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”) plays a critical role in global supply chains, innovating and delivering essential products for our customers in a wide variety of end markets and applications that touch people’s lives, such as building and construction, fertilizers, plastics, solvents, packaging, paints, coatings, adhesives and electronics. Our reliable and sustainable supply of quality products emerges from the vertically integrated value chain of our three U.S.-based manufacturing facilities. AdvanSix strives to deliver best-in-class customer experiences and differentiated products in the industries of nylon solutions, chemical intermediates and plant nutrients, guided by our core values of Safety, Integrity, Accountability and Respect.
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”).
COVID-19
In March 2020, the World Health Organization categorized the novel coronavirus (COVID-19) as a global pandemic with numerous countries around the world declaring national emergencies, including the United States. Since early 2020, COVID-19 has continued to spread, with confirmed cases worldwide, and with certain jurisdictions experiencing resurgences, including as a result of variant strains. The spread resulted in authorities implementing numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. The pandemic and these containment measures have had a substantial impact on businesses around the world and on global, regional and national economies, including disruptions to supply chains, volatility in demand, production and sales across most industries, volatility within global financial markets, inflationary pressures in commodity pricing and an increasingly dynamic workforce environment. The continuously evolving nature of this pandemic and the pace and shape of a full recovery may continue to have an impact on the United States and global economies.
The Company’s Consolidated Financial Statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and reported amounts of revenue and expenses during the reporting periods presented. The Company continues to consider the impact of COVID-19 on the estimates and assumptions used for the financial statements. As previously disclosed, the Company experienced a material impact on its second quarter 2020 results of operations associated with lower demand, particularly in nylon, caprolactam and phenol, and a decrease in overall sales volume related to global markets and the economic impact of COVID-19. Starting in the second half of 2020, and through the end of 2021, demand improved to pre-COVID-19 levels with states, regions and countries in various phases of re-opening and continued administration of vaccines for COVID-19. The Company will continue to monitor developments and execute our operational and safety mitigation plans as previously disclosed.
As the situation surrounding COVID-19 remains fluid and unpredictable, the Company cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s results of operations, financial position, and liquidity.
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 $4.5 million at December 31, 2021 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:
| | | | | | | | | | | | | | |
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities |
| Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or |
| 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 |
| Level 3 | Unobservable inputs for the asset or liability |
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, 2021 and 2020, 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 $149.6 million and $180.1 million at December 31, 2021 and 2020. Had such LIFO inventories been valued at current costs, their carrying values would have been approximately $6.0 million and $35.4 million higher at December 31, 2021 and 2020.
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 $17.6 million and $15.0 million as of December 31, 2021 and 2020, respectively. 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. Management 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, 2021 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 – The Company 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 typically 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. The Company adopted ASU 2016-13 effective January 1, 2020, using a modified retrospective approach, which did not have a material impact on the Company's consolidated financial position or results of operations upon adoption.
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 $14.0 million, $11.8 million, and $13.9 million for the years ended December 31, 2021, 2020 and 2019, 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" to the Consolidated Financial Statements included in Item 8 of this Form 10-K, are non-qualified stock options, performance stock 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, including the impact of the Company's anticipated performance against certain metrics for performance stock units, 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. Estimates of future performance are utilized to determine the underlying expense for shares expected to vest. 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.
Dividend Equivalents – If a dividend is authorized by the Board for stockholders of common stock, holders of unvested RSUs and unvested PSUs will have their accounts credited with dividend equivalents in the form and in an amount equal to the dividend that the holder would have received had the shares underlying the RSUs and PSUs been distributed at the time that such dividend was paid. Dividend equivalents are subject to the same vesting, forfeiture, performance and payment restrictions as the respective equity award for which it is attributable. Since the dividend equivalents are forfeitable, there is no impact on the basic earnings per share calculation.
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, 2021, 2020 and 2019. As of December 31, 2021 and 2020, 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.
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 adopted ASU 2016-02, Leases (Topic 842) effective January 1, 2019 and 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 (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”). ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
On August 5, 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The amendments in the ASU remove certain separation models for convertible debt instruments and convertible preferred stock that require the separation of a convertible debt instrument into a debt component and an equity or derivative component. Therefore, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in-capital. This will result in more convertible debt instruments being accounted for as a single liability measured at its amortized cost and more convertible preferred stock being accounted for as a single equity instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives. The ASU also amends the derivative scope exception guidance for contracts in an entity’s own equity. The amendments remove three settlement conditions that are required for equity contracts to qualify for the derivative scope exception. The guidance is effective for public business entities for fiscal years, and interim terms within those fiscal years, beginning after December 15, 2021. Early adoption of the amendments in this update is permitted, but no earlier than fiscal years, including interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted ASU 2020-06 effective January 1, 2022, which did not have any impact on the Company's consolidated financial position or results of operations upon adoption.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments of ASU No. 2020-04 are effective for companies as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The amendments in this update apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform and provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The Company adopted ASU 2020-04 effective September 30, 2021, which did not have a material impact on the Company's consolidated financial position or results of operations upon adoption.
On December 18, 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU removes the exception to the general principles in FASB Accounting Standards Codification ("ASC") 740, Income Taxes, associated with the incremental approach for intra-period tax allocation, accounting for basis differences when there are ownership changes in foreign investments and interim-period income tax accounting for year-to-date losses that exceed anticipated losses. In addition, the ASU improves the application of income tax related guidance and simplifies U.S. GAAP when accounting for franchise taxes that are partially based on income, transactions with government resulting in a step-up in tax basis goodwill, separate financial statements of legal entities not subject to tax, and enacted changes in tax laws in interim periods. Different transition approaches, retrospective, modified retrospective, or prospective, will apply to each income tax simplification provision. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments in this update is permitted, including adoption in any interim period. The Company adopted ASU 2019-12 effective January 1, 2021, which did not have a material impact on the Company’s consolidated financial position or results of operations upon adoption.
Note 3. Revenue
We serve approximately 400 customers annually in approximately 50 countries and across a wide variety of industries. For 2021, 2020 and 2019, the Company's ten largest customers accounted for approximately 40%, 43% and 47% 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 caprolactam and
Nylon 6 resin to Shaw under a long-term agreement. Sales to Shaw were 12% of our total sales for the year ended December 31, 2021, 14% for the year ended December 31, 2020 and 22% for the year ended December 31, 2019.
