The Notes to Consolidated and Combined Financial
Statements are an integral part of this statement.
The Notes to Consolidated and Combined Financial
Statements are an integral part of this statement.
The Notes to Consolidated and Combined Financial
Statements are an integral part of this statement.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL
STATEMENTS
(Dollars in thousands, other than per share
data or unless otherwise noted)
Note 1. Organization, Operations and Basis
of Presentation
Description of Business
AdvanSix Inc. (“AdvanSix”, the
“Business”, the “Company”, “we” or “our”) is an integrated manufacturer of Nylon
6, a polymer resin which is a synthetic material used by our customers to produce engineered plastics, fibers, filaments and films
that, in turn, are used in such end-products as automotive and electronic components, carpets, sports apparel, fishing nets and
food and industrial packaging. As a result of our backward integration and the configuration of our manufacturing facilities, we
also sell a variety of other products, all of which are produced as part of the Nylon 6 resin manufacturing process including
caprolactam, ammonium sulfate fertilizers, and other chemical intermediates.
All of our manufacturing plants and operations
are located in the United States. We serve approximately 500 customers globally located in more than 40 countries. For the years
ended December 31, 2016, 2015 and 2014, we had sales of $1,191.5 million, $1,329.4 million and $1,790.4 million, respectively,
and net income of $34.1 million, $63.8 million and $83.9 million, respectively. For the years ended December 31, 2016, 2015 and
2014, our sales to customers located outside the United States were $216.4 million, $355.8 million and $502.3 million, respectively.
Each of these product lines represented
the following approximate percentage of our sales:
|
Years Ended December 31,
|
|
2016
|
2015
|
2014
|
|
|
|
|
Nylon
|
28%
|
27%
|
25%
|
Caprolactam
|
17%
|
18%
|
21%
|
Ammonium Sulfate Fertilizers
|
24%
|
25%
|
20%
|
Chemical Intermediates
|
31%
|
30%
|
34%
|
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 Business serves. Production rates and output volumes are managed
across all three plants jointly to align with the overall Business operating plan. The CODM makes operational performance assessments
and resource allocation decisions on a consolidated basis, inclusive of all of the Business’s products.
AdvanSix is primarily located in North America,
operating through three integrated manufacturing sites located in Frankford, Pennsylvania, Hopewell, Virginia and Chesterfield,
Virginia.
Separation from Honeywell
On October 1, 2016, Honeywell International
Inc. (“Honeywell”) completed the previously announced separation of AdvanSix. The separation was completed by Honeywell
distributing all of the then outstanding shares of common stock of AdvanSix on October 1, 2016 (the “Distribution Date”)
through a dividend in kind of AdvanSix common stock, par value $0.01, to holders of Honeywell common stock as of the close of business
on the record date of September 16, 2016 who held their shares through the Distribution Date (the “Spin-Off”).
Each Honeywell stockholder who held
their shares through the Distribution Date received one share of AdvanSix common stock for every 25 shares of Honeywell
common stock held at the close of business on the record date of September 16, 2016. The separation was completed pursuant to
a Separation and Distribution Agreement and other agreements with Honeywell related to the separation, including an Employee
Matters Agreement, a Tax Matters Agreement and a Transition Services Agreement, each of which was filed as an exhibit to our
Current Report on Form 8-K, filed with the Securities and Exchange Commission (“SEC”) on September 28, 2016, as
well as Site Sharing and Services Agreements for facilities located in Chesterfield, Colonial Heights and Pottsville, each
of which was filed as an exhibit to our Current Report on Form 8-K, filed with the SEC on October 3, 2016. These agreements
govern the relationship between AdvanSix and Honeywell following the separation and provide for the allocation of various
assets, liabilities, rights and obligations. These agreements also include arrangements for transition services to be
provided by Honeywell to AdvanSix and by AdvanSix to Honeywell. A description of the material terms and conditions of these
agreements can be found in the section titled “Certain Relationships and Related Party Transactions” of the
Company’s Information Statement filed as Exhibit 99.1 to Amendment No. 5 to the Registration Statement of AdvanSix Inc.
on Form 10 dated and filed with the SEC on September 7, 2016 and declared effective by the SEC on September 8, 2016 (the
“Form 10”).
On October 3, 2016, AdvanSix stock began
“regular-way” trading on the New York Stock Exchange under the “ASIX” stock symbol.
Basis of Presentation
Prior to the separation, these Consolidated
and Combined Financial Statements were derived from the consolidated financial statements and accounting records of Honeywell.
These Consolidated and Combined Financial Statements reflect the consolidated historical results of operations, financial position
and cash flows of AdvanSix as they were historically managed in conformity with GAAP.
All intracompany transactions have been
eliminated. As described in Note 3, all significant transactions between the Business and Honeywell prior to separation have been
included in these Consolidated and Combined Financial Statements and are considered to be effectively settled for cash at the time
the transaction was recorded. The total net effect of the settlement of these pre-separation transactions is reflected in the Consolidated
and Combined Statements of Cash Flows as a financing activity and in the Consolidated and Combined Balance Sheets as invested equity.
Prior to the Spin-Off, Honeywell provided
certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf
of the Business. The cost of these services has been allocated to the Business on a direct usage basis when identifiable, with
the remainder allocated on the basis of revenues, headcount or other relevant measures. However, the financial information presented
in these Consolidated and Combined Financial Statements may not reflect the financial position, operating results and cash flows
of the Business had the Business been a separate stand-alone entity during the periods presented. Actual costs that would have
been incurred if the Business had been a stand-alone company would depend on multiple factors, including organizational structure
and strategic decisions made in various areas, including information technology and infrastructure. Both we and Honeywell consider
the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or
the benefits received by the Business during the periods presented. After the Spin-Off, a number of the above services will continue
under a transition service agreement with Honeywell, which we will expense as incurred based on the contractual pricing terms.
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 and Combined Financial Statements include the accounts of AdvanSix Inc. 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 Business 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 $12.5 million at December 31, 2016 and are included in Cash and cash
equivalents and Accounts payable in the Consolidated and Combined Balance Sheet.
Commodity Price Risk Management –
Our 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 through the use of 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 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.
