an option will be exercised, it is included in the determination of the corresponding assets and liabilities. Short-term leases are not recognized on our unaudited Condensed Consolidated Balance Sheets. Lease expense for all operating lease payments is recognized on a straight-line basis over the lease term.

We have lease agreements with lease and non-lease components, which are generally accounted for separately. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities. The Company has entered into agreements to lease transportation equipment, storage facilities, office space, dock access and other equipment. The leases have initial terms of up to 20 years with some containing renewal options subject to customary conditions. The term and length of the various agreements, as well as the timing of any renewals, will impact the ROU asset calculation and related liability.

The components of lease expense were as follows:


	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Finance lease cost:
Amortization of right-of-use asset	$	172	$	527
Interest on lease liabilities	11		39
Total finance lease cost	183		566
Operating lease cost	11,087		33,157
Short-term lease cost	2,126		5,846
Variable lease cost	—		—
Total lease cost	$	13,396	$	39,569

Supplemental cash flow information related to leases was as follows:

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Nine Months Ended September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	33,046
Operating cash flows from finance leases	41
Financing cash flows from finance leases	534
Non-cash information:
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	2,785
Finance leases	16

Supplemental balance sheet information related to leases was as follows:


	September 30, 2020
Operating Leases
Operating lease right-of-use assets	$	110,360
Operating lease liabilities – short-term	31,724
Operating lease liabilities – long-term	79,085
Total operating lease liabilities	$	110,809
Finance Leases
Property, plant and equipment – gross	$	1,992
Accumulated depreciation	(1,101)
Property, plant and equipment – net	$	891
Accounts payable	581
Other liabilities	320
Total finance lease liabilities	$	901
Weighted Average Remaining Lease Term
Operating leases	9.9 years
Finance leases	1.7 years
Weighted Average Discount Rate
Operating leases	5.92		%
Finance leases	4.69		%

Maturities of lease liabilities are as follows:


Year Ending December 31,	Operating Leases		Finance Leases
2020 (remainder)	$	11,092	$	186
2021	33,182		531
2022	23,099		199
2023	13,620		13
2024	11,754		8
Thereafter	62,376		—
Total lease payments	155,123		937
Less imputed interest	(44,314)		(36)
Total	$	110,809	$	901

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

10. Commitments and Contingencies

The Company is subject to a number of lawsuits, investigations and disputes, some of which 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 (taking into consideration any insurance recoveries), 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.

11. Income Taxes

The CARES Act includes various modifications to current tax law and is intended to provide economic relief in response to the COVID-19 pandemic. One provision included in the CARES Act allows for a five-year carryback of Federal net operating losses (NOLs) generated in tax years beginning in 2018, 2019 and 2020. The Company finalized its 2019 U.S. federal income tax return in July 2020 which reflected a net operating loss, on a tax basis, and certain tax credits which were carried back to earlier tax years. This carryback claim generated a refund of previously paid taxes in the amount of $12.2 million which is currently reflected in Taxes receivable. We anticipate receiving the refund in the fourth quarter of 2020.

The Company’s provision for income taxes in interim periods is computed by applying an estimated annual effective tax rate against Income before taxes for the period in addition to recording any tax effects of discrete items for the quarter. The Company recorded a net Income tax benefit of $0.2 million as a discrete item for the quarter ended September 30, 2020 related to 2019 state return-to-provision adjustments, and a net Income tax benefit of $0.8 million as discrete items for the nine months ended September 30, 2020. The year to date discrete items primarily relate to the impact of the CARES Act, additional research tax credits claimed on the Company's 2019 U.S. federal income tax return, tax deficiencies on vesting of equity compensation and the impact of changes in the Company's geographical sales mix on state tax. In the quarter ended June 30, 2020, we recorded a liability for unrecognized tax benefits ("UTB"), in the amount of $3.8 million, all of which, if recognized, would impact our effective tax rate. The UTB relates to an energy credit claimed on the Company's 2019 U.S. federal income tax return associated with the installation of natural gas boilers at our Hopewell manufacturing plant. As of September 30, 2020, we have not recorded any interest and penalties associated with uncertain tax positions. The benefit from income taxes was $(1.0) million for the three months ended September 30, 2020 and the provision for income taxes was $1.5 million for the three months ended September 30, 2019, respectively.

12. 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. During the fourth quarter of 2018, the Company acquired a royalty stream which has been treated as an asset acquisition. The purchase price of the royalty stream for $1.0 million approximated its fair value at December 31, 2018 and is considered a Level 3 asset. The fair value measurement is based on the expected future cash flows and, as there is no reason to believe that the asset is impaired, it is assumed that the valuation remains unchanged at

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2020. In November 2018 and July 2019, the Company entered into two interest rate swap transactions related to its credit agreement. The fair value of the interest rate swaps at September 30, 2020 was a loss of approximately $3.8 million and is considered a Level 2 liability.

The pension plan assets are invested in collective investment trust funds. 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, 2020 and we have concluded that an impairment for goodwill did not occur.

13. 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 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 had one customer that accounted for approximately 13% of trade accounts receivable - net at September 30, 2020, and did not have any customers accounting for a significant percentage of trade accounts receivable - net at December 31, 2019. Allowance for doubtful accounts is calculated based upon the Company's estimate of expected credit losses over the life of exposure based upon both historical information as well as future expected losses.

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

Interest Rate Risk Management – The Company has entered into two interest rate swap agreements for a total notional amount of $100 million to exchange floating for fixed rate interest payments for our LIBOR-based borrowings. 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 FASB Accounting Standards Codification (“ASC”) ASC 815, the Company designated the interest rate swaps as cash flow hedges of floating-rate borrowings. The

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

interest rate swaps convert the Company’s interest rate payments on the first $100 million of variable-rate, 1-month LIBOR-based debt to a fixed interest rate. These interest rate swaps involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the interest rate swap without an exchange of the underlying principal amount.

