NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts or unless otherwise noted)
Note 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 as part of our integrated manufacturing value chain including caprolactam, ammonium sulfate fertilizers, acetone and other chemical intermediates.
We evaluated segment reporting in accordance with Accounting Standards Codification Topic (“ASC”) 280. We concluded that AdvanSix is a single operating segment and a single reportable segment based on the operating results available which are evaluated regularly by the chief operating decision maker (“CODM”) to make decisions about resource allocation and performance assessment. AdvanSix operations are managed as one integrated process spread across three manufacturing sites, including centralized supply chain and procurement functions. The production process is dependent upon one key raw material, cumene, as the input to the manufacturing of all finished goods produced for sale through the sales channels and end-markets the Company serves. Production rates and output volumes are managed across all three plants jointly to align with the overall Company operating plan. The CODM makes operational performance assessments and resource allocation decisions on a consolidated basis, inclusive of all of the Company’s products.
AdvanSix operates through three integrated U.S.-based manufacturing sites located in Frankford, Pennsylvania, and Hopewell and Chesterfield, Virginia. The Company's headquarters is located in Parsippany, New Jersey.
Corporate History
On October 1, 2016, Honeywell International Inc. (“Honeywell”) completed the separation of AdvanSix. The separation was completed by Honeywell distributing (the "Distribution") 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 per share, 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”).
Basis of Presentation
Unless the context otherwise requires, references in these Notes to the Consolidated 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 intercompany transactions have been eliminated.
Note 2. Summary of Significant Accounting Policies
Accounting Principles – The financial statements and accompanying Notes are prepared in accordance with accounting principles generally accepted in the United States of America. The following is a description of AdvanSix’s significant accounting policies.
Principles of Consolidation – The Consolidated Financial Statements include the accounts of AdvanSix and all of its subsidiaries in which a controlling financial interest is maintained. Our consolidation policy requires equity investments that we exercise significant influence over but do not control the investee and are not the primary beneficiary of the investee’s activities to be accounted for using the equity method. Investments through which we are not able to exercise significant influence over the investee and which we do not have readily determinable fair values are accounted for under the cost method. All intercompany transactions and balances are eliminated in consolidation.
Cash and Cash Equivalents – Cash and cash equivalents include cash on hand and on deposit and highly liquid, temporary cash investments with an original maturity to the Company of three months or less. We reduce cash and extinguish liabilities when the creditor receives our payment and we are relieved of our obligation for the liability when checks clear the Company’s bank account. Liabilities to creditors to whom we have issued checks that remain outstanding aggregated $1.7 million at December 31, 2019 and are included in Cash and cash equivalents and Accounts payable in the Consolidated Balance Sheets.
Fair Value Measurement – ASC 820, Fair Value Measurement defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Financial Accounting Standards Board's ("FASB") guidance classifies the inputs used to measure fair value into the following hierarchy:
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Level 1
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Unadjusted quoted prices in active markets for identical assets or liabilities
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Level 2
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Unadjusted quoted prices in active markets for similar assets or liabilities, or
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Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or Inputs other than quoted prices that are observable for the asset or liability
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Level 3
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Unobservable inputs for the asset or liability
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Derivative Financial Instruments – We minimize our risks from interest and foreign currency exchange rate fluctuations through our normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes. Derivative financial instruments that qualify for hedge accounting must be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value of the derivative contract must be highly correlated with changes in fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.
All derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value. For derivatives designated as hedges of the fair value of assets or liabilities, the changes in fair values of both the derivatives and the hedged items are recorded in current earnings. For derivatives designated as cash flow hedges, the changes in fair value of the derivatives are recorded in Accumulated other comprehensive income (loss) and subsequently recognized in earnings when the hedged items impact earnings. Cash flows of such derivative financial instruments are classified consistent with the underlying hedged item. For derivative instruments that are designated and qualify as a net investment hedge, the derivative’s gain or loss is reported as a component of Other comprehensive income (loss) and recorded in Accumulated other comprehensive income (loss). The gain or loss will be subsequently reclassified into net earnings when the hedged net investment is either sold or substantially liquidated.
Commodity Price Risk Management – The Company's exposure to market risk for commodity prices can result in changes in our 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 they do not include take-or-pay terms. Instead, each customer agreement, the majority of which have a term of at least one year, is typically determined by monthly or quarterly volume estimates. 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 December 31, 2019 and 2018, we had no contracts with notional amounts related to forward commodity agreements.
Inventories – Substantially all of the Company's inventories are valued at the lower of cost or market using the last-in, first-out (“LIFO”) method. The Company includes spare and other parts in inventory which are used in support of production or production facilities operations and are valued based on weighted average cost.
Inventories valued at LIFO amounted to $171.7 million and $137.2 million at December 31, 2019 and 2018. Had such LIFO inventories been valued at current costs, their carrying values would have been approximately $31.6 million and $28.5 million higher at December 31, 2019 and 2018.
Property, Plant, Equipment – Property, plant, equipment asset values are recorded at cost, including any asset retirement obligations, less accumulated depreciation. For financial reporting, the straight-line method of depreciation is used over the estimated useful lives of 30 to 50 years for buildings and improvements and 5 to 40 years for machinery and equipment. Our machinery and equipment includes (1) assets used in short production cycles or subject to high corrosion, such as instrumentation, controls and insulation systems with useful lives up to 15 years, (2) standard plant assets, such as boilers and railcars, with useful lives ranging from 15 to 30 years and (3) major process equipment that can be used for long durations with effective preventative maintenance and repair, such as cooling towers, compressors, tanks and turbines with useful lives ranging from 5 to 40 years. Recognition of the fair value of obligations associated with the retirement of tangible long-lived assets is required when there is a legal obligation to incur such costs. Upon initial recognition of a liability, the cost is capitalized as part of the related long-lived asset and depreciated over the corresponding asset’s useful life.
Repairs and maintenance, including planned major maintenance, are expensed as incurred. Costs which materially add to the value of the asset or prolong its useful life are capitalized and the replaced assets are retired.
Long-Lived Assets – The Company evaluates the recoverability of the carrying amount of long-lived assets (including property, plant and equipment and intangible assets with determinable lives) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company evaluates events or changes in circumstances based on several factors including operating results, business plans and forecasts, general and industry trends, and economic projections and anticipated cash flows. An impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. Impairment losses are measured as the amount by which the carrying value of an asset exceeds its fair value and are recognized in the Consolidated Statements of Operations. The Company also evaluates the estimated useful lives of long-lived assets if circumstances warrant and revises such estimates based on current events.
Goodwill – The Company had goodwill of $15.0 million as of December 31, 2019 and 2018. Goodwill is subject to impairment testing annually as of March 31, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. The Company first assesses qualitative factors as described in ASC 350 to determine whether it is necessary to perform the quantitative goodwill impairment test. The Company completed its annual goodwill impairment test as of March 31, 2019 and, based on the results of the Company's assessment of qualitative factors, it was determined that it was not necessary to perform the quantitative goodwill impairment test.
Revenue Recognition – The Company recognizes revenue upon the transfer of control of goods or services to customers at amounts that reflect the consideration expected to be received. AdvanSix primarily recognizes revenues when title and control of the product transfers from the Company to the customer. Outbound shipping costs incurred by the Company are not included in revenues but are reflected as freight expense in Costs of goods sold in the Consolidated Statements of Operations.
Sales of our products to customers are made under a purchase order, and in certain cases in accordance with the terms of a master services agreement. These agreements typically contain formula-based pass-through pricing tied to key feedstock materials and volume ranges, but often do not specify the goods, including the quantities thereof, to be transferred. Certain master services agreements (including with respect to our largest customer) may contain minimum purchase volumes which can be satisfied by the customer on a periodic basis by choosing from various products offered by the Company. In these cases, a performance obligation is created when a customer submits a purchase order for a specific product at a specified price, typically providing for delivery within the next 60 days. Management considers the performance obligation with respect to such purchase order satisfied at the point in time when control of the product is transferred to the customer, which is indicated by shipment of the product and transfer of title and risk of loss to the customer. Transfer of control to the customer occurs through various modes of shipment, including trucks, railcars, and vessels, and follows a variety of commercially acceptable shipping or destination point terms pursuant to the arrangement with the customer. Variable consideration is estimated for future volume rebates and early pay discounts on certain products and product returns. The Company records variable consideration as an adjustment to the sale transaction price. Since variable consideration is generally settled within one year, the time value of money is not significant.
The Company applies the practical expedient in Topic 606 and does not include disclosures regarding remaining performance obligations that have original expected durations of one year or less, or amounts for variable consideration allocated to wholly-unsatisfied performance obligations or wholly-unsatisfied distinct goods that form part of a single performance obligation, if any.