The Company’s revenue by product line, and related approximate percentage of total sales for 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Nylon | $ | 422,897 | | | 25% | | $ | 284,701 | | | 24% | | $ | 351,169 | | | 27% |
| Caprolactam | 316,132 | | | 19% | | 216,268 | | | 19% | | 278,634 | | | 22% |
| Chemical Intermediates | 544,504 | | | 32% | | 369,130 | | | 32% | | 368,361 | | | 28% |
| Ammonium Sulfate | 401,092 | | | 24% | | 287,818 | | | 25% | | 299,229 | | | 23% |
| $ | 1,684,625 | | | 100% | | $ | 1,157,917 | | | 100% | | $ | 1,297,393 | | | 100% |
The Company’s revenues by geographic area, and related approximate percentage of total sales for 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| United States | $ | 1,382,501 | | | 82 | % | | $ | 890,776 | | | 77 | % | | $ | 1,057,498 | | | 82 | % |
| International | 302,124 | | | 18 | % | | 267,141 | | | 23 | % | | 239,895 | | | 18 | % |
| Total | $ | 1,684,625 | | | 100 | % | | $ | 1,157,917 | | | 100 | % | | $ | 1,297,393 | | | 100 | % |
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, 2021:
| | | | | | | | | | | |
| Deferred Income and Customer Advances | | | 2021 |
| Opening balance January 1, 2021 | | | $ | 26,379 | |
| Additional cash advances | | | 4,328 | |
| Less amounts recognized in revenues | | | (27,958) | |
| Ending balance December 31, 2021 | | | $ | 2,749 | |
The Company expects to recognize as revenue the December 31, 2021 ending balance of Deferred income and customer advances within one year or less.
Note 4. Income Taxes
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Income before taxes | | | | | |
U.S. | $ | 184,963 | | | $ | 54,902 | | | $ | 53,231 | |
Non-U.S. | 153 | | | 131 | | | 117 | |
| | $ | 185,116 | | | $ | 55,033 | | | $ | 53,348 | |
Income taxes
Income tax expense (benefit) consists of:
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Current Provision: | | | | | |
Federal | $ | 34,079 | | | $ | (10,289) | | | $ | 2,519 | |
State | 6,504 | | | 1,605 | | | 1,007 | |
Non-U.S. | 35 | | | 20 | | | 24 | |
| Total current provision | $ | 40,618 | | | $ | (8,664) | | | $ | 3,550 | |
Deferred Provision: | | | | | |
Federal | $ | 2,256 | | | $ | 17,853 | | | $ | 7,536 | |
State | 2,445 | | | (240) | | | 907 | |
Non-U.S. | 6 | | | 7 | | | 8 | |
| Total deferred provision | 4,707 | | | 17,620 | | | 8,451 | |
| Total income tax expense (benefit) | $ | 45,325 | | | $ | 8,956 | | | $ | 12,001 | |
The U.S. federal statutory income tax rate is reconciled to the effective income tax rate as follows: | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
U.S. state income taxes | 3.0 | % | | 2.0 | % | | 2.8 | % |
| | | | | |
| U.S. state income tax rate change | 0.8 | % | | — | % | | — | % |
Energy credit | — | % | | (6.2) | % | | — | % |
| Forfeitures, cancellations and shortfalls of equity compensation | — | % | | 0.3 | % | | — | % |
| Executive compensation limitations | 1.0 | % | | 0.9 | % | | 1.5 | % |
| Research and other tax credits | (0.3) | % | | (2.6) | % | | (3.0) | % |
| Foreign derived intangible income deduction | (0.9) | % | | — | % | | — | % |
Other, net | (0.1) | % | | 0.9 | % | | 0.2 | % |
| | 24.5 | % | | 16.3 | % | | 22.5 | % |
The Company's effective income tax rate for 2021 was higher compared to the U.S. Federal statutory rate of 21% due primarily to state taxes and executive compensation deduction limitations partially offset by research tax credits and the foreign-derived intangible income deduction.
Under a provision included in the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, the Company filed a Federal net operating loss (NOL) carryback claim in July 2020 which generated a refund of previously paid taxes in the amount of $12.3 million. The refund was received in the first quarter of 2021. Although the carryback claim generated a $12.3 million refund, it also resulted in the loss of prior year permanent tax benefits, the impact of which, is reflected in the above table under "Other, net" above.
On March 11, 2021, the American Rescue Plan Act ("ARPA") was signed into law. The ARPA is aimed at addressing the continuing economic and health impacts of the COVID-19 pandemic. This legislative relief, along with the previous governmental relief packages, provide for numerous changes to current tax law. The ARPA did not have a material impact on our financial statements for the year ended December 31, 2021.
The Company's effective income tax rate for 2020 was lower compared to the U.S. Federal statutory rate of 21% due primarily to the impact of research tax credits as well as an energy tax credit described in more detail below. This was partially offset by state taxes, executive compensation deduction limitations and a shortfall on the vesting of equity compensation.
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 and research tax credits.
As of December 31, 2021, 2020 and 2019, there were no unrecognized tax benefits recorded by the Company (see below for further information on unrecognized tax benefits). 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 uses the flow-through method to account for investment tax credits, including certain energy credits. Under this method, investment tax credits are recognized as a reduction to income tax expense in the year they are earned.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company is currently under a federal tax examination for the tax years ended December 31, 2017 through December 31, 2019. There are no material examinations by state tax authorities; however, tax years 2017 through 2021 generally remain open under the statute of limitations and are subject to examination by the tax authorities.
We are subject to income taxes in the United States and to a lesser extent several foreign jurisdictions. Changes to income tax laws and regulations, or the interpretation of such laws, in any of the jurisdictions in which we operate could impact our effective tax rate and cash flows from operating activities. The current US administration has released various draft tax reform proposals, as such, we continue to monitor these legislative proposals to evaluate the impact on our business.