Liability Derivatives

September 30, 2020

December 31, 2019

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

(3,801)

Accrued liabilities and Other liabilities

(1,718)

Total Derivatives

(3,801)

(1,718)

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, 2020
Loss on derivative instruments included in Accumulated other comprehensive income (loss) at December 31, 2019	$	(1,718)
Fair value adjustment	(2,083)
Loss on derivative instruments included in Accumulated other comprehensive income (loss) at September 30, 2020	$	(3,801)

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


	Amount of Loss Recognized in Earnings
	Three Months Ended September 30,				Nine Months Ended September 30,

	2020		2019		2020		2019

Derivatives:

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

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

14. Restructuring

On May 2, 2019, the Company approved the closure of its Pottsville, Pennsylvania films plant as part of its broader strategic efforts to improve the Company’s competitive position in providing quality film products and services to its customers. The Company also announced a strategic alliance with Oben Holding Group S.A. (“Oben”), a third-party producer of films for the flexible packaging industry, leveraging the Company's sales channels and Nylon 6 supply with Oben's new state-of-the-art manufacturing facility. The Company ceased operations at the Pottsville, Pennsylvania plant in July 2019.

Restructuring costs consist of long-lived asset impairments, facility exit costs, employee separations and inventory write-downs. Facility exit costs include demolition, equipment relocation, contract terminations and project management costs. These

ADVANSIX INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

costs are included in Costs of goods sold in the Condensed Consolidated Statements of Operations. The Company recorded a restructuring charge of $12.6 million in the second quarter of 2019 which was reduced to $11.0 million in the fourth quarter of 2019. As of September 30, 2020, all related restructuring liabilities have been paid.

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


	Employee Separation Benefits		Facility Exit Costs		Total
Accrual balance at December 31, 2019	$	127	$	410	$	537
Charges	—		—		—
Cash payments	(127)		(410)		(537)
Accrual balance at September 30, 2020	$	—	$	—	$	—

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 elsewhere 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, 2019 filed with the Securities and Exchange Commission (“SEC”) on February 21, 2020 (the “2019 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 set forth in, and 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 and duration of the pandemic and pace of recovery; the timing of the development and distribution of an effective vaccine or treatment for COVID-19; governmental, business and individuals’ actions in response to the pandemic, including our business continuity and cash optimization plans that have 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; and any closures of our and our customers’ offices and facilities; risks associated with increased phishing, compromised business emails and other cybersecurity attacks and disruptions to our technology infrastructure; risks associated with employees working remotely or operating with a reduced workforce; 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 including the COVID-19 pandemic; 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; disruptions in transportation and logistics; our inability to achieve some or all of the anticipated benefits of our spin-off including uncertainty regarding qualification for expected tax treatment; 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 2019 Form 10-K, Item 1A of Part II in our Quarterly Reports on Form 10-Q filed on May 1, 2020 and July 31, 2020, Item 1A of Part II in this Quarterly Report on Form 10-Q, and subsequent reports filed with the SEC. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this paragraph. We do not undertake to update or revise any of our forward-looking statements.

Business Overview

We produce and sell caprolactam as a commodity product and produce and sell our Nylon 6 resin as both a commoditized and differentiated resin product. Our results of operations are primarily driven by production volume and the spread between the sales prices of our products and the costs of the underlying raw materials built into market-based and value-based pricing models. 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. Generally, Nylon 6 resin prices track the cyclicality of caprolactam prices, although prices set above the 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.

Our ammonium sulfate is used by customers as a fertilizer containing nitrogen and sulfur, two key crop nutrients. 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 are general agriculture trends, including 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 than other fertilizers.

We produce ammonium sulfate fertilizer continuously throughout the year as part of our manufacturing process, but quarterly sales experience seasonality based on the timing and length of the growing seasons in North and South America. North America ammonium sulfate prices are typically strongest during second quarter fertilizer application and then typically decline seasonally with new season fill in the third quarter. 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 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 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 several 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 rapidly, with most countries and territories worldwide having confirmed cases, and with certain jurisdictions experiencing resurgences. The spread has resulted in authorities implementing numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these

containment measures have had, and are expected to continue to have, a substantial negative impact on businesses around the world and on global, regional and national economies, including disruptions to supply chains, reduced demand and production sales across most industries, declines and volatility within global financial markets, and decreased workforces causing increased unemployment. The continuously evolving nature of this pandemic and the responses to combat the pandemic, such as governmental restrictions on non-essential business and travel, continue to have a negative impact on the United States and global economies. While various jurisdictions have ended, or have implemented policies to phase out, these containment measures, increases in new COVID-19 cases have caused certain jurisdictions to re-implement restrictions.

The U.S. Department of Homeland Security designated our industry as "essential critical infrastructure" during the response to COVID-19 for both public health and safety as well as community well-being. The Company takes its obligation seriously to produce materials that support the broader population, all while maintaining a prioritized focus on the health and safety of its employees and the communities in which it operates, and assuring the continuity of its business operations. As a global provider of products that are key inputs for our customers’ processes serving a variety of end-markets, a pandemic presents obstacles that can adversely affect our supply chain effectiveness and efficiencies, our manufacturing operations and customer demand for our products and, ultimately, our financial results. We believe we are well positioned to respond to and mitigate the potential impacts of the rapidly evolving market dynamics.