The Company also utilizes the practical expedient in Topic 606 and does not include an adjustment for the effects of a significant financing component given the expected period duration of one year or less.
Environmental – AdvanSix accrues costs related to environmental matters when it is probable that we have incurred a liability related to a contaminated site and the amount can be reasonably estimated.
Deferred Income and Customer Advances – AdvanSix has an annual pre-buy program for ammonium sulfate that is classified as deferred income and customer advances in the Consolidated Balance Sheets. Customers pay cash in advance to reserve capacity for ammonium sulfate to guarantee product availability during peak planting season. The Company recognizes a customer advance when cash is received for the advanced buy. Revenue is then recognized and the customer advance is relieved upon title transfer of ammonium sulfate.
Trade Receivables and Allowance for Doubtful Accounts – Trade accounts receivables are recorded at the invoiced amount as a result of transactions with customers. AdvanSix maintains allowances for doubtful accounts for estimated losses based on a customer’s inability to make required payments. AdvanSix estimates anticipated losses from doubtful accounts based on days past due, as measured from the contractual due date and historical collection history and incorporates changes in economic conditions that may not be reflected in historical trends such as customers in bankruptcy, liquidation or reorganization. Receivables are written-off against the allowance for doubtful accounts when they are determined uncollectible. Such determination includes analysis and consideration of the particular conditions of the account, including time intervals since last collection, customer performance against agreed upon payment plans, success of outside collection agencies activity, solvency of customer and any bankruptcy proceedings.
Research and Development – AdvanSix conducts research and development (“R&D”) activities, which consist primarily of the development of new products and product applications consisting primarily of labor costs and depreciation and maintenance costs. R&D costs are charged to expense as incurred. Such costs are included in costs of goods sold and were $13.9 million, $14.8 million, and $12.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Debt Issuance Costs – Debt issuance costs are capitalized as a component of Other assets and are amortized through interest expense over the related term.
Stock-Based Compensation Plans – The principal awards issued under our stock-based compensation plans, which are described in "Note 16. Stock-Based Compensation Plans", are non-qualified stock options, performance share units and restricted stock units. The cost for such awards is measured at the grant date based on the fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods (generally the vesting period of the equity award) and is included in selling, general and administrative expenses. Forfeitures are estimated at the time of grant to recognize expense for those awards that are expected to vest and are based on our historical forfeiture rates.
Pension Benefits – We have a defined benefit plan covering certain employees primarily in the U.S. The benefits are accrued over the employees’ service periods. We use actuarial methods and assumptions in the valuation of defined benefit obligations and the determination of net periodic pension income or expense. Differences between actual and expected results or changes in the value of defined benefit obligations and fair value of plan assets, if any, are not recognized in earnings as they occur but rather systematically over subsequent periods when net actuarial gains or losses are in excess of 10% of the greater of the fair value of plan assets or the plan’s projected benefit obligation.
Foreign Currency Translation – Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. dollars are translated into U.S. dollars using year-end exchange rates. Sales, costs and expenses are translated at the average exchange rates in effect during the year. Foreign currency translation gains and losses are included as a component of Accumulated other comprehensive income (loss) in our Consolidated Balance Sheets.
Income Taxes – We account for income taxes pursuant to the asset and liability method which requires us to recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.
We adopted the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s consolidated financial statements. ASC 740 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.
The benefit of tax positions taken or expected to be taken in our income tax returns are recognized in the financial statements if such positions are more likely than not of being sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits”. A liability is recognized (or amount of net operating loss carryover or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740. Interest costs and related penalties related to unrecognized tax benefits are required to be calculated, if applicable. Our policy is to classify tax related interest and penalties, if any, as a component of income tax expense. No interest or penalties related to unrecognized income tax benefits were recorded during the years ended December 31, 2019, 2018 and 2017. As of December 31, 2019 and 2018, no liability for unrecognized tax benefits was required to be reported. We do not expect any significant changes in our unrecognized tax benefits in the next year.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. SAB 118 provides guidance for registrants under three scenarios where the measurement of certain tax items is either complete, can be reasonably estimated or cannot be reasonably estimated. The Company has completed its evaluation of the 2017 Act and the impacts of those items have been reflected in our Consolidated Financial Statements as of December 31, 2018 and 2017. The impacts of those changes are disclosed in “Note 4. Income Taxes”.
Leases – The Company enters into agreements to lease transportation equipment, storage facilities, office space, dock access and other equipment. Operating leases have initial terms of up to 20 years with some containing renewal options subject to customary conditions.
An arrangement is considered to be a lease if the agreement conveys the right to control the use of the identified asset in exchange for consideration.
Operating leases, which are reported as Operating lease right-of-use assets, and Operating lease liabilities – short-term and Operating lease liabilities – long-term are included in our Consolidated Balance Sheets. Finance leases are included as a component of Property, plant and equipment – net, Accounts payable and Other liabilities in our Consolidated Balance Sheets.
The Company has elected the following practical expedients available in Topic 842:
•the package of three expedients which allows the Company to not re-assess (i) whether any expired or existing contracts are, or contain, leases, (ii) lease classification for any expired or existing leases, and (iii) initial direct costs for any expired or existing leases;
•the short-term lease practical expedient, which allows the Company to exclude leases with an initial term of 12 months or less ("short-term leases") from recognition in the unaudited Consolidated Balance Sheets;
•the bifurcation of lease and non-lease components practical expedients, which did not require the Company to bifurcate lease and non-lease components for real estate leases; and
•the land easements practical expedient, which allows the Company to carry forward the accounting treatment for land easements on existing agreements.
Earnings Per Share – Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on the weighted average number of common shares outstanding and all dilutive potential common shares outstanding.
Treasury Stock – The Company has elected to account for treasury stock purchased under the constructive retirement method. For shares repurchased in excess of par, the company will allocate the excess value to additional paid-in capital.
Use of Estimates – The preparation of the Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the Consolidated Financial Statements and related disclosures in the accompanying Notes. Actual results could differ from those estimates.
Estimates and assumptions are periodically reviewed and the effects of changes are reflected in the Consolidated Financial Statements in the period they are determined to be necessary.
Reclassifications – Certain prior period amounts have been reclassified for consistency with the current period presentation. All reclassified amounts have been immaterial.
Recent Accounting Pronouncements – The Company considers the applicability and impact of all Accounting Standards Updates (“ASU’s”) issued by the FASB. ASU’s not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Consolidated Financial Statements.
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 calendar-year public business entities in 2021 and interim periods within that year, and early adoption is permitted. The Company is still evaluating these changes and does not anticipate any material impact on the Company’s consolidated financial position or results of operations upon adoption.
In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes which permits use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct Treasury obligations of the U.S. government ("UST"), the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate and the SIFMA Municipal Swap Rate. Pursuant to the amendments, SOFR will be an option to replace LIBOR as it is phased out. The amendments of ASU No. 2018-16 are effective for companies that have adopted ASU 2017-12 for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year or at such time a company adopts ASU 2017-12. Early adoption of ASU 2018-16 is not permitted without previous adoption of ASU 2017-12. As the Company elected to early adopt ASU 2017-12 during the fourth quarter of 2018, the Company adopted ASU 2018-16 effective January 1, 2019 which did not have a material impact on the Company's consolidated financial position or results of operations upon adoption.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, that allows companies to reclassify to Retained earnings the stranded tax effects in Accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act. The amendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted, including adoption in any interim period. The Company elected to early adopt this guidance effective January 1, 2018 and to reclassify the stranded tax effects from the Tax Cuts and Jobs Act from Accumulated other comprehensive income to Retained earnings (refer to "Note 4. Income Taxes").
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities which simplifies financial statement reporting for qualifying hedging relationships by eliminating the requirement to separately measure and report hedge ineffectiveness. For net investment hedges, the entire change in fair value of the hedging instruments is recorded in the currency translation adjustment section of other comprehensive income or loss. Pursuant to the amendments, these amounts are required to be subsequently reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is presented when the hedged item affects earnings. The amendments of ASU No. 2017-12 are effective for the Company’s fiscal years beginning after December 31, 2018, including interim periods within that fiscal year. Early adoption of these amendments is permitted, including in any interim period. The Company elected to early adopt the guidance in the period ended December 31, 2018.