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, |
| | 2021 | | 2020 |
| Deferred tax assets: | | | |
| Net Operating Loss | $ | 51 | | | $ | 107 | |
| Accruals and Reserves | 7,040 | | | 4,966 | |
| Inventory | 5,934 | | | 4,439 | |
| Pension Obligation | 2,500 | | | 8,028 | |
| Operating lease liability | 32,902 | | | 27,358 | |
| Equity Compensation | 2,584 | | | 1,793 | |
| Other | 421 | | | 900 | |
| Total gross deferred tax assets | 51,432 | | | 47,591 | |
| Less: Valuation Allowance | — | | | — | |
| Total deferred tax assets | $ | 51,432 | | | $ | 47,591 | |
| | | |
| Deferred tax liabilities: | | | |
| Property, plant & equipment | $ | (146,717) | | | $ | (140,735) | |
| Intangibles | (3,721) | | | (3,744) | |
| Operating lease asset | (32,782) | | | (27,262) | |
| Other | (1,542) | | | (1,417) | |
| Total deferred tax liabilities | (184,762) | | | (173,158) | |
| Net deferred taxes | $ | (133,330) | | | $ | (125,567) | |
The net deferred taxes are primarily related to U.S. operations. The federal net operating loss ("NOL") generated as of December 31, 2019 was carried back to previous tax periods under the CARES Act and the amount was fully utilized in the carryback claim. As of 2021, we recognized a state NOL carryforward in Illinois for $0.7 million which begins to expire in 2028. The Company fully utilized its foreign NOL as of December 31, 2021. The Company has no material federal or state tax credit carryforwards remaining as of December 31, 2021. We believe that the state NOL carryforward, 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.
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, 2021 and 2020, 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.
Unrecognized tax benefits
The following table sets forth the change in the Company's unrecognized tax benefits (UTBs) for year ended December 31, 2021 and 2020. There are no unrecognized tax benefits in 2019.
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Unrecognized tax benefits - January 1 | $ | — | | | $ | — | |
| Gross amounts of decreases in UTBs for tax positions related to the prior year | — | | | (3,804) | |
| Gross amounts of increases in UTBs for tax positions related to the prior year | — | | | 3,804 | |
| Gross amounts of increases and decreases in UTBs for tax positions taken during the current period | — | | | — | |
| Unrecognized tax benefits - December 31 | $ | — | | | $ | — | |
At the end of fiscal 2019, it was unclear whether we qualified for a certain energy tax credit. After performing a detailed review during the second quarter of 2020, we concluded it was appropriate to recognize a tax benefit (credit) of $3.8 million. However, based on information available at the time, we also recorded a corresponding unrecognized tax benefit reserve for the same amount. A portion of this credit which was claimed on the 2019 U.S. federal income tax return of approximately $2.2 million was utilized in the carryback claim under the CARES Act and the remaining was utilized in 2020. In the fourth quarter of 2020, based on a thorough evaluation of new information and applicable technical guidance, the Company reassessed its position which resulted in the reversal of the unrecognized tax benefit as reflected in the above table. As such, the full amount of the energy credit is reflected in the effective income tax rate reconciliation table above for the year ended December 31, 2020.
Note 5. Accounts and Other Receivables – Net
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Accounts receivables | $ | 175,584 | | | $ | 122,357 | |
Other | 4,051 | | | 2,668 | |
| Total accounts and other receivables | 179,635 | | | 125,025 | |
Less – allowance for doubtful accounts | (1,495) | | | (1,471) | |
Total accounts and other receivables – net | $ | 178,140 | | | $ | 123,554 | |
The roll-forward of allowance for doubtful accounts are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Year | | Charged to Costs | | Charged to Other Accounts (1) | | Bad Debt Write-Offs (1) | | Balance at End of Year |
| Year ended December 31, 2021 | $ | 1,471 | | | $ | — | | | $ | — | | | $ | 24 | | | $ | 1,495 | |
| Year ended December 31, 2020 | 2,323 | | | 33 | | | (559) | | | (326) | | | 1,471 | |
| Year ended December 31, 2019 | 7,467 | | | 274 | | | (396) | | | (5,022) | | | 2,323 | |
(1) No Impact to Statement of Operations
Note 6. Inventories
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Raw materials | $ | 56,961 | | | $ | 88,612 | |
Work in progress | 43,526 | | | 54,291 | |
Finished goods | 27,961 | | | 45,345 | |
Spares and other | 27,150 | | | 27,198 | |
| | 155,598 | | | 215,446 | |
Reduction to LIFO cost basis | (6,028) | | | (35,361) | |
Total inventories | $ | 149,570 | | | $ | 180,085 | |
Note 7. Property, Plant, Equipment – Net
| | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Land and improvements | $ | 6,566 | | | $ | 6,396 | |
Machinery and equipment | 1,476,896 | | | 1,430,192 | |
Buildings and improvements | 209,604 | | | 201,728 | |
Construction in progress | 44,414 | | | 47,000 | |
| | 1,737,480 | | | 1,685,316 | |
Less – accumulated depreciation | (969,516) | | | (919,847) | |
Total property, plant, equipment – net | $ | 767,964 | | | $ | 765,469 | |
Capitalized interest was $2,565, $5,580 and $6,359 for the years ended December 31, 2021, 2020 and 2019, respectively.
Depreciation expense was $61,405, $57,240 and $53,424 for the years ended December 31, 2021, 2020 and 2019, 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 ("ROU"), 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 term and length of the various agreements, as well as the timing of any renewals, will impact the ROU asset calculation and related liability.