In the first quarter of 2020, the Company began executing its business continuity plans with dedicated teams chartered to proactively implement measures to mitigate COVID-19 impacts while continuing to operate all of its manufacturing facilities to meet customer demand. In response to COVID-19, the Company took many actions to protect its employees, customers, suppliers, shareholders and surrounding communities including, but not limited to: (i) 100% thermal screening process at all manufacturing facilities and restrictions on non-essential visitors; (ii) telecommuting across all sites, where possible; (iii) prohibiting all non-essential domestic and international business travel; (iv) establishing social distancing while limiting the number of employees in control rooms, labs and in-person meetings; and (v) maintaining policies and practices consistent with CDC and government guidelines including upgraded personal protective equipment, face coverings at all facilities, and exposure management protocols. Our telecommuting policies have been designed to allow for continued operation of non-production business-critical functions, including financial reporting systems and internal controls. The Company has protocols in place at all sites, including on-site medical personnel at manufacturing facilities to actively monitor employees and contractors who report symptoms of or exposure to COVID-19. In addition, the Company has trained a contingent workforce to operate the plants as part of its business continuity planning. The Company continued its execution of these measures at all sites through the third quarter of 2020.

We believe our competitive strengths are serving us well during this time including our vertically integrated asset base and global low-cost advantage as well as driving disciplined cost and cash management across the organization with further reductions of capital expenditures and discretionary spending. During the third quarter of 2020 and moving into the fourth quarter of 2020, the Company continues to support safe and stable operations while serving its customers by adjusting output to changes in mix and demand. During the third quarter, the Company executed processes and procedures associated with the planned plant turnaround, which was rescheduled from the second quarter 2020, mitigating any potential employee or contractor operational safety risks posed by COVID-19. From an industry perspective, building and construction demand has improved, particularly in residential applications, however, commercial construction remains soft. Auto demand has also been improving through the third quarter with the U.S. and Europe experiencing a slower recovery, in contrast to a faster rebound in China and other Asia markets. Export demand for textiles out of Asia has been soft, which has also impacted nylon supply and demand conditions, while food packaging demand for nylon remains robust. Ammonium Sulfate and acetone demand have not been significantly impacted by COVID-19 to date. Ammonium Sulfate has experienced steady demand through the peak second quarter domestic planting season and into the new season fill, while North American acetone industry supply and demand balance has continued to be favorable following the affirmative final anti-dumping duties and robust demand for isopropyl alcohol (IPA), used for hand sanitizer and other disinfectants, methyl methacrylate (MMA), used for acrylic screens, and other solvents. As a result of COVID-19, demand reduction for transportation fuels and resultant inventory builds have reduced refinery utilization rates, which the Company continues to monitor as it relates to potential impacts on its supply chain and availability of key raw materials.

improvement of demand to approximately pre-COVID-19 levels. With states, regions and countries in various phases of re-opening, we expect demand to gradually improve through the fourth quarter of 2020, although there is no assurance demand will recover given the potential for increased restrictions imposed by governments due to a surge in infection rates. We will continue to monitor developments and execute our operational and safety mitigation plans.

The situation surrounding COVID-19 remains fluid and unpredictable, and the potential for a continued material impact on the Company increases the longer the social and economic restrictions which impact the overall level of consumer and business activity in the United States and globally, remain in place or are reinstituted. 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 the impact COVID-19 could have on our business, financial condition, results of operations and liquidity, see below in the MD&A under “Liquidity and Capital Resources” and Part II, Item 1A - “Risk Factors.”

Credit Agreement

On February 19, 2020, the Company entered into Amendment No. 2 to the Credit Agreement to amend the consolidated leverage ratios in order to provide the Company with additional operating flexibility. For a discussion of Amendment No. 2 to the Credit Agreement, please refer to "Note 8. Long-term Debt and Credit Agreement" to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Anti-Dumping Duty Petitions

On February 19, 2019, the Company announced that it filed anti-dumping duty petitions covering imports of acetone with the International Trade Commission (“ITC”) and U.S. Department of Commerce ("Commerce"). The petitions allege that dumped acetone imports into the United States from Belgium, Saudi Arabia, Singapore, South Africa, South Korea, and Spain have caused material injury to the domestic industry. On April 4, 2019, the ITC voted to continue the anti-dumping duty investigations concerning imports of acetone from all such nations other than Saudi Arabia. During the third quarter of 2019, Commerce announced its preliminary affirmative dumping determination regarding imports from Singapore, Spain, Belgium, South Africa and South Korea. On October 21, 2019, Commerce published its final affirmative determination of dumping regarding imports from Singapore and Spain, and on December 10, 2019, the ITC issued its final determination of material injury to the industry by reason of imports from Singapore and Spain. Effective December 20, 2019, Commerce imposed anti-dumping orders and applicable duties on imports of acetone from Singapore and Spain for a five-year period. On February 13, 2020, Commerce published its final affirmative determination of dumping regarding imports from Belgium, South Africa and South Korea and on March 17, 2020, the ITC issued its final determination of material injury to the industry by reason of imports from Belgium, South Africa and South Korea. Effective March 31, 2020, Commerce imposed anti-dumping orders and applicable duties on imports of acetone from Belgium, South Africa and South Korea for a five-year period. The anti-dumping orders are subject to annual administrative review, which may change the applicable level of duties. On May 26, 2020, LG Chem, Ltd., and LG Chem America, Inc., filed a motion with the U.S. Court of International Trade contesting the final determination made by Commerce concerning imports from South Korea, and on June 19, 2020, the Company filed a motion to intervene. The anti-dumping orders applicable to imports from all other sources were not appealed.