In March 2017, the 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 were applied retrospectively whereas balance sheet activity was applied prospectively. For public business entities, the effective date for ASU 2017-07 was annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted within the first interim period. The Company adopted this guidance effective January 1, 2018 and there was no impact on the Company’s consolidated financial position and results of operations upon adoption other than immaterial pension expense reclassifications in the 2017 and 2016 Consolidated Statements of Operations which reduced Cost of goods sold and Selling, general and administrative expenses and increased Other non-operating expense (income), net.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The amended guidance addresses eight specific cash flow issues, including debt prepayment or extinguishment costs, and clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. Entities are required to apply the guidance retrospectively and provide the relevant disclosure in ASC 250. For public business entities, the effective date for ASU 2017-07 was annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company adopted this guidance effective January 1, 2018 and there was no impact on the Company’s consolidated financial position, results of operations or cash flows upon adoption on the 2018 Consolidated Statement of Cash Flows.
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). Initial guidance stated that the new standard be applied under a modified retrospective approach with periods prior to the adoption date being adjusted. During July 2018, however, the FASB issued ASU 2018-11, Leases (Topic 842), providing another transition method allowing a company to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjusting prior periods. The Company adopted the standard effective January 1, 2019 electing the cumulative-effect adjustment approach made available in ASU 2018-11. The Company has also elected the following practical expedients:
•the package of three expedients which allows the Company to not re-assess (i) whether any expired or existing contracts are, or contain, leases, (ii) lease classification for any expired or existing leases, and (iii) initial direct costs for any expired or existing leases;
•the short-term lease practical expedient, which allows the Company to exclude leases with an initial term of 12 months or less ("short-term leases") from recognition in the unaudited Consolidated Balance Sheets;
•the bifurcation of lease and non-lease components practical expedients, which did not require the Company to bifurcate lease and non-lease components for our real estate leases; and
•the land easements practical expedient, which allows the Company to carry forward the accounting treatment for land easements on existing agreements.
We have implemented internal controls and key system functionality to enable the preparation of financial information on adoption. The standard had a material impact to our Consolidated Balance Sheet but did not have a significant impact in the recognition, measurement or presentation of lease expenses within the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows. The most significant impact was the recognition of right-of-use ("ROU") assets and liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. See "Note 8. Leases" for further information.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which replaced 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. The provisions of ASU 2014-09 became effective for public business entities for interim and annual periods beginning after December 15, 2017. The Company adopted this standard effective January 1, 2018 using the modified retrospective method of transition. Under this standard, revenue recognition from the Company's products remained unchanged from the Company's previous revenue recognition model causing no cumulative impact adjustment on the Company’s consolidated financial position and results of operations.
Note 3. Revenue
We serve approximately 400 customers annually in more than 40 countries and across a wide variety of industries. For 2019, 2018 and 2017, the Company's ten largest customers accounted for approximately 47%, 45% and 44% of total sales, respectively.
We typically sell to customers under master services agreements, with primarily one-year terms, or by purchase orders. We have historically experienced low customer turnover and have an average customer relationship of approximately 20 years. Our largest customer is Shaw Industries Group Inc. ("Shaw"), a significant consumer of caprolactam and Nylon 6 resin. We sell Nylon 6 resin and caprolactam to Shaw under a long-term agreement. Sales to Shaw were 22% of our total sales for each of the years ended December 31, 2019, 2018 and 2017.
Each of the Company’s product lines represented the following approximate percentage of total sales for 2019, 2018 and 2017:
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Years Ended December 31,
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2019
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2018
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2017
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Nylon
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27%
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28%
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29%
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Caprolactam
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22%
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19%
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19%
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Ammonium Sulfate Fertilizer
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23%
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20%
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19%
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Chemical Intermediates
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28%
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33%
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33%
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100%
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100%
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100%
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The Company’s revenues by geographic area for 2019, 2018 and 2017 were as follows (in millions):
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Years Ended December 31,
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2019
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2018
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2017
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United States
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$
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1,057
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$
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1,271
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$
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1,189
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International
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240
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244
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286
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Total
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$
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1,297
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$
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1,515
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$
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1,475
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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 twelve months ended December 31, 2019:
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Deferred Income and Customer Advances
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2019
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Opening balance January 1, 2019
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$
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22,556
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Additional cash advances
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19,517
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Less amounts recognized in revenues
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(22,377)
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Ending balance December 31, 2019
|
|
|
$
|
19,696
|
|
The Company expects to recognize as revenue the December 31, 2019 ending balance of Deferred income and customer advances within one year or less.
Note 4. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Income (loss) before taxes
|
|
|
|
|
|
U.S.
|
$
|
53,231
|
|
|
$
|
85,596
|
|
|
$
|
144,499
|
|
Non-U.S.
|
117
|
|
|
172
|
|
|
133
|
|
|
$
|
53,348
|
|
|
$
|
85,768
|
|
|
$
|
144,632
|
|
Income taxes
Income tax expense (benefit) consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current Provision:
|
|
|
|
|
|
Federal
|
$
|
2,519
|
|
|
$
|
7,529
|
|
|
$
|
3,682
|
|
State
|
1,007
|
|
|
2,442
|
|
|
1,743
|
|
Non-U.S.
|
24
|
|
|
27
|
|
|
22
|
|
Total current provision
|
$
|
3,550
|
|
|
$
|
9,998
|
|
|
$
|
5,447
|
|
Deferred Provision:
|
|
|
|
|
|
Federal
|
$
|
7,536
|
|
|
$
|
8,081
|
|
|
$
|
(6,824)
|
|
State
|
907
|
|
|
1,435
|
|
|
(700)
|
|
Non-U.S.
|
8
|
|
|
10
|
|
|
10
|
|
Total deferred provision
|
8,451
|
|
|
9,526
|
|
|
(7,514)
|
|
Total income tax expense (benefit)
|
$
|
12,001
|
|
|
$
|
19,524
|
|
|
$
|
(2,067)
|
|
The U.S. federal statutory income tax rate is reconciled to the effective income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
U.S. federal statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
2017 Act
|
—
|
%
|
|
(1.9)
|
%
|
|
(37.6)
|
%
|
U.S. state income taxes
|
2.8
|
%
|
|
3.5
|
%
|
|
2.6
|
%
|
U.S. state income tax rate change
|
—
|
%
|
|
—
|
%
|
|
(1.7)
|
%
|
Manufacturing incentives
|
—
|
%
|
|
—
|
%
|
|
(0.3)
|
%
|
|
|
|
|
|
|
Executive compensation limitations
|
1.5
|
%
|
|
1.2
|
%
|
|
0.7
|
%
|
Tax credits
|
(3.0)
|
%
|
|
(0.5)
|
%
|
|
—
|
%
|
Other, net
|
0.2
|
%
|
|
(0.5)
|
%
|
|
(0.1)
|
%
|
|
22.5
|
%
|
|
22.8
|
%
|
|
(1.4)
|
%
|
On December 22, 2017 the U.S. government enacted significant changes to federal tax law following the passage of the Tax Cuts and Jobs Act (the “2017 Act”). In 2017, the Company reasonably estimated the accounting for the effects of the 2017 Act. In 2018, under Staff Accounting Bulletin No. 118 (“SAB 118”), we finalized the accounting for the 2017 Act and our financial statements for the year ended December 31, 2018 and 2017 reflect certain effects of the 2017 Act including a reduction in the corporate tax rate to 21% from 35% and changes made to executive compensation rules. As a result of changes to tax laws and tax rates under the 2017 Act, the Company recorded a reduction in income tax expense of $1,651 and $53,424 primarily related to the reduction in the federal corporate tax rate to 21% during the years ended December 31, 2018 and 2017, respectively.
The Company's effective income tax rate for 2019 was slightly higher compared to the U.S. Federal statutory rate of 21% due primarily to state taxes and executive compensation deduction limitations, partially offset by the vesting of restricted stock units as well as current year research tax credits and additional credits claimed on the Company's 2018 U.S. federal income tax return.
The Company's effective income tax rate for 2018 was higher compared to the U.S. Federal statutory rate of 21% due primarily to state taxes and executive compensation deduction limitations resulting from the 2017 Act, partially offset by income tax benefits associated with the filing of the 2017 U.S. Federal income tax return and the related completion of the accounting for the impacts of the 2017 Act.
The Company’s effective income tax rate for 2017 was lower compared to the U.S. Federal statutory rate of 35% due primarily to the enactment of the 2017 Act and the related remeasurement of deferred tax assets and liabilities. Additionally, the Company made certain state tax apportionment elections in 2017 which resulted in a state income tax rate change and related income tax benefit.
