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AdvanSix Inc. - Quarter Report: 2017 September (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
or
o
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)
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting 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  o
Accelerated filer   o
Non-accelerated filer  x
Smaller reporting company   o
 
 
 
Emerging growth company   o
 
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 o   No ý
 
The Registrant had 30,482,966 shares of common stock, $0.01 par value, outstanding at November 1, 2017.

ADVANSIX INC.
FORM 10-Q
 
TABLE OF CONTENTS


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
PART I. FINANCIAL INFORMATION


 
ITEM 1. FINANCIAL STATEMENTS
 
ADVANSIX INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Sales
$
366,660

 
$
323,953

 
$
1,104,805

 
$
932,201

Costs, expenses and other:
 

 
 

 
 
 
 
Costs of goods sold
309,629

 
285,091

 
923,268

 
804,471

Selling, general and administrative expenses
19,086

 
11,695

 
54,022

 
33,949

Other non-operating expense (income), net
2,133

 
(635
)
 
6,381

 
(1,792
)
 
330,848

 
296,151

 
983,671

 
836,628

 
 
 
 
 
 
 
 
Income before taxes
35,812

 
27,802

 
121,134

 
95,573

Income taxes
14,538

 
11,342

 
46,803

 
36,712

Net income
$
21,274


$
16,460

 
$
74,331

 
$
58,861

Earnings per common share
 

 
 

 
 
 
 
Basic
$
0.70

 
$
0.54

 
$
2.44

 
$
1.93

Diluted
$
0.68

 
$
0.54

 
$
2.40

 
$
1.93

Weighted average common shares outstanding
 

 
 

 
 
 
 
Basic
30,482,966

 
30,482,966

 
30,482,966

 
30,482,966

Diluted
31,159,710

 
30,482,966

 
31,013,606

 
30,482,966

 

See accompanying notes to Condensed Consolidated and Combined Financial Statements.

3
ADVANSIX INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)



 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
21,274

 
$
16,460

 
$
74,331

 
$
58,861

Foreign exchange translation adjustment
(12
)
 
(148
)
 
(15
)
 
284

Commodity hedges
—

 
(3,470
)
 
—

 
(1,635
)
Other comprehensive income (loss), net of tax
(12
)
 
(3,618
)
 
(15
)
 
(1,351
)
Comprehensive income
$
21,262

 
$
12,842

 
$
74,316

 
$
57,510


See accompanying notes to Condensed Consolidated and Combined Financial Statements.

4
ADVANSIX INC.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except share and per share amounts)



 
September 30, 2017
 
December 31, 2016
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
39,986

 
$
14,199

Accounts and other receivables – net
152,511

 
131,671

Inventories – net
100,474

 
128,978

Other current assets
8,684

 
7,690

Total current assets
301,655

 
282,538

Property, plant and equipment – net
597,877

 
575,375

Goodwill
15,005

 
15,005

Other assets
35,105

 
32,039

Total assets
$
949,642

 
$
904,957

 
 
 
 
LIABILITIES
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
177,688

 
$
222,929

Accrued liabilities
27,630

 
25,396

Income taxes payable
18

 
86

Deferred income and customer advances
801

 
25,567

Current portion of long-term debt
10,125

 
—

Total current liabilities
216,262

 
273,978

Deferred income taxes
147,461

 
114,200

Long-term debt
254,995

 
264,838

Postretirement benefit obligations
25,372

 
33,544

Other liabilities
2,941

 
3,035

Total liabilities
647,031

 
689,595

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)


 


 
 
 
 
EQUITY
 

 
 

Common stock, par value $0.01; 200,000,000 shares authorized and 30,482,966 shares issued and outstanding
305

 
305

Preferred stock, par value $0.01; 50,000,000 shares authorized and 0 shares issued and outstanding
—

 
—

Additional paid in capital
255,709

 
242,806

Retained earnings/(accumulated deficit)
49,617

 
(24,714
)
Accumulated other comprehensive income (loss)
(3,020
)
 
(3,035
)
Total equity
302,611

 
215,362

Total liabilities and equity
$
949,642

 
$
904,957


See accompanying notes to Condensed Consolidated and Combined Financial Statements.

5
ADVANSIX INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 


 
Nine Months Ended
September 30,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net income
$
74,331

 
$
58,861

Adjustments to reconcile net income to net cash (used for) provided by operating activities:
 
 
 

Depreciation and amortization
35,524

 
29,964

Loss on disposal of assets
1,236

 
1,246

Deferred income taxes
40,478

 
29,206

Stock based compensation
5,686

 
—

Accretion of deferred financing fees
444

 
—

Changes in assets and liabilities:
 
 
 

Accounts and other receivables
(20,825
)
 
(20,117
)
Inventories
28,504

 
13,581

Accounts payable
(33,893
)
 
(161
)
Income taxes payable
(68
)
 
—

Accrued liabilities
2,234

 
(9,690
)
Deferred income and customer advances
(24,766
)
 
