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EX-32 - EXHIBIT 32 - RAYONIER ADVANCED MATERIALS INC.ex32q3201810-q.htm
EX-31.2 - EXHIBIT 31.2 - RAYONIER ADVANCED MATERIALS INC.ex312q3201810-q.htm
EX-31.1 - EXHIBIT 31.1 - RAYONIER ADVANCED MATERIALS INC.ex311q3201810-q.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 29, 2018
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
ryam-logoa51.jpg
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
 
 
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

The registrant had 51,060,954 shares of common stock, $.01 par value per share, outstanding as of November 1, 2018.




Table of Contents

Item
 
 
Page
 
 
Part I  Financial Information
 
1.
 
 
 
 
 
 
 
 
 
 
2.
 
3.
 
4.
 
 
 
Part II  Other Information
 
1.
 
1A.
 
2.
 
6.
 
 
 
 



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 29, 2018
 
September 23, 2017
 
September 29, 2018
 
September 23, 2017
Net Sales
$
544,339

 
$
209,717

 
$
1,608,051

 
$
612,358

Cost of Sales
(448,426
)
 
(177,597
)
 
(1,330,307
)
 
(508,573
)
Gross Margin
95,913

 
32,120

 
277,744

 
103,785

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
(31,002
)
 
(12,475
)
 
(78,927
)
 
(40,138
)
Duties
(816
)
 

 
(20,680
)
 

Other operating income (expense), net
(7,945
)
 
(871
)

(9,507
)
 
(3,322
)
Operating Income
56,150

 
18,774

 
168,630

 
60,325

Interest expense
(14,973
)
 
(9,337
)
 
(45,137
)
 
(27,374
)
Interest income and other, net
(394
)
 
987

 
5,013

 
2,122

Other components of net periodic benefit costs
2,159

 
(1,117
)
 
6,553

 
(3,349
)
Adjustment to gain on bargain purchase
6,175

 

 
20,836

 

Gain on derivative instrument

 
14,087

 

 
16,149

Income Before Income Taxes
49,117

 
23,394

 
155,895

 
47,873

Income tax expense (Note 13)
(11,181
)
 
(7,722
)
 
(40,114
)
 
(17,986
)
Net Income Attributable to Rayonier Advanced Materials Inc.
37,936

 
15,672

 
115,781

 
29,887

Mandatory convertible stock dividends
(3,441
)
 
(3,441
)
 
(10,284
)
 
(10,057
)
Net Income Available to Rayonier Advanced Materials Inc.
Common Stockholders
$
34,495

 
$
12,231

 
$
105,497

 
$
19,830

 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock (Note 10)
 
 
 
 
 
 
 
Basic earnings per share
$
0.68

 
$
0.29

 
$
2.07

 
$
0.47

Diluted earnings per share
$
0.60

 
$
0.28

 
$
1.82

 
$
0.46

 
 
 
 
 
 
 
 
Dividends Declared Per Common Share
$
0.07

 
$
0.07

 
$
0.21

 
$
0.21

Comprehensive Income