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EXCEL - IDEA: XBRL DOCUMENT - RAYONIER ADVANCED MATERIALS INC.Financial_Report.xls
EX-31.2 - SECTION 302 CFO CERTIFICATION - RAYONIER ADVANCED MATERIALS INC.ryamex3123q2014.htm
EX-32 - SECTION 906 CEO & CFO CERTIFICATION - RAYONIER ADVANCED MATERIALS INC.ryamex323q2014.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - RAYONIER ADVANCED MATERIALS INC.ryamex3113q2014.htm



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the transition period from              to             
Commission File Number 001-36285
RAYONIER ADVANCED MATERIALS INC.
Incorporated in the State of Delaware
I.R.S. Employer Identification No. 46-4559529
1301 RIVERPLACE BOULEVARD, SUITE 2300
JACKSONVILLE, FL 32207
(Principal Executive Office)
Telephone Number: (904) 357-4600

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x       NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
Accelerated filer  o
Non-accelerated filer  o
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o        NO  x

The registrant had 42,653,189 shares of common stock, $.01 par value per share, outstanding as of October 22, 2014,


















TABLE OF CONTENTS
 
Item
 
 
Page
 
 
PART I - FINANCIAL INFORMATION
 
1.
 
 
 
 
 
 
 
 
 
2.
 
3.
 
4.
 
 
 
PART II - OTHER INFORMATION
 
1.
 
1A.
 
2.
 
6.
 
 
 
 

i



PART I.        FINANCIAL INFORMATION

Item 1.         Financial Statements

RAYONIER ADVANCED MATERIALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts) 
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2014
 
September 30, 2013
 
September 27, 2014
 
September 30, 2013
NET SALES
$
253,695

 
$
225,523

 
$
709,725

 
$
764,876

COST OF SALES
198,006

 
158,147

 
546,942

 
515,842

GROSS MARGIN
55,689

 
67,376

 
162,783

 
249,034

 
 
 
 
 
 
 
 
Selling and general expenses
9,493

 
8,144

 
26,730

 
26,894

Other operating expense (income), net
4,518

 
(144
)

44,800


3,761

OPERATING INCOME
41,678

 
59,376

 
91,253

 
218,379

Interest expense
(9,469
)
 

 
(12,694
)
 

Interest and miscellaneous (expense) income, net
(57
)
 
292

 
(62
)
 
292

INCOME BEFORE INCOME TAXES
32,152

 
59,668

 
78,497

 
218,671

Income tax expense
(12,744
)
 
(19,702
)
 
(23,580
)
 
(49,704
)
NET INCOME
$
19,408

 
$
39,966

 
$
54,917

 
$
168,967

 
 
 
 
 
 
 
 
EARNINGS PER SHARE OF COMMON STOCK (Note 10)
 
 
 
 
 
 
 
Basic earnings per share
$
0.46

 
$
0.95

 
$
1.30

 
$
4.01

Diluted earnings per share
$
0.46

 
$
0.95

 
$
1.30

 
$
4.01

 
 
 
 
 
 
 
 
DIVIDENDS DECLARED PER SHARE
$
0.07

 
$

 
$
0.07

 
$





COMPREHENSIVE INCOME:
 
 
 
 
 
 
 
NET INCOME
$
19,408

 
$
39,966

 
$
54,917

 
$
168,967

OTHER COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Net gain (loss) from pension and postretirement plans, net of income tax (expense) benefit of ($2,779), ($734), $501 and ($2,299)
4,834

 
1,280

 
(871
)
 
3,999

Total other comprehensive income (loss)
4,834

 
1,280

 
(871
)
 
3,999

COMPREHENSIVE INCOME
$
24,242

 
$
41,246

 
$
54,046

 
$
172,966


See Notes to Condensed Consolidated Financial Statements.

1



RAYONIER ADVANCED MATERIALS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
 
September 27, 2014
 
December 31, 2013
ASSETS
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
28,163

 
$

Accounts receivable, less allowance for doubtful accounts of $151 and $140
93,266

 
71,097

Inventory
122,141

 
128,706

Deferred tax assets
11,206

 
22,532

Prepaid and other current assets
43,856

 
23,720

Total current assets
298,632

 
246,055

TOTAL PROPERTY, PLANT AND EQUIPMENT, GROSS
2,000,820

 
1,955,953

LESS — ACCUMULATED DEPRECIATION
(1,156,378
)
 
(1,109,665
)
TOTAL PROPERTY, PLANT AND EQUIPMENT, NET
844,442

 
846,288

OTHER ASSETS (Note 16)
103,276

 
27,923

TOTAL ASSETS
$
1,246,350

 
$
1,120,266

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable
$
49,804

 
$
54,198

Current maturities of long-term debt
8,400

 

Accrued taxes
5,099

 
1,867

Accrued payroll and benefits
22,161

 
10,814

Accrued interest
10,855

 

Accrued customer incentives
14,921

 
7,728

Other current liabilities
12,543

 
5,239

Current liabilities for disposed operations (Note 14)
7,515

 

Total current liabilities
131,298

 
79,846

LONG-TERM DEBT
938,471

 

NON-CURRENT LIABILITIES FOR DISPOSED OPERATIONS (Note 14)
84,193

 

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 9)
98,285

 
21,793

DEFERRED INCOME TAXES

 
49,224

OTHER NON-CURRENT LIABILITIES
7,547

 
1,102

COMMITMENTS AND CONTINGENCIES (Notes 8 and 12)

 

STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 
Preferred stock, 10,000,000 shares authorized at $0.01 par value, 0 issued and outstanding as of September 27, 2014 and December 31, 2013

 

Common stock, 140,000,000 shares authorized at $0.01 par value, 42,653,189 and 0 issued and outstanding, as of September 27, 2014 and December 31, 2013, respectively
427

 

Additional paid-in capital
57,358

 

Retained earnings
4,760

 
1,415,894

Transfers to Rayonier, net

 
(407,894
)
Accumulated other comprehensive loss
(75,989
)
 
(39,699
)
TOTAL STOCKHOLDERS’ (DEFICIT) EQUITY
(13,444
)
 
968,301

TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
$
1,246,350

 
$
1,120,266


See Notes to Condensed Consolidated Financial Statements.

2



RAYONIER ADVANCED MATERIALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
Nine Months Ended
 
September 27, 2014
 
September 30, 2013
OPERATING ACTIVITIES
 
 
 
Net income
$
54,917

 
$
168,967

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
62,115

 
51,142

Stock-based incentive compensation expense
5,614

 
4,845

Amortization of capitalized debt costs
550

 

Deferred income taxes
760

 
(12,027
)
Increase in liabilities for disposed operations
20,019

 

Amortization of losses and prior service costs from pension and postretirement plans
5,662

 
6,298

Loss from sale/disposal of property, plant and equipment
988

 
1,260

Other

 
(583
)
Changes in operating assets and liabilities:
 
 
 
Receivables
(21,405
)
 
(18,780
)
Inventories
6,565

 
(1,918
)
Accounts payable
(10,556
)
 
10,263

Accrued liabilities
24,979

 
1,966

All other operating activities
(20,356
)
 
(22,623
)
Expenditures for disposed operations
(2,151
)
 

CASH PROVIDED BY OPERATING ACTIVITIES
127,701

 
188,810

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(60,214
)
 
(81,540
)
Purchase of timber deeds
(12,692
)
 

Purchase of land
(1,528
)
 

Jesup plant cellulose specialties expansion

 
(137,392
)
Other
(1,450
)
 
(1,335
)
CASH USED FOR INVESTING ACTIVITIES
(75,884
)
 
(220,267
)
FINANCING ACTIVITIES
 
 
 
Issuance of debt
1,025,000

 

Repayment of debt
(77,100
)
 

Proceeds from the issuance of common stock
549

 

Debt issuance costs
(15,432
)
 

Common stock repurchased
(92
)
 

Net payments (to) from Rayonier
(956,579
)
 
31,457

CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
(23,654
)
 
31,457

 


 


CASH AND CASH EQUIVALENTS
 
 
 
Change in cash and cash equivalents
28,163

 

Balance, beginning of year

 

Balance, end of period
$
28,163

 
$

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid during the period:
 
 
 
Interest
$
1,881

 
$

Income taxes
$
18,350

 
$

Non-cash investing and financing activities:
 
 
 
Capital assets purchased on account
$
7,935

 
$
27,394


See Notes to Condensed Consolidated Financial Statements.