(23,501
)
Other assets and liabilities
(10,414
)
 
(12,922
)
Net cash provided by operating activities
98,471

 
66,467

 
 
 
 
Cash flows from investing activities:
 

 
 

Expenditures for property, plant and equipment
(67,206
)
 
(56,859
)
Other investing activities
(5,387
)
 
(461
)
Net cash used for investing activities
(72,593
)
 
(57,320
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from long term debt
—

 
270,000

Payment of debt issuance costs
—

 
(1,770
)
Borrowings from revolving credit facility
308,500

 
40,000

Payments to revolving credit facility
(308,500
)
 
—

Payment of revolving credit facility fees
—

 
(1,016
)
Distribution to Honeywell in connection with the Spin-Off
—

 
(269,347
)
Principal payments of capital leases
(91
)
 
—

Net decrease in invested equity
—

 
(9,050
)
Net cash (used for) provided by financing activities
(91
)

28,817

 
 
 
 
Net increase in cash and cash equivalents
25,787

 
37,964

Cash and cash equivalents at beginning of period
14,199

 
—

Cash and cash equivalents at the end of period
$
39,986


$
37,964

 
 
 
 
Non-Cash Investing Activities:
 

 
 

Capital expenditures included in accounts payable
$
17,228

 
$
19,935

 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 

 
 

Interest paid
$
7,976

 
$
—

Income taxes paid
$
12,695

 
$
—


See accompanying notes to Condensed Consolidated and Combined Financial Statements.

6
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED 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” or the “Company”) is an integrated manufacturer of Nylon 6, a polymer resin which is a synthetic material used by our customers to produce engineered plastics, fibers, filaments and films that, in turn, are used in such end-products as automotive and electronic components, carpets, sports apparel, fishing nets and food and industrial packaging. 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 as part of our Nylon 6 integrated manufacturing chain including caprolactam, ammonium sulfate fertilizers, acetone and other chemical intermediates. Each of our product lines represented the following approximate percentage of our sales:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Nylon
28%
 
29%
 
29%
 
29%
Caprolactam
19%
 
16%
 
19%
 
16%
Ammonium Sulfate Fertilizers
20%
 
22%
 
20%
 
24%
Chemical Intermediates
33%
 
33%
 
32%
 
31%
 
Separation from Honeywell
 
On October 1, 2016, Honeywell International Inc. (“Honeywell”) completed the separation of AdvanSix. The separation was completed by Honeywell distributing all of the then outstanding shares of common stock of AdvanSix on October 1, 2016 (the “Distribution Date”) through a dividend in kind of AdvanSix common stock, par value $0.01, to holders of Honeywell common stock as of the close of business on the record date of September 16, 2016 who held their shares through the Distribution Date (the “Spin-Off”).
 
Each Honeywell stockholder who held their shares through the Distribution Date received one share of AdvanSix common stock for every 25 shares of Honeywell common stock held at the close of business on the record date of September 16, 2016. The separation was completed pursuant to a Separation and Distribution Agreement and other agreements with Honeywell related to the separation, including an Employee Matters Agreement, a Tax Matters Agreement, and Transition Services Agreement as well as Site Sharing and Services Agreements for Chesterfield, Colonial Heights and Pottsville. These agreements govern the relationship between AdvanSix and Honeywell following the separation and provide for the allocation of various assets, liabilities, rights and obligations. These agreements also include arrangements for transition services to be provided by Honeywell to AdvanSix and by AdvanSix to Honeywell.
 
On October 3, 2016, AdvanSix stock began “regular-way” trading on the New York Stock Exchange under the “ASIX” stock symbol.
 
Basis of Presentation
 
Unless the context otherwise requires, references in these Notes to Condensed Consolidated and Combined Financial Statements to “we,” “us,” “our,” “AdvanSix” and the “Company” refer to AdvanSix Inc. and its consolidated subsidiaries after giving effect to the Spin-Off. All significant intercompany balances and transactions have been eliminated.
 
The Condensed Consolidated and Combined 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 and Combined Financial Statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of September 30, 2017, and its results of operations for the three and nine months ended September 30, 2017 and 2016, and cash flows for the nine months ended September 30, 2017 and 2016. The Condensed Consolidated and

7
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
 


Combined Balance Sheet at December 31, 2016 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. 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, 2016.
 
In preparing these Condensed Consolidated and Combined Financial Statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date that the Condensed Consolidated and Combined Financial Statements were issued.
 
Certain prior period amounts have been reclassified for consistency with the current period presentation.
 
We report our quarterly financial information using a calendar convention; prior to the Spin-Off, the first, second and third quarters were consistently reported as ending on March 31, June 30 and September 30 in the financial statements of Honeywell; subsequent to the Spin-Off we continued to follow that convention. 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 ending September 30, 2017 and 2016 were September 30, 2017 and October 1, 2016, respectively.
 