2019 Operational Events

On June 24, 2019, the Company announced that it was assessing the potential business impact of the fire that occurred at Philadelphia Energy Solutions' (“PES”) refinery in Philadelphia. PES was one of multiple suppliers to the Company of cumene, a feedstock material used to produce phenol, acetone and other chemical intermediates. The PES disruption did not have a material impact on second quarter 2019 financial results. The Company incurred an approximately $10 million unfavorable impact to pre-tax income in the second half of 2019, including incremental raw material and logistics costs as well as a modest unfavorable impact from fixed cost absorption. As the PES refinery remains shutdown, the Company submitted a business interruption insurance claim and has realigned its supply chain to ensure the continuity of cumene supply. The Company anticipates the unfavorable impact to pre-tax income in 2020, associated with its realigned supply chain, to be approximately flat compared to full-year 2019.

On May 2, 2019, the Company approved the closure of its Pottsville, Pennsylvania films plant as part of its broader strategic efforts to improve the Company’s competitive position in providing quality film products and services to its customers. The Company also announced a strategic alliance with Oben Holdings Group S.A. (“Oben”), a third-party producer of films for the flexible packaging industry, leveraging the Company's sales channels and Nylon 6 resin supply with Oben's new state-of-the-art manufacturing facility. The Company ceased operations at the Pottsville, Pennsylvania plant in July 2019. We recognized a restructuring charge of $12.6 million in the second quarter of 2019 which was reduced to $11 million in the fourth quarter of

2019 and do not expect to incur any additional restructuring charges related to the closure. See “Note 14. Restructuring” to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further information.

On March 11, 2019, the Company announced that it declared force majeure on its phenol product line as a result of shortages and delivery delays of its key raw material, cumene. The Company's cumene deliveries were reduced due to weather related logistics disruptions in the Gulf Coast area and supplier operational constraints. As a result of this force majeure event, phenol production at the Company's Frankford, Pennsylvania facility and caprolactam production at its Hopewell, Virginia facility were reduced. The Company incurred an approximately $6.9 million unfavorable impact to pre-tax income in the first quarter of 2019, including the unfavorable impact of fixed cost absorption and incremental logistics costs. In addition, the Company incurred an approximately $1.4 million unfavorable impact to pre-tax income in the first quarter of 2019 and an approximately $2.3 million unfavorable impact to pre-tax income in the second quarter of 2019 due to lost sales. The Company is no longer on force majeure with phenol customers.

Results of Operations

(Dollars in thousands, unless otherwise noted)

Sales


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Sales	$	281,910	$	310,633	$	817,644	$	970,743
% change compared with prior year period	(9.2)%				(15.8)%

The change in sales compared to the prior year period is attributable to the following:


	Three Months Ended September 30, 2020	Nine Months Ended September 30, 2020
Volume	5.2%	(2.3)%
Price	(14.4)%	(13.5)%
	(9.2)%	(15.8)%

Sales decreased in the three months ended September 30, 2020 compared to the prior year period by $28.7 million (approximately 9%) due primarily to lower pricing (approximately 14%) driven primarily by (i) lower formula-based pass-through pricing (approximately 13%) following a net decrease in the cost of benzene and propylene (inputs to cumene which is a key feedstock material for our products) and (ii) lower market-based pricing (approximately 1%) in nylon, ammonium sulfate and caprolactam product lines, partially offset by market price increases in chemical intermediates, particularly acetone. The price decrease was partially offset by higher volume (approximately 5%) due to increases in nylon and ammonium sulfate, partially offset by lower volumes in caprolactam.

Sales decreased in the nine months ended September 30, 2020 compared to the prior year period by $153.1 million (approximately 16%) due primarily to lower sales prices (approximately 14%) driven primarily by (i) lower formula-based pass-through pricing (approximately 8%) and (ii) lower market-based pricing (approximately 6%) in nylon, ammonium sulfate and caprolactam product lines, partially offset by pricing strength in chemical intermediates, primarily acetone. Volume decreased by approximately 2% due primarily to decreases in nylon and caprolactam related to global markets and the economic impact of COVID-19.

Costs of Goods Sold


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Costs of goods sold	$	265,758	$	280,123	$	736,504	$	850,131
% change compared with prior year period	(5.1)%				(13.4)%
Gross Margin percentage	5.7%		9.8%		9.9%		12.4%

Costs of goods sold decreased in the three months ended September 30, 2020 compared to the prior year period by $14.4 million (approximately 5%) due primarily to (i) lower prices of raw materials, particularly benzene and propylene (approximately 16%), (ii) decreased costs related to the PES shutdown (approximately 1%) and (iii) reduction in R&D and other expenses (approximately 1%). This was partially offset by (i) higher volumes as discussed above (approximately 8%) and (ii) higher plant spending (approximately 6%) in the third quarter of 2020 due to the planned plant turnaround.

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

Gross margin percentage decreased by approximately 4% in the three months ended September 30, 2020 compared to the prior year period due primarily to the spend and production impact of the planned plant turnaround (approximately 6%) and unfavorable product mix (approximately 3%). This was partially offset by the net favorable margin impact of lower formula based pass-through pricing (driven by decreased raw material costs) and market pricing impacts (approximately 2%) as well as decreased costs related to the PES shutdown (approximately 1%) and reduction of other expenses (approximately 2%).