Inventory Adjustments –
Substantially
all of the Business’s inventories are valued at the lower of cost or market using the last-in, first-out (“LIFO”)
method. The Business 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.
Property, Plant, Equipment –
Property,
plant, equipment 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 7 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 30 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.
Long-Lived Assets –
The Business
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 Business evaluates events or changes in circumstances based on a number of 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
and Combined Statements of Operations. The Business also evaluates the estimated useful lives of long-lived assets if circumstances
warrant and revises such estimates based on current events.
Goodwill –
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. This testing compares carrying values to fair values and, when appropriate, the carrying value of
these assets is reduced to fair value. We completed our annual goodwill impairment test as of March 31, 2016 and again as of the Spin-Off date and determined that no impairment was necessary. The Business had goodwill of $15,005
as of December 31, 2016 and 2015. No further triggering events have been identified since our last impairment test date.
Sales Recognition –
Sales are
recognized when persuasive evidence of an arrangement exists, product delivery has occurred, pricing is fixed or determinable,
and collection is reasonably assured. AdvanSix is a ship and bill operation recognizing revenue when title transfers at FOB shipping
point. For domestic sales, title transfers at point of shipment. For international sales, title transfers at point of shipment
or from the port of departure to the customer’s location. Outbound shipping costs are incurred by the Company and included
as freight expense in costs of goods sold in the Consolidated and Combined Statements of Operations.
Environmental –
AdvanSix accrues
costs related to environmental matters when it is probable that we have incurred a liability related to a contaminated site and
the amount can be reasonably estimated.
Deferred Income and Customer Advances
–
AdvanSix has an annual pre-buy program for ammonium sulfate that is classified as deferred income and customer advances
in the Consolidated and Combined Balance Sheets. Customers pay cash in advance to reserve capacity for ammonium sulfate to guarantee
product availability during peak planting season. The Business 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 as a result of 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, historical collection history and incorporates changes in economic conditions that may not be
reflected in historical trends for example, customers in
bankruptcy, liquidation or reorganization. Receivables are written-off against the allowance for doubtful accounts when they
are determined uncollectible. Such determination includes analysis and consideration of the particular conditions of the
account, including time intervals since last collection, customer performance against agreed upon payment plans, success of
outside collection agencies activity, solvency of customer and any bankruptcy proceedings.
Research and Development –
AdvanSix
conducts research and development (“R&D”) activities, which consist primarily of the development of new products
and product applications consisting primarily of labor costs and depreciation and maintenance costs. R&D costs are charged
to expense as incurred. Such costs are included in costs of goods sold and were $13,762, $12,807, and $13,003 for the years ended
December 31, 2016, 2015, and 2014, respectively.
Stock-Based Compensation Plans
–
The principal awards issued under our stock-based compensation plans, which are described in Note 15 Stock-Based
Compensation Plans, are non-qualified stock options, performance share units and restricted stock units. The cost for such
awards is measured at the grant date based on the fair value of the award. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the requisite service periods (generally the vesting period of
the equity award) and is included in selling, general and administrative expenses. Forfeitures are estimated at the time of
grant to recognize expense for those awards that are expected to vest and are based on our historical forfeiture rates.
Pension Benefits –
We
have a defined benefit plan covering certain employees primarily in the U.S. The benefits are accrued over the employees’ service periods. We use actuarial methods and assumptions in the valuation of
defined benefit obligations and the determination of net periodic pension income or expense. Differences between actual and
expected results or changes in the value of defined benefit obligations and 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 and Combined 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 Accounting Standards Codification Topic 740 (“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 were recorded during the years ended December 31, 2016 and 2015.
As of December 31, 2016 and December 31, 2015, 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.
Prior to the Spin-Off, income taxes as presented
are calculated on a separate tax return basis modified to apply the benefits-for-loss approach and may not be reflective of the
results that would have occurred if tax returns were filed on a stand-alone basis. In applying the benefits-for-loss methodology,
the tax provision was computed as if the Business filed tax returns on a separate tax return basis independent of other Honeywell
businesses with an adjustment to reflect a tax benefit for losses generated by the Business but utilized by other Honeywell businesses
in a combined tax filing. Given that the taxpaying entities in which the Business operates were retained by Honeywell subsequent
to the Spin-Off transaction, all tax payables and attributes,
such as tax credit and tax loss carryforwards, associated with these entities was also retained by Honeywell whether or not such
attribute was generated in whole or in part by the Business. As a result, the taxes payable and attributes that relate to the Business’s
operations were recorded and settled through intercompany accounts with Honeywell since they are attributable to the taxable entity
to be retained by Honeywell. Accordingly, a tax attribute, such a tax loss, generated by the Business but utilized by Honeywell,
reduced the intercompany payable to Honeywell and be recorded as a current tax benefit in the calculation of the tax provision.
We believe applying the separate tax return
method modified to apply the benefits-for-loss approach was more appropriate than carrying the tax attribute forward since the
attribute no longer exists, nor was the attribute included in the assets and liabilities of the Business subsequent to the Spin-Off
transaction. Furthermore, the amount of the attributes that were generated by the Business but utilized by Honeywell were not material
to the overall financial statements.
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. On October 1, 2016,
the date of consummation of the Spin-Off, 30,482,966 shares of the Company’s Common Stock were distributed to Honeywell stockholders
of record as of September 16, 2016 who held their shares through the Distribution Date. Basic and diluted EPS for all periods prior
to the Spin-Off reflect the number of distributed shares, or 30,482,966 shares. For 2016, the distributed shares were treated as
issued and outstanding from January 1, 2016 for purposes of calculating historical basic earnings per share.
Use of Estimates –
The preparation
of the Consolidated and Combined Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts in the Consolidated and Combined 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 and Combined Financial Statements in the period they are determined to be necessary.
Recent Accounting Pronouncements –
We consider the applicability and impact of all recent accounting standards updates (“ASU’s”). ASU’s
not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Consolidated
and Combined Financial Statements.