Liabilities to creditors to whom we have issued checks that remained outstanding at September 30, 2017 and December 31, 2016 aggregated $6.4 million and $12.5 million, respectively, and were included in Cash and cash equivalents and Accounts payable in the Condensed Consolidated and Combined Balance Sheets.

2. Recent Accounting Pronouncements
 
The Company considers the applicability and impact of all Accounting Standards Updates (“ASU”). ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
 
In March 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715), in order to improve the presentation of net periodic pension and postretirement costs. The amendment requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments in this ASU also allow only the service cost component to be eligible for capitalization when applicable. The amendments in this update related to income statement activity should be applied retrospectively whereas balance sheet activity should be applied prospectively. For public business entities, the effective date for ASU 2017-07 is annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted within the first interim period. We expect to adopt this guidance effective January 1, 2018 and no impact, other than expense classification, on the Company’s consolidated financial position and results of operations is expected upon adoption.
 
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under ASC 350. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The amendment eliminates the requirement to calculate a goodwill impairment charge by comparing the implied fair value of goodwill with its carrying amount (i.e., Step 2 of today’s goodwill impairment test). The standard will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company elected to adopt ASU 2017-04 early beginning in January 2017 and there was no impact on the Company’s consolidated financial position and results of operations upon adoption.
 
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as

8
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
 


acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The new guidance requires an entity to first evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. If the threshold is not met, the entity evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. For public business entities, the effective date for ASU 2017-01 is annual periods beginning after December 15, 2017, including interim periods within those periods. The Company elected to adopt ASU 2017-01 early beginning in January 2017 and there was no impact on the Company’s consolidated financial position and results of operations upon adoption.
 
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718), which simplifies certain aspects of share-based payment transactions including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new guidance requires an entity to record all excess tax benefits / deficiencies as income tax expense / benefit in the income statement. The new guidance also allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. For public business entities, the effective date for ASU 2016-09 is annual periods beginning after December 15, 2016, including interim periods within those periods. The Company adopted this ASU effective January 1, 2017 and has elected to continue to accrue compensation cost for forfeitures based on the number of awards that are expected to vest. There was no impact on the Company’s consolidated financial position and results of operations upon adoption.
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The new standard also requires disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning after December 15, 2018 (early adoption is permitted). The new standard should be applied under a modified retrospective approach. We are evaluating the impact of the new standard on the Company’s consolidated financial position and results of operations and related disclosures. Although we have not yet completed our assessment, adoption of this standard will have a significant impact on our Consolidated Balance Sheets.  However, we do not expect adoption of this standard to have a significant impact on the recognition, measurement or presentation of lease expenses within the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows.  Information about our undiscounted future lease payments and the timing of those payments is provided under “Contractual Obligations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2016 Form 10-K.  We will adopt this standard effective January 1, 2019. 
 
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which replaces the existing accounting standards for revenue recognition with a single comprehensive five-step model eliminating industry-specific accounting rules. The core principle is to recognize revenue upon the transfer of goods or services to customers at an amount that reflects the consideration expected to be received. Since its issuance, the FASB has amended several aspects of the new guidance, including provisions that address revenue recognition associated with the licensing of intellectual property. The provisions of ASU 2014-09 will be effective for public business entities for interim and annual periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016. The guidance may be adopted either by restating all years presented in the Company’s financial statements or by recording the impact of adoption as an adjustment to retained earnings at the beginning of the year of adoption. During the three months ended September 30, 2017, the Company continued its assessment of AdvanSix revenue streams by reviewing and documenting customer contracts and related transaction support to determine the impact on revenue recognition under the new standard. The Company has made progress on redrafting its revenue recognition policies, assessing the redesign of internal controls, as well as evaluating the expanded disclosure requirements. The Company plans to adopt the standard effective January 1, 2018 and the impact of adoption, if any, will be reflected as an adjustment to retained earnings at the beginning of the year of adoption. Based on the results of the assessment performed to date, the Company has preliminarily concluded that revenues from the Company's products are expected to remain substantially unchanged from the Company's current revenue recognition model. The Company will continue to assess the new standard and the potential impact on the Company’s consolidated financial position and results of operations and related disclosures upon adoption.
 
3. Related Party Transactions with Honeywell
 
Prior to consummation of the Spin-Off, the Condensed Consolidated and Combined Financial Statements have been prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of Honeywell.
 
During the three and nine months ended September 30, 2016, AdvanSix was allocated $10,470 and $31,877, respectively, of general corporate expenses incurred by Honeywell for certain services, such as legal, accounting, information technology, human resources,

9
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
 


other infrastructure support and shared facilities, on behalf of AdvanSix. These expenses were reflected within Costs of goods sold and Selling, general and administrative expenses in the Condensed Consolidated and Combined Statements of Operations.
 