For 2019, 2018 and 2017, there were no unrecognized tax benefits recorded by the Company. Although there are no unrecognized income tax benefits, when applicable, the Company’s policy is to report interest expense and penalties related to unrecognized income tax benefits in the income tax provision.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2019, tax years 2016, 2017 and 2018 are subject to examination by the tax authorities.
Deferred tax assets (liabilities)
The tax effects of temporary differences which give rise to future income tax benefits and expenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
Net Operating Loss
|
$
|
8,167
|
|
|
$
|
27
|
|
Accruals and Reserves
|
2,859
|
|
|
4,158
|
|
Interest Expense Limitation
|
2,655
|
|
|
—
|
|
Pension Obligation
|
7,318
|
|
|
4,804
|
|
Equity Compensation
|
1,695
|
|
|
1,979
|
|
Other
|
1,314
|
|
|
289
|
|
Total gross deferred tax assets
|
24,008
|
|
|
11,257
|
|
Less: Valuation Allowance
|
—
|
|
|
—
|
|
Total deferred tax assets
|
$
|
24,008
|
|
|
$
|
11,257
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant & equipment
|
$
|
(123,915)
|
|
|
$
|
(102,783)
|
|
Intangibles
|
(3,713)
|
|
|
(3,280)
|
|
Inventory
|
(5,503)
|
|
|
(8,252)
|
|
Other
|
(931)
|
|
|
(698)
|
|
Total deferred tax liabilities
|
(134,062)
|
|
|
(115,013)
|
|
Net deferred taxes
|
$
|
(110,054)
|
|
|
$
|
(103,756)
|
|
The net deferred taxes are primarily related to U.S. operations. As of December 31, 2019, we recognized a federal net operating loss ("NOL") carryforward of $38,301 which can be carried forward indefinitely. We also recognized state NOL carryforwards in multiple jurisdictions for $2,139 which generally begin to expire in 2039. The Company has a foreign NOL of $70 and $111, respectively, at December 31, 2019 and 2018 which is not subject to expiration. We recognized a research tax credit carryforward of $758 at December 31, 2019 which will expire in 2039. We believe that the federal, foreign and state NOL carryforwards, tax credit carryforwards and other deferred tax assets are more likely than not to be realized and we have not recorded a valuation allowance against the deferred tax assets.
As a result of the early adoption of ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, during the three months ended March 31, 2018, the Company elected to reclassify $0.4 million from Accumulated other comprehensive income to Retained earnings. The reclassification results from the remeasurement of deferred taxes pursuant to the Tax Cuts and Jobs Act related to the Company’s pension plan that was recognized as a component of Income taxes related to continuing operations for the year ended December 31, 2017 which was originally recognized in Other comprehensive income. The Company elected the optional transition method and recorded the adjustment at the beginning of the period of adoption of ASU 2018-02. The Company’s current accounting policy related to stranded tax effects in Accumulated other comprehensive income is to review and reclassify on an item by item basis.
The Company's accounting policy is to record the tax impacts of Global intangible low-taxed income as a period cost.
As of December 31, 2019 and 2018, there were no material undistributed earnings of the Company's non-U.S. subsidiaries and, as such, we have not provided a deferred tax liability for undistributed earnings.
Note 5. Accounts and Other Receivables – Net
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Accounts receivables
|
$
|
105,275
|
|
|
$
|
166,017
|
|
Other
|
3,708
|
|
|
1,716
|
|
Total accounts and other receivables
|
108,983
|
|
|
167,733
|
|
Less – allowance for doubtful accounts
|
(2,323)
|
|
|
(7,467)
|
|
Total accounts and other receivables – net
|
$
|
106,660
|
|
|
$
|
160,266
|
|
The roll-forward of allowance for doubtful accounts are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning of
Year
|
|
Charged to
Costs and
Expenses
|
|
Charged to
Other
Accounts
|
|
Deductions
|
|
Balance at
End of Year
|
Year ended December 31, 2019
|
$
|
7,467
|
|
|
$
|
274
|
|
|
$
|
(396)
|
|
|
$
|
(5,022)
|
|
|
$
|
2,323
|
|
Year ended December 31, 2018
|
1,410
|
|
|
6,226
|
|
|
(187)
|
|
|
18
|
|
|
7,467
|
|
Year ended December 31, 2017
|
3,211
|
|
|
725
|
|
|
(34)
|
|
|
(2,492)
|
|
|
1,410
|
|
Note 6. Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Raw materials
|
$
|
63,644
|
|
|
$
|
55,002
|
|
Work in progress
|
56,065
|
|
|
46,728
|
|
Finished goods
|
58,527
|
|
|
39,368
|
|
Spares and other
|
25,035
|
|
|
24,555
|
|
|
203,271
|
|
|
165,653
|
|
Reduction to LIFO cost basis
|
(31,561)
|
|
|
(28,471)
|
|
Total inventories
|
$
|
171,710
|
|
|
$
|
137,182
|
|
Note 7. Property, Plant, Equipment – Net
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
Land and improvements
|
$
|
6,396
|
|
|
$
|
6,396
|
|
Machinery and equipment
|
1,337,234
|
|
|
1,308,865
|
|
Buildings and improvements
|
184,951
|
|
|
173,328
|
|
Construction in progress
|
97,143
|
|
|
80,720
|
|
|
1,625,724
|
|
|
1,569,309
|
|
Less – accumulated depreciation
|
(869,843)
|
|
|
(897,099)
|
|
Total property, plant, equipment – net
|
$
|
755,881
|
|
|
$
|
672,210
|
|
Capitalized interest was $6,359, $3,619 and $3,637 for the years ended December 31, 2019, 2018 and 2017, respectively.
Depreciation expense was $53,424, $49,729 and $46,428 for the years ended December 31, 2019, 2018 and 2017, respectively.
Note 8. Leases
We determine if an arrangement is a lease at inception. Operating leases, which are reported as Operating lease right-of-use assets, and Operating lease liabilities – short-term, and Operating lease liabilities – long-term are included in our Consolidated Balance Sheets. Finance leases are included in Property, plant and equipment – net, Accounts payable, and Other liabilities in our 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 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 operating leases have initial terms of up to 20 years with some containing renewal options subject to customary conditions.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use asset
|
|
|
$
|
661
|
|
Interest on lease liabilities
|
|
|
70
|
|
Total finance lease cost
|
|
|
731
|
|
Operating lease cost
|
|
|
36,454
|
|
Short-term lease cost
|
|
|
12,885
|
|
|
|
|
|
Total lease cost
|
|
|
$
|
50,070
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
Year ended December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
36,165
|
|
Operating cash flows from finance leases
|
65
|
|
Financing cash flows from finance leases
|
4,839
|
|
Non-cash information:
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating leases
|
45,541
|
|
Finance leases
|
1,031
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
December 31, 2019
|
Operating Leases
|
|
Operating lease right-of-use assets
|
$
|
135,985
|
|
Operating lease liabilities – short term
|
38,005
|
|
Operating lease liabilities – long term
|
98,347
|
|
Total operating lease liabilities
|
$
|
136,352
|
|
Finance Leases
|
|
Property, plant and equipment – gross
|
$
|
2,793
|
|
Accumulated depreciation
|
(1,391)
|
|
Property, plant and equipment – net
|
$
|
1,402
|
|
Accounts payable
|
712
|
|
Other liabilities
|
708
|
|
Total finance lease liabilities
|
$
|
1,420
|
|
Weighted Average Remaining Lease Term
|
|
Operating leases
|
9.1 years
|
Finance leases
|
2.2 years
|
Weighted Average Discount Rate
|
|
Operating leases
|
5.72
|
%
|
Finance leases
|
4.79
|
%
|
The cumulative effect of the changes made to the Consolidated Balance Sheets for the adoption of the new leasing standard on January 1, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet accounts prior to new leasing standard adoption adjustments
|
|
Adjustments due to the adoption of the new leasing standard
|
|
Balance Sheet accounts after the new leasing standard adoption adjustments
|
ASSETS
|
|
|
|
|
|
Property, plant and equipment – net
|
$
|
1,032
|
|
|
$
|
—
|
|
|
$
|
1,032
|
|
Operating lease right-of-use assets
|
—
|
|
|
117,921
|
|
|
117,921
|
|
Total assets
|
1,034,626
|
|
|
$
|
117,921
|
|
|
1,152,547
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
318
|
|
|
$
|
—
|
|
|
$
|
318
|
|
Operating lease liabilities – short term
|
—
|
|
|
24,794
|
|
|
24,794
|
|
Total current liabilities
|
284,724
|
|
|
24,794
|
|
|
309,518
|
|
Operating lease liabilities – long term
|
—
|
|
|
93,127
|
|
|
93,127
|
|
Other liabilities
|
762
|
|
|
—
|
|
|
762
|
|
Total liabilities
|
614,288
|
|
|
117,921
|
|
|
732,209
|
|
Total equity
|
420,338
|
|
|
—
|
|
|
420,338
|
|
Total liabilities and equity
|
1,034,626
|
|
|
$
|
117,921
|
|
|
1,152,547
|
|
Maturities of lease liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
Operating
Leases
|
|
Finance
Leases
|
2020
|
$
|
44,454
|
|
|
$
|
762
|
|
2021
|
32,264
|
|
|
522
|
|
2022
|
22,602
|
|
|
193
|
|
2023
|
13,033
|
|
|
11
|
|
2024
|
11,166
|
|
|
8
|
|
Thereafter
|
61,506
|
|
|
—
|
|
Total lease payments
|
185,025
|
|
|
1,496
|
|
Less imputed interest
|
(48,673)
|
|
|
(76)
|
|
Total
|
$
|
136,352
|
|
|
$
|
1,420
|
|
As previously disclosed in our 2018 Form 10-K and under the previous lease accounting standard, future minimum lease payments for leases having initial or remaining non-cancellable lease terms in excess of one year were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
Operating
Leases
|
|
Capital
Leases
|
2019
|
$
|
36,110
|
|
|
$
|
239
|
|
2020
|
29,318
|
|
|
212
|
|
2021
|
16,111
|
|
|
131
|
|
2022
|
11,571
|
|
|
89
|
|
2023
|
9,104
|
|
|
—
|
|
Thereafter
|
26,627
|
|
|
—
|
|
Total lease payments
|
$
|
128,841
|
|
|
$
|
671
|
|
Note 9. Long-term Debt and Credit Agreement
The Company’s debt at December 31, 2019 consisted of the following:
|
|
|
|
|
|
Total term loan outstanding
|
$
|
—
|
|
Amounts outstanding under the Revolving Credit Facility
|
297,000
|
|
Total outstanding indebtedness
|
297,000
|
|
Less: amounts expected to be repaid within one year
|
—
|
|
Total long-term debt due after one year
|
$
|
297,000
|
|
At December 31, 2019, the Company assessed the amount recorded under the Term Loan (defined below) and the Revolving Credit Facility (defined below) and determined that such amounts approximated fair value. The fair values of the debt are based on quoted inactive market prices and are therefore classified as Level 2 within the valuation hierarchy.