In January 2017, the Financial Accounting
Standards Board (“FASB”) issued amended guidance that simplifies the accounting for goodwill impairment for all entities
by requiring impairment charges to be based on the first step in today’s two-step impairment test under ASC 350. Under the
new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based
on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The amendments
eliminate the requirement to calculate a goodwill impairment charge by comparing the implied fair value of goodwill with its carrying
amount (i.e., Step 2 of today’s goodwill impairment test). The standard will be applied prospectively and is effective for
annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual
and interim goodwill impairment testing dates after January 1, 2017. We are evaluating the impact of the amended guidance on our
Consolidated and Combined Financial Statements and related disclosures.
In August 2016, the FASB issued amended
guidance clarifying how entities should classify certain cash receipts and cash payments on the statement of cash flows. The amended
guidance addresses eight specific cash flow issues, including debt prepayment or extinguishment costs, and clarifies how the predominance
principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The amended
guidance will be effective for interim and annual periods beginning after December 15, 2017; entities will be required to apply
the guidance retrospectively and provide the relevant disclosures in ASC 250, in the first interim and annual periods in which
they adopt the guidance. If it is impracticable to apply the amendments retrospectively for an issue, the amendments related to
that issue would be applied prospectively. Early adoption is permitted. An entity that elects early adoption must adopt all of
the amendments in the same period. Early adoption in an interim period is permitted, but any adjustments must be reflected as of
the beginning of the fiscal year that includes that interim period. We are evaluating the impact of the amended guidance on our
Consolidated and Combined Financial Statements and related disclosures.
In March 2016, the FASB issued amended guidance
related to employee share-based payment accounting. The guidance requires all income tax effects of awards to be recognized in
the income statement on a prospective basis. The guidance also requires presentation of excess tax benefits as an operating activity
on the statement of cash flows rather than as a financing activity, and can be applied retrospectively or prospectively. The guidance
increases the amount companies can withhold to cover income taxes on awards without triggering liability classification
for shares used to satisfy statutory income tax withholding obligations and requires application of a modified retrospective
transition method. The amended guidance will be effective for interim and annual periods beginning after December 15, 2016; early adoption is permitted if all
provisions are adopted in the same period. We are evaluating the impact of the amended
guidance on our Consolidated and Combined Financial Statements and related disclosures.
In February 2016, the FASB issued a new
standard on accounting for leases which requires lessees to recognize most leases on their balance sheets related to the rights
and obligations created by those leases. The new standard also requires disclosures to help financial statement users better understand
the amount, timing, and uncertainty of cash flows arising from leases and will be effective for interim and annual periods beginning
after December 15, 2018 (early adoption is permitted). The new standard should be applied under a modified retrospective approach.
We are evaluating the impact of the new standard on our Consolidated and Combined Financial Statements and related disclosures.
In November 2015, the FASB issued guidance
to simplify the presentation of deferred income taxes by permitting classification of all deferred tax assets and liabilities as
noncurrent on the Consolidated and Combined Balance Sheets. The new guidance is effective for public business entities in fiscal
years beginning after December 15, 2016, including interim periods within those years (i.e., in the first quarter of 2017 for calendar
year-end companies). Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period.
The Business elected to early adopt the guidance on a prospective basis effective with the Consolidated and Combined Balance Sheets
as of December 31, 2015. This is a change from the Business’s historical presentation whereby certain deferred tax assets
and liabilities were classified as current and the remainder were classified as non-current. Adoption of the guidance resulted
in a reclassification of $8,470 from current assets to noncurrent assets within the Consolidated and Combined Balance Sheets as
of December 31, 2015.
In May 2014 and in subsequent
related updates and amendments, the FASB issued guidance on revenue from contracts with customers that will supersede most
current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will
recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be
entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine
when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of
time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before
contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature,
amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The
effective date was deferred for one year to the interim and annual periods beginning on or after December 15, 2017. Early
adoption is permitted as of the original effective date – interim and annual periods beginning on or after December 15,
2016. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not made a
decision on the method of adoption. The analysis identifying areas that will be impacted by the new guidance and their
potential impacts to the consolidated financial statements and related disclosures is currently underway. While data is still
being accumulated, our initial indication is that revenue from Nylon 6 and our other products sold as part of the Nylon 6
manufacturing process are expected to remain substantially unchanged from our current revenue recognition model. A final
determination cannot be made until we complete our analysis.
Note 3. Related Party Transactions with
Honeywell
The Consolidated and Combined Financial
Statements have been prepared on a stand-alone basis and are derived from the Consolidated and Combined Financial Statements and
accounting records of Honeywell.
Prior to consummation of the Spin-Off, Honeywell
provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support,
on behalf of the Business. The cost of these services were allocated to the Business on a direct usage basis when identifiable,
with the remainder allocated on the basis of revenues, headcount or other relevant measures. When not specifically identifiable,
legal and accounting costs were allocated on the basis of revenues, information technology and human resources were allocated on
the basis of headcount and other infrastructure support was allocated on the basis of revenue.
During the nine months ended September 30,
2016 and the years ended December 31, 2015 and 2014, AdvanSix was allocated $31,877, $49,292 and $57,171, respectively, of general
corporate expenses incurred by Honeywell for certain services, such as legal, accounting, information technology, human resources,
other infrastructure support and shared facilities, on behalf of the Business. These expenses have been reflected within Costs
of goods sold and Selling, general and administrative expenses in the Consolidated and Combined Statements of Operations.
Sales to Honeywell during the nine months
ended September 30, 2016 and the years ended December 31, 2015 and 2014 were $5,955, $9,071 and $8,585, respectively. Of these
sales, during the nine months ended September 30, 2016 and the years ended December 31, 2015 and 2014, $5,682, $7,736 and $8,362,
respectively, were sold to Honeywell at zero margin. Costs of goods sold to Honeywell during the nine months ended September 30,
2016 and the years ended December 31, 2015 and 2014 were $5,842, $288 and $378, respectively.
Purchases from Honeywell during the
nine months ended September 30, 2016 and the years ended December 31, 2015 and 2014 were $3,299, $4,694 and $5,140, respectively.
The total net effect of the settlement of these intercompany transactions, prior to the Spin-off, is reflected in the Consolidated
and Combined Statements of Cash Flows as a financing activity and in the Consolidated and Combined Balance Sheets as Invested equity.