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

Selling, General and Administrative Expenses


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Selling, general and administrative expenses	$	16,177	$	19,261	$	50,827	$	58,683
Percent of sales	5.7%		6.2%		6.2%		6.0%

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

Tax Expense


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Tax expense	$	(980)	$	1,513	$	4,957	$	13,617
Effective tax rate	58.6%		16.0%		20.4%		23.9%

As noted in Note 11. "Income Taxes" to the Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Form 10-Q, The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), enacted on March 27, 2020, includes various modifications to current tax law and is intended to provide economic relief in response to the COVID-19 pandemic. One provision included in the CARES Act allows for a five-year carryback of Federal net operating losses (NOLs) generated in tax years beginning in 2018, 2019 and 2020. The Company finalized its 2019 U.S. federal income tax return in July 2020 which reflected a net operating loss, on a tax basis, and certain tax credits which were carried back to earlier years. This carryback claim generated a refund of previously paid taxes in the amount of $12.2 million which is currently reflected in Taxes receivable. We anticipate receiving the refund in the fourth quarter of 2020.

The Company’s effective tax rate for the three months ended September 30, 2020 was higher compared to the U.S. federal statutory rate primarily due to the Loss before taxes incurred in the third quarter, an increase in 2020 anticipated research tax

credits and 2019 state return-to-provision adjustments recorded in the quarter. The Company’s effective tax rate for the three months ended September 30, 2019 was lower compared to the U.S. federal statutory rate, due primarily to additional research tax credits claimed on the Company's 2018 U.S. federal income tax return, partially offset by state taxes and executive compensation deduction limitations.

The Company’s effective tax rate for the nine months ended September 30, 2020 was lower compared to the U.S. federal statutory rate due primarily to research tax credits and the impact of changes in the Company’s geographical sales mix on state tax, partially offset by tax deficiencies on vesting of equity compensation, executive compensation deduction limitations, the impact of the CARES Act and state taxes. The Company’s effective tax rate for the nine months ended September 30, 2019 was higher compared to the U.S. federal statutory rate due primarily to state taxes and executive compensation deduction limitations offset partially by research tax credits.

The Company’s effective tax rate for the nine months ended September 30, 2020 was lower than the prior year period due primarily to the impact of changes in the Company’s geographical sales mix on state tax partially offset by the impact of the CARES Act. The Company’s effective tax rate for the three months ended September 30, 2020 was higher than the prior year period primarily due to the Loss before taxes incurred in the quarter which resulted in a higher income tax benefit, and 2019 state return-to-provision adjustments recorded in the quarter.

Net Income


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income (loss)	$	(692)	$	7,921	$	19,313	$	43,441

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

Non-GAAP Measures

(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 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 are not considered core to the Company’s 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,
	2020		2019		2020		2019
Net income (loss)	$	(692)	$	7,921	$	19,313	$	43,441
Interest expense, net	1,981		1,293		5,827		3,727
Income tax expense (benefit)	(980)		1,513		4,957		13,617
Depreciation and amortization	15,497		14,222		45,061		42,094
EBITDA (non-GAAP)	15,806		24,949		75,158		102,879
One-time Pottsville restructuring charges (1)	—		—		—		12,623
EBITDA excluding one-time Pottsville restructuring charges (non-GAAP)	$	15,806	$	24,949	$	75,158	$	115,502

Sales	$	281,910	$	310,633	$	817,644	$	970,743

EBITDA margin (non-GAAP)	5.6%		8.0%		9.2%		10.6%

EBITDA margin excluding one-time Pottsville restructuring charges (non-GAAP)	5.6%		8.0%		9.2%		11.9%

(1) Prior year one-time Pottsville restructuring charges reflect the closure of the Company's Pottsville, Pennsylvania films plant. See “Note 14. Restructuring” to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further information.

Liquidity and Capital Resources

(Dollars in thousands, unless otherwise noted)

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 2019 Form 10-K, as updated in Part II, Item 1A below. 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, 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, and capital expenditures reflecting disciplined capital deployment and following the completion of several high-return growth and cost savings investments. Capital expenditures are deployed for various ongoing investments and initiatives to improve reliability, yield and quality, expand production capacity and comply with HSE regulations. While the COVID-19 pandemic has created and continues to create significant volatility in funding markets, we believe that our future cash from operations, together with cash on hand and our access to credit and capital markets, will provide adequate resources to fund our expected operating and financing needs and obligations. Our ability to fund our capital needs, however, will depend on our ongoing ability to generate cash from operations and access to credit and capital markets, both of which are subject to the risk factors previously disclosed in our 2019 Form 10-K as updated in Part II, Item 1A below, as well as general economic, financial, competitive, regulatory and other factors that are beyond our control.

As of the end of the third quarter of 2020, the Company had approximately $17 million of cash on hand with approximately $111 million of additional capacity available under the revolving credit facility. Given the uncertain environment in light of the COVID-19 pandemic, the Company maintained higher cash balances as a precautionary measure in the second quarter of 2020 for its working capital needs and other general corporate purposes. Cash balances were reduced in the third quarter of 2020 in order to decrease debt levels and minimize interest cost. The Company’s Consolidated Leverage Ratio financial covenant of its credit facility allows it to net up to $75 million of cash with debt. The Second Amendment to the credit facility also provides leverage ratio covenant flexibility in 2020. In response to the current environment, the Company has taken certain actions to improve liquidity and optimize cash flow in 2020. Capital expenditures are expected to be approximately $85 million in 2020, which represents a decrease of approximately $65 million versus 2019, as we continue to assess opportunities to maximize free cash flow by deferring, or reducing, non-critical repair and maintenance capital expenditures in light of current and anticipated economic conditions. The Company is also driving disciplined cost management across the organization including all discretionary spending. As a result of its actions, the Company is targeting an approximately $20 to $25 million full-year cost reduction versus the prior year.