3



RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)


1.
SEPARATION AND BASIS OF PRESENTATION
The Separation
On May 27, 2014, the board of directors of Rayonier Inc. (“Rayonier”) approved the separation of its performance fibers segment from Rayonier to form an independent, publicly traded corporation named Rayonier Advanced Materials Inc. (“Rayonier Advanced Materials” or “the Company”). Subsequently, the Company entered into a separation and distribution agreement with Rayonier (the “Separation Agreement”), whereby Rayonier agreed to distribute 100% of the outstanding common stock of the Company to Rayonier shareholders in a tax-free distribution (the “Distribution”). As a condition to the Distribution, Rayonier received a private letter ruling from the Internal Revenue Service to the effect that, based on certain facts, assumptions, representations and undertakings set forth in the ruling, for U.S. federal income tax purposes, the Distribution of the Company’s stock was not taxable to Rayonier or U.S. holders of Rayonier common shares, except in respect to cash received in lieu of fractional share interests. A registration statement on Form 10 (the “Form 10”), as amended through the time of its effectiveness, was filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) and was declared effective on June 13, 2014.
The Distribution was made on June 27, 2014 to Rayonier shareholders of record as of the close of business on June 18, 2014. Holders of Rayonier common shares received one share of the Company’s common stock for every three Rayonier common shares held on the record date. This resulted in the distribution of 42,176,565 shares of the Company’s common stock to Rayonier shareholders after the market closed on June 27, 2014. In addition, the Company made special cash distributions to Rayonier in an aggregate amount of $906.2 million and, as between Rayonier and the Company, assumed certain liabilities associated with pension, other post-retirement employee benefits and environmental remediation. After consideration of the cash retained by the Company at the date of Distribution, as well as cash flow impacts for the six months ending June 27, 2014, the net distribution to Rayonier was $956.6 million.
Following the Distribution, Rayonier retained no equity ownership interest in the Company, and each company now has independent public ownership, boards of directors and management.
Separation Costs
For the nine months ended September 27, 2014, the Company recorded separation costs of $19.4 million within other operating expenses, consisting mostly of professional service fees within the finance, legal and information system functions.
Basis of Presentation
The unaudited condensed consolidated financial statements and notes thereto of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the rules and regulations of the SEC. In the opinion of management, these financial statements and notes reflect all adjustments (all of which are normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. These statements and notes should be read in conjunction with the financial statements and supplementary data included in the Company’s Audited Combined Financial Statements for the year ended December 31, 2013, which is included in our Form 10, as well as in conjunction with the interim financial information in our report on Form 10-Q for the quarterly period ended June 28, 2014. The results of operations for the three and nine months ended September 27, 2014, are not necessarily indicative of the results to be expected for the full year.
Prior to the Distribution, the Company’s results of operations, financial position and cash flows consisted of the performance fibers segment of Rayonier and an allocable portion of its corporate costs (together, the “performance fibers business”). These financial statements have been presented as if the performance fibers business had been combined for all periods presented. All intercompany transactions are eliminated. Historically, financial statements have not been prepared for the performance fibers business. The accompanying financial statements for the Company have been derived from the historical accounting records of Rayonier.

4


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

The statements of income for periods prior to the Distribution include allocations of certain costs from Rayonier related to the operations of the Company. These corporate administrative costs were charged to the Company based on employee headcount and payroll costs. The combined statements of income also include expense allocations for certain corporate functions historically performed by Rayonier and not allocated to its operating segments. These allocations were based on revenues and specific identification of time and/or activities associated with the Company. Management believes the methodologies employed for the allocation of costs were reasonable in relation to the historical reporting of Rayonier, but may not necessarily be indicative of costs had the Company operated on a stand-alone basis during the periods prior to the Distribution, nor what the costs may be in the future.
Fiscal Year
Prior to the Distribution, the Company’s quarter and fiscal year end was the last day of the calendar quarter and calendar year, respectively. In connection with the Distribution, the Company changed its interim reporting periods to the last Saturday of the fiscal quarter. The Company’s fiscal year end will remain the last day of the calendar year. As the effect on prior interim period results were not material, prior periods have not been revised.
New or Recently Adopted Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The standard requires a disposal of a component of an entity to be reported in discontinued operations if it represents a strategic shift with a major effect on an entity’s operations and financial results. It also removes requirements related to the evaluation of the component’s effect on ongoing operations and the entity’s continuing involvement with the component. Additional disclosures about discontinued operations are also required under this standard. ASU No. 2014-08 is required to be applied prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning December 15, 2014. Early adoption is permitted for disposals (or classifications as held for sale) that have not been previously reported. The Company does not expect the adoption of this standard will have a material impact on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, a comprehensive new revenue recognition standard. This standard will supersede virtually all current revenue recognition guidance. The core principle is that a company will recognize revenue when it transfers goods or services to customers in an amount that reflects consideration to which the company expects to be entitled to in exchange for those goods or services. This standard will be effective for the Company’s first quarter 2017 Form 10-Q filing with full or modified retrospective adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This standard requires a performance target that affects vesting and that could be achieved after the requisite service period to be treated as a performance condition. The current accounting standard for stock-based compensation as it applies to awards with performance conditions should be applied. This guidance is effective for fiscal years, including interim reporting periods, beginning after December 15, 2015, and is applicable to the Company's fiscal year beginning January 1, 2016. The Company is currently evaluating this guidance, but does not expect the adoption of this standard will have a material impact to its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 with early adoption permitted. The Company does not expect the adoption of this standard will have a material impact on the consolidated financial statements.
Subsequent Events
The Company signed a one-year contract extension with Nantong Cellulose Fibers Co., Ltd., a significant customer. A report on Form 8-K was filed on October 20, 2014 with the SEC, in respect to this event.


5


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

2.
RELATED PARTY TRANSACTIONS
As discussed in Note 1Separation and Basis of Presentation, for periods prior to the Distribution, the Consolidated Statements of Income and Comprehensive Income include expense allocations for certain corporate functions historically performed by Rayonier and not allocated to its operating segments, including general corporate expenses related to executive oversight, accounting, treasury, tax, legal, human resources and information technology. Net charges from Rayonier for these services, reflected in selling and general expenses in the Condensed Consolidated Statements of Income and Comprehensive Income were $0 and $3.5 million for the three months ended September 27, 2014, and September 30, 2013, respectively, and $8.0 million and $12.5 million for the nine months ended September 27, 2014 and September 30, 2013, respectively.
For periods prior to the Distribution, the Consolidated Statements of Income and Comprehensive Income also include allocations of certain costs from Rayonier related to the operations of the Company including: medical costs for active salaried and retired employees, worker’s compensation, general liability and property insurance, salaried payroll costs, equity based compensation and a pro-rata share of direct corporate administration expense for accounting, human resource services and information system maintenance. Net charges from Rayonier for these costs, reflected in the Condensed Consolidated Statements of Income and Comprehensive Income were $0 and $12.7 million for the three months ended September 27, 2014 and September 30, 2013, respectively, and $27.3 million and $38.3 million for the nine months ended September 27, 2014 and September 30, 2013, respectively.

3.
INCOME TAXES
In connection with the Separation, the Company entered into a tax matters agreement with Rayonier. The agreement governs the parties’ respective rights, responsibilities and obligations with respect to taxes for any period (or portion thereof) ending on or before the Distribution. Generally, Rayonier Advanced Materials is liable for all pre-distribution U.S. federal income taxes, state taxes and non-income taxes attributable to Rayonier’s former performance fibers business.
The Company’s effective tax rate for the third quarter of 2014 was 39.6 percent compared with 33.0 percent for the corresponding period of 2013. The effective tax rate differs from the federal statutory rate of 35 percent primarily due to the manufacturing tax credit, state taxes and nondeductible expenses.
The Company’s effective tax rate for the first nine months of 2014 was 30.0 percent compared with 23.0 percent for the corresponding period of 2013. The effective tax rate differs from the federal statutory rate of 35 percent primarily due to the reversal of a tax reserve related to the taxability of the cellulosic biofuel producer credit (“CBPC”) for 2014 and the alternative fuel mixture credit (“AFMC”) for the CBPC exchange for 2013.
The provision for income taxes for periods prior to the Distribution has been computed as if the Company were a stand-alone company.

4.
INVENTORY
As of September 27, 2014 and December 31, 2013, the Company’s inventory included the following:
 
September 27, 2014
 
December 31, 2013
Finished goods
$
97,777

 
$
105,398

Work in progress
3,569

 
3,555

Raw materials
17,900

 
17,420

Manufacturing and maintenance supplies
2,895

 
2,333

Total inventory
$
122,141

 
$
128,706



6


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

5.STOCKHOLDERS’ (DEFICIT) EQUITY
An analysis of stockholders’ (deficit) equity for the nine months ended September 27, 2014 and the year ended December 31, 2013 is shown below (share amounts not in thousands):
 
Common Stock
 
Retained
Earnings (Accumulated Deficit)
 
Transfers (to) from Rayonier, net
 
Accumulated Other Comprehensive Loss
 
Total Stockholders'
(Deficit) Equity
 
Shares
 
Par Value
 
Additional Paid in Capital
 
Balance, December 31, 2012

 
$

 
$

 
$
1,196,127

 
$
(406,753
)
 
$
(64,670
)
 
$
724,704

Net income

 

 

 
219,767

 

 

 
219,767

Net gain from pension and postretirement plans

 

 

 

 

 
24,971

 
24,971

Net transfers to Rayonier

 

 

 

 
(1,141
)
 

 
(1,141
)
Balance, December 31, 2013

 
$

 
$

 
$
1,415,894

 
$
(407,894
)
 
$
(39,699
)
 