Scheduled principal repayments under the Long-term Debt and Credit Agreement subsequent to December 31, 2019 are as follows:
|
|
|
|
|
|
2020
|
$
|
—
|
|
2021
|
—
|
|
2022
|
—
|
|
2023
|
297,000
|
|
2024
|
—
|
|
Thereafter
|
—
|
|
Total
|
$
|
297,000
|
|
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.
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 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). If the Company did not comply with the covenants in the First Amended and Restated Credit Agreement, the lenders could have, subject to customary cure rights, required the immediate payment of all amounts outstanding under the Revolving Credit Facility.
The obligations under the First Amended and Restated Credit Agreement are secured by a pledge of assets and liens on substantially all of the assets of AdvanSix.
The Company had approximately $4.2 million of letter of credit agreements outstanding as of December 31, 2019, of which $3.2 million are bi-lateral letters of credit outside the Revolving Credit Facility with $1.0 million outstanding under the Revolving Credit Facility.
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 19. "Subsequent Events."
Note 10. Postretirement Benefit Obligations
Defined Contribution Benefit Plan
On January 1, 2017, the Company established a defined contribution plan which covers all eligible U.S. employees. Our plan allows eligible employees to contribute a portion of their cash compensation to the plan on a tax-deferred basis to save for their future retirement needs. The Company matches 50% of the first 8% of contributions for employees covered by a collective bargaining agreement and matches 75% of the first 8% of the employee’s contribution election for all other employees. The plan’s matching contributions vest after three years of service with the Company. The Company may also provide an additional discretionary retirement savings contribution which is at the sole discretion of the Company. The Company made contributions to the defined contribution plan of $5,944, $5,514 and $5,379 for the years ended December 31, 2019, 2018 and 2017, respectively.
Defined Benefit Pension Plan
Prior to the Spin-Off certain of our employees participated in a defined benefit pension plan (the “Shared Plan”) sponsored by Honeywell which includes participants of other Honeywell subsidiaries and operations. We accounted for our participation in the Shared Plan as a multi-employer benefit plan. Accordingly, we did not record an asset or liability to recognize the funded status of the Shared Plan. The related pension expense was allocated based on annual service cost of active participants and reported within Costs of goods sold and Selling, general and administrative expenses in the Statements of Operations.
As of the date of separation from Honeywell, these employees’ entitlement to benefits in Honeywell’s plans was frozen and they will accrue no further benefits in Honeywell’s plans. Honeywell retained the liability for benefits payable to eligible employees, which are based on age, years of service and average pay upon retirement.
Upon consummation of the Spin-Off, AdvanSix employees who were participants in a Honeywell defined benefit pension plan became participants in the AdvanSix defined benefit pension plan (“AdvanSix Retirement Earnings Plan”). The AdvanSix Retirement Earnings Plan has the same benefit formula as the Honeywell defined benefit pension plan. Moreover, vesting service, benefit accrual service and compensation credited under the Honeywell defined benefit pension plan apply to the determination of pension benefits under the AdvanSix Retirement Earnings Plan. Benefits earned under the AdvanSix Retirement Earnings Plan shall be reduced by the value of benefits accrued under the Honeywell plans.
The following tables summarize the balance sheet impact, including the benefit obligations, assets and funded status associated with the AdvanSix Retirement Earnings Plan.
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Change in benefit obligation:
|
2019
|
|
2018
|
|
2017
|
Benefit obligation at January 1,
|
$
|
48,450
|
|
|
$
|
51,018
|
|
|
$
|
33,887
|
|
Service Cost
|
6,855
|
|
|
8,008
|
|
|
7,629
|
|
Interest Cost
|
2,084
|
|
|
1,875
|
|
|
1,333
|
|
Actuarial losses (gains)
|
12,364
|
|
|
(12,324)
|
|
|
8,190
|
|
Benefits Paid
|
(472)
|
|
|
(127)
|
|
|
(21)
|
|
Benefit obligation at December 31,
|
$
|
69,281
|
|
|
$
|
48,450
|
|
|
$
|
51,018
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|
|
|
|
|
|
|
Change in plan assets:
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|
|
|
|
|
Fair value of plan assets at January 1,
|
$
|
26,789
|
|
|
$
|
17,321
|
|
|
$
|
—
|
|
Actual return on plan assets
|
5,462
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|
|
(2,205)
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|
|
592
|
|
Benefits paid
|
(472)
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|
|
(127)
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|
|
(21)
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Company Contributions
|
4,200
|
|
|
11,800
|
|
|
16,750
|
|
Fair value of plan assets at December 31,
|
35,979
|
|
|
26,789
|
|
|
17,321
|
|
|
|
|
|
|
|
Funded status of plan
|
$
|
33,302
|
|
|
$
|
21,661
|
|
|
$
|
33,697
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|
|
|
|
|
|
|
Amounts recognized in Balance Sheet consists of:
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|
|
|
|
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Accrued pension liabilities-current (1)
|
$
|
892
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|
|
$
|
581
|
|
|
$
|
301
|
|
Accrued pension liabilities-noncurrent (2)
|
32,410
|
|
|
21,080
|
|
|
33,396
|
|
Total pension liabilities recognized
|
$
|
33,302
|
|
|
$
|
21,661
|
|
|
$
|
33,697
|
|
(1) Included in accrued liabilities on Balance Sheet
(2) Included in postretirement benefit obligations on Balance Sheet
Pension amount recognized in accumulated other comprehensive loss (income) associated with the Company's pension plan are as follows for:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Years Ended December 31,
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|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Transition obligation
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
Net actuarial (gain) loss
|
4,012
|
|
|
(4,226)
|
|
|
4,743
|
|
Pension amounts recognized in other comprehensive loss (income)
|
$
|
4,012
|
|
|
$
|
(4,226)
|
|
|
$
|
4,743
|
|
The components of net periodic benefit cost and other amounts recognized in other comprehensive income for our pension plan include the following components:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net periodic pension cost (benefit)
|
|
|
|
|
|
|
Service cost
|
|
$
|
6,855
|
|
|
$
|
8,008
|
|
|
$
|
7,629
|
|
Interest cost
|
|
2,084
|
|
|
1,875
|
|
|
1,333
|
|
Expected return on plan assets
|
|
(1,336)
|
|
|
(1,151)
|
|
|
(302)
|
|
Recognition of actuarial losses
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic Pension Cost
|
|
7,603
|
|
|
8,732
|
|
|
8,660
|
|
Other changes in benefits obligations recognized in other comprehensive loss (income)
|
|
|
|
|
|
|
Actuarial losses (gains)
|
|
8,238
|
|
|
(8,969)
|
|
|
7,902
|
|
Total recognized in other comprehensive income
|
|
8,238
|
|
|
(8,969)
|
|
|
7,902
|
|
Total net periodic pension cost (benefit) recognized in Other comprehensive income
|
|
$
|
15,841
|
|
|
$
|
(237)
|
|
|
$
|
16,562
|
|
The estimated actuarial loss (gain) that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2019 and 2018 is expected to be nil.