While we were owned by Honeywell, a
centralized approach to cash management and financing of operations was used. Prior to consummation of the Spin-Off, the
Business’s cash was transferred to Honeywell daily and Honeywell funded the Business’s operating and investing
activities as needed. Net transfers to and from Honeywell are included within Invested equity on the Consolidated and
Combined Balance Sheets. The components of the net transfers to and from Honeywell as of December 31, 2016, 2015 and 2014 are
as follows:
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
Cash pooling and general financing activities
|
|
$
|
(73,534
|
)
|
|
$
|
(84,312
|
)
|
|
$
|
(187,975
|
)
|
Distribution to Honeywell in connection with the Spin-Off
|
|
|
(269,347
|
)
|
|
|
–
|
|
|
|
–
|
|
Net contribution of assets and liabilities upon Spin-Off
|
|
|
(22,938
|
)
|
|
|
–
|
|
|
|
–
|
|
Sales to Honeywell
|
|
|
(5,955
|
)
|
|
|
(9,071
|
)
|
|
|
(8,585
|
)
|
Purchases from Honeywell
|
|
|
3,299
|
|
|
|
4,694
|
|
|
|
5,140
|
|
Corporate allocations
|
|
|
31,877
|
|
|
|
49,292
|
|
|
|
57,171
|
|
Income tax expense
|
|
|
36,712
|
|
|
|
36,461
|
|
|
|
48,189
|
|
Net decrease in invested equity
|
|
$
|
(299,886
|
)
|
|
$
|
(2,936
|
)
|
|
$
|
(86,060
|
)
|
Note 4. Income Taxes
|
|
2016
|
|
2015
|
|
2014
|
Income (loss) before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S
|
|
$
|
55,189
|
|
|
$
|
103,115
|
|
|
$
|
132,852
|
|
Non-U.S
|
|
|
(1,414
|
)
|
|
|
(2,878
|
)
|
|
|
(805
|
)
|
|
|
$
|
53,775
|
|
|
$
|
100,237
|
|
|
$
|
132,047
|
|
Income taxes
Income tax expense (benefit) consists of:
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Current Provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,875
|
|
|
$
|
23,023
|
|
|
$
|
26,502
|
|
State
|
|
|
1,290
|
|
|
|
4,241
|
|
|
|
4,875
|
|
Non-U.S
|
|
|
(71
|
)
|
|
|
(716
|
)
|
|
|
(146
|
)
|
|
|
$
|
8,094
|
|
|
$
|
26,548
|
|
|
$
|
31,231
|
|
Deferred Provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
10,908
|
|
|
$
|
8,372
|
|
|
$
|
14,333
|
|
State
|
|
|
638
|
|
|
|
1,527
|
|
|
|
2,614
|
|
Non-U.S
|
|
|
(12
|
)
|
|
|
14
|
|
|
|
11
|
|
|
|
|
11,534
|
|
|
|
9,913
|
|
|
|
16,958
|
|
|
|
$
|
19,628
|
|
|
$
|
36,461
|
|
|
$
|
48,189
|
|
The U.S. federal statutory income tax rate
is reconciled to the effective income tax rate as follows:
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
U.S. federal statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
U.S. state income taxes
|
|
|
2.3
|
%
|
|
|
3.7
|
%
|
|
|
3.7
|
%
|
Manufacturing incentives
|
|
|
(1.8
|
)%
|
|
|
(2.6
|
)%
|
|
|
(2.3
|
)%
|
Tax rate differential on non-U.S. earnings
|
|
|
0.8
|
%
|
|
|
0.3
|
%
|
|
|
0.1
|
%
|
Other, net
|
|
|
0.2
|
%
|
|
|
–
|
|
|
|
–
|
|
|
|
|
36.5
|
%
|
|
|
36.4
|
%
|
|
|
36.5
|
%
|
The Company’s effective income tax
rates for 2016, 2015 and 2014 were higher than the U.S. Federal statutory rate of 35.0% primarily due to state taxes and, to a
lesser extent, losses incurred in foreign jurisdictions with lower than the U.S. federal statutory rate, partially offset by the
federal tax credit for research activities and the U.S. manufacturing incentive credits.
For 2016, 2015 and 2014, there were no unrecognized
tax benefits recorded by the Company. Although there are no unrecognized income tax benefits, when applicable, the Company’s
policy is to report interest expense related to unrecognized income tax benefits in the income tax provision.
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,
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net Operating Loss
|
|
$
|
12,560
|
|
|
$
|
–
|
|
Accruals and Reserves
|
|
|
6,772
|
|
|
|
5,673
|
|
Inventory
|
|
|
215
|
|
|
|
4,520
|
|
Pension Obligation
|
|
|
13,086
|
|
|
|
–
|
|
Other
|
|
|
141
|
|
|
|
184
|
|
Total gross deferred tax assets
|
|
|
32,774
|
|
|
|
10,377
|
|
Less: Valuation Allowance
|
|
|
–
|
|
|
|
–
|
|
Total deferred tax assets
|
|
$
|
32,774
|
|
|
$
|
10,377
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant & equipment
|
|
$
|
(145,712
|
)
|
|
$
|
(123,574
|
)
|
Intangibles
|
|
|
(1,262
|
)
|
|
|
(1,713
|
)
|
Total deferred tax liabilities
|
|
|
(146,974
|
)
|
|
|
(125,287
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
(114,200
|
)
|
|
$
|
(114,910
|
)
|
The net deferred taxes are primarily related
to U.S. operations. As of December 31, 2016, we recognized a federal net operating loss (“NOL”) carryforward of $32,392,
which is expected to expire in 2036, and a foreign NOL carryforward of $213 which is not subject to expiration. We also have state
NOL carryforwards in multiple jurisdictions, including most materially in Virginia, $14,248. The most significant state NOL carryforwards
are expected to expire in 2036. There were no material tax loss or tax credit carryforwards at December 31, 2015. We believe that
the federal, foreign and state NOL carryforwards and other deferred tax assets are more likely than not to be realized and we have
not recorded a valuation allowance against the deferred tax assets.
As of December 31, 2016, there are no undistributed
earnings of the Business’ non-U.S. subsidiary and, as such, we have not provided a deferred tax liability for undistributed
earnings.