$
968,301

Net income

 

 

 
54,917

 

 

 
54,917

Net loss from pension and postretirement plans

 

 

 

 

 
(871
)
 
(871
)
Net transfers to Rayonier

 

 

 

 
(1,001,509
)
 
(35,419
)
 
(1,036,928
)
Reclassification to additional paid-in capital at distribution date

 

 
53,696

 
(1,463,099
)
 
1,409,403

 

 

Issuance of common stock at the separation
42,176,565

 
422

 
(422
)
 

 

 

 

Issuance of common stock under incentive stock plans
477,234

 
5

 
544

 

 

 

 
549

Stock-based compensation

 

 
2,052

 
 
 
 
 
 
 
2,052

Repurchase of common stock
(610
)
 

 
(92
)
 

 

 

 
(92
)
Adjustments to tax assets and liabilities associated with the Distribution

 

 
1,580

 

 

 

 
1,580

Dividends ($0.07 per share)

 

 

 
(2,952
)
 

 

 
(2,952
)
Balance, September 27, 2014
42,653,189

 
$
427

 
$
57,358

 
$
4,760

 
$

 
$
(75,989
)
 
$
(13,444
)
 

Net Parent Company Investment
The following is a reconciliation of the amounts presented as “Net transfers to Rayonier” in the above table and the amounts presented as “Net payments (to) from Rayonier” on the Condensed Consolidated Statements of Cash Flows.
 
Nine Months Ended
 
September 27, 2014
 
September 30, 2013
Allocation of costs from Rayonier (a)
$
(35,279
)
 
$
(50,815
)
Cash receipts received by Rayonier on Company's behalf
472,780

 
787,857

Cash disbursements made by Rayonier on Company's behalf
(484,318
)
 
(700,740
)
Net distribution to Rayonier on separation
(906,200
)
 

Net liabilities from transfer of assets and liabilities with Rayonier (b)
(83,911
)
 

Net transfers (to) from Rayonier
(1,036,928
)
 
36,302

Non-cash adjustments:
 
 
 
Stock-based compensation
(3,562
)
 
(4,845
)
Net liabilities from transfer of assets and liabilities with Rayonier (b)
83,911

 

Net payments (to) from Rayonier per the Condensed Consolidated Statements of Cash Flows, prior to separation
$
(956,579
)
 
$
31,457


7


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

(a) Included in the costs allocated to the Company from Rayonier are expense allocations for certain corporate functions historically performed by Rayonier and not allocated to its operating segments. See Note 2Related Party Transactions to the Consolidated Financial Statements.
(b) In accordance with the Separation Agreement, certain assets and liabilities were transferred to the Company that were not included in the historical financial statements for periods prior to the Distribution. These non-cash capital contributions included:
$73.9 million of disposed operations liabilities (See Note 14 - Liabilities for Disposed Operations for additional information)
$73.8 million of employee benefit plan liabilities (See Note 9 - Employee Benefit Plans for additional information)
$67.4 million of deferred tax assets (primarily associated with the liabilities above)
$3.6 million of other liabilities, net

6.
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated Other Comprehensive Loss was comprised of the following:
 
For the Period Ended
 
September 27, 2014
 
September 30, 2013
Unrecognized components of employee benefit plans, net of tax
 
 
 
Balance, beginning of period
$
(39,699
)
 
$
(64,670
)
Amounts reclassified from accumulated other comprehensive loss (a)
3,596

 
3,999

Other comprehensive loss before reclassifications
(4,467
)
 

Net other comprehensive (loss) income
(871
)
 
3,999

Net transfer from Rayonier (b)
(35,419
)
 

Balance, end of period
$
(75,989
)
 
$
(60,671
)
(a)
These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 9Employee Benefit Plans for additional information.
(b)
Prior to the Distribution, certain of the Company’s employees participated in employee benefit plans sponsored by Rayonier. The Company did not record an asset, liability or accumulated other comprehensive loss to recognize the funded status of the Rayonier plans on the consolidated balance sheet until the Distribution. See Note 5Stockholders' (Deficit) Equity for additional information.

7.
OTHER OPERATING EXPENSE (INCOME), NET
Other operating expense, net was comprised of the following:
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2014
 
September 30, 2013
 
September 27, 2014
 
September 30, 2013
Loss on sale or disposal of property, plant and equipment
$
271

 
$
278

 
$
988

 
$
1,260

One-time separation and legal costs
2,774

 
(175
)
 
23,454

 
2,825

Increase to liabilities for disposed operations resulting from separation from Rayonier (a)

 

 
18,419

 

Environmental reserve adjustment
1,500

 

 
1,500

 

Miscellaneous expense (income)
(27
)
 
(247
)
 
439

 
(324
)
Total
$
4,518

 
$
(144
)
 
$
44,800

 
$
3,761


8


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

(a) The Company is subject to certain legal requirements relating to the provision of annual financial assurance regarding environmental remediation and post closure care at certain disposed sites. To comply with these requirements, the Company purchased surety bonds from an insurer, with the Company’s repayment obligations (if the bonds are drawn upon) secured by the issuance of a letter of credit by the Company’s revolving credit facility lender. As a result of the Distribution and its obligations to procure financial assurance annually for the foreseeable future, the Company recorded a corresponding increase to liabilities for disposed operations. See Note 12Guarantees and Note 14Liabilities for Disposed Operations for additional information.

8.
CONTINGENCIES
The Company is engaged in various legal actions, including certain proceedings relating to environmental matters, and has been named as a defendant in various other lawsuits and claims arising in the normal course of business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, it has in certain cases retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance and general liability. These other lawsuits and claims, either individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

9.
EMPLOYEE BENEFIT PLANS
The Company has three qualified non-contributory defined benefit pension plans covering a significant majority of its employees and an unfunded plan that provides benefits in excess of amounts allowable in the qualified plans under current tax law. All qualified plans and the unfunded excess plan are closed to new participants. Employee benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change.
The net pension and postretirement benefit costs that have been recorded are shown in the following tables:
 
Pension
Postretirement
 
Three Months Ended
 
Three Months Ended
 
September 27, 2014
 
September 30, 2013
 
September 27, 2014
 
September 30, 2013
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost
$
1,510

 
$
698

 
$
162

 
$
288

Interest cost
3,788

 
1,725

 
191

 
174

Expected return on plan assets
(5,934
)
 
(3,128
)
 

 

Amortization of prior service cost
296

 
323

 
4

 
39

Amortization of losses
2,812

 
1,623

 
133

 
63

Amortization of negative plan amendment

 

 
(134
)
 
(34
)
Net periodic benefit cost
$
2,472

 
$
1,241

 
$
356

 
$
530



9


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

 
Pension
 
Postretirement
 
Nine Months Ended
 
Nine Months Ended
 
September 27, 2014
 
September 30, 2013
 
September 27, 2014
 
September 30, 2013
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost
$
2,589

 
$
2,092

 
$
476

 
$
742

Interest cost
7,591

 
5,175

 
497

 
564

Expected return on plan assets
(12,399
)
 
(9,386
)
 

 

Amortization of prior service cost
865

 
969

 
12

 
19

Amortization of losses
4,808

 
4,871

 
377

 
439

Amortization of negative plan amendment

 

 
(402
)
 

Net periodic benefit cost
$
3,454

 
$
3,721

 
$
960

 
$
1,764

In 2014, the Company has no mandatory pension contribution requirements and does not expect to make any discretionary contributions.
Shared Pension and Postretirement Plans
Prior to the Distribution, Rayonier provided defined benefit pension and postretirement health and life insurance benefits to certain Company employees. As such, these liabilities were not reflected in the Company’s combined balance sheets prior to the Distribution. On June 27, in connection with the Distribution, these liabilities, totaling $73.8 million, were transferred from Rayonier to the Company and are reflected in the Balance Sheet as of September 27, 2014.