Significant actuarial assumptions used in determining the benefit obligations and net periodic benefit cost for our pension plan were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key actuarial assumptions used to determine benefit obligations at December 31,
|
|
2019
|
2018
|
2017
|
|
Effective discount rate for benefit obligation
|
|
3.5%
|
|
4.6%
|
|
3.9%
|
|
|
Expected annual rate of compensation increase
|
|
2.4%
|
|
2.8%
|
|
2.8%
|
|
|
|
|
|
|
Key actuarial assumptions used to determine the net periodic benefit cost for the years ended December 31,
|
|
2019
|
2018
|
2017
|
|
Effective discount rate for service cost
|
|
4.6%
|
|
3.9%
|
|
4.5%
|
|
|
Effective discount rate for interest cost
|
|
4.3%
|
|
3.7%
|
|
4.0%
|
|
|
Expected long-term rate of return
|
|
7.0%
|
|
7.0%
|
|
5.8%
|
|
|
Expected annual rate of compensation increase
|
|
2.8%
|
|
2.8%
|
|
2.8%
|
|
The discount rate for our pension plan reflects the current rate at which the associated liabilities could be settled at the measurement date of December 31 of a given year. To determine discount rates for our pension plan, we use a modeling process that involves matching the expected cash outflows of our benefit plan to a yield curve constructed from a portfolio of high quality, fixed-income debt instruments. We use the single weighted-average yield of this hypothetical portfolio as a discount rate benchmark.
The long-term expected rate of return on funded assets is developed by using forward-looking long-term return assumptions for each asset class. Management incorporates the expected future investment returns on current and planned asset allocations using information from external investment consultants as well as management judgment. A single rate is then calculated as the weighted average of the target asset allocation percentages and the long-term return assumption for each asset class.
The accumulated benefit obligation for our pension plan was $54.4 million, $36.7 million and $31.2 million as of December 31, 2019, 2018 and 2017, respectively.
Benefit payments, including amounts to be paid from Company assets, and reflecting expected future service, as appropriate, are expected to be paid during the following years:
|
|
|
|
|
|
2020
|
$
|
892
|
|
2021
|
1,461
|
|
2022
|
1,836
|
|
2023
|
2,312
|
|
2024
|
2,805
|
|
Thereafter
|
21,327
|
|
Our general funding policy for our pension plan is to contribute amounts at least sufficient to satisfy regulatory funding standards. We plan to make estimated payments through such time as the plan is fully funded. The Company made pension plan contributions sufficient to satisfy pension funding requirements under the AdvanSix Retirement Earnings Plan as follows:
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
1st Quarter
|
|
$
|
—
|
|
|
$
|
1,950
|
|
|
$
|
2,150
|
|
2nd Quarter
|
|
500
|
|
|
6,600
|
|
|
1,600
|
|
3rd Quarter
|
|
3,700
|
|
|
3,250
|
|
|
11,050
|
|
4th Quarter
|
|
—
|
|
|
—
|
|
|
1,950
|
|
Total
|
|
$
|
4,200
|
|
|
$
|
11,800
|
|
|
$
|
16,750
|
|
The Company plans to make pension plan contributions during 2020 sufficient to satisfy pension funding requirements of $5.0 to $10.0 million as well as 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.
The target asset allocation percent for the Company's pension plan assets is summarized as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
2018
|
Cash and cash equivalents
|
2%
|
|
|
2%
|
|
US and non-US equity securities
|
65%
|
|
|
65%
|
|
Fixed income / real estate / other securities
|
33%
|
|
|
33%
|
|
Total Pension Assets
|
100%
|
|
|
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.
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|
|
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|
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|
|
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|
|
|
|
|
|
|
|
Fair Value at December 31,
|
|
|
|
|
Fair Value Measurements
|
2019
|
|
2018
|
|
2017
|
Investments valued using NAV per share
|
|
|
|
|
|
Emerging Markets Region Equities
|
$
|
2,264
|
|
|
$
|
1,538
|
|
|
$
|
1,090
|
|
International Region Equities
|
6,755
|
|
|
4,535
|
|
|
3,215
|
|
United States Equities
|
15,377
|
|
|
11,071
|
|
|
7,273
|
|
United States Bonds
|
9,477
|
|
|
7,878
|
|
|
4,723
|
|
Real Estate
|
1,767
|
|
|
1,357
|
|
|
872
|
|
Cash Fund
|
339
|
|
|
410
|
|
|
148
|
|
Total Pension Plan Assets at Fair Value
|
$
|
35,979
|
|
|
$
|
26,789
|
|
|
$
|
17,321
|
|
The pension plan assets are invested in collective investment trust funds as shown above. These investments are measured at fair value using the net asset value per share practical expedient and have not been classified in the fair value hierarchy.
Note 11. Fair Value Measurements
Financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. 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 million approximated 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 December 31, 2019. 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 December 31, 2019 and 2018 was a loss of approximately $1.7 million and $0.8 million, respectively, and is considered a Level 2 liability.
There were no financial or non-financial assets or liabilities which required fair value measurement at December 31, 2017.
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 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 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. Goodwill and indefinite lived intangible assets must be evaluated at least annually.
Note 12. Derivative and Hedging Instruments
The specific credit and market, commodity price and interest rate risks to which the Company is exposed in connection with its ongoing business operations are described below. This discussion includes an explanation of the hedging instrument and interest rate swap 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. Although the Company did not have any customers with significant concentrations of trade accounts receivable – net at December 31, 2019, it had one customer that accounted for approximately 22% of trade accounts receivable – net at December 31, 2018.
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 December 31, 2019 and 2018, we had no contracts with notional amounts 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") 815, the Company designated the interest rate swaps as cash flow hedges of floating-rate borrowings. These 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.
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Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
Fair Value
|
|
Balance Sheet Classification
|
Fair Value
|
|
Balance Sheet Classification
|
Fair Value
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Contracts
|
Accrued liabilities and Other liabilities
|
$
|
(1,718)
|
|
|
Accrued liabilities and Other liabilities
|
$
|
(833)
|
|
|
N / A
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives
|
|
$
|
(1,718)
|
|
|
|
$
|
(833)
|
|
|
|
$
|
—
|
|
The following table summarizes adjustments related to cash flow hedge included in “Cash flow hedges”, in the Consolidated Statements of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Loss on derivative instruments included in Accumulated other comprehensive income at December 31, 2018
|
|
|
|
$
|
(833)
|
|
Fair value adjustment
|
|
|
|
(885)
|
|
Loss on derivative instruments included in Accumulated other comprehensive income at December 31, 2019
|
|
|
|
$
|
(1,718)
|
|
At December 31, 2019, the Company expects to reclassify approximately $0.8 million of net gains (losses) on derivative instruments from Accumulated other comprehensive income to earnings during the next 12 months due to the payment of variable interest associated with the floating rate debt.
Note 13. Commitments and Contingencies
Litigation
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 Balance Sheets, 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.
On March 13, 2018, a federal search warrant was executed at the Company’s Hopewell, Virginia manufacturing facility. On the same date, the Company was separately served with a grand jury subpoena issued by the U.S. District Court for the Eastern District of Virginia, which requested documents related to the Hopewell facility’s air emissions and its compliance with the terms of the previously disclosed 2013 consent decree with the federal government and the Commonwealth of Virginia. The Company was notified during the first quarter of 2019 that the U.S. Attorney’s Office for the Eastern District of Virginia had closed its investigation and no further action by the Company was required. On May 13, 2019, the Company announced that the United States Government notified the Company that the balance of the criminal investigation concluded with no further action required.
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 2020.
Unconditional Purchase Obligations:
In the normal course of business, the Company makes commitments to purchase goods with various vendors in the normal course of business which are consistent with our expected requirements and primarily relate to cumene, oleum, sulfur and natural gas as well as a long-term agreement for loading, unloading and the handling of a portion of our ammonium sulfate export volumes.