The components of lease expense were as follows:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 |
| Finance lease cost: | | | |
| Amortization of right-of-use asset | $ | 706 | | | $ | 697 | |
| Interest on lease liabilities | 33 | | | 48 | |
| Total finance lease cost | 739 | | | 745 | |
| Operating lease cost | 40,994 | | | 44,513 | |
| Short-term lease cost | 10,632 | | | 7,832 | |
| | | |
| Total lease cost | $ | 52,365 | | | $ | 53,090 | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 40,888 | | | $ | 44,445 | |
| Operating cash flows from finance leases | 31 | | | 51 | |
| Financing cash flows from finance leases | 735 | | | 710 | |
| Non-cash information: | | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | |
| Operating leases | 41,132 | | | 16,082 | |
| Finance leases | 1,352 | | | 16 | |
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 |
| Operating Leases | | | |
| Operating lease right-of-use assets | $ | 136,207 | | | $ | 114,484 | |
| Operating lease liabilities – short term | 36,127 | | | 29,279 | |
| Operating lease liabilities – long term | 100,580 | | | 85,605 | |
| Total operating lease liabilities | $ | 136,707 | | | $ | 114,884 | |
| Finance Leases | | | |
| Property, plant and equipment – gross | $ | 2,663 | | | $ | 1,978 | |
| Accumulated depreciation | (1,274) | | | (1,257) | |
| Property, plant and equipment – net | $ | 1,389 | | | $ | 721 | |
| Accounts payable | 600 | | | 509 | |
| Other liabilities | 741 | | | 215 | |
| Total finance lease liabilities | $ | 1,341 | | | $ | 724 | |
| Weighted Average Remaining Lease Term | | | |
| Operating leases | 8.2 years | | 9.8 years |
| Finance leases | 2.8 years | | 1.5 years |
| Weighted Average Discount Rate | | | |
| Operating leases | 5.32 | % | | 6.07 | % |
| Finance leases | 2.75 | % | | 4.65 | % |
Maturities of lease liabilities are as follows:
| | | | | | | | | | | |
| Year Ending December 31, | Operating
Leases | | Finance
Leases |
| 2022 | $ | 42,414 | | | $ | 628 | |
| 2023 | 37,776 | | | 435 | |
| 2024 | 27,043 | | | 205 | |
| 2025 | 18,397 | | | 76 | |
| 2026 | 8,974 | | | 47 | |
| Thereafter | 44,181 | | | — | |
| Total lease payments | 178,785 | | | 1,391 | |
| Less imputed interest | (42,078) | | | (50) | |
| Total | $ | 136,707 | | | $ | 1,341 | |
As of December 31, 2021, we have additional operating leases that have not yet commenced for $3.4 million. These leases will commence during 2022 with lease terms of up to 7 years.
Note 9. Long-term Debt and Credit Agreement
The Company’s debt at December 31, 2021 consisted of the following:
| | | | | |
Total term loan outstanding | $ | — | |
Amounts outstanding under the Revolving Credit Facility | 135,000 | |
Total outstanding indebtedness | 135,000 | |
Less: amounts expected to be repaid within one year | — | |
Total long-term debt due after one year | $ | 135,000 | |
At December 31, 2021, the Company assessed 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, 2021 are as follows: | | | | | |
| 2022 | $ | — | |
| 2023 | — | |
| 2024 | — | |
| 2025 | — | |
| 2026 | 135,000 | |
| Thereafter | — | |
Total | $ | 135,000 | |
Credit Agreement
On September 30, 2016, the Company as the borrower, entered into a Credit Agreement with Bank of America, as administrative agent (the "Original Credit Agreement"), which was amended on February 21, 2018 pursuant to Amendment No. 1 to the Original Credit Agreement (the "First Amended and Restated Credit Agreement"), and further amended on February 19, 2020 pursuant to, Amendment No. 2 to the First Amended and Restated Credit Agreement (after giving effect to the Second Amendment, the “Second Amended and Restated Credit Agreement”). The Second Amended and Restated Credit Agreement had a five-year term with a scheduled maturity date of February 21, 2023.
The Second Amended and Restated Credit Agreement required the Company to maintain a Consolidated Leverage Ratio (as defined in the Second Amended and Restated Credit Agreement) of (i) 3.50 to 1.00 or less for the fiscal quarter ending March 31, 2020, (ii) 4.50 to 1.00 or less for the fiscal quarter ending June 30, 2020, (iii) 4.25 to 1.00 or less for the fiscal quarter ending September 30, 2020, (iv) 3.50 to 1.00 or less for the fiscal quarter ending December 31, 2020, (v) 3.25 to 1.00 or less for the fiscal quarter ending March 31, 2021 through and including the fiscal quarter ending December 31, 2021, and (vi) 3.00 to 1.00 or less for the fiscal quarter ending March 31, 2022 and each fiscal quarter thereafter (subject to the Company’s option to elect a Consolidated Leverage Ratio increase in connection with certain acquisitions). The Consolidated Interest Coverage Ratio financial covenant required the Company to maintain a Consolidated Interest Coverage Ratio (as defined in the Second Amended and Restated Credit Agreement) of not less than 3.00 to 1.00. If the Company did not comply with the covenants in the Second Amended and Restated Credit Agreement, the lenders could, subject to customary cure rights, require the immediate payment of all amounts outstanding under the Revolving Credit Facility.
Borrowings under the Second Amended and Restated Credit Agreement bore interest at a rate equal to either the sum of a base rate plus a margin ranging from 0.50% to 2.00% or the sum of a Eurodollar rate plus a margin ranging from 1.50% to 3.00%, with either such margin varying according to the Company’s Consolidated Leverage Ratio (as defined in the Second Amended and Restated Credit Agreement). The Company was also required to pay a commitment fee in respect of unused commitments under the credit facility, if any, at a rate ranging from 0.20% to 0.50% per annum depending on the Company’s Consolidated Leverage Ratio.
In addition, the Second Amendment also amended certain administrative provisions associated with the LIBOR Successor Rate (as defined in the Second Amended and Restated Credit Agreement).
The obligations under the Second Amended and Restated Credit Agreement were secured by a pledge of assets and liens on substantially all of the assets of AdvanSix.
The Second Amended and Restated Credit Agreement contained customary covenants limiting the ability of the Company and its subsidiaries to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock of the Company, enter into transactions with affiliates, make investments, make capital expenditures, merge or consolidate with others or dispose of assets, as
well as financial covenants that require the Company to maintain interest coverage and leverage ratios at levels specified in the Second Amended and Restated Credit Agreement. These covenants placed limits on how we conduct our business, and in the event of certain defaults, our repayment obligations could be accelerated.