Sales to Honeywell during the three and nine months ended September 30, 2016 were $3,274 and $5,955, respectively. Of these sales, $3,080 and $5,682, respectively, were sold to Honeywell at zero margin. Costs of goods sold to Honeywell during the three and nine months ended September 30, 2016 were $3,157 and $5,842, respectively. Purchases from Honeywell during the three and nine months ended September 30, 2016 were $1,041 and $3,299, respectively. The total net effect of the settlement of these inter-company transactions was reflected in the Condensed Consolidated and Combined Statements of Cash Flows as a financing activity identified as Invested equity.

When the Company was owned by Honeywell, a centralized approach was used for cash management and financing of operations. Prior to consummation of the Spin-Off, the Company’s cash was transferred to Honeywell daily and Honeywell funded the Company’s operating and investing activities as needed.
 
Subsequent to the Spin-Off on October 1, 2016, transactions with Honeywell were not considered related party transactions. Accordingly, no related party transactions with Honeywell were recorded for the three and nine months ended September 30, 2017.
 
4. Earnings Per Share
 
On October 1, 2016, the date of consummation of the Spin-Off, 30,482,966 shares of the Company’s Common Stock were distributed to Honeywell shareholders of record as of September 16, 2016. This share amount is being utilized for the calculation of basic earnings per share for all periods presented as no Common Stock was outstanding prior to the date of the Spin-Off. In October 2016, the Company issued 908,540 time-based restricted stock units in connection with the Spin-Off with vesting periods ranging from 18 to 42 months. These restricted stock units were not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2016.
 
The details of the earnings per share calculations for the three and nine months ended September 30, 2017 and 2016 are as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Basic
 

 
 

 
 

 
 

Net Income
$
21,274

 
$
16,460

 
$
74,331

 
$
58,861

Weighted average common shares outstanding
30,482,966

 
30,482,966

 
30,482,966

 
30,482,966

EPS – Basic
$
0.70

 
$
0.54

 
$
2.44

 
$
1.93

Diluted
 

 
 

 
 

 
 

Dilutive effect of unvested equity awards
676,744

 
—

 
530,640

 
—

Weighted average common shares outstanding
31,159,710

 
30,482,966

 
31,013,606

 
30,482,966

EPS – Diluted
$
0.68

 
$
0.54

 
$
2.40

 
$
1.93


On March 8, 2017, the Company granted equity awards representing 333,719 shares of common stock under the 2016 Stock Incentive Plan of AdvanSix Inc. and its Affiliates to Company employees consisting of 175,026 stock options, 89,896 performance stock units (at target) and 68,797 restricted stock units. These equity awards have a per share strike price or grant date fair value per share of $26.66 with vesting periods ranging from 12 to 36 months.

On June 1, 2017, the Company granted equity awards representing 28,856 shares of common stock under the 2016 Stock Incentive Plan of AdvanSix Inc. and its Affiliates to Company employees and the Company's Board of Directors consisting of restricted stock units. These equity awards have a grant date fair value per share of $29.25 with vesting periods ranging from 12 to 36 months.
 

10
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
 


Stock compensation expense related to all outstanding equity awards is being ratably recognized over the vesting period of each type of equity award with vesting periods ranging from 12 to 42 months based on grant date fair value. Stock compensation expense aggregated $2,067 and $5,686 for the three and nine months ended September 30, 2017.


11
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
 


5. Accounts and Other Receivables – Net
 
September 30, 2017
 
December 31, 2016
Accounts receivables
$
151,318

 
$
119,475

Other
1,816

 
15,407

Total accounts and other receivables
153,134

 
134,882

Less – allowance for doubtful accounts
(623
)
 
(3,211
)
Total accounts and other receivables – net
$
152,511

 
$
131,671

 
The increase in Accounts receivable at September 30, 2017 versus December 31, 2016 was due to significantly higher sales during the third quarter of 2017 versus the fourth quarter of 2016 which was impacted by the Company's plant turnaround activities. The increase in accounts receivable at September 30, 2017 was partially offset by higher accounts receivable collections related to a trade receivables discount arrangement with a third party financial institution which enhances liquidity and enables the Company to efficiently manage its working capital needs.

6. Inventories
 
September 30, 2017
 
December 31, 2016
Raw materials
$
39,313

 
$
68,900

Work in progress
36,801

 
47,759

Finished goods
32,946

 
19,069

Spares and other
24,118

 
23,129

 
133,178

 
158,857

Reduction to LIFO cost basis
(32,704
)
 
(29,879
)
Total inventories
$
100,474

 
$
128,978

 
The decrease in total inventories as of September 30, 2017 compared to December 31, 2016 is due primarily to lower levels of raw materials driven primarily by cumene delivery delays resulting from hurricane impacts on logistics as well as higher than normal levels of cumene inventory at December 31, 2016. The decrease was partially offset by a buildup of finished goods inventory compared to December 31, 2016 following fourth quarter 2016 plant outages. The overall lower levels of inventories at September 30, 2017 resulted in a change in the LIFO cost basis reserve of $4.4 million (unfavorable pretax income impact) during the three months ended September 30, 2017.