Note 5. Accounts and Other Receivables
– Net
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Accounts receivables
|
|
$
|
119,475
|
|
|
$
|
129,402
|
|
Other
|
|
|
15,407
|
|
|
|
1,018
|
|
|
|
|
134,882
|
|
|
|
130,420
|
|
Less – allowance for doubtful accounts
|
|
|
(3,211
|
)
|
|
|
(2,875
|
)
|
Total accounts and other receivables – net
|
|
$
|
131,671
|
|
|
$
|
127,545
|
|
The roll-forward of allowance for doubtful
accounts are summarized in the table below:
|
|
Balance at
Beginning of
Year
|
|
Charged to
Costs and
Expenses
|
|
Charged to
Other
Accounts
|
|
Deductions
|
|
Balance at
End of Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
$
|
2,875
|
|
|
$
|
334
|
|
|
$
|
74
|
|
|
$
|
(72
|
)
|
|
$
|
3,211
|
|
Year ended December 31, 2015
|
|
|
484
|
|
|
|
2,477
|
|
|
|
–
|
|
|
|
(86
|
)
|
|
|
2,875
|
|
Year ended December 31, 2014
|
|
|
978
|
|
|
|
3
|
|
|
|
(79
|
)
|
|
|
(418
|
)
|
|
|
484
|
|
Note 6. Inventories
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Raw materials
|
|
$
|
68,900
|
|
|
$
|
75,666
|
|
Work in progress
|
|
|
47,759
|
|
|
|
56,025
|
|
Finished goods
|
|
|
19,069
|
|
|
|
35,508
|
|
Spares and other
|
|
|
23,129
|
|
|
|
21,528
|
|
|
|
|
158,857
|
|
|
|
188,727
|
|
Reduction to LIFO cost basis
|
|
|
(29,879
|
)
|
|
|
(38,496
|
)
|
Total inventories
|
|
$
|
128,978
|
|
|
$
|
150,231
|
|
Note 7. Property, Plant, Equipment –
Net
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
Land and improvements
|
|
$
|
6,396
|
|
|
$
|
6,599
|
|
Machinery and equipment
|
|
|
1,116,758
|
|
|
|
1,102,087
|
|
Buildings and improvements
|
|
|
155,749
|
|
|
|
152,765
|
|
Construction in progress
|
|
|
67,829
|
|
|
|
74,544
|
|
|
|
|
1,346,732
|
|
|
|
1,335,995
|
|
Less – accumulated depreciation
|
|
|
(771,357
|
)
|
|
|
(808,453
|
)
|
Total property, plant, equipment – net
|
|
$
|
575,375
|
|
|
$
|
527,542
|
|
Capitalized interest was $2,725, $2,870
and $2,846 for the years ended December 31, 2016, 2015 and 2014, respectively.
Depreciation expense was $39,304, $35,703
and $33,065 for the years ended December 31, 2016, 2015 and 2014, respectively.
Note 8. Lease Commitments
The Business has entered into
agreements to lease land, buildings and equipment. The operating leases have initial terms of up to 20 years with some
containing renewal options subject to customary conditions.
Future minimum lease payments under operating
leases having an initial or remaining non-cancellable lease terms in excess of one year are as follows:
|
|
December 31,
|
|
|
|
|
|
2017
|
|
$
|
43,748
|
|
2018
|
|
|
31,171
|
|
2019
|
|
|
19,734
|
|
2020
|
|
|
11,148
|
|
2021
|
|
|
10,532
|
|
Thereafter
|
|
|
44,644
|
|
Total
|
|
$
|
160,977
|
|
Rent expense was $19,357, $15,984 and $14,625
for the years ended December 31, 2016, 2015 and 2014, respectively.
Note 9. Long-term Debt and Credit Agreement
The Company’s debt at December 31,
2016 consisted of the following:
Total term loan outstanding
|
|
$
|
264,838
|
|
Amounts outstanding under the Revolving Credit Facility
|
|
|
–
|
|
Total outstanding indebtedness
|
|
|
264,838
|
|
Less: amounts due within one year
|
|
|
–
|
|
Total long term debt due after one year
|
|
$
|
264,838
|
|
At December 31, 2016, the Company assessed
the amount recorded under the Term Loan (defined below) and the Revolving Credit Facility (defined below) and determined that such
amounts approximated fair value. The fair values of the debt are based on quoted inactive market prices and are therefore classified
as Level 2 within the valuation hierarchy.
The Term Loan is presented net of deferred
costs of issuance, which are amortized using the effective interest method over the term of the Term Loan. Gross deferred issuance
costs at the inception of the Term Loan were $1,881 and, as of December 31, 2016, there were $1,787 of unamortized deferred issuance
costs netted against the Term-Loan.
Scheduled principal repayments under the
Term Loan subsequent to December 31, 2016 are as follows:
2017
|
|
$
|
–
|
|
2018
|
|
|
16,875
|
|
2019
|
|
|
27,000
|
|
2020
|
|
|
27,000
|
|
Thereafter
|
|
|
195,750
|
|
Total
|
|
$
|
266,625
|
|
Credit Agreement
On September 30, 2016, in connection with
the consummation of the Spin-Off, the Company as the borrower, entered into a Credit Agreement with Bank of America, as administrative
agent (the “Credit Agreement”). The Credit Agreement consists of a $270.0 million term loan (the “Term Loan”)
and a $155.0 million revolving loan facility (the “Revolving Credit Facility”). The Revolving Credit Facility includes
a $25.0 million letter-of-credit sub-facility and a $20.0 million Swing-Line Loan sub-facility, issuances against which reduce
the available capacity for borrowing. As of December 31, 2016, the Company has issued $2.1 million of letters of credit, against
which no funds have been drawn, and has no outstanding
borrowings against the Swing-Line Loan. The unutilized portion of the Revolving Credit Facility is subject to an annual
commitment fee of 0.25% to 0.40% depending on the Company’s consolidated leverage ratio. The Term Loan and the
Revolving Credit Facility both have a scheduled maturity date of September 30, 2021. The interest rates on borrowings under
the facilities are based on, at the option of the Company, either: (a) the London Interbank Offered Rate
(“LIBOR”), plus a margin of 2.25% to 3.00% depending on the Company’s consolidated leverage ratio, or (b)
the higher of (i) the Federal Funds Rate plus 0.5%, (ii) Bank of America’s “prime rate”, and (iii) LIBOR
plus 1.0%, plus a margin of 1.25% to 2.00% depending on the Company’s consolidated leverage ratio.