The CARES Act is intended to provide economic relief resulting from the COVID-19 pandemic and includes, but is not limited to provisions for taxes, employment related costs, deferral of pension funding obligations and options for liquidity. While we continue to evaluate the impact and benefits of the CARES Act, the Company anticipates approximately $12 million of cash tax savings in 2020 and an approximately $6 million cash benefit in 2020 from the deferral of social security taxes. For social security taxes that have been deferred, 50% will be due by December 31, 2021 with the remainder 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 2020 will be to fund costs associated with ongoing operations, capital expenditures, and amounts related to other contractual obligations.

The Company made contributions to the defined benefit pension plan of $1.7 million during the nine months ended September 30, 2020 with $1.7 million in the first quarter of 2020 and no contributions in the second or third quarter of 2020. The Company made an additional cash contribution of $6.4 million in the fourth quarter of 2020 for a total of $8.1 million for the full year of 2020. The Company does not anticipate making any further contributions for the remainder of 2020 but anticipates making additional contributions in future years sufficient to satisfy pension funding requirements in those periods.

On May 4, 2018, the Company announced that its Board of Directors (the “Board”) authorized a share repurchase program of up to $75 million of the Company’s common stock. 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, 2020, the Company had repurchased 3,592,639 shares of common stock including 502,877 shares withheld to cover tax withholding obligations in connection with the vesting of equity awards, for an aggregate of $101.7 million at a weighted average market price of $28.31 per share. As of September 30, 2020, $59.6 million remained available for repurchase under the currently authorized repurchase program. During the third quarter and the period from October 1, 2020 through October 23, 2020, no additional shares were repurchased under the currently authorized repurchase program.

Credit Agreement

administrative agent (the Original Credit Agreement, after giving effect to the First Amendment, the “First Amended and Restated Credit Agreement”).

The credit facilities under the Original Credit Agreement consisted of a senior secured term loan in an aggregate principal amount of $270 million, of which $267 million was outstanding just prior to entering into the First Amendment, and a senior secured revolving credit facility in a principal amount of $155 million. Pursuant to the First Amendment, (i) the term loan facility under the Original Credit Agreement was terminated and the entire outstanding balance of the term loan facility (the “Term Loan”) thereunder was paid in full and (ii) the maximum aggregate principal amount of the senior secured revolving credit facility (the “Revolving Credit Facility”) was increased to $425 million.

The First Amended and Restated Credit Agreement permits the Company to utilize up to $40 million of the Revolving Credit Facility for the issuance of letters of credit and up to $40 million for swing line loans. The Company has the option to incur incremental term loans and/or increase the amount of the Revolving Credit Facility in an aggregate principal amount for all such incremental term loans and increases of the Revolving Credit Facility of up to the sum of (x) $175 million plus (y) an amount such that the Company’s Consolidated Senior Secured Leverage Ratio (as defined in the First Amended and Restated Credit Agreement) would not be greater than 1.75 to 1.00, in each case, to the extent that any one or more lenders, whether or not currently party to the First Amended and Restated Credit Agreement, commits to be a lender for such amount. Borrowings under the First Amended and Restated Credit Agreement bore interest at a rate equal to either the sum of a base rate plus a margin ranging from 0.50% to 1.50% or the sum of a Eurodollar rate plus a margin ranging from 1.50% to 2.50%, with either such margin varying according to the Company’s Consolidated Leverage Ratio (as defined in the First Amended and Restated Credit Agreement). The Company was also required to pay a commitment fee in respect of unused commitments under the Revolving Credit Facility, if any, at a rate ranging from 0.20% to 0.40% per annum depending on the Company’s Consolidated Leverage Ratio. The initial margin under the First Amended and Restated Credit Agreement was 0.75% for base rate loans and 1.75% for Eurodollar rate loans and the initial commitment fee rate was 0.25% per annum.

The Second Amendment amended the Consolidated Leverage Ratio financial covenant of the Credit Agreement and requires the Company to maintain a Consolidated Leverage Ratio (as defined in the Second Amended and Restated Credit Agreement) of (i) 3.50 to 1.00 or less for the fiscal quarter ending March 31, 2020, (ii) 4.50 to 1.00 or less for the fiscal quarter ending June 30, 2020, (iii) 4.25 to 1.00 or less for the fiscal quarter ending September 30, 2020, (iv) 3.50 to 1.00 or less for the fiscal quarter ending December 31, 2020, (v) 3.25 to 1.00 or less for the fiscal quarter ending March 31, 2021 through and including the fiscal quarter ending December 31, 2021, and (vi) 3.00 to 1.00 or less for the fiscal quarter ending March 31, 2022 and each fiscal quarter thereafter (subject to the Company’s option to elect a Consolidated Leverage Ratio increase in connection with certain acquisitions). The Consolidated Interest Coverage Ratio financial covenant of the First Amended and Restated Credit Agreement was not changed and continues to require the Company to maintain a Consolidated Interest Coverage Ratio (as

defined in the Second Amended and Restated Credit Agreement) of not less than 3.00 to 1.00. If the Company does not comply with the covenants in the Second Amended and Restated Credit Agreement, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding under the Revolving Credit Facility. The Company was in compliance with all related covenants at September 30, 2020.

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 are secured by a pledge of assets and liens on substantially all of the assets of AdvanSix.

The Amended and Restated 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, as well as financial covenants that require the Company to maintain interest coverage and leverage ratios at levels specified in the Amended and Restated Credit Agreement. These covenants may limit how we conduct our business, and in the event of certain defaults, our repayment obligations may be accelerated. We were in compliance with all of our covenants at September 30, 2020 and through the date of the filing of this Quarterly Report on Form 10-Q.