10.
EARNINGS PER SHARE OF COMMON STOCK
On June 27, 2014, 42,176,565 shares of our common stock were distributed to Rayonier shareholders in conjunction with the Distribution. For comparative purposes, and to provide a more meaningful calculation of weighted-average shares outstanding, we have assumed this amount to be outstanding as of the beginning of each period prior to the Distribution presented in the calculation of weighted-average shares. Prior to separation, there were no dilutive shares since the Company had no outstanding equity awards.
The following table provides details of the calculations of basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2014
 
September 30, 2013
 
September 27, 2014
 
September 30, 2013
Net income
$
19,408

 
$
39,966

 
$
54,917

 
$
168,967

 
 
 
 
 
 
 
 
Shares used for determining basic earnings per share of common stock
42,167,014

 
42,176,565

 
42,160,559

 
42,176,565

Dilutive effect of:
 
 
 
 
 
 
 
Stock options
68,799

 

 
69,600

 

Performance and restricted shares
12,157

 

 
10,289

 

Shares used for determining diluted earnings per share of common stock
42,247,970

 
42,176,565

 
42,240,448

 
42,176,565

Basic earnings per share (not in thousands)
$
0.46

 
$
0.95

 
$
1.30

 
$
4.01

Diluted earnings per share (not in thousands)
$
0.46

 
$
0.95

 
$
1.30

 
$
4.01



10


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

Anti-dilutive shares excluded from the computation of diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2014
 
September 30, 2013
 
September 27, 2014
 
September 30, 2013
Stock options
179,693

 

 
174,679

 

Restricted shares
109,894

 

 
37,444

 

Total
289,587

 

 
212,123

 


11.
FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The Accounting Standards Codification established a three-level hierarchy that prioritizes the inputs used to measure fair value as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices included in Level 1.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table presents the carrying amount, estimated fair values and categorization under the fair value hierarchy of financial instruments held by the Company at September 27, 2014, using market information and what management believes to be appropriate valuation methodologies under generally accepted accounting principles:
 
September 27, 2014
Asset (liability)
Carrying
Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
Cash and cash equivalents
$
28,163

 
$
28,163

 
$

Current maturities of long-term debt
(8,400
)
 

 
(8,400
)
Long-term debt
(938,471
)
 

 
(910,625
)

The Company uses the following methods and assumptions in estimating the fair value of its financial instruments:
Cash and cash equivalents — The carrying amount is equal to fair market value.
Debt — The fair value of fixed rate debt is based upon quoted market prices for debt with similar terms and maturities. The variable rate debt adjusts with changes in the market rate, therefore the carrying value approximates fair value.

12.
GUARANTEES
The Company provides financial guarantees as required by creditors, insurance programs, and various governmental agencies. As of September 27, 2014, the following financial guarantees were outstanding:
Financial Commitments
 
Maximum Potential
Payment
 
Carrying Amount
of Liability
Standby letters of credit (a)
 
$
26,572

 
$

Surety bonds (b)
 
55,652

 
19,106

Total financial commitments
 
$
82,224

 
$
19,106

(a)
The letters of credit primarily provide credit support for surety bonds issued to comply with financial assurance legal requirements relating to environmental remediation of disposed sites. The letter of credit will expire during 2015 and will be renewed as required.

11


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

(b)
Rayonier Advanced Materials purchases surety bonds primarily to comply with financial assurance legal requirements relating to environmental remediation and post closure care and to provide collateral for the Company’s workers’ compensation program. These surety bonds expire at various dates during 2015 and 2019. They are expected to be renewed annually as required. See Note 7Other Operating Expense (Income), Net.
 

13.
INCENTIVE STOCK PLANS
The Rayonier Advanced Materials Incentive Stock Plan (“the Stock Plan”) provides for up to 5.2 million shares of stock to be granted for incentive stock options, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and restricted stock units, subject to certain limitations. At September 27, 2014, approximately 4.0 million shares were available for future grants under the Stock Plan.
In connection with the separation from Rayonier, incentive stock options, performance shares and restricted stock awards issued to employees and directors under the Rayonier Incentive Stock Plan prior to the Distribution were adjusted or converted, as applicable, into new awards using formulas generally designed to preserve the value of the awards immediately prior to the Distribution.
The Employee Matters Agreement between Rayonier and the Company, which was executed in connection with the Distribution and filed with the Form 10, describes how the Rayonier stock awards will be treated. In summary:
Stock Options: Rayonier stock options were converted into both an adjusted Rayonier stock option and a Company stock option, with adjustments made to the exercise prices and number of shares in order to preserve the aggregate intrinsic value of the original award as measured immediately before and immediately after the Distribution.
Restricted Stock: Holders of Rayonier restricted stock, including Rayonier non-employee directors, retained those awards and also received one share of Company restricted stock for every three shares of Rayonier restricted stock held prior to spin-off.
Performance Share Awards
Performance-based stock unit awards granted in 2012 (with a 2012-2014 performance period) will continue to be subject to the same performance criteria as applied immediately prior to the separation, except that total shareholder return at the end of the performance period will be based on the combined stock prices of Rayonier and the Company and any payment with respect to a Rayonier Advanced Materials performance share award will be made in shares of the Company’s common stock. The number of shares, if any, that are ultimately awarded is contingent upon the Company’s total shareholder return versus selected peer group companies. The conversion ratio for the 2012 performance share awards is between 0 and 200 percent of target. The payout is based on a market condition and as such, the awards are valued using a Monte Carlo simulation model. The model generates the fair value of the award at the grant date, which is then amortized over the vesting period. The Company has reserved 83,454 shares of common stock for these awards as of September 27, 2014.
Performance-based stock unit awards granted in 2013 (with a 2013-2015 performance period) were canceled as of the distribution date and replaced with restricted stock awards of the Company that will vest 24 months after the distribution date, generally subject to the holder’s continued employment.
Performance-based stock unit awards granted in 2014 (with a 2014-2016 performance period) were canceled and replaced with performance-based restricted stock of the Company and will be subject to the achievement of performance criteria that relate to the post-separation business during a performance period ending December 31, 2016. The number of shares, if any, that are ultimately awarded is contingent upon the Company’s total shareholder return versus selected peer group companies. The conversion ratio for the 2014 performance share awards is between 0 and 200 percent of target. The payout is based on a market condition and as such, the awards are valued using a Monte Carlo simulation model. The model generates the fair value of the award at the grant date, which is then amortized over the vesting period. The Company has reserved 313,423 shares of common stock for these awards as of September 27, 2014.
The adjusted awards resulted in incremental compensation expense of $2.3 million that will be recognized over a two year period following the Distribution.

12


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

The Company’s total stock based compensation cost, including allocated amounts, for the nine months ended September 27, 2014 and September 30, 2013 was $5.6 million and $4.8 million, respectively. These amounts may not reflect the cost of current or future equity awards nor results we would have experienced, or expect to experience, as an independent, publicly traded company.
Outstanding Awards
 
Stock Options
 
Restricted Stock
 
Performance-Based Stock Units
 
Performance-Based Restricted Stock
 
Options
 
Weighted Average Exercise Price
 
Awards
 
Weighted Average Grant Date Fair Value
 
Awards
 
Weighted Average Grant Date Fair Value
 
Awards
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2014

 
$

 

 
$

 

 
$

 

 
$

Awards granted in connection with spin-off
500,681

 
31.15

 
145,201

 
42.43

 
49,811

 
42.27

 
146,732

 
39.67

Granted
5,130

 
39.07

 
15,083

 
40.86

 

 

 
9,980

 
46.38

Forfeited
(228
)
 
39.03

 

 

 

 

 

 

Exercised or settled
(24,689
)
 
22.21

 
(1,875
)
 
33.82

 

 

 

 

Expired or canceled
(57
)
 
42.12

 

 

 

 

 

 

Outstanding at September 27, 2014
480,837

 
$
31.69

 
158,409

 
$
42.38

 
49,811

 
$
42.27

 
156,712

 
$
40.10

All option, restricted stock and performance share awards presented in this table are for Rayonier Advanced Materials stock only, including those awards held by Rayonier Inc. employees.
As of September 27, 2014, unrecognized compensation cost related to stock option awards was $2.5 million, which is expected to be recognized over a weighted average period of 0.9 years. Unrecognized compensation cost related to restricted stock awards was $6.3 million, which is expected to be recognized over a weighted average period of 1.8 years. Unrecognized compensation cost related to performance-based stock units and performance-based restricted stock awards was $6.3 million, which is expected to be recognized over a weighted average period of 2.6 years.
The Company issued a $4.0 million fixed award at the separation from Rayonier to be settled in the Company’s common stock. The award will vest on August 31, 2018 contingent on certain factors. The number of shares issued will be determined based on an average of the stock’s closing price prior to vesting.

14.
LIABILITIES FOR DISPOSED OPERATIONS
In accordance with the Separation Agreement, as between Rayonier and the Company, the Company assumed certain environmental liabilities not included in the Company’s historical combined financial statements, as these operations were previously managed by Rayonier. These environmental liabilities relate to previously disposed operations, which include Rayonier’s Port Angeles, Washington dissolving pulp mill that was closed in 1997; Rayonier’s wholly-owned subsidiary, Southern Wood Piedmont Company (“SWP”), which ceased operations other than environmental investigation and remediation activities in 1989; and other miscellaneous assets held for disposition. SWP owns or has liability for ten inactive former wood treating sites that are subject to the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and/or other similar federal or state statutes relating to the investigation and remediation of environmentally-impacted sites.


13


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

An analysis of the liabilities for disposed operations since the separation follows:
 
September 27,
 
2014
Balance, beginning of period
$

Net transfer of liabilities with Rayonier
73,840

Expenditures charged to liabilities
(2,151
)
Increase to liabilities (a)
20,019

Balance, end of period
91,708

Less: Current portion
(7,515
)
Non-current portion
$
84,193


(a) The increase to liabilities is primarily due to certain legal requirements relating to the provision of annual financial assurance regarding environmental remediation and post closure care at certain disposed sites. The Company is subject to these requirements as a result of the Distribution. To comply with the requirements, the Company purchased surety bonds from an insurer, with the Company’s repayment obligations (if the bonds are drawn upon) secured by the issuance of a letter of credit by the Company’s revolving credit facility lender. As a result of its obligations to procure financial assurance annually for the foreseeable future, the Company recorded an $18.4 million increase to liabilities for disposed operations. See Note 12Guarantees for additional information.