Future minimum payments for these unconditional purchase obligations as of December 31, 2019 are as follows (dollars in thousands):
|
|
|
|
|
|
Year
|
Amount
|
2020
|
$
|
80,772
|
|
2021
|
38,465
|
|
2022
|
30,142
|
|
2023
|
14,954
|
|
2024
|
11,707
|
|
Thereafter
|
184,544
|
|
|
$
|
360,584
|
|
Note 14. Changes in Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Translation
Adjustment
|
|
Postretirement
Benefit
Obligations
Adjustment
|
|
Changes in
Fair Value of
Effective Cash
Flow Hedges
|
|
Accumulated
Other
Comprehensive
Income (loss)
|
Balance at December 31, 2016
|
$
|
(4,998)
|
|
|
$
|
1,963
|
|
|
$
|
—
|
|
|
$
|
(3,035)
|
|
Other comprehensive income (loss)
|
12
|
|
|
(7,902)
|
|
|
—
|
|
|
(7,890)
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Income tax expense (benefit)
|
—
|
|
|
1,879
|
|
|
—
|
|
|
1,879
|
|
Current period change
|
12
|
|
|
(6,023)
|
|
|
—
|
|
|
(6,011)
|
|
Balance at December 31, 2017
|
(4,986)
|
|
|
(4,060)
|
|
|
—
|
|
|
(9,046)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
(25)
|
|
|
8,969
|
|
|
(833)
|
|
|
8,111
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
—
|
|
|
410
|
|
|
—
|
|
|
410
|
|
Income tax expense (benefit)
|
—
|
|
|
(2,149)
|
|
|
200
|
|
|
(1,949)
|
|
Current period change
|
(25)
|
|
|
7,230
|
|
|
(633)
|
|
|
6,572
|
|
Balance at December 31, 2018
|
(5,011)
|
|
|
3,170
|
|
|
(633)
|
|
|
(2,474)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
(9)
|
|
|
(8,238)
|
|
|
(1,589)
|
|
|
(9,836)
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
—
|
|
|
—
|
|
|
705
|
|
|
705
|
|
Income tax expense (benefit)
|
—
|
|
|
1,943
|
|
|
211
|
|
|
2,154
|
|
Current period change
|
(9)
|
|
|
(6,295)
|
|
|
(673)
|
|
|
(6,977)
|
|
Balance at December 31, 2019
|
$
|
(5,020)
|
|
|
$
|
(3,125)
|
|
|
$
|
(1,306)
|
|
|
$
|
(9,451)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15. Earnings Per Share
The details of the earnings per share calculations for the years ended December 31, 2019, 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Basic
|
|
|
|
|
|
Net Income
|
$
|
41,347
|
|
|
$
|
66,244
|
|
|
$
|
146,699
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
28,122,288
|
|
|
30,172,050
|
|
|
30,482,966
|
|
|
|
|
|
|
|
EPS – Basic
|
$
|
1.47
|
|
|
$
|
2.20
|
|
|
$
|
4.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Diluted
|
|
|
|
|
|
Net Income
|
$
|
41,347
|
|
|
$
|
66,244
|
|
|
$
|
146,699
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Basic
|
28,122,288
|
|
|
30,172,050
|
|
|
30,482,966
|
|
|
|
|
|
|
|
Dilutive effect of unvested equity awards
|
776,548
|
|
|
806,241
|
|
|
608,635
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Diluted
|
28,898,836
|
|
|
30,978,291
|
|
|
31,091,601
|
|
|
|
|
|
|
|
EPS – Diluted
|
$
|
1.43
|
|
|
$
|
2.14
|
|
|
$
|
4.72
|
|
Diluted EPS is computed based upon the weighted average number of common shares outstanding for the year plus the dilutive effect of common stock equivalents 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. For the years ended December 31, 2019, 2018 and 2017, stock options of 544,635, 349,312 and nil, respectively, were anti-dilutive and excluded from the computations of dilutive EPS.
In September 2017, the Board of Directors (the "Board") adopted the AdvanSix Inc. Deferred Compensation Plan (the “DCP”), effective January 1, 2018. Pursuant to the DCP, our directors may elect to defer their cash retainer fees and allocate their deferrals to the AdvanSix stock unit fund. Each unit allocated under the stock unit fund represents the economic equivalent of one share of common stock. Units are paid out in shares of AdvanSix common stock upon distribution. As of December 31, 2019, a total of 29,106 units were allocated to the AdvanSix stock unit fund under the DCP.
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 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 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. During 2019, the Company repurchased 1,898,013 shares of common stock under the share repurchase program and 400,394 shares of common stock covering the tax withholding obligations in connection with the vesting of equity awards for a total of $62.2 million at a weighted average market price of $27.04 per share. The purchase of shares reduces the weighted average number of shares outstanding in the basic and diluted earnings per share calculations.
Note 16. Stock-Based Compensation Plans
On September 8, 2016, prior to the Spin-Off, our Board adopted, and Honeywell, as our sole stockholder, approved, the 2016 Stock Incentive Plan of AdvanSix Inc. (the “Equity Plan”). Following the Spin-Off, the material terms of performance-based compensation under the Equity Plan were approved by the Company's stockholders for tax purposes at our 2017 annual meeting of stockholders. The Equity Plan provides for the grant of stock options, stock appreciation rights, performance awards, restricted stock units, restricted stock, other stock-based awards and non-share-based awards. The maximum aggregate number of shares of our common stock that may be issued under all stock-based awards granted under the Equity Plan is 3,350,000. Of those shares, only 1,750,000 may be subject, on a one-for-one basis, to awards granted under the Equity Plan that are not stock options or stock appreciation rights (“full-value awards”). After the number of shares subject to full-value awards exceed such limit, each share subject to future full-value awards would reduce the number of shares available for grant under the Equity Plan by four shares, with the exception of awards to non-employee directors, which shall not count towards such limit and shares related to such awards shall always be counted on a one-for-one basis.
Under the terms of the Equity Plan, there were 1,438,519 shares of AdvanSix common stock available for future grants of full-value awards, of which 328,799 were available for awards other than full-value awards on a one-for-one basis, at December 31, 2019.
Restricted Stock Units – The Company granted RSUs to key management employees and directors that generally vest over periods ranging from 1 to 3 years. Upon vesting, the RSUs entitle the holder to receive one share of AdvanSix common stock for each RSU at time of vesting and are payable in AdvanSix common stock upon vesting. The fair value of all stock-settled RSUs is based upon the market price of the underlying common stock as of the grant date.
The following table summarizes information about RSU activity related to the Equity Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted
Stock Units
(In Thousands)
|
|
Weighted Average Grant Date Fair Value
(Per Share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2016
|
908
|
|
|
$
|
16.41
|
|
Granted
|
98
|
|
|
27.43
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
(2)
|
|
|
27.73
|
|
Non-vested at December 31, 2017
|
1,004
|
|
|
17.46
|
|
Granted
|
65
|
|
|
41.58
|
|
Vested
|
(73)
|
|
|
19.31
|
|
Forfeited
|
(2)
|
|
|
32.59
|
|
Non-vested at December 31, 2018
|
994
|
|
|
18.90
|
|
Granted
|
131
|
|
|
29.42
|
|
Vested
|
(864)
|
|
|
16.78
|
|
Forfeited
|
(7)
|
|
|
32.93
|
|
Non-vested at December 31, 2019
|
254
|
|
|
$
|
30.97
|
|
As of December 31, 2019, there was approximately $3.6 million of total unrecognized compensation cost related to non-vested RSUs granted under the Equity Plan which is expected to be recognized over a weighted-average period of 0.33 years.
The following table summarizes information about the income statement impact from RSUs for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Compensation expense
|
$
|
6,125
|
|
|
$
|
6,606
|
|
|
$
|
6,141
|
|
Future income tax benefit recognized
|
$
|
678
|
|
|
$
|
1,262
|
|
|
$
|
755
|
|
Stock Options – The exercise price, term and other conditions applicable to each option granted under the Equity Plan are generally determined by the Compensation Committee of the Board. The exercise price of stock options is set on the grant date and may not be less than the fair market value per share of our stock on that date. The fair value is recognized as an expense over the employee’s requisite service period (generally the vesting period of the award). Options generally vest over periods ranging from 1 to 3 years.