The proceeds of the Term Loan, net of adjustments
for certain working capital and other items, were used to fund a cash distribution to Honeywell in connection with the Spin-Off.
Amounts available under the Revolving Credit Facility may be used for working capital, general corporate purposes, and other uses,
all as more fully set forth in the Credit Agreement.
The Company incurred
approximately $1.9 million in debt issuance costs related to the Term Loan and $1.0 million in costs related to the Revolving
Credit Facility. The debt issuance costs associated with the Term Loan were recorded as a reduction of the principal balance
of the debt, and the Revolving Credit Facility costs were capitalized in Other assets. All issuance costs are being amortized
through interest expense for the duration of each respective debt facility. The accretion in interest expense during the year
ended December 31, 2016 was $148.
The obligations under the Credit Agreement
are secured by liens on substantially all of the assets of AdvanSix Inc.
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) 3:00 to 1:00 or less for the fiscal quarter ending September 30, 2016, through
and including the fiscal quarter ending March 31, 2018, (ii) 2:75 to 1:00 or less for the fiscal quarter ending June 30, 2018,
through and including the fiscal quarter ending March 31, 2019, and (iii) 2:50 to 1:00 or less for the fiscal quarter ending June
30, 2019, and each fiscal quarter thereafter (subject to the Company’s option to elect a consolidated leverage ratio increase
in connection with certain acquisitions). If the Company 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 Credit Agreement.
Note 10. Postretirement Benefit Obligations
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 multiemployer 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 Combined Statements of Operations. The pension expense related to our participation
in the Shared Plan for the nine months ended September 30, 2016 and years ended December 31, 2015, 2014 was $5,151, $10,215 and
$9,249, respectively.
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:
|
|
|
|
|
Benefit obligation at October 1, 2016 (Spin-Off)
|
|
$
|
34,935
|
|
Service Cost
|
|
|
1,796
|
|
Interest Cost
|
|
|
315
|
|
Actuarial (gains) losses
|
|
|
(3,159
|
)
|
Benefit obligation at December 31, 2016
|
|
$
|
33,887
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at October 1, 2016 (Spin-Off)
|
|
$
|
–
|
|
Company contributions
|
|
|
–
|
|
Fair value of plan assets at end of year
|
|
|
–
|
|
Funded status of plans
|
|
$
|
(33,887
|
)
|
|
|
|
|
|
Amounts recognized in Balance Sheet consists of:
|
|
|
|
|
Accrued pension liabilities-current
(1)
|
|
$
|
(343
|
)
|
Accrued pension liabilities-noncurrent
(2)
|
|
|
(33,544
|
)
|
Net amount recognized
|
|
$
|
(33,887
|
)
|
|
(1)
|
Included in accrued liabilities on Balance Sheet
|
|
(2)
|
Included in postretirement benefit obligations on Balance Sheet
|
Amounts recognized in accumulated other
comprehensive income (loss) associated with our pension plan at December 31, 2016 are as follows:
Transition obligation
|
|
$
|
–
|
|
Prior service (credit) cost
|
|
|
–
|
|
Net actuarial gain
|
|
|
(3,159
|
)
|
Net amount recognized
|
|
$
|
(3,159
|
)
|
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,
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
$
|
1,796
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Interest cost
|
|
|
|
315
|
|
|
|
–
|
|
|
|
–
|
|
Expected return on plan assets
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Recognition of actuarial losses
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Net periodic benefit cost
|
|
|
$
|
2,111
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Changes in Benefits Obligations Recognized in Other Comprehensive
Income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gains
|
|
|
|
(3,159
|
)
|
|
|
–
|
|
|
|
–
|
|
Total recognized in other comprehensive income
|
|
|
$
|
(3,159
|
)
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
|
|
$
|
(1,048
|
)
|
|
$
|
–
|
|
|
$
|
–
|
|
The estimated actuarial gain that
will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2017 is expected to
be nil.
Significant actuarial assumptions used in
determining the benefit obligations and net periodic benefit cost for our pension plan were as follows:
|
2016
|
Actuarial assumptions used to determine benefit obligations as of December 31,:
|
|
Discount rate
|
4.48%
|
Expected annual rate of compensation increase
|
2.75%
|
Actuarial assumptions used to determine the net periodic benefit cost for the year ended December 31,:
|
|
Discount rate
|
3.93%
|
Expected annual rate of compensation increase
|
3.75%
|
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, 2016. 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 accumulated benefit obligation for our
pension plan was $31.2 million as of December 31, 2016.
No assets had been contributed to the Plan
prior to December 31, 2016.
Our general funding policy for
our pension plan is to contribute amounts at least sufficient to satisfy regulatory funding standards. We plan to make
estimated payments through such time as the plan is fully funded. During January 2017, the Company made a contribution to the
AdvanSix Retirement Earnings Plan of $2.2 million. The Company plans to make additional contributions of approximately $20
million during 2017 sufficient to satisfy pension funding requirements as well as additional
contributions in future years sufficient to satisfy pension funding requirements in those periods.
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:
2017
|
|
$
|
343
|
|
2018
|
|
|
879
|
|
2019
|
|
|
1,481
|
|
2020
|
|
|
2,106
|
|
2021
|
|
|
2,778
|
|
2022–2026
|
|
|
24,379
|
|
Note 11. Financial Instruments and Fair
Value Measures
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. 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 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 Company. The terms and conditions of credit sales are
designed to mitigate or eliminate concentrations of credit risk with any single customer. The Company has one major customer that
accounts for approximately 16% of the trade accounts receivable – net balance.
Commodity Price Risk Management
–
The Company 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 through the use of long-term, formula-based price contracts with our suppliers and formula-based
price agreements with customers. We also enter into forward commodity contracts with third parties designated as hedges of anticipated
purchases of natural gas. 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, 2016 and 2015, we had
contracts with notional amounts of $0 and $18,726, respectively, related to natural gas forward commodity agreements.