Below are the disclosures for specific site liabilities where current estimates exceed 10 percent of the total liabilities for disposed operations at September 27, 2014. An analysis of the activity from the separation to September 27, 2014 is as follows:
 
Activity (in millions)
 
 
Liabilities Assumed at Separation
 
Expenditures
 
Increase
(Reduction)
to
Liabilities
 
September 27,
2014
Liability
Augusta, Georgia
 
$
10.8

 
$
(0.3
)
 
$
7.3

 
$
17.8

Spartanburg, South Carolina
 
10.9

 
(0.3
)
 
5.0

 
15.6

East Point, Georgia
 
9.4

 
(0.4
)
 
4.3

 
13.3

Baldwin, Florida
 
10.2

 
(0.3
)
 
2.1

 
12.0

Other SWP sites
 
18.1

 
(0.4
)
 
1.1

 
18.8

Total SWP
 
59.4

 
(1.7
)
 
19.8

 
77.5

Port Angeles, Washington
 
8.1

 
(0.4
)
 
0.1

 
7.8

All other sites
 
6.4

 
(0.1
)
 
0.1

 
6.4

TOTAL
 
$
73.9

 
$
(2.2
)
 
$
20.0

 
$
91.7


A brief description of each of these sites is as follows:
Augusta, Georgia — SWP operated a wood treatment plant at this site from 1928 to 1988. The majority of visually contaminated surface soils have been removed, and remediation activities currently consist primarily of a groundwater treatment and recovery system. The site operates under a 10-year hazardous waste permit issued pursuant to the Resource Conservation and Recovery Act, which expires in 2014 and is currently in the renewal process. Current cost estimates could change if recovery or discharge volumes increase or decrease significantly, or if changes to current remediation activities are required in the future. Total spending as of September 27, 2014 was $69.7 million. Liabilities are recorded to cover obligations for the estimated remaining remedial, monitoring activities and financial assurance costs through 2033.
Spartanburg, South Carolina — SWP operated a wood treatment plant at this site from 1925 to 1989. Remediation activities include: (1) a recovery system and biological wastewater treatment plant, (2) an ozone-sparging system treating soil and groundwater and (3) an ion-exchange resin system treating groundwater. In 2012, SWP entered into a consent decree with the South Carolina Department of Health and Environmental Control which governs future investigatory and assessment activities at the site. Depending on the results of this investigation and assessment, additional remedial actions may be required in the future. Therefore,

14


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

current cost estimates could change. Total spending as of September 27, 2014 was $41.4 million. Liabilities are recorded to cover obligations for the estimated remaining assessment, remedial, monitoring activities and financial assurance costs through 2033.
East Point, Georgia — SWP operated a wood treatment plant at this site from 1908 to 1984. This site operates under a 10-year Resource Conservation and Recovery Act hazardous waste permit, which is currently in the renewal process. In 2009, SWP entered into a consent order with the Environmental Protection Division of the Georgia Department of Natural Resources which requires that SWP perform certain additional investigatory, analytical and potentially, remedial activity. Therefore, while active remedial measures are currently ongoing, additional remedial measures may be necessary in the future. Total spending as of September 27, 2014 was $22.8 million. Liabilities are recorded to cover obligations for the estimated remaining assessment, remedial, monitoring activities and financial assurance costs through 2033.
Baldwin, Florida — SWP operated a wood treatment plant at this site from 1954 to 1987. This site operates under a 10-year hazardous waste permit issued pursuant to the Resource Conservation and Recovery Act, which expires in 2016. Visually contaminated surface soils have been removed, and current remediation activities primarily consist of a groundwater recovery and treatment system. Investigation and assessment of other potential areas of concern are ongoing in accordance with the facility’s Resource Conservation and Recovery Act permit and additional remedial activities may be necessary in the future. Therefore, current cost estimates could change. Total spending as of September 27, 2014 was $22.5 million. Liabilities are recorded to cover obligations for the estimated remaining assessment, remedial, monitoring activities and financial assurance costs through 2033.
Port Angeles, Washington — Rayonier operated a dissolving pulp mill at this site from 1930 until 1997. The site and the adjacent marine areas (a portion of Port Angeles harbor) have been in various stages of the assessment process under the Washington Model Toxics Control Act (“MTCA”) since about 2000, and several voluntary interim soil clean-up actions have also been performed during this time. In 2010, Rayonier entered into an agreed order with the Washington Department of Ecology (“Ecology”), under which the MTCA investigatory, assessment and feasibility and alternatives study process will be completed on a set timetable, subject to approval of all reports and studies by Ecology. Upon completion of all work required under the agreed order and negotiation of an approved remedy, additional remedial measures for the site and adjacent marine areas may be necessary in the future. Total spending as of September 27, 2014 was $44.3 million. Liabilities are recorded to cover obligations for the estimated assessment, remediation, monitoring obligations and financial assurance costs that are deemed probable and estimable at this time.
The Company is exposed to the risk of reasonably possible additional losses in excess of the established liabilities. As of September 27, 2014, this amount could range up to $33 million, attributable to several of the above described and other applicable sites, and arises from uncertainty over the availability, feasibility and effectiveness of certain remediation technologies, additional or different contamination that may be discovered, development of new or more effective environmental remediation technologies, potential changes in applicable law and regulations, and the exercise of discretion in interpretation of applicable law and regulations by governmental agencies.
Subject to the previous paragraph, the Company believes established liabilities are sufficient for probable costs expected to be incurred over the next 20 years with respect to its disposed operations. Remedial actions for these sites vary, but include on-site (and in certain cases off-site) removal or treatment of contaminated soils and sediments, recovery and treatment/remediation of groundwater, and source remediation and/or control.

15.
DEBT
The Company’s debt consisted of the following:
 
September 27, 2014
Term A-1 Loan Facility borrowings due 2019 at a variable interest rate of 1.65% at September 27, 2014 (a)
$
108,332

Term A-2 Loan Facility borrowings due 2021 at a variable interest rate of 1.23% at September 27, 2014 (b)
288,539

Senior Notes due 2024 at a fixed interest rate of 5.50%
550,000

Total debt
946,871

Less: Current maturities of long-term debt
(8,400
)
Long-term debt
$
938,471


(a)
The Term A-1 Loan includes an unamortized issue discount of approximately $293 thousand at September 27, 2014. Upon maturity the liability will be $109 million.

15


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

(b)
The Term A-2 Loan includes an unamortized issue discount of approximately $736 thousand at September 27, 2014. Upon maturity the liability will be $289 million.

Principal payments due during the next five years and thereafter are as follows:
Remaining 2014
$
2,100

2015
8,400

2016
8,400

2017
9,775

2018
11,150

Thereafter
908,075

Total Principal Payments
$
947,900


5.50% Senior Notes due 2024
On May 22, 2014, the Company issued $550 million in aggregate principal amount of 5.50% senior notes due 2024 (the “Senior Notes”). The Senior Notes were issued and sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the U.S. Securities Act of 1933, as amended (the “Securities Act”) and non-U.S. persons pursuant to Regulation S under the Securities Act.
On or after June 1, 2019, the Company may redeem the Senior Notes, in whole or in part, at the redemption prices specified in the indenture governing the Senior Notes plus accrued and unpaid interest to, but excluding, the redemption date. Prior to June 1, 2019, the Company may redeem some or all of the Senior Notes at a redemption price of 100% of the principal amount, plus accrued and unpaid interest, to, but excluding, the redemption date, plus a “make-whole” premium. Prior to June 1, 2017, the Company may redeem up to 40% of the Senior Notes using proceeds from certain equity offerings in accordance with the terms of the indenture.

Senior Secured Credit Facilities
On June 26, 2014, the Company entered into senior secured credit facilities comprised of a $110 million senior secured term loan facility (the “Term A-1 Loan Facility”), a $290 million senior secured term loan facility (the “Term A-2 Loan Facility” and together with the Term A-1 Facility, the “Term Loan Facilities”) and a $250 million senior secured revolving credit facility (which includes letter of credit and swingline loans subfacilities) (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “Credit Facilities”). The Credit Facilities are secured by substantially all present and future material assets, including the Jesup plant real property (but excluding the Fernandina Beach plant).
The loans under the Credit Facilities will bear interest at either (a) a base rate or (b) an adjusted LIBOR rate, in each case, plus an applicable margin (the “Applicable Margin”), in the case of base rate loans, ranging between 0.25% and 1.00%, and in the case of adjusted LIBOR rate loans, ranging between 1.25% and 2.00%. The Applicable Margin for borrowings under the Credit Facilities is based on a consolidated total net leverage-based pricing grid.
$110 million Senior Secured Term Loan
The Term A-1 Loan matures in June 2019. On June 30, 2014, the Company borrowed $75 million under the Term A-1 Loan Facility. At September 27, 2014, the carrying value of the debt outstanding was $108 million. The interest rate is LIBOR plus 1.5%. During the third quarter, the Company made $1.4 million in principal debt repayments on the Term A-1 Loan Facility.