On October 27, 2021, the Company completed a refinancing of its existing senior secured revolving credit facility under the Second Amended and Restated Credit Agreement by entering into a new Credit Agreement (the “Credit Agreement”), among the Company, the lenders party thereto, the swing line lenders party thereto, the letter of credit issuers party thereto and Truist Bank, as administrative agent, which provides for a new senior secured revolving credit facility in an aggregate principal amount of $500 million (the “Revolving Credit Facility”).
The Revolving Credit Facility has a scheduled maturity date of October 27, 2026. The 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 establish a new class of 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 First Lien Secured Leverage Ratio (as defined in the Credit Agreement) would not be greater than 2.75 to 1.00, in each case, to the extent that any one or more lenders, whether or not currently party to the Credit Agreement, commits to be a lender for such amount or any portion thereof.
Borrowings under the Credit Agreement bear interest at a rate equal to either the sum of a base rate plus a margin ranging from 0.25% to 1.25% or the sum of a Eurodollar rate plus a margin ranging from 1.25% to 2.25%, with either such margin varying according to the Company’s Consolidated Leverage Ratio (as defined in the Credit Agreement). The Company is also required to pay a commitment fee in respect of unused commitments under the Revolving Credit Facility, if any, at a rate ranging from 0.15% to 0.35% per annum depending on the Company’s Consolidated Leverage Ratio. As of October 27, 2021, the applicable margin under the Credit Agreement was 0.375% for base rate loans and 1.375% for Eurodollar loans and the applicable commitment fee rate was 0.175% per annum.
Substantially all tangible and intangible assets of the Company and its domestic subsidiaries are pledged as collateral to secure the obligations under the Credit Agreement.
As of October 27, 2021, the Company borrowed $150 million under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility will be subject to customary borrowing conditions.
The Credit Agreement contains customary covenants limiting the ability of the Company and its subsidiaries to, among other things, pay cash dividends, incur debt or liens, redeem or repurchase stock of the Company, enter into transactions with affiliates, make investments, make capital expenditures, merge or consolidate with others or dispose of assets. The Credit Agreement also contains financial covenants that require the Company to maintain a Consolidated Interest Coverage Ratio (as defined in the Credit Agreement) of not less than 3.00 to 1.00 and to maintain a Consolidated Leverage Ratio of (i) 4.00 to 1.00 or less for the fiscal quarter ending December 31, 2021, through and including the fiscal quarter ending September 30, 2023 and (ii) 3.75 to 1.00 or less for 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 does not comply with the covenants in the Credit Agreement, the lenders may, subject to customary cure rights, require the immediate payment of all amounts outstanding under the Revolving Credit Facility. We were in compliance with all of our covenants at December 31, 2021 and through the date of the filing of this Annual Report on Form 10-K.
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 $5,874, $6,142 and $5,944 for the years ended December 31, 2021, 2020 and 2019, 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.
| | | | | | | | | | | | | | | | | |
Change in benefit obligation: | 2021 | | 2020 | | 2019 |
Benefit obligation at January 1, | $ | 89,137 | | | $ | 69,281 | | | $ | 48,450 | |
Service Cost | 7,817 | | | 8,021 | | | 6,855 | |
Interest Cost | 2,071 | | | 2,175 | | | 2,084 | |
Actuarial losses (gains) | (6,342) | | | 10,507 | | | 12,364 | |
| Benefits Paid | (1,294) | | | (847) | | | (472) | |
Benefit obligation at December 31, | $ | 91,389 | | | $ | 89,137 | | | $ | 69,281 | |
| | | | | | |
Change in plan assets: | | | | | |
Fair value of plan assets at January 1, | $ | 48,444 | | | $ | 35,979 | | | $ | 26,789 | |
| Actual return on plan assets | 6,572 | | | 5,212 | | | $ | 5,462 | |
| Benefits paid | (1,294) | | | (847) | | | (472) | |
Company Contributions | 17,530 | | | 8,100 | | | 4,200 | |
Fair value of plan assets at December 31, | 71,252 | | | 48,444 | | | 35,979 | |
| | | | | |
Under-Funded status of plan | $ | 20,137 | | | $ | 40,693 | | | $ | 33,302 | |
| | | | | | |
Amounts recognized in Balance Sheet consists of: | | | | | |
Accrued pension liabilities-current (1) | $ | 1,894 | | | $ | 1,525 | | | $ | 892 | |
Accrued pension liabilities-noncurrent (2) | 18,243 | | | 39,168 | | | 32,410 | |
Total pension liabilities recognized | $ | 20,137 | | | $ | 40,693 | | | $ | 33,302 | |
(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:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Transition obligation | $ | — | | | $ | — | | | $ | — | |
Prior service cost | — | | | — | | | — | |
Net actuarial (gain) loss | 1,071 | | | 11,405 | | | 4,012 | |
Pension amounts recognized in other comprehensive loss (income) | $ | 1,071 | | | $ | 11,405 | | | $ | 4,012 | |
The components of net periodic benefit cost and other amounts recognized in other comprehensive income for our pension plan include the following components:
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Net periodic pension cost (benefit) | | | | | | |
Service cost | | $ | 7,817 | | | $ | 8,021 | | | $ | 6,855 | |
Interest cost | | 2,071 | | | 2,175 | | | 2,084 | |
Expected return on plan assets | | (2,924) | | | (2,098) | | | (1,336) | |
Recognition of actuarial losses | | 345 | | | — | | | — | |
Net periodic Pension Cost | | 7,309 | | | 8,098 | | | 7,603 | |
Other changes in benefits obligations recognized in other comprehensive loss (income) | | | | | | |
Actuarial losses (gains) | | (10,335) | | | 7,393 | | | 8,238 | |
Total recognized in other comprehensive income | | (10,335) | | | 7,393 | | | 8,238 | |
Total net periodic pension cost (benefit) recognized in Other comprehensive income | | $ | (3,026) | | | $ | 15,491 | | | $ | 15,841 | |
The estimated actuarial loss (gain) that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2021 and 2020 was nil.