7. Postretirement Benefit Cost
 
The components of net periodic benefit cost of the Company’s pension plan are as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Service costs
$
1,908

 
$
—

 
$
5,724

 
$
—

Interest costs
333

 
—

 
999

 
—

Expected return on plan assets
(76
)
 
—

 
(228
)
 
—

Other (1)
—

 
1,717

 
—

 
5,151

Net periodic benefit cost
$
2,165

 
$
1,717

 
$
6,495

 
$
5,151

 
(1)
Prior to the Spin-Off, certain of our employees participated in a defined benefit pension plan (“Shared Plan”) sponsored by Honeywell which included participants of other Honeywell subsidiaries and operations. Net periodic benefit cost related to participation in the Shared Plan was $1.7 million and $5.2 million for the three and nine months ended September 30, 2016, respectively.


12
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
 


The Company made contributions during 2017 sufficient to satisfy pension funding requirements under the AdvanSix Retirement Earnings Plan in an aggregate amount of approximately $17.0 million and will make additional contributions in future years sufficient to satisfy pension funding requirements in those periods. The Company made contributions of $2.2 million in the first quarter of 2017, $1.6 million in the second quarter of 2017, $11.1 million in the third quarter of 2017 and $2.0 million in October 2017. 
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.
The approximate target asset allocation for the Company's pension plan assets is summarized as follows:
 
 
 
September 30, 2017
Cash and cash equivalents
 
 
2%
US and non-US equity securities
 
 
65%
Fixed income / other securities
 
 
33%
Total Pension Assets
 
 
100%
Fixed income and other securities include investment grade securities covering the Treasury, agency, asset-backed, mortgage-backed and credit sectors of the U.S. Bond Market, as well as listed real estate companies and real estate investment trusts located in both developed and emerging markets.

8. 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, including matters relating to commercial transactions. 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, results of operations or cash flows. 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 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 be material for 2017.

9. Income Taxes
 
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. The provision for income taxes was $14.5 million and $11.3 million for the three months

13
ADVANSIX INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts and as otherwise noted)
 


ended September 30, 2017 and 2016, respectively. The provision for income taxes was $46.8 million and $36.7 million for the nine months ended September 30, 2017 and 2016, respectively.

During the three months ended September 30, 2017, the Company adjusted its deferred tax assets and liabilities to account for changes to the September 30, 2016 deferred tax balances related to the separation from Honeywell. The changes were attributable to the completion of Honeywell’s 2016 income tax return and related return to provision adjustment. The current period adjustment resulted in a $7.2 million decrease in Deferred income taxes and an increase in Additional paid in capital.


14


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 and Combined Financial Statements and the notes thereto contained elsewhere in this Report, as well as the MD&A section included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 6, 2017 (the “2016 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, including those incorporated by reference in Item 1A of Part II of this Report, 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 Report 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. When used in this Report, words such as “anticipate,” “believe,” “will,” “estimate,” “expect,” “intend” and similar expressions identify forward-looking statements. Such forward-looking statements are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors detailed in our filings 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.
 
Business Overview
 
We produce and sell our Nylon 6 resin and caprolactam as commodity products and also produce and sell our Nylon 6 resin as a specialized resin product. The production of these products is capital intensive, requiring ongoing investments in improving plant reliability, expanding production capacity and achieving higher quality. Our results of operations are primarily driven by production volume and the spread between the prices of our products and the costs of the underlying raw materials built into the market-based pricing models for most of our sales. 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 ultimately 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, are able to formulate and produce specialized nylon resin products. Our specialized Nylon 6 products are typically valued at a higher level than commodity resin products.

In recent years, nylon and caprolactam prices have experienced a cyclical period of downturn as the global market has experienced large increases in supply without a commensurate increase in demand. Most of this supply increase has been built by new Chinese manufacturers, resulting in margin compression for Nylon 6 resin and caprolactam in recent years to historic lows. Over the last year, capacity reductions by our competitors have occurred in North America and Europe improving supply/demand fundamentals in North America with continued dynamic conditions globally. We believe that, in addition to a potential recovery that has historically followed periods of oversupply and declining prices, Nylon 6 end-market growth will continue to generally track global GDP with certain applications growing at faster rates including engineered plastics and packaging. Additionally, one of our strategies is to continue developing specialty nylon and copolymer products that we believe will obtain higher margins.
 
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. A secondary global price driver for ammonium sulfate fertilizer is the price of future deliveries of crops, including corn, wheat and coffee, which are impacted by general trends in the agricultural industry. We expect agriculture fundamentals to remain challenging through the 2017/2018 planting season.
 