$290 million Senior Secured Term Loan
The Term A-2 Loan matures in June 2021. At September 27, 2014 the carrying value of the debt outstanding was $289 million. The effective interest rate is LIBOR plus 1.08%, after consideration of a 0.67% cash patronage benefit. During the third quarter, the Company made $0.7 million in principal debt repayments on the Term A-2 Loan Facility.

$250 million Senior Secured Revolving Credit Facility
The Revolving Credit Facility matures in June 2019. As of September 27, 2014, the Company had no net activity on the Revolving Credit Facility. At September 27, 2014, the Company had $223 million of available borrowings under the Revolving Credit Facility, net of $27 million to secure its outstanding letters of credit.

16


RAYONIER ADVANCED MATERIALS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

Debt Covenants
The Credit Facilities contain a number of covenants that restrict the ability of the Company and its restricted subsidiaries to take certain specified actions, subject to certain significant exceptions, including: creating liens; incurring indebtedness; making investments and acquisitions; engaging in mergers and other fundamental changes; making dispositions; making restricted payments, including dividends and distributions; and consummating transactions with affiliates. Under the Credit Facilities, the Company will be required to maintain a consolidated first lien secured net leverage ratio of no greater than 3.00 to 1.00 and an interest coverage ratio of no less than 3.00 to 1.00. Covenants will be tested quarterly on a pro forma and trailing twelve month basis. Additionally, the Credit Facilities contain customary affirmative covenants for credit facilities of this kind and customary events of default (subject, in certain cases, to customary grace or cure periods), including, without limitation, payment defaults, breach of covenant defaults, bankruptcy defaults, judgment defaults, defaults under certain other indebtedness and changes in control.
The indenture governing the Senior Notes contains various customary covenants that restrict the ability of the Company and its restricted subsidiaries to take certain specified actions, subject to certain significant exceptions, including: creating liens; incurring indebtedness; making investments and acquisitions; engaging in mergers and other fundamental changes; making dispositions; making restricted payments, including dividends and distributions; and consummating transactions with affiliates. Additionally, the Senior Notes contain customary affirmative covenants and customary events of default (subject, in certain cases, to customary grace or cure periods), including, without limitation, payment defaults, breach of covenant defaults, bankruptcy defaults, judgment defaults, defaults under certain other indebtedness and changes in control. At September 27, 2014, the Company was in compliance with all covenants.

16.
OTHER ASSETS
As of September 27, 2014 and December 31, 2013, the Company’s other assets included the following:
 
September 27, 2014
 
December 31, 2013
Deferred income tax assets, non-current (a)
$
30,337

 
$

Manufacturing and maintenance supplies
22,093

 
20,960

Debt issuance costs, net of amortization (b)
13,808

 

Timber deeds
11,107

 

Disposed operations assets (c)
11,079

 

Deposits
3,945

 
27

Deferred software charges
1,975

 
2,227

Other non-current assets
8,932

 
4,709

Total other assets
$
103,276

 
$
27,923

(a)
Deferred tax assets are primarily due to the transfer of pension and disposition liabilities from Rayonier at separation. See Note 9Employee Benefit Plans and Note 14Liabilities for Disposed Operations for additional information.
(b)
Debt issuance costs are capitalized and amortized to interest expense over the term of the debt to which they relate using a method that approximates the interest method. See Note 15 - Debt for additional information.
(c)
Disposed operations assets were transferred with the liabilities from Rayonier at separation. See Note 14Liabilities for Disposed Operations for additional information.


17




Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
When we refer to “we,” “us,” “our,” or “the Company,” we mean Rayonier Advanced Materials Inc. and its consolidated subsidiaries. References herein to “Notes to Financial Statements” refer to the Notes to the Consolidated Financial Statements of Rayonier Advanced Materials Inc. included in Item 1 of this Report.
The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors which may affect future results. Our MD&A should be read in conjunction with the financial statements and supplementary data included in the Company’s Audited Combined Financial Statements for the year ended December 31, 2013, included in our Form 10 and information contained in our subsequent Form 8-K’s, and other reports to the U.S. Securities and Exchange Commission (the “SEC”).
Forward-Looking Statements
Certain statements in this document regarding anticipated financial, business, legal or other outcomes, including earnings guidance, if any, business and market conditions, outlook and other similar statements relating to Rayonier Advanced Materials’ future events, developments or financial or operational performance or results, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as “may,” “will,” “should,” “expect,” “estimate,” “believe,” “intend,” “anticipate” and other similar language. However, the absence of these or similar words or expressions does not mean a statement is not forward-looking. While we believe these forward-looking statements are reasonable when made, forward-looking statements are not guarantees of future performance or events and undue reliance should not be placed on these statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance these expectations will be attained and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. The Risk Factors contained in the preliminary information statement attached as Exhibit 99.1 to the Form 10, among others, could cause actual results or events to differ materially from the Company’s historical experience and those expressed in forward-looking statements made in this document.
Forward-looking statements are only as of the date they are made, and the Company undertakes no duty to update its forward-looking statements except as required by law. You are advised, however, to review any disclosures we made on our report Form 10, and any further disclosures we make on related subjects in our subsequent Forms 10-Q, 10-K, 8-K and other reports to the SEC.
 
BUSINESS
Rayonier Advanced Materials Inc. (“Rayonier Advanced Materials”, or the “Company”) is a leading manufacturer of high-value cellulose products with production facilities in Jesup, Georgia and Fernandina Beach, Florida, which have a combined annual production capacity of approximately 675,000 metric tons. These products are sold throughout the world to companies for use in various industrial applications and to produce a wide variety of products, including cigarette filters, foods, pharmaceuticals, textiles and electronics. Approximately 58 percent of performance fibers sales are to export customers, primarily in Asia and Europe.
The Company’s primary products consist of the following:
Cellulose specialties are primarily used in dissolving chemical applications that require a highly purified form of cellulose. The Company concentrates on producing the most high-value, technologically-demanding forms of cellulose specialties products, such as cellulose acetate and high purity cellulose ethers, and is a leading supplier of these products.
Commodity viscose is primarily sold to producers of viscose staple fibers, which are used in the manufacture of textiles for clothing and other fabrics, and in non-woven applications such as baby wipes, cosmetic and personal wipes, industrial wipes and mattress ticking.
Absorbent materials consist of fibers used for absorbent hygiene products. These fibers are typically referred to as fluff fibers and are used as an absorbent medium in products such as disposable baby diapers, feminine hygiene products, incontinence pads, convalescent bed pads, industrial towels and wipes and non-woven fabrics.

The Separation
On May 27, 2014, the board of directors of Rayonier Inc. (“Rayonier”) approved the separation of its performance fibers segment from Rayonier to form an independent, publicly traded corporation named Rayonier Advanced Materials Inc. (“the Company”). Subsequently, the Company entered into a separation and distribution agreement with Rayonier (the “Separation Agreement”), whereby Rayonier agreed to distribute 100% of the outstanding common stock of the Company to Rayonier

18



shareholders in a tax-free distribution (the “Distribution”). As a condition to the Distribution, Rayonier received a private letter ruling from the Internal Revenue Service to the effect that, based on certain facts, assumptions, representations and undertakings set forth in the ruling, for U.S. federal income tax purposes, the Distribution of the Company’s stock was not taxable to Rayonier or U.S. holders of Rayonier common shares, except in respect to cash received in lieu of fractional share interests. A registration statement on Form 10 (the “Form 10”), as amended through the time of its effectiveness, was filed by the Company with the SEC and was declared effective on June 13, 2014.

The Distribution was made on June 27, 2014 to Rayonier shareholders of record as of the close of business on June 18, 2014. Holders of Rayonier common stock received one share of the Company’s common stock for every three shares of Rayonier held on the record date. This resulted in the distribution of 42,176,565 shares of the Company’s common stock to the Rayonier shareholders after the market closed on June 27, 2014. In addition, the Company made special cash distributions to Rayonier in an aggregate amount of $906.2 million and, as between Rayonier and the Company, assumed certain liabilities associated with pension, other post-retirement employee benefits and environmental remediation. After consideration of the cash retained by the Company at the date of Distribution, as well as cash flow impacts for the nine months ending September 27, 2014, the net distribution to Rayonier was $956.6 million.
Following the Distribution, Rayonier retained no equity ownership interest in the Company, and each company now has independent public ownership, boards of directors and management. As a result of the Distribution, the Company is now an independent public company and its common stock is listed under the symbol “RYAM” on the New York Stock Exchange.

Basis of Presentation

The Company’s financial statements prior to the Separation were prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of its former parent, Rayonier. The Company’s combined financial statements include certain expenses of its former parent which were allocated to it for certain functions, including general corporate expenses related to finance, legal, information technology, human resources, compliance, shared services, insurance, employee benefits and incentives and stock-based compensation. The Company considers the expense allocation methodology and results to be reasonable for all periods presented. However, these allocations may not be indicative of the actual expenses it would have incurred as an independent public company or of the costs it will incur in the future. All financial information presented after the Separation represents the consolidated results of Rayonier Advanced Materials.