Significant actuarial assumptions used in determining the benefit obligations and net periodic benefit cost for our pension plan were as follows: | | | | | | | | | | | | | | |
Key actuarial assumptions used to determine benefit obligations at December 31, | 2021 | 2020 | 2019 |
| Effective discount rate for benefit obligation | 3.1% | 2.9% | 3.5% |
| Expected annual rate of compensation increase | 2.4% | 2.4% | 2.4% |
| | | | |
| Key actuarial assumptions used to determine the net periodic benefit cost for the years ended December 31, | 2021 | 2020 | 2019 |
| Effective discount rate for service cost | 2.9% | 3.5% | 4.6% |
| Effective discount rate for interest cost | 2.3% | 3.2% | 4.3% |
| Expected long-term rate of return | 6.8% | 6.8% | 7.0% |
| Expected annual rate of compensation increase | 2.4% | 2.4% | 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 $79.6 million, $73.2 million and $54.4 million as of December 31, 2021, 2020 and 2019, 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:
| | | | | |
| 2022 | $ | 1,894 | |
| 2023 | 2,376 | |
| 2024 | 2,874 | |
| 2025 | 3,386 | |
| 2026 | 3,914 | |
| Thereafter | 25,916 | |
Our general funding policy for our pension plan is to contribute amounts at least sufficient to satisfy regulatory funding standards. The Company made pension plan contributions sufficient to satisfy pension funding requirements under the AdvanSix Retirement Earnings Plan as follows:
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| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| 1st Quarter | $ | 1,200 | | | $ | 1,700 | | | $ | — | |
| 2nd Quarter | 3,620 | | | — | | | 500 | |
| 3rd Quarter | 12,710 | | | — | | | 3,700 | |
| 4th Quarter | — | | | 6,400 | | | — | |
| Total | $ | 17,530 | | | $ | 8,100 | | | $ | 4,200 | |
The Company plans to make pension plan contributions during 2022 sufficient to satisfy pension funding requirements of $10.0 million to $15.0 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, |
| 2021 | | 2020 |
| 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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| | Fair Value at December 31, |
| Fair Value Measurements | 2021 | | 2020 | | 2019 |
| Investments valued using NAV per share | | | | | |
| Emerging Markets Region Equities | $ | 4,249 | | | $ | 3,199 | | | $ | 2,264 | |
| International Region Equities | 13,303 | | | 9,274 | | | 6,755 | |
| United States Equities | 34,273 | | | 20,528 | | | 15,377 | |
| United States Bonds | 17,357 | | | 12,506 | | | 9,477 | |
| Real Estate | 599 | | | 2,312 | | | 1,767 | |
| Cash Fund | 1,471 | | | 625 | | | 339 | |
| Total Pension Plan Assets at Fair Value | $ | 71,252 | | | $ | 48,444 | | | $ | 35,979 | |
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. In July 2019, the Company entered into an interest rate swap transaction related to its credit agreement. The fair value of the interest rate swaps at December 31, 2021, 2020 and 2019 was a loss of approximately $0.7 million, $3.1 million and $1.7 million, respectively, and is considered a Level 2 liability.
The pension plan assets are invested in collective investment trust funds. These investments are measured at fair value using the net asset value per share 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. The Company did not have any customers with significant concentrations of trade accounts receivable – net at December 31, 2021 and December 31, 2020, respectively. Allowance for doubtful accounts is calculated based upon the Company's estimate of expected credit losses over the life of exposure based upon both historical information as well as future expected losses.
Commodity Price Risk Management – The Company's exposure to market risk for commodity prices can result in changes in the cost of production. We primarily mitigate our exposure to commodity price risk by using long-term, formula-based price contracts with our suppliers and formula-based price agreements with customers. Our customer agreements provide for price adjustments based on relevant market indices and raw material prices and generally do not include take-or-pay terms. We may also enter into forward commodity contracts with third-parties designated as hedges of anticipated purchases of several commodities. Forward commodity contracts are marked-to-market, with the resulting gains and losses recognized in earnings, in the same category as the items being hedged, when the hedged transaction is recognized. At December 31, 2021 and 2020, we had zero contracts with notional amounts related to forward commodity agreements.
Interest Rate Risk Management – As of December 31, 2021, the company had one interest rate swap agreement outstanding for a total notional amount of $50 million to exchange floating for fixed rate interest payments for our LIBOR-based borrowings. The interest rate swap had a fair value of zero at inception and was effective July 31, 2019 with a maturity date of February 21, 2023. The interest rate swap has been designated as a cash flow hedge and converts the Company's interest rate payments on the first $50 million of variable-rate, 1-month LIBOR-based debt to a fixed interest rate. As a result of this interest rate swap, interest payments on approximately 37% of our borrowings, as of December 31, 2021, have been swapped from floating rate to fixed rate for the life of the swap, without an exchange of the underlying principal amount.
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| Liability Derivatives |
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| Balance Sheet Classification | Fair Value | | Balance Sheet Classification | Fair Value | | Balance Sheet Classification | Fair Value |
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| Derivatives designated as hedging instruments under ASC 815: | | | | |
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| Interest Rate Contracts | Accrued liabilities and Other liabilities | $ | (708) | | | Accrued liabilities and Other liabilities | $ | (3,063) | | | Accrued liabilities and Other liabilities | $ | (1,718) | |
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| Total Derivatives | | $ | (708) | | | | $ | (3,063) | | | | $ | (1,718) | |
The following table summarizes adjustments related to cash flow hedge included in “Cash flow hedges”, in the Consolidated Statements of Comprehensive Income:
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| | | | December 31, 2021 |
| Loss on derivative instruments included in Accumulated other comprehensive loss at December 31, 2020 | $ | (3,063) | |
| Fair value adjustment | | 2,355 | |
| Loss on derivative instruments included in Accumulated other comprehensive loss at December 31, 2021 | $ | (708) | |
At December 31, 2021, the Company expects to reclassify approximately $0.6 million of net losses on derivative instruments from Accumulated other comprehensive income ("AOCI") to earnings during the next 12 months due to the payment of variable interest associated with the floating rate debt with the remainder recognized in future periods through the expiration date. The following table summarizes the reclassification of net losses on derivative instruments from AOCI into earnings:
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| Amount of Loss Recognized in Earnings |
| Twelve Months Ended December 31, |
| | | |
| 2021 | | 2020 |
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| Derivatives: | | |
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| Interest Rate Contracts | $ | 1,836 | | | $ | 2,240 | |
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| Total Derivatives | 1,836 | | 2,240 |
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.