The following table summarizes information about the income statement impact from stock options for the years ended December 31, 2019, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Compensation expense
|
$
|
1,989
|
|
|
$
|
1,470
|
|
|
$
|
969
|
|
Future income tax benefit recognized
|
$
|
745
|
|
|
$
|
466
|
|
|
$
|
230
|
|
The fair value related to stock options granted was determined using Black-Scholes option pricing model and the weighted average assumptions are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
Key Black-Scholes Assumptions
|
2019
|
|
2018
|
|
2017
|
Risk-free interest rate
|
|
2.5%
|
|
|
2.7%
|
|
|
2.2%
|
|
Expected term (years)
|
6
|
|
6
|
|
6
|
Volatility
|
|
30.9%
|
|
|
29.7%
|
|
|
37.0%
|
|
Dividend yield
|
|
—
|
|
|
—
|
|
|
—
|
|
Fair value per stock option
|
|
$11.67
|
|
|
$14.44
|
|
|
$10.48
|
|
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Volatility is determined based on the average volatility of peer companies with similar option terms. The expected term is determined using a simplified approach, calculated as the mid-point between the vesting period and the contractual term of the award. The risk-free interest rate is determined based upon the yield of an outstanding U.S. Treasury note with a term equal to the expected term of the option granted.
The following table summarizes information about stock option activity related to the Equity Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
(In Thousands)
|
|
Weighted Average Exercise Price (Per Share)
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value
|
Outstanding at December 31, 2016
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
|
Granted
|
175
|
|
|
26.66
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
(3)
|
|
|
26.66
|
|
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2017
|
172
|
|
|
26.66
|
|
|
9.31
|
|
$
|
2,651
|
|
Exercisable at December 31, 2017
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Granted
|
129
|
|
|
41.97
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited
|
(3)
|
|
|
33.64
|
|
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2018
|
298
|
|
|
33.24
|
|
|
8.80
|
|
$
|
—
|
|
Exercisable at December 31, 2018
|
57
|
|
|
$
|
33.23
|
|
|
8.30
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Granted
|
196
|
|
|
33.34
|
|
|
|
|
|
Exercised
|
1
|
|
|
26.66
|
|
|
|
|
|
Forfeited
|
(4)
|
|
|
31.75
|
|
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at December 31, 2019
|
491
|
|
|
33.28
|
|
|
8.22
|
|
$
|
—
|
|
Exercisable at December 31, 2019
|
156
|
|
|
$
|
30.83
|
|
|
7.45
|
|
|
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year and the exercise price, multiplied by the number of in-the-money options) that would have been received had all option holders exercised their in-the-money options at year-end. The amount changes based on the fair market value of the Company’s stock.
As of December 31, 2019, there was $1.4 million of unrecognized stock-based compensation expense related to stock options that is expected to be recognized over a weighted average period of approximately 0.9 years.
Performance Stock Units – The Company has issued PSUs to key senior management employees which, upon vesting, convert one-for-one to AdvanSix common stock. The actual number of shares an employee receives for each PSU depends on the Company’s performance against cumulative Earnings Per Share and average annual Return on
Investment goals over three-year performance and vesting periods. Each grantee is granted a target level of PSUs and may earn between 0% and 200% of the target level depending on the Company’s performance against the financial goals.
The following table summarizes information about PSU activity related to the Equity Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Performance
Stock Units
(In Thousands)
|
|
Weighted Average Grant Date Fair Value
(Per Share)
|
Non-vested at December 31, 2016
|
—
|
|
|
$
|
—
|
|
Granted
|
90
|
|
|
26.66
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
(1)
|
|
|
26.66
|
|
Non-vested at December 31, 2017
|
89
|
|
|
26.66
|
|
Granted
|
58
|
|
|
41.97
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
(2)
|
|
|
31.68
|
|
Non-vested at December 31, 2018
|
145
|
|
|
32.73
|
|
Granted
|
88
|
|
|
33.34
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
(3)
|
|
|
35.04
|
|
Non-vested at December 31, 2019
|
230
|
|
|
30.03
|
|
The fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date. The number of underlying shares to be issued will be based on actual performance achievement over the performance period. The fair value of each PSU grant is amortized monthly into compensation expense on a straight-line basis over a vesting period of 36 months. The accrual of compensation costs is based on our estimate of the final expected value of the award and is adjusted as required for the performance-based condition. The Company assumes that forfeitures will be minimal, and estimates forfeitures at time of issuance, which results in a reduction in compensation expense. As the payout of PSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the PSUs. The Company currently does not pay dividends.
As of December 31, 2019, there was approximately $2.1 million of total unrecognized compensation cost related to non-vested PSUs granted under the Equity Plan which is expected to be recognized over a weighted-average period of 0.9 years.
The following table summarizes information about the income statement impact from PSUs for the year ended December 31, 2019, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Compensation expense
|
$
|
236
|
|
|
$
|
2,057
|
|
|
$
|
632
|
|
Future income tax benefit recognized
|
$
|
271
|
|
|
$
|
252
|
|
|
$
|
66
|
|
Note 17. Unaudited Selected Quarterly Financial Data
The following tables show selected unaudited quarterly results of operations for 2019 and 2018. The quarterly data has been prepared on the same basis as the audited annual financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our results of operations for these periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
Year Ended
December 31,
|
Net Sales
|
$
|
314,895
|
|
|
$
|
345,215
|
|
|
$
|
310,633
|
|
|
$
|
326,650
|
|
|
$
|
1,297,393
|
|
Gross Profit
|
48,015
|
|
|
42,087
|
|
|
30,510
|
|
|
14,860
|
|
|
135,472
|
|
Net Income
|
20,174
|
|
|
15,346
|
|
|
7,921
|
|
|
(2,094)
|
|
|
41,347
|
|
Earnings per share – basic (1)
|
0.70
|
|
|
0.54
|
|
|
0.29
|
|
|
(0.08)
|
|
|
1.47
|
|
Earnings per share – diluted (1)
|
0.68
|
|
|
0.53
|
|
|
0.28
|
|
|
(0.08)
|
|
|
1.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
Year Ended
December 31,
|
Net Sales
|
$
|
359,238
|
|
|
$
|
400,459
|
|
|
$
|
368,653
|
|
|
$
|
386,634
|
|
|
$
|
1,514,984
|
|
Gross Profit
|
37,918
|
|
|
57,501
|
|
|
25,219
|
|
|
53,849
|
|
|
174,487
|
|
Net Income
|
11,593
|
|
|
28,410
|
|
|
5,480
|
|
|
20,761
|
|
|
66,244
|
|
Earnings per share – basic (1)
|
0.38
|
|
|
0.93
|
|
|
0.18
|
|
|
0.70
|
|
|
2.20
|
|
Earnings per share – diluted (1)
|
0.37
|
|
|
0.91
|
|
|
0.18
|
|
|
0.68
|
|
|
2.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Total for the full year may differ from the sum of the individual quarters due to the requirement to use weighted average shares each quarter which may fluctuate with share repurchases and share issuances.
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 18. 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 costs are included in Cost of goods sold in the Consolidated Statements of Operations. The Company recorded a restructuring charge of $11.0 million during 2019 and does not expect to incur any additional restructuring charges related to the closure of its films plant.
Restructuring costs for the year ended December 31, 2019 were as follows:
|
|
|
|
|
|
|
Year ended December 31, 2019
|
Write-off of equipment and facility
|
$
|
7,164
|
|
Facility exit costs
|
1,326
|
|
Employee separations
|
1,491
|
|
Inventory write-downs
|
1,039
|
|
Total restructuring charges
|
$
|
11,020
|
|
The following table summarizes the components of restructuring activities and the remaining balances of accrued restructuring charges as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Separation Benefits
|
|
Facility Exit Costs
|
|
Total
|
Accrual balance at December 31, 2018
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charges
|
1,491
|
|
|
1,326
|
|
|
2,817
|
|
Cash payments
|
(1,364)
|
|
|
(916)
|
|
|
(2,280)
|
|
Accrual balance at December 31, 2019
|
$
|
127
|
|
|
$
|
410
|
|
|
$
|
537
|
|
The balance of accrued restructuring charges is expected to be settled within the next twelve months.
Note 19. Subsequent Events
On February 19, 2020, the Company entered into Amendment No. 2 (the “Second Amendment”) to the First Amended and Restated Credit Agreement (the First Amended and Restated Credit Agreement, after giving effect to the Second Amendment, the “Second Amended and Restated Credit Agreement”).
The Second Amendment amends the consolidated leverage ratio financial covenant of the First Amended and Restated 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.
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. Based on 2019 year-end results, the applicable margin under the Second Amended and Restated Credit Agreement is expected to be 1.25% for base rate loans and 2.25% for Eurodollar rate loans and the applicable commitment fee rate is expected to be 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).