We produce ammonium sulfate fertilizer continuously throughout the year as part of our manufacturing process, but sales experience quarterly cyclicality based on the timing and length of the growing seasons in North and South America. Due to the ammonium sulfate fertilizer sales cycle, we occasionally build up higher inventory balances because our production is continuous and not tied to seasonal demand for fertilizers. Sales of most of our other products have generally been subject to minimal, or no, seasonality.
 
We seek to run our production facilities on a nearly continuous basis for maximum efficiency and several of our intermediate products are key feedstock materials for other products in our integrated manufacturing chain. We schedule several planned outages each year to conduct routine and major maintenance across our facilities, which are referred to as plant turnarounds. While we

15


may experience unplanned interruptions from time to time, we seek to mitigate the risk through regularly scheduled maintenance both for major and minor repairs at all of our production facilities. We also utilize maintenance excellence and mechanical integrity programs and maintain appropriate buffer inventory of intermediate chemicals necessary for our manufacturing process, which are intended to mitigate the extent of any production losses as a result of planned and unplanned downtime. While our integrated manufacturing, scale and the quantity and range of our product offerings make us one of the most efficient manufacturers in our industry, we are also exposed to increased risk associated with unplanned downtime or material disruptions at any one of our production facilities which could impact our supply chain to downstream plants in our manufacturing process.

Results of Operations
(Dollars in thousands, unless otherwise noted)
 
Sales
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Sales
$366,660
 
$323,953
 
$1,104,805
 
$932,201
% change compared with prior year period
13.2%
 
 
 
18.5%
 

 
The change in sales compared to the prior year period is attributable to the following:
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
Volume
4.9%
 
4.1%
Price
8.3%
 
14.4%
 
13.2%
 
18.5%
 
Sales increased in the three months ended September 30, 2017 compared to the prior year period by $42.7 million (approximately 13.2%) due primarily to higher sales prices (approximately 8.3%) and volume increases (approximately 4.9%) of caprolactam, chemical intermediates, and ammonium sulfate offset partially by lower nylon volume. Sales prices increased due primarily to (i) higher prices of the raw materials used to manufacture caprolactam, nylon and chemical intermediates impacting formula-based pass-through pricing (approximately 4.2% favorable impact), particularly benzene and propylene (inputs to cumene which is a key feedstock material for our products), and (ii) market-based pricing due primarily to increases in nylon and caprolactam pricing offset partially by lower prices of ammonium sulfate (approximately 4.1% favorable impact).

Sales increased in the nine months ended September 30, 2017 compared to the prior year period by $172.6 million or approximately 18.5% due primarily to higher sales prices (approximately 14.4%) and volume increases (approximately 4.1%) of ammonium sulfate, chemical intermediates and caprolactam offset partially by volume decreases of nylon. Sales prices increased due primarily to (i) higher prices of the raw materials used to manufacture caprolactam, nylon and chemical intermediates impacting formula-based pass-through pricing (approximately 10.5% favorable impact), particularly benzene and propylene, and (ii) market-based pricing due primarily to increases in nylon, caprolactam and chemical intermediates pricing offset partially by lower prices of ammonium sulfate (approximately 3.9% favorable impact).
 
Costs of Goods Sold
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Costs of goods sold
$309,629
 
$285,091
 
$923,268
 
$804,471
% change compared with prior year period
8.6%
 
 
 
14.8%
 
 
Gross Margin percentage
15.6%
 
12.0%
 
16.4%
 
13.7%
 
Costs of goods sold increased in the three months ended September 30, 2017 compared to the prior year period by $24.5 million or approximately 8.6% due primarily to higher prices of raw materials (approximately 5.7%), particularly benzene and propylene (inputs to cumene which is a key feedstock material for our products) and higher sales volumes (approximately 1.8%).

16



Gross margin percentage increased by approximately 3.6% in the three months ended September 30, 2017 compared to the prior year period due primarily to higher sales prices net of rising raw materials costs (approximately 2.1%) and increased sales volumes (approximately 2.1%).

Costs of goods sold increased in the nine months ended September 30, 2017 compared to the prior year period by $118.8 million or approximately 14.8% due primarily to higher prices of raw materials (approximately 13.4%), particularly benzene and propylene, and a one-time prior year benefit related to the termination of a long-term supply agreement in the three months ended March 31, 2016 (approximately 2.0% unfavorable).

Gross margin percentage increased by approximately 2.7% in the nine months ended September 30, 2017 compared to the prior year period due primarily to higher sales and production volumes on a year-over-year basis (approximately 3.7%) offset partially by the termination of a long-term supply agreement in the three months ended March 31, 2016 (approximately 1.4%).