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 2022.
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, 2021 are as follows (dollars in thousands):
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Year | Amount |
| 2022 | $ | 216,886 | |
| 2023 | 11,207 | |
| 2024 | 11,628 | |
| 2025 | 5,968 | |
| 2026 | 5,969 | |
Thereafter | 83,190 | |
| | $ | 334,848 | |
Note 14. Changes in Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) are as follows:
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| | 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, 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) | |
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Other comprehensive income (loss) | (49) | | | (7,393) | | | (3,586) | | | (11,028) | |
Amounts reclassified from accumulated other comprehensive income (loss) | — | | | — | | | 2,240 | | | 2,240 | |
Income tax expense (benefit) | — | | | 1,789 | | | 318 | | | 2,107 | |
Current period change | (49) | | | (5,604) | | | (1,028) | | | (6,681) | |
| Balance at December 31, 2020 | (5,069) | | | (8,729) | | | (2,334) | | | (16,132) | |
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Other comprehensive income (loss) | (43) | | | 10,334 | | | 519 | | | 10,810 | |
Amounts reclassified from accumulated other comprehensive income (loss) | — | | | — | | | 1,836 | | | 1,836 | |
Income tax expense (benefit) | — | | | (2,487) | | | (566) | | | (3,053) | |
Current period change | (43) | | | 7,847 | | | 1,789 | | | 9,593 | |
| Balance at December 31, 2021 | $ | (5,112) | | | $ | (882) | | | $ | (545) | | | $ | (6,539) | |
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Note 15. Earnings Per Share
The details of the earnings per share calculations for the years ended December 31, 2021, 2020 and 2019 are as follows:
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| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Basic | | | | | |
Net Income | $ | 139,791 | | | $ | 46,077 | | | $ | 41,347 | |
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Weighted average common shares outstanding | 28,152,876 | | | 28,048,726 | | | 28,122,288 | |
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EPS – Basic | $ | 4.97 | | | $ | 1.64 | | | $ | 1.47 | |
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| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Diluted | | | | | |
Net Income | $ | 139,791 | | | $ | 46,077 | | | $ | 41,347 | |
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Weighted average common shares outstanding – Basic | 28,152,876 | | | 28,048,726 | | | 28,122,288 | |
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Dilutive effect of unvested equity awards | 892,310 | | | 108,336 | | | 776,548 | |
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Weighted average common shares outstanding – Diluted | 29,045,186 | | | 28,157,062 | | | 28,898,836 | |
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EPS – Diluted | $ | 4.81 | | | $ | 1.64 | | | $ | 1.43 | |
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, 2021, 2020 and 2019, stock options of 400,205, 951,607 and 544,635, 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, 2021, a total of 66,544 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. The par value of the shares repurchased is applied to Treasury stock and the excess of the purchase price over par value is applied to Additional paid in capital. During 2021, the Company had repurchased 21,564 shares of common stock to cover the tax withholding obligations in connection with the vesting awards, for an aggregate of $651,875 at a weighted average market price of $30.23 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. and its Affiliates, and the material terms of performance-based compensation were approved by the Company's stockholders for tax purposes at our 2017 annual meeting of stockholders (the "Original Plan"). The Original Plan was amended and restated as the 2016 Stock Incentive Plan of AdvanSix Inc. and its Affiliates, as Amended and Restated, which was approved by stockholders of the Company at the Annual Meeting of Stockholders held on June 23, 2020 (the “Equity Plan”). As a result, no further grants will be made under the Original Plan. 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 2,937,209, subject to adjustment in accordance with the terms of the Equity Plan. Under the Equity Plan, the shares underlying all full-value awards, including those granted to non-employee directors, will be counted against the share reserve on a 1.85-for-one basis. Shares underlying stock option awards and SARs will be counted against the share reserve on a one-for-one basis.
Under the terms of the Equity Plan, there were approximately 1,400,000 shares of AdvanSix common stock available for future grants of full-value awards at December 31, 2021.
Restricted Stock Units – The Company may grant RSUs to key management employees and directors that generally vest over periods ranging from 1 to 3 years. In the event cash dividends are paid to shareholders of common stock, dividend equivalents accrue on all unvested RSUs. Dividend equivalents are subject to the same termination and vesting terms as the underlying RSU. Upon vesting, the RSUs and related dividend equivalents entitle the holder to receive one share of AdvanSix common stock for each RSU and dividend equivalent 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:
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| | Number of Restricted Stock Units (In Thousands) | | Weighted Average Grant Date Fair Value (Per Share) |
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| 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 | |
| Granted | 331 | | | 13.11 | |
| Vested | (120) | | | 24.28 | |
| Forfeited | (33) | | | 32.11 | |
| Non-vested at December 31, 2020 | 432 | | | 18.94 | |
| Granted | 153 | | | 29.64 | |
| Vested | (115) | | | 23.51 | |
| Forfeited | (28) | | | 11.07 | |
| Non-vested at December 31, 2021 | 442 | | | $ | 22.11 | |
As of December 31, 2021, there was approximately $4.4 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 1.5 years.
The following table summarizes information about the income statement impact from RSUs for the years ended December 31, 2021, 2020 and 2019:
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| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Compensation expense | $ | 3,544 | | | $ | 3,018 | | | $ | 6,125 | |
| Future income tax benefit recognized | $ | 887 | | | $ | 1,025 | | | $ | 678 | |
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, 2021, 2020 and 2019.