Critical Accounting Policies and Use of Estimates
The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates. For a full description of our critical accounting policies, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10.


19



Results of Operations

 
Three Months Ended
 
Nine Months Ended
Financial Information (in millions)
September 27, 2014
 
September 30, 2013
 
September 27, 2014
 
September 30, 2013
Net Sales
 
 
 
 
 
 
 
Cellulose specialties
$
223

 
$
200

 
$
630

 
$
680

Absorbent materials
18

 
9

 
29

 
66

Commodity viscose and other
13

 
17

 
51

 
19

Total Net Sales
254

 
226

 
710

 
765

 
 
 
 
 
 
 
 
Cost of Sales
198

 
158

 
547

 
516

Gross Margin
56

 
68

 
163

 
249

Selling and general expenses
9

 
8

 
27

 
27

Other operating expense
5

 

 
45

 
4

Operating Income
42

 
60

 
91

 
218

Interest Expense, Interest Income and Other
(10
)
 

 
(13
)
 

Income Before Income Taxes
32

 
60

 
78

 
218

Income Tax Expense
(13
)
 
(20
)
 
(23
)
 
(49
)
Net Income
$
19

 
$
40

 
$
55

 
$
169

 
 
 
 
 
 
 
 
Other Data
 
 
 
 
 
 
 
Sales Prices ($ per metric ton)
 
 
 
 
 
 
 
Cellulose specialties
$
1,727

 
$
1,941

 
$
1,771

 
$
1,903

Absorbent materials
718

 
603

 
685

 
639

Commodity viscose and other
699

 
789

 
698

 
789

Sales Volumes (thousands of metric tons)
 
 
 
 
 
 
 
Cellulose specialties
129

 
103

 
356

 
357

Absorbent materials
26

 
13

 
42

 
98

Commodity viscose and other
13

 
19

 
60

 
19

Total Tons
168

 
135

 
458

 
474

 
 
 
 
 
 
 
 
Gross Margin %
22.0
%
 
30.1
%
 
23.0
%
 
32.5
%
Operating Margin %
16.4
%
 
26.3
%
 
12.9
%
 
28.6
%
Effective Tax Rate %
39.6
%
 
33.0
%
 
30.0
%
 
23.0
%
Sales (in millions)
September 30, 2013
 
Changes Attributable to:
 
September 27, 2014
Three Months Ended
Price
 
Volume/
Mix
 
Cellulose specialties
$
200

 
$
(26
)
 
$
49

 
$
223

Absorbent materials
9

 
2

 
7

 
18

Commodity viscose and other
17

 
(6
)
 
2

 
13

Total Sales
$
226

 
$
(30
)
 
$
58

 
$
254

For the three months ended September 27, 2014, total sales increased $28 million, or approximately 12 percent, primarily due to higher cellulose specialties volumes, reflecting the timing of customer orders, partially offset by cellulose specialty prices, as a result of the annual price negotiations.

20



Sales (in millions)
September 30, 2013
 
Changes Attributable to:
 
September 27, 2014
Nine Months Ended
Price
 
Volume/
Mix
 
Cellulose specialties
$
680

 
$
(47
)
 
$
(3
)
 
$
630

Absorbent materials
66

 
2

 
(39
)
 
29

Commodity viscose and other
19

 
(6
)
 
38

 
51

Total Sales
$
765

 
$
(51
)
 
$
(4
)
 
$
710

Year-to-date sales were $55 million lower, or approximately 7 percent, for the nine months ended September 27, 2014, reflecting an average price decline of 7 percent from 2013 pricing. Year-to-date absorbent materials sales volumes decreased and commodity viscose sales volumes increased from the prior year periods, reflecting a shift in production. The shift in production was made possible due to the 2013 completion of the Cellulose Specialties Expansion project which allows production of either cellulose specialties, commodity viscose or absorbent materials.
Operating Income (in millions)
September 30, 2013
 
Changes Attributable to:
 
September 27, 2014
 
Cellulose Specialties
 
Costs/Mix/Other
 
Three Months Ended
Price
 
Volume
 
 
Operating Income
$
59

 
$
(26
)
 
$
20

 
$
(11
)
 
$
42

Operating Margin %
26.3
%
 
(9.7
)%
 
4.7
%
 
(4.9
)%
 
16.4
%
For the three month period ending September 27, 2014, operating income and margin percentage declined $17 million and 9.9 percent as lower cellulose specialties prices and increased costs were partially offset by higher cellulose specialties volumes. Cost/Mix/Other includes the negative impact of higher wood costs of $2 million due to wet weather in the first half of 2014, increased energy cost, as a result of equipment issues which occurred in the second quarter, of $3 million and one-time separation and legal costs of $3 million.
Operating Income (in millions)
September 30, 2013
 
Changes Attributable to:
 
September 27, 2014
 
Cellulose Specialties
 
Costs/Mix/Other
 
Nine Months Ended
Price
 
Volume
 
 
Operating Income
$
218

 
$
(47
)
 
$
(1
)
 
$
(79
)
 
$
91

Operating Margin %
28.6
%
 
(4.7
)%
 
(0.1
)%
 
(10.9
)%
 
12.9
%
For the nine month period ending September 27, 2014, operating income and margin percentage declined $127 million and 15.7 percent due to lower cellulose specialties prices and increased costs. Cost/Mix/Other includes the negative impact of higher wood costs of $14 million due to wet weather, energy costs of $10 million due to weather and equipment issues, depreciation of $11 million from the start-up of CSE and one-time separation and legal costs of $42 million. Included in the one-time separation costs and legal costs was an $18 million expense for financial assurance related to disposed operations. See Note 14 - Liabilities for Disposed Operations for additional information.
Interest Expense/Income and Income Tax Expense
Third quarter and year-to-date interest was $9.5 million and $12.7 million, respectively, primarily related to Company’s debt issued in the second quarter of 2014. See Note 15 Debt for additional information on debt.
Our effective tax rate for the third quarter and the first nine months of 2014 was 39.6 percent and 30.0 percent, compared with 33.0 percent and 23.0 percent for the corresponding periods of 2013. The effective tax rate differs from the federal statutory rate of 35 percent primarily due to the manufacturing tax credit, state taxes, nondeductible expenses, the reversal of a tax reserve related to the taxability of the cellulosic biofuel producer credit (“CBPC”) for 2014 and the alternative fuel mixture credit (“AFMC”) for the CBPC exchange for 2013. See Note 3 —  Income Taxes for additional information.

Liquidity and Capital Resources
The Company’s operations have generally produced stable cash flows, which is its primary source of liquidity and capital resources. On June 26, 2014, the Company arranged a revolving credit facility with a borrowing capacity of $250 million. The credit facility contains customary covenants and events of default. Indebtedness under the revolving credit facility bears interest at either (a) a base rate or (b) an adjusted LIBOR rate, in each case, plus an applicable margin. Entering into the revolving credit facility also resulted in the Company paying customary fees, including administrative agent fees, upfront fees and other fees. The credit facility expires June 2019.

21



The Company incurred approximately $950 million of new debt to effect the Distribution. The debt consisted of $325 million of term loans, borrowings of $75 million under the Company’s revolving credit facility and $550 million of senior notes. Approximately, $906 million of borrowings from the new debt were distributed to Rayonier as described in “Certain Relationships and Related Person Transactions-The Separation Agreement-Cash Transfers” of the Company’s Form 10. On June 30, 2014, the $75 million of borrowings under the revolving credit facility was repaid by the Company with the proceeds of a delayed draw term loan.
The debt agreements contain various customary covenants. At September 27, 2014, the Company was in compliance with all covenants. As per disclosure required within our debt agreements, non-guarantors had no assets, revenues, covenant EBITDA or liabilities.
Following the distribution, the Company believes its cash flow and availability under its revolving credit facility, as well as its ability to access the capital markets, if necessary or desirable, will be adequate to fund its operations and anticipated long-term funding requirements, including capital expenditures, dividend payments, defined benefit plan contributions and repayment of debt maturities.
A summary of liquidity and capital resources is shown below (in millions of dollars):
 
September 27,
 
December 31,
 
2014
 
2013
Cash and cash equivalents (a)
$
28

 
$

Availability under the Revolving Credit Facility (b)
223

 

Total debt (c)
947

 

(a) Cash and cash equivalents consisted of cash, money market deposits, and time deposits with original maturities of 90 days or less.
(b) Availability under the revolving credit facility is reduced by stand-by letters of credit of approximately $27 million.
(c) See Note 15 Debt for additional information.
Cash Flows (in millions of dollars)
The following table summarizes our cash flows from operating, investing and financing activities for the nine months ended:
 
September 27, 2014
 
September 30, 2013
Cash provided by (used for):
 
 
 
Operating activities
$
128

 
$
189

Investing activities
(76
)
 
(220
)
Financing activities
(24
)
 
31

Cash provided by operating activities decreased $61 million due to lower operating results and higher non-cash charges for disposed operations in 2014.
Cash used for investing activities decreased $144 million primarily due to the completion of the CSE project in 2013, partially offset by a $13 million purchase of timber deeds in second quarter 2014.
Cash provided by financing activities decreased $55 million due debt issuance costs and net payments to the Company’s former parent, Rayonier. These were offset by $948 million of net issuances of debt. See Note 1Separation and Basis of Presentation for information on the net distribution to Rayonier and Note 15Debt for additional information on the debt.
Expected 2014 Expenditures
Capital expenditures in 2014 are expected to range between $75 million and $85 million. Income tax payments are expected to range between $35 million and $40 million. Environmental payments related to disposed operations are expected to be approximately $4 million in the second half of the year. The Company has no mandatory pension contributions in 2014 and does not expect to make any discretionary contributions during the balance of the year.