Fair Value of Financial Instruments
– The FASB’s accounting guidance 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 FASB’s
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
|
Financial and nonfinancial assets and liabilities
are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following
table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis
as of December 31, 2016 and 2015:
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
Liabilities:
|
|
|
|
|
|
|
|
|
Forward commodity contracts
|
|
$
|
–
|
|
|
$
|
3,628
|
|
The forward commodity contracts are valued
using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments
are classified within level 2 of the fair value hierarchy.
The carrying value of accounts receivables
and payables contained in the Consolidated and Combined Balance Sheets approximates fair value.
Note 12. 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, including matters relating to commercial transactions. A liability
is recognized for any contingency that is probable of occurrence and reasonably estimable. The Company continually assesses the
likelihood of adverse judgments or outcomes in these matters, as well as potential ranges of possible losses (taking into consideration
any insurance recoveries), based on an analysis of each matter with the assistance of legal counsel and, if applicable, other experts.
Given the uncertainty inherent in such lawsuits,
investigations and disputes, the Company does not believe it is possible to develop estimates of reasonably possible loss in excess
of current accruals for these matters. Considering the Company’s past experience and existing accruals, the Business 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 and Combined 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 and combined results of operations, balance sheet and/or operating cash flows in the periods recognized or paid.
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, 2016 are as follows (dollars in thousands):
Year
|
|
Amount
|
|
|
|
|
|
2017
|
|
$
|
67,154
|
|
2018
|
|
|
26,854
|
|
2019
|
|
|
26,957
|
|
2020
|
|
|
27,006
|
|
2021
|
|
|
26,920
|
|
Thereafter
|
|
|
12,649
|
|
|
|
$
|
187,540
|
|
Note 13. Changes in Accumulated Other
Comprehensive Income (Loss)
The components of accumulated other comprehensive
income (loss) are as follows:
|
|
|
Currency
Translation
Adjustment
|
|
Postretirement
Benefit
Obligations
Adjustment
|
|
Changes in
Fair Value of
Effective Cash
Flow Hedges
|
|
Accumulated
Other
Comprehensive
Income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
|
$
|
(3,479
|
)
|
|
$
|
–
|
|
|
$
|
(119
|
)
|
|
$
|
(3,598
|
)
|
Other comprehensive income (loss)
|
|
|
|
(283
|
)
|
|
|
–
|
|
|
|
(1,333
|
)
|
|
|
(1,616
|
)
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Income tax expense
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Current period change
|
|
|
|
(283
|
)
|
|
|
–
|
|
|
|
(1,333
|
)
|
|
|
(1,616
|
)
|
Balance at December 31, 2014
|
|
|
|
(3,762
|
)
|
|
|
–
|
|
|
|
(1,452
|
)
|
|
|
(5,214
|
)
|
Other comprehensive income (loss)
|
|
|
|
(1,390
|
)
|
|
|
–
|
|
|
|
2,865
|
|
|
|
1,475
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Income tax expense
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Current period change
|
|
|
|
(1,390
|
)
|
|
|
–
|
|
|
|
2,865
|
|
|
|
1,475
|
|
Balance at December 31, 2015
|
|
|
|
(5,152
|
)
|
|
|
–
|
|
|
|
1,413
|
|
|
|
(3,739
|
)
|
Other comprehensive income (loss)
|
|
|
|
154
|
|
|
|
1,963
|
|
|
|
(1,413
|
)
|
|
|
704
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Income tax expense
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Current period change
|
|
|
|
154
|
|
|
|
1,963
|
|
|
|
(1,413
|
)
|
|
|
704
|
|
Balance at December 31, 2016
|
|
|
$
|
(4,998
|
)
|
|
$
|
1,963
|
|
|
$
|
–
|
|
|
$
|
(3,035
|
)
|
Note 14. Earnings Per Share
On October 1, 2016, the date of consummation
of the Spin-Off, 30,482,966 shares of the Company’s Common Stock were distributed to Honeywell stockholders of record as
of September 16, 2016 who held their shares through the Distribution Date. Basic and Diluted EPS for all periods prior to the Spin-off
reflect the number of distributed shares, or 30,482,966 shares. For the 2016 year to date calculations, these shares are treated
as issued and outstanding from January 1, 2016 for purposes of calculating historical basic earnings per share.
The details of the earnings per share calculations
for the years ended December 31, 2016, 2015 and 2014 are as follows:
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
34,147
|
|
|
$
|
63,776
|
|
|
$
|
83,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
30,482,966
|
|
|
|
30,482,966
|
|
|
|
30,482,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS – Basic
|
|
$
|
1.12
|
|
|
$
|
2.09
|
|
|
$
|
2.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
2014
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
34,147
|
|
|
$
|
63,776
|
|
|
$
|
83,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – Basic
|
|
|
30,482,966
|
|
|
|
30,482,966
|
|
|
|
30,482,966
|
|
Dilutive effect of unvested RSUs
|
|
|
20,621
|
|
|
|
–
|
|
|
|
–
|
|
Weighted average common shares outstanding – Diluted
|
|
|
30,503,587
|
|
|
|
30,482,966
|
|
|
|
30,482,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS – Diluted
|
|
$
|
1.12
|
|
|
$
|
2.09
|
|
|
$
|
2.75
|
|
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.
Note 15. Stock-Based Compensation Plans
On September 8, 2016, our Board adopted,
and Honeywell, as our sole stockholder, approved, the 2016 Stock Incentive Plan of AdvanSix Inc. and its Affiliates (the “Equity
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 3,350,000. Of those shares, only
1,750,000 may be subject, on a one-for-one basis, to awards granted under the Equity Plan that are not stock options or stock appreciation
rights (“full-value awards”). After the number of shares subject to full-value awards exceed such limit, each share
subject to future full-value awards would reduce the number of shares available for grant under the Equity Plan by four shares,
with the exception of awards to non-employee directors, which shall not count towards such limit and shares related to such awards
shall always be counted on a one-for-one basis.
Under the terms of the Equity Plan, there
were 2,441,460 shares of AdvanSix common stock available for future grants of full value awards, of which 841,460 were available
for awards other than full-value awards on a one-for-one basis, at December 31, 2016.