Selling, General and Administrative Expenses
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Selling, general and administrative expenses
$19,086
 
$11,695
 
$54,022
 
$33,949
Percent of sales
5.2%
 
3.6%
 
4.9%
 
3.6%
 
Selling, general and administrative expenses increased by $7.4 million and $20.1 million in the three and nine months ended September 30, 2017, respectively compared to the corresponding prior year periods due primarily to higher stand-alone costs incurred since the Spin-Off on October 1, 2016. These stand-alone costs are related primarily to workforce and other infrastructure and shared facilities including costs for transition services provided by Honeywell which were partially offset by the elimination of costs allocated in the prior year to the Company from Honeywell on the basis of sales. The incremental one-time and ongoing stand-alone costs to operate our business as an independent public company remain in line with the Company’s expectations as previously disclosed in our Form 10 filed with the SEC and are expected to exceed the historical allocations of expenses from Honeywell. 

Tax Expense
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Tax expense
$14,538
 
$11,342
 
$46,803
 
$36,712
Effective tax rate
40.6%
 
40.8%
 
38.6%
 
38.4%
 
The Company’s effective tax rate for the three and nine months ended September 30, 2017 was higher compared to the U.S. federal statutory rate due primarily to state taxes and changes in the Company's domestic manufacturing deduction. 

The Company’s effective tax rate for three and nine months ended September 30, 2017 were comparable to the effective tax rates in the same prior year periods.

Net Income
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$21,274
 
$16,460
 
$74,331
 
$58,861
 
As a result of the factors described above, net income was $21.3 million and $74.3 million for the three and nine months ended September 30, 2017, respectively, as compared to $16.5 million and $58.9 million in the corresponding prior year period.

17




Non-GAAP Measures
(Dollars in thousands, unless otherwise noted)
 
The following tables set forth the non-GAAP financial measures of EBITDA and EBITDA Margin, and EBITDA and EBITDA Margin excluding the prior year one-time benefit described below. EBITDA is defined as Net income before Interest, Income taxes, Depreciation and amortization. EBITDA Margin is equal to EBITDA divided by Sales. 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 GAAP. Non-GAAP financial measures should be read only in conjunction with the comparable GAAP financial measures. The following is a reconciliation between the non-GAAP financial measures of EBITDA and EBITDA Margin, and EBITDA and EBITDA Margin excluding the prior year one-time benefit to their most directly comparable GAAP financial measure:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
21,274

 
$
16,460

 
$
74,331

 
$
58,861

Interest expense (income)
1,961

 
—

 
5,373

 
—

Income taxes
14,538

 
11,342

 
46,803

 
36,712

Depreciation and amortization
12,565

 
10,307

 
35,524

 
29,964

EBITDA (non-GAAP)
50,338

 
38,109

 
162,031


125,537

Prior year one-time benefit (1)
—

 
—

 
—

 
15,500

EBITDA excluding prior year one-time benefit (non-GAAP)
$
50,338

 
$
38,109

 
$
162,031

 
$
110,037

 
 
 
 
 
 
 
 
Sales
$
366,660

 
$
323,953

 
$
1,104,805

 
$
932,201

 
 
 
 
 
 
 
 
EBITDA Margin (non-GAAP)
13.7%
 
11.8%
 
14.7%
 
13.5%
 
 
 
 
 
 
 
 
EBITDA Margin excluding prior year one-time benefit (non-GAAP)
13.7%
 
11.8%
 
14.7%
 
11.8%
 
(1)
Prior year one-time benefit reflects the $15.5 million one-time benefit in the first quarter of 2016 related to the termination of a long-term supply agreement.

Liquidity and Capital Resources
(Dollars in thousands, unless otherwise noted)
 
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 annual operating and longer term strategic plans, subject to the risks and uncertainties outlined below and in the risk factors as previously disclosed in our 2016 Form 10-K. Our principal source of liquidity is our cash flow generated from operating activities, which is expected to provide us with the ability to meet the majority of our short-term funding requirements. Our operating cash flows are affected by capital requirements and production volume as well as the prices of our raw materials and general economic and industry trends. We utilize a trade receivables discount arrangement with a third party financial institution which enhances liquidity and enables us to efficiently manage our working capital needs. In addition, we monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on 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.

18



On a recurring basis, our primary future cash needs will be centered on operating activities, working capital, capital expenditures including high return growth and cost savings investments, environmental compliance costs, employee benefit obligations, interest payments, debt repayment and strategic acquisitions. We believe that our future cash from operations, together with our access to funds on hand and credit and capital markets, will provide adequate resources to fund our expected operating and financing needs. 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, which are subject to the risk factors previously disclosed in our 2016 Form 10-K, as well as general economic, financial, competitive, regulatory and other factors that are beyond our control.
 
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 be material for 2017.
 
The Company made contributions during 2017 sufficient to satisfy pension funding requirements under the AdvanSix Retirement Earnings Plan in the aggregate amount of approximately $17 million and will make additional contributions in future years sufficient to satisfy pension funding requirements in those periods. The Company made contributions of $2.2 million in first quarter of 2017, $1.6 million in the second quarter of 2017, $11.1 million in third quarter of 2017 and $2.0 million in October 2017.
 
We expect that our primary cash requirements for the remainder of 2017 will be to fund costs associated with ongoing operations including planned plant outages and capital expenditures.
 