The situation surrounding COVID-19 remains fluid and unpredictable, and the potential for a material impact on the Company increases the longer the social and economic restrictions remain in place or are reinstituted, which impacts the overall level of consumer and business activity in the United States and globally. 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 Part II, Item 1A. "Risk Factors."

As of September 30, 2020, $111 million was available for use out of the total of $425 million under the Revolving Credit Facility.

As of December 31, 2019, we had a balance of $297 million under the Revolving Credit Facility. During the first nine months of 2020, we borrowed an incremental net amount of $16 million to bring the balance under the Revolving Credit Facility to $313 million as of September 30, 2020. Going forward, we expect that Cash provided by operating activities will fund future interest payments on the Company's outstanding indebtedness.

Cash Flow Summary


	Nine Months Ended September 30,
	2020		2019
Cash provided by (used for):
Operating activities	$	64,086	$	100,536
Investing activities	(68,461)		(108,589)
Financing activities	14,011		8,293
Net change in cash and cash equivalents	$	9,636	$	240

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

ended September 30, 2020 versus a $9.0 million unfavorable cash impact from working capital in the prior year period and a $11.7 million unfavorable cash impact from taxes receivable. These decreases were partially offset by an increase in Other assets and liabilities driven by a $3.8 million increase in income tax reserve, a $2.9 million increase in pension liabilities, and a $2.6 million increase in Prepaid expenses as well as a change in the timing of payments for Accrued liabilities of $12.2 million versus the same period in the prior year. The Pottsville restructuring charge had a net neutral impact on operational cash flow during the nine months ended September 30, 2019.

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

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

Capital Expenditures

(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, 2020
Capital expenditures in Accounts payable at December 31, 2019	$	21,594
Purchases of property, plant and equipment	51,771
Less: Capital expenditures in Accounts payable at September 30, 2020	(5,802)
Cash paid for capital expenditures	$	67,563

For 2020, we expect our total capital expenditures to be approximately $85 million, which represents a decrease of approximately $65 million versus 2019 reflecting disciplined capital deployment following the completion of several high-return growth and cost savings investments. Capital expenditures are deployed for various ongoing investments and initiatives to improve reliability, yield and quality, expand production capacity and comply with HSE regulations.

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 2019 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, 2020, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any material changes in the commitments or contractual obligations detailed in the Company's 2019 Form 10-K. The Company has not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to risk based on changes in interest rates relates primarily to our Second Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement bears interest at floating rates. For variable rate debt, interest rate changes generally do not affect the fair market value of such debt assuming all other factors remain constant but do impact future earnings and cash flows. Accordingly, we may be exposed to interest rate risk on borrowings under the Second Amended and Restated Credit Agreement.

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. These interest rate swaps have been designated as cash flow hedges and 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. As a result of these interest rate swaps, interest payments on approximately 32% of our total borrowings, as of September 30, 2020, have been swapped from floating rate to fixed rate for the life of the swaps, without an exchange of the underlying principal amount.

A hedge effectiveness assessment was completed by comparing the critical terms of the hedged items with the hedging instruments, and also by reviewing the credit standing of the counterparties. As of September 30, 2020, it was determined that the critical terms continued to exactly match, and that the counterparties still had the ability to honor their obligations. As a result, the hedges continue to be deemed effective.

Based on current borrowing levels at September 30, 2020, net of the interest rate swap, a 25-basis point fluctuation in interest rates for the nine months ended September 30, 2020 would have resulted in an increase or decrease to our interest expense of approximately $0.5 million.

See “Note 13. Derivative and Hedging Instruments” to the Condensed Consolidated Financial Statements, included in Part I. Item 1 of this Form 10-Q, for a discussion relating to credit and market, commodity price and interest rate risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud have been, or will be, detected.

Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our management, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of September 30, 2020, the end of the period covered by this quarterly report.

Changes in Internal Control over Financial Reporting

Management has not identified any change in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company has not experienced any material impact to the Company’s internal control over financial reporting due to the fact that certain of the Company’s employees responsible for financial reporting are working remotely during the COVID-19 pandemic. The Company continually monitors and assesses the potential impact of the COVID-19 pandemic on the Company’s internal control over financial reporting to mitigate any impact to design and operating effectiveness.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in litigation relating to claims arising outside of the ordinary course of our business operations. We are not a party to, and, to our knowledge, there are not threats of any claims or actions against us, the ultimate disposition of which would have a material adverse effect on our consolidated financial position, results of operations or operating cash flows.

Environmental Matters Involving Potential Monetary Sanctions in Excess of $100,000

The Virginia Department of Environmental Quality (“Virginia DEQ”) provided notice to the Company in April 2020 of a consent order to address certain alleged violations involving monitoring, recordkeeping, emissions bypass and other related requirements at the Company’s manufacturing facility in Hopewell, Virginia, in each case that were self-reported by the Company under the Virginia Air Pollution Control Law and applicable regulatory requirements. In July 2020, the Virginia DEQ and the Company agreed in a consent order that the Company would pay a civil charge of $123,082.

ITEM 1A. RISK FACTORS

Except as discussed below, there have been no material changes to our risk factors as previously disclosed in Item 1A of Part I of the Company’s 2019 Form 10-K, as amended by our subsequent Quarterly Reports on Form 10-Q, which are hereby incorporated by reference. The risks described below, and the risks described in the Company’s 2019 Form 10-K, as amended by our subsequent Quarterly Reports on Form 10-Q, are not the only risks we face. Additional risks and uncertainties that are not presently known to us or are currently deemed to be immaterial also may materially adversely affect our business, financial condition or results of operations in the future. If any of the risks actually occur, our business, financial condition or results of operations could be materially impacted.