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| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Compensation expense | $ | 1,410 | | | $ | 1,520 | | | $ | 1,989 | |
| Future income tax benefit recognized | $ | 1,030 | | | $ | 441 | | | $ | 745 | |
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:
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| Years Ended December 31, |
| Key Black-Scholes Assumptions | 2021 | | 2020 | | 2019 |
| Risk-free interest rate | 0.8% | | 1.2% | | 2.5% |
| Expected term (years) | 6 | | 6 | | 6 |
| Volatility | 35.6% | | 32.2% | | 30.9% |
| Dividend yield | — | | — | | — |
| Fair value per stock option | $10.34 | | $4.74 | | $11.67 |
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:
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| | Number of Shares
(In Thousands) | | Weighted Average Exercise Price (Per Share) | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
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| Outstanding at December 31, 2018 | 298 | | | 33.24 | | | 8.80 | | $ | — | |
| Exercisable at December 31, 2018 | 57 | | | $ | 33.23 | | | 8.30 | | $ | — | |
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| 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 | | $ | — | |
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| Granted | 306 | | | 14.29 | | | | | |
| Exercised | — | | | — | | | | | |
| Forfeited | (38) | | | 35.53 | | | | | |
| Expired | — | | | — | | | | | |
| Outstanding at December 31, 2020 | 759 | | | 25.44 | | | 7.42 | | $ | — | |
| Exercisable at December 31, 2020 | 326 | | | $ | 32.16 | | | 6.84 | | $ | — | |
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| Granted | 160 | | | 29.21 | | | | | |
| Exercised | 20 | | | 27.55 | | | | | |
| Forfeited | (33) | | | 21.29 | | | | | |
| Expired | — | | | — | | | | | |
| Outstanding at December 31, 2021 | 906 | | | 26.13 | | | 7.42 | | $ | 19,123 | |
| Exercisable at December 31, 2021 | 443 | | | $ | 29.42 | | | 6.54 | | $ | 7,895 | |
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, 2021, there was $1.0 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 may issue PSUs to key senior management employees which, upon vesting, convert one-for-one to AdvanSix common stock. In the event cash dividends are paid to shareholders of common stock, dividend equivalents will accrue on all unvested PSUs. Dividend equivalents are subject to the same termination, vesting and performance terms as the underlying PSU award. The actual number of shares an employee receives for each PSU and related dividend equivalent depends on the Company’s performance against certain metrics, including cumulative Earnings Per Share and average annual Return on Investment goals over three-year performance and vesting periods. Commencing with the 2021 awards, a market-based factor has the potential to increase or decrease the performance award by 10%. This metric is calculated based upon how the Company's Total Shareholder Return compares to that of its peer group over the vesting period. 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) |
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| 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 | |
| Granted | 248 | | | 13.99 | |
| Vested | (91) | | | 26.66 | |
| Forfeited | (40) | | | 35.72 | |
| Non-vested at December 31, 2020 | 347 | | | 20.77 | |
| Granted | 128 | | | 29.21 | |
| Vested | (6) | | | 9.47 | |
| Forfeited | (65) | | | 32.25 | |
| Non-vested at December 31, 2021 | 404 | | | $ | 20.04 | |
The fair value of the PSUs is principally 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 accrual of compensation costs is based on our estimate of the probable expected value of the award. 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. Changes in expected probable value are recorded as compensation expense on a catch-up basis in the month in which the change is identified. Any remaining balance is amortized monthly into compensation expense on a straight-line basis over the remaining vesting period. 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 initiated a dividend during the fourth quarter of 2021.
As of December 31, 2021, there was approximately $6.2 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 1.5 years.
The following table summarizes information about the income statement impact from PSUs for the year ended December 31, 2021, 2020 and 2019. | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Compensation expense | $ | 6,345 | | | $ | 366 | | | $ | 236 | |
| Future income tax benefit recognized | $ | 667 | | | $ | 327 | | | $ | 271 | |
Note 17. Acquisitions
We actively target potential acquisitions that build on our competitive advantage and core capabilities and create opportunities for broader expansion, value chain integration, portfolio diversification, increased exposure to attractive end markets and the potential for long-term value creation.
In January 2021, the Company acquired certain assets associated with ammonium sulfate packaging, warehousing and logistics services in Virginia from Commonwealth Industrial Services, Inc. for approximately $9.5 million. This acquisition enables the Company to expand its product offerings by directly supplying packaged ammonium sulfate to customers, primarily in North and South America. It diversifies and optimizes our product offerings to include spray-grade adjuvant to support crop protection and products for industrial use. The Company also expects the addition of packaging and warehousing capabilities to bolster logistics and operational efficiency across its Richmond, Virginia area plants. The Company did not make any acquisitions during the three or twelve months ended December 31, 2020 or 2019.
In accordance with ASC 805, this transaction has been accounted for as a business combination. The Company used its best estimates and assumptions to assign fair value to the tangible and identifiable intangible assets acquired and liabilities assumed at the acquisition date based on the information that was available as of the acquisition date. The transaction resulted in the Company acquiring tangible assets and a finite-lived intangible asset, comprised of customer relationships which reflects the value of the benefit derived from incremental revenue and related cash flows as a direct result of the customer relationships. This intangible asset is being amortized on a straight-line basis over its estimated useful life of 15 years. The residual amount of the purchase price in excess of the value of the tangible and definite-lived intangible assets was allocated to goodwill. Pro forma financial information related to the acquisition has not been included as the impact on the Company's consolidated results of operations was below the reporting thresholds of the significance test.
The following table summarizes the allocation of the purchase price consideration as of the acquisition date:
| | | | | | | |
| |
| | | |
| Twelve months ended December 31, 2021 | | |
| Accounts receivable | $ | 858 | | | |
| Inventories | 712 | | | |
| Property, plant and equipment | 1,875 | | | |
| Intangible assets | 3,920 | | | |
| Accounts payable and accrued liabilities | (429) | | | |
| Net tangible and intangible assets | 6,936 | | | |
| Goodwill | 2,587 | | | |
| Total purchase price | $ | 9,523 | | | |
| | | |
| Cash paid to date | $ | 9,523 | | | |
| Due to seller | — | | | |
| Total purchase price | $ | 9,523 | | | |
| | | |
| Goodwill deductible for tax purposes | $ | 2,587 | | | |
Note 18. Subsequent Events
As announced on February 18, 2022, the Board declared a quarterly cash dividend of $0.125 per share on the Company's common stock, payable on March 15, 2022 to stockholders of record as of the close of business on March 1, 2022.
On February 18, 2022, the Company announced the signing of a definitive agreement to acquire U.S. Amines, Ltd., a leading North American producer of alkyl and specialty amines serving high-value end markets such as agrochemicals and pharmaceuticals, for an estimated net purchase price of approximately $100 million. The transaction is expected to close in the first quarter of 2022, subject to customary closing conditions.