Credit Agreement
 
On September 30, 2016, under the Credit Agreement, we incurred indebtedness in the aggregate principal amount of approximately $270.0 million in the form of a term loan, the net proceeds of which were distributed to Honeywell substantially concurrent with the consummation of the Spin-Off, and we also entered into a $155.0 million revolving credit facility to fund our working capital and other cash needs. For information regarding our Credit Agreement, refer to “Note 9-Long-term Debt and Credit Agreement” to the Consolidated and Combined Financial Statements in Item 8 of our 2016 Form 10-K. Going forward, cash provided by operating activities will be needed to fund future interest payments on the Company's outstanding indebtedness.

Under the terms of the Credit Agreement, we are subject to restrictive covenants that limit our ability, among other things, to incur additional indebtedness, pay dividends or make other distributions, and consolidate, merge, sell or otherwise dispose of assets, as well as financial covenants that require us to maintain interest coverage and leverage ratios at levels specified in the 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, 2017. As of September 30, 2017, $152.9 million of the total credit facility of $425.0 million is available to be drawn under the Credit Agreement.

During the three months ended September 30, 2017, we borrowed $32.5 million in the aggregate from our revolving credit facility for our working capital and other cash needs and these borrowings were fully repaid by September 30, 2017. During the nine months ended September 30, 2017, we borrowed $308.5 million in the aggregate from our revolving credit facility for our working capital and other cash needs and these borrowings were fully repaid by September 30, 2017.

Cash Flow Summary
 
Nine Months Ended
September 30,
 
2017
 
2016
Cash provided by (used for):
 

 
 

Operating activities
$
98,471

 
$
66,467

Investing activities
(72,593
)
 
(57,320
)
Financing activities
(91
)
 
28,817

Net increase in cash and cash equivalents
$
25,787

 
$
37,964

 

19


Cash provided by operating activities increased by $32.0 million for the nine months ended September 30, 2017 versus the prior year period due primarily to (i) a $15.5 million increase in Net income versus the prior year period due to significantly higher sales for the nine months ended September 2017, (ii) a $14.9 million larger decrease in Inventory during the nine months ended September 30, 2017 versus the prior year period due primarily to the timing of cumene purchases, (iii) a $11.9 million increase in Accrued liabilities due to the timing of payments during the nine months ended September 30, 2017 versus the same period last year and (iv) a $11.3 million increase in deferred income taxes versus the prior year period due primarily to lower cash tax payments relative to the income tax provision.  This activity was offset partially by a net $33.8 million unfavorable cash impact from Accounts payable due primarily to the timing of payments during the nine months ended September 30, 2017 versus the prior year period.
 
Cash used for investing activities increased by $15.3 million for the nine months ended September 30, 2017 versus the prior year period due primarily to an increase in cash paid for capital expenditures of $10.3 million.
 
Cash from financing activities decreased by $28.9 million for the nine months ended September 30, 2017 versus the prior year period. Cash provided by operating activities was sufficient to repay all current period borrowings under the revolving credit facility whereas revolver borrowings from the prior year period were not repaid and remained outstanding during that period.

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 capacity, further improve mix, yield, throughput, and cost position, and comply with environmental and safety regulations.

The following table summarizes ongoing and expansion capital expenditures:
 
Nine Months Ended
September 30, 2017
Capital expenditures in Accounts payable at December 31, 2016
$
28,485

Purchases of property, plant and equipment
55,949

Capital expenditures in Accounts payable at September 30, 2017
(17,228
)
Cash paid for capital expenditures
$
67,206

 
For the full year 2017, we expect the Company’s total capital expenditures to be approximately $90 million.
 
Critical Accounting Policies
 
The preparation of our Condensed Consolidated and Combined 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 and Combined 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 the 2016 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, 2017, we 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 commitments or contractual obligations other than those detailed in our 2016 Form 10-K. We have 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 and Combined Financial Statements included in Part I, Item 1 of this Form 10-Q.


20


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 Credit Agreement. We have not used derivative financial instruments in our investment portfolio. The 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 Credit Agreement. Based on current borrowing levels, a 25 basis point fluctuation in interest rates for the nine months ended September 30, 2017 would result in an increase or decrease to our interest expense of approximately $0.5 million. 

ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
The Company maintains a system of disclosure controls and procedures designed to give reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934, as amended (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 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 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, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

21


PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
From time to time, we are involved in litigation relating to claims arising out 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 results of operations or liquidity.


ITEM 1A. RISK FACTORS
 
There have been no material changes to our risk factors as previously disclosed in the Company’s 2016 Form 10-K. 


ITEM 6. EXHIBITS
 
Exhibit
 
Description
3.1
 
3.2
 
10.1
 
31.1
 
31.2
 
32.1
 
32.2
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase

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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: November 7, 2017
By:
 
/s/ Michael Preston
 
 
 
Michael Preston
 
 
 
Senior Vice President and Chief Financial Officer


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