Our results of operations have been, and may continue to be, materially adversely impacted by the coronavirus (COVID-19) pandemic and the measures implemented to contain the spread of the virus.

The continued spread of the coronavirus (COVID-19) pandemic and the resulting containment measures have created significant volatility, uncertainty and economic disruption globally and have had, and may continue to have, a material impact on the Company's results of operations.

The U.S. Department of Homeland Security has designated our industry as "essential critical infrastructure" during the response to COVID-19 for both public health and safety as well as community well-being. The Company takes its obligation seriously to produce materials that support the broader population, all while maintaining a prioritized focus on the health and safety of its employees and the communities in which it operates, and assuring the continuity of its business operations. As a global provider of products that are key inputs for our customers’ processes serving a variety of end-markets, a pandemic presents obstacles that can adversely affect our supply chain effectiveness and efficiencies, our manufacturing operations and customer demand for our products and, ultimately, our financial results. We believe we are well positioned to respond to and mitigate the potential impacts of the rapidly evolving market dynamics. While the Company was not materially adversely impacted by COVID-19 in the first quarter of 2020, the Company experienced lower demand, particularly in nylon, caprolactam and phenol, during the second quarter of 2020, resulting in a reduction of utilization rates and a decrease in overall sales volume compared to the prior year period, primarily related to global markets and the economic impact of COVID-19. During the third quarter of 2020, the Company experienced an improvement of demand to approximately pre-COVID-19 levels; however, there is no assurance that sales volumes will remain stable or that demand will fully recover or continue given the potential for increased restrictions imposed by governments or other factors resulting from sustained, or a surge in, infection rates. While we expect that COVID-19 may continue to impact the Company's results of operations, financial position and liquidity in the near-term and potentially beyond, we are unable to predict the extent or nature of these impacts at this time.

The extent of the future and overall impact from the COVID-19 pandemic on our business depends on numerous evolving factors and future developments that cannot be accurately predicted at this time, including, but not limited to: the scope and duration of the pandemic, including the extent of any resurgences, and the pace of recovery; the timing of the development and distribution of an effective vaccine or treatments for COVID-19; governmental, business and individuals’ actions that have been and continue to be taken 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; and risks associated with employees working remotely or operating with a reduced workforce. Customers may also slow down decision-making, delay planned work or seek to terminate existing agreements.

Under difficult market conditions, there can be no assurance that access to credit or the capital markets would be available or sufficient, and as such, if needed, we may not be able to successfully obtain additional financing on reasonable terms, at a reasonable cost, or at all. Further, the difficult market conditions created by the pandemic may impact our ability to comply with financial covenants in our credit facility, increase our cost of capital or make additional capital, including the refinancing of our credit facility, more difficult or available only on terms less favorable to us. A sustained downturn may also result in the carrying value of our goodwill exceeding its fair value, which may require us to recognize an impairment to those assets. A sustained downturn in the financial markets and asset values may have the effect of increasing our pension funding obligations in order to ensure that our qualified pension plans continue to be adequately funded, which may divert cash flow from other uses. The effects of the pandemic may also impact our financial reporting systems and internal control over financial reporting, including our ability to ensure information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Any of these events could materially adversely impact our business, financial condition, results of operations, cash flow, liquidity and/or stock price. The COVID-19 pandemic, as well as future pandemics or resurgences of COVID-19, could also cause or contribute to the other risk factors identified in our 2019 Form 10-K, as amended in our subsequent Quarterly Reports on Form 10-Q, which in turn could materially adversely affect our business, financial condition, results of operations, cash flow, liquidity and/or stock price. Further, the COVID-19 pandemic may also affect our business, operations and financial results in a manner that is not presently known to us or that we currently do not consider to present significant risks to our operations.

For additional information regarding the impact of COVID-19 on our business, financial condition, results of operations, cash flow and liquidity, see above in the MD&A under "Recent Developments - COVID-19" and "Liquidity and Capital Resources."

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On May 4, 2018, the Company announced that 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 authorization was in addition to the remaining capacity authorized 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 share repurchase program has no expiration date and may be modified, suspended or discontinued at any time.

The below table sets forth the repurchases of Company common stock, by month, for the quarter ended September 30, 2020. During the quarter ended September 30, 2020, no shares were purchased under our share repurchase program and no shares were repurchased as a result of tax withholding obligations in connection with the vesting of equity awards.

ISSUER PURCHASES OF EQUITY SECURITIES


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan
July 2020	—	$	—	—	$	59,581,679
August 2020	—	—		—	59,581,679
September 2020	—	—		—	59,581,679
Total	—	$	—	—

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

ITEM 6. EXHIBITS


Exhibit						Description
3.1						Amended and Restated Certificate of Incorporation of AdvanSix Inc. (conformed copy) (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed on August 1, 2019).
3.2						Amended and Restated By-laws of AdvanSix Inc. (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed on August 1, 2019).



31.1						Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Executive Officer.
31.2						Rule 13a-14(a)/15d-14(a) Certification of the Company’s Principal Financial Officer.
32.1						Section 1350 Certification of the Company’s Principal Executive Officer. The information contained in this Exhibit shall not be deemed filed with the SEC nor incorporated by reference in any registration statement filed by the registrant under the Securities Act of 1933, as amended.
32.2						Section 1350 Certification of the Company’s Principal Financial Officer. The information contained in this Exhibit shall not be deemed filed with the SEC nor incorporated by reference in any registration statement filed by the registrant under the Securities Act of 1933, as amended.
101.INS						Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101)

† Indicates management contract or compensatory plan.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ADVANSIX INC.

Date: October 30, 2020	By:	/s/ Michael Preston
		Michael Preston
		Senior Vice President and Chief Financial Officer