Performance and Liquidity Indicators
The discussion below is presented to enhance the reader’s understanding of our operating performance, liquidity, ability to generate cash and satisfy rating agency and creditor requirements. This information includes the following measures of financial results: Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”), Pro Forma EBITDA, Segment EBITDA and Adjusted Free Cash Flow. These measures are not defined by U.S. Generally Accepted Accounting Principles (“GAAP”) and the discussion of EBITDA and Adjusted Free Cash Flow is not intended to conflict with or change any of the GAAP disclosures

22



described above. Management considers these measures in addition to operating income to be important to estimate the enterprise and stockholder values of the Company, and for making strategic and operating decisions. In addition, analysts, investors and creditors use these measures when analyzing our operating performance, financial condition and cash generating ability. Management uses EBITDA, Pro Forma EBITDA and Segment EBITDA as performance measures and Adjusted Free Cash Flow as a liquidity measure.
EBITDA is defined by the SEC. Pro Forma EBITDA is defined as EBITDA before one-time separation and legal costs and environmental reserve adjustments. Segment EBITDA is defined as EBITDA before one-time separation and legal costs, environmental reserve adjustments and corporate costs.
Below is a reconciliation of Net Income to EBITDA for the respective periods (in millions of dollars):
 
Three Months Ended
 
Nine Months Ended
 
September 27, 2014
 
September 30, 2013
 
September 27, 2014
 
September 30, 2013
Net Income to EBITDA Reconciliation
 
 
 
 
 
 
 
Net Income
$
19

 
$
40

 
$
55

 
$
169

Interest, net
9

 

 
12

 

Income tax expense
13

 
20

 
24

 
50

Depreciation and amortization
24

 
22

 
62

 
51

EBITDA
65

 
82

 
153

 
270

One-time separation and legal costs
3

 

 
42

 
3

Environmental reserve adjustment
2

 

 
2

 

Pro Forma EBITDA
70

 
82

 
197

 
273

Allocated corporate costs
6

 
3

 
14

 
12

Segment EBITDA
$
76

 
$
85

 
$
211

 
$
285


EBITDA, Pro Forma EBITDA and Segment EBITDA for the three and nine months ended 2014 decreased from the prior year periods due to lower operating results and increased separation costs related to the spin-off from Rayonier.
Adjusted Free Cash Flow is defined as cash provided by operating activities adjusted for capital expenditures excluding strategic capital and subsequent tax benefits to exchange the AFMC for the CBPC. Adjusted Free Cash Flow is a non-GAAP measure of cash generated during a period which is available for dividend distribution, debt reduction, strategic acquisitions and repurchase of the Company’s common shares. Adjusted Free Cash Flow is not necessarily indicative of the Adjusted Free Cash Flow that may be generated in future periods.
Below is a reconciliation of Cash Flow from Operations to Adjusted Free Cash Flow for the respective periods (in millions of dollars):
 
Nine Months Ended
 
September 27, 2014
 
September 30, 2013
Cash Flow from Operations to Adjusted Free Cash Flow Reconciliation
 
 
 
Cash flow from operations
$
128

 
$
189

Capital expenditures (a)
(60
)
 
(82
)
Tax benefit due to exchange of AFMC for CBPC

 
(19
)
Adjusted Free Cash Flow
$
68

 
$
88


Cash used for investing activities
$
(76
)
 
$
(220
)
Cash (used for) provided by financing activities
$
(24
)
 
$
31

(a)
Capital expenditures exclude strategic capital expenditures which are deemed discretionary by management. Strategic capital totaled $13 million for the purchase of timber deeds and $2 million for the purchase of land from Rayonier for the nine months ended September 27, 2014. Strategic capital totaled $137 million for the CSE for the nine months ended September 30, 2013.
Adjusted Free Cash Flow decreased over the prior year due to lower sales while costs increased due to higher wood, energy, interest and corporate expenses. Adjusted Free Cash Flow generated in any period is not necessarily indicative of the amounts that may be generated in future periods.


23



Contractual Financial Obligations and Off-Balance Sheet Arrangements
See Note 12Guarantees for details on the letters of credit and surety bonds as of September 27, 2014.
The following table includes material additions to our contractual financial obligations table as presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contractual Financial Obligations of our Form 10:
Contractual Financial Obligations (in millions)
Total
 
Payments Due by Period
Remaining 2014
 
2015-2016
 
2017-2018
 
Thereafter
Long-term debt
$
940

 
$

 
$
11

 
$
21

 
$
908

Current maturities of long-term debt
8

 
2

 
6

 

 

Interest payments on long-term debt (a)
339

 
22

 
75

 
75

 
167

Postretirement obligations (b)

 

 

 

 

Operating leases — PP&E, offices (c)
3

 

 
1

 
1

 
1

Purchase obligations - environmental services (d)
5

 
1

 
1

 

 
3

Total contractual cash obligations
$
1,295

 
$
25

 
$
94

 
$
97

 
$
1,079

(a)
Projected interest payments for variable-rate debt were calculated based on outstanding principal amounts and interest rates as of September 27, 2014.
(b)
Upon separation we assumed a liability of $33 million in postretirement obligations. At this time it is uncertain when payments will be made. As a result, this amount has been excluded from the table above.
(c)
Primarily consists of the office lease for the Company’s corporate headquarters.
(d)
These obligations relate to various environmental monitoring and maintenance service agreements.

Outlook
Full year cellulose specialties volumes are expected to be comparable to 2013 with pro forma EBITDA of approximately $265 million. In the fourth quarter of 2014, cellulose specialties sales prices and volumes are expected to increase and production costs are anticipated to decline.
Markets for the Company’s cellulose specialties are currently over supplied and demand in certain end-use markets has slowed. The over supply is a result of production capacity expansions and competitors who produce both cellulose specialties and commodity viscose shifting production into more cellulose specialties.
Our full year 2014 performance is and will be subject to a number of risk variables and uncertainties, including those discussed under Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Forward-Looking Statements of this Form 10-Q and our Form 10.
Employee Relations
On April 30, 2014 collective bargaining agreements covering approximately 225 hourly employees at our Fernandina plant expired. On September 25, 2014, an initial vote on a proposed new contract was taken and the proposal was rejected by the unions. All parties have agreed to continue to work under the existing contracts while negotiations continue. While there can be no assurance, we expect to reach agreements with our unions; however, a work stoppage could have a material adverse effect on our business, results of operations and financial condition.


Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market and Other Economic Risks
We are exposed to various market risks, primarily changes in interest rates and commodity prices. Our objective is to minimize the economic impact of these market risks. We use derivatives in accordance with policies and procedures approved by the Audit Committee of our Board of Directors. Derivatives are managed by a senior executive committee whose responsibilities include initiating, managing and monitoring resulting exposures. We do not enter into financial instruments for trading or speculative purposes. At September 27, 2014, we had no derivatives outstanding.
Cyclical pricing of commodity market paper pulp is one of the factors which influences prices in the absorbent materials and commodity viscose product lines. Our cellulose specialty products’ prices are based on market supply and demand and are not correlated to commodity paper pulp prices. In addition, a majority of our cellulose specialty products are under long-term volume

24



contracts that extend through 2015 to 2017. The pricing provisions of these contracts are set in the fourth quarter in the year prior to the shipment.
As of September 27, 2014 we had $390 million of long-term variable rate debt which is subject to interest rate risk. At this borrowing level, a hypothetical one-percentage point increase/decrease in interest rates would result in a corresponding increase/decrease of approximately $4 million in interest payments and expense over a 12 month period. Our primary interest rate exposure on variable rate debt results from changes in LIBOR.
The fair market value of our long-term fixed interest rate debt is also subject to interest rate risk. However, we intend to hold most of our debt until maturity. The estimated fair value of our fixed-rate debt at September 27, 2014 was $521 million compared to the $550 million principal amount. We use quoted market prices to estimate the fair value of our debt. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise. A hypothetical one-percentage point increase/decrease in prevailing interest rates at September 27, 2014 would result in a corresponding decrease/increase in the fair value of our fixed-rate debt of approximately $40 million.
We may periodically enter into commodity forward contracts to fix some of our fuel oil and natural gas costs. The forward contracts partially mitigate the risk of a change in margins resulting from an increase or decrease in these energy costs. At September 27, 2014, we had no fuel oil or natural gas contracts outstanding.

25