Restricted Stock Units
– Restricted
stock unit (“RSU”) awards entitle the holder to receive one share of common stock for each unit when the units vest.
RSUs are issued to certain key employees and directors at fair market value at the date of grant as compensation. RSUs typically
become fully vested over periods ranging from 1.5 to 3 years and are payable in AdvanSix common stock upon vesting.
Since the Spin-Off on October 1, 2016, we
have granted the following awards:
|
•
|
783,159 RSUs were granted to officers of AdvanSix with three year vesting periods in accordance
with the Equity Plan
|
|
•
|
Honeywell RSU awards held by certain of our key employees who would otherwise forfeit prior Honeywell
awards as a result of the Spin-Off were issued replacement grants in the amount of 88,817 shares of our RSUs with substantially the same vesting schedule as the forfeited awards. Compensation expense for these awards will continue to be recognized
ratably over the remaining term of the unvested awards, which ranged from 1.25 to 3.25 years as of the date of the
Spin-Off
|
•
|
36,564 RSUs were granted to members of our Board of Directors for annual director compensation
with three year vesting periods in accordance with the Equity Plan
|
The following table summarizes information
about RSU activity related to our Equity Plan:
|
|
Number of Restricted
Stock Units
|
|
Weighted Average Grant Date Fair Value Per Share
|
|
|
|
|
|
|
|
|
|
Non-vested at October 1, 2016
|
|
|
–
|
|
|
$
|
–
|
|
Granted
|
|
|
908,540
|
|
|
|
16.41
|
|
Vested
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Non-vested at December 31, 2016
|
|
|
908,540
|
|
|
$
|
16.41
|
|
As of December 31, 2016, there was approximately
$13.6 million of total unrecognized compensation cost related to non-vested RSUs granted under our Equity Plan, which is expected
to be recognized over a weighted-average period of 2.65 years.
The following table summarizes information
about income statement impact from RSUs for the year ended December 31, 2016:
Compensation expense
|
|
$
|
1,327
|
|
Future income tax benefit recognized
|
|
|
513
|
|
Certain share-based compensation expense
relates to stock options and restricted stock units awarded to key employees of the Business as part of Honeywell’s incentive
compensation plans prior to the Spin-off. Such share-based compensation expense was $538, $562 and $469 for the nine months ended
September 30, 2016 and the years ended December 31, 2015 and 2014, respectively.
Note 16. Geographic Areas and Major Customers
– Financial Data
|
|
Net Sales
|
|
Long-lived Assets
(1)
|
Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
975
|
|
|
$
|
936
|
|
|
$
|
1,249
|
|
|
$
|
575
|
|
|
$
|
527
|
|
|
$
|
468
|
|
International
|
|
|
217
|
|
|
|
372
|
|
|
|
511
|
|
|
|
–
|
|
|
|
1
|
|
|
|
1
|
|
Total
|
|
$
|
1,192
|
|
|
$
|
1,308
|
|
|
$
|
1,760
|
|
|
$
|
575
|
|
|
$
|
528
|
|
|
$
|
469
|
|
|
(1)
|
Long-lived assets are comprised of property, plant and equipment – net.
|
Our largest customer is Shaw
Industries Group Inc. (“Shaw”), one of the world’s largest consumers of caprolactam and Nylon 6 resin. We
sell Nylon 6 resin and caprolactam to Shaw under a long-term contract. In 2016, 2015 and 2014, our sales to Shaw were 17%,
16% and 19%, respectively, of our total sales. We typically sell to our other customers under short-term contracts with one-
to two-year terms or by purchase orders. International sales for the years ended December 31, 2016, 2015 and 2014 include
export sales of $216.4 million, $350.3 million and $480.4 million, respectively.
Note 17. Unaudited Quarterly Financial
Information
The following tables show selected unaudited
quarterly results of operations for 2016 and 2015. The quarterly data have been prepared on the same basis as the audited annual
financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair statement
of our results of operations for these periods.
|
|
2016
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
299,830
|
|
|
$
|
308,418
|
|
|
$
|
323,953
|
|
|
$
|
259,323
|
|
|
$
|
1,191,524
|
|
Gross Profit
|
|
|
54,271
|
|
|
|
34,598
|
|
|
|
38,862
|
|
|
|
(20,101
|
)
|
|
|
107,630
|
|
Net Income (Loss)
|
|
|
27,393
|
|
|
|
15,008
|
|
|
|
16,460
|
|
|
|
(24,714
|
)
|
|
|
34,147
|
|
Earnings (loss) per share – basic
(a)
|
|
|
0.90
|
|
|
|
0.49
|
|
|
|
0.54
|
|
|
|
(0.81
|
)
|
|
|
1.12
|
|
Earnings (loss) per share – diluted
(a)
|
|
|
0.90
|
|
|
|
0.49
|
|
|
|
0.54
|
|
|
|
(0.81
|
)
|
|
|
1.12
|
|
|
|
2015
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
310,229
|
|
|
$
|
367,441
|
|
|
$
|
335,874
|
|
|
$
|
315,865
|
|
|
$
|
1,329,409
|
|
Gross Profit
|
|
|
15,546
|
|
|
|
51,914
|
|
|
|
45,889
|
|
|
|
36,409
|
|
|
|
149,758
|
|
Net Income
|
|
|
3,062
|
|
|
|
24,965
|
|
|
|
20,411
|
|
|
|
15,338
|
|
|
|
63,776
|
|
Earnings per share – basic
(a)
|
|
|
0.10
|
|
|
|
0.82
|
|
|
|
0.67
|
|
|
|
0.50
|
|
|
|
2.09
|
|
Earnings per share – diluted
(a)
|
|
|
0.10
|
|
|
|
0.82
|
|
|
|
0.67
|
|
|
|
0.50
|
|
|
|
2.09
|
|
|
(a)
|
On October 1, 2016, the date of consummation of the Spin-Off, 30,482,966 shares of the Company’s
Common Stock were distributed to Honeywell stockholders of record as of September 16, 2016. Basic and Diluted EPS for all periods
prior to the Spin-off reflect the number of distributed shares, or 30,482,966 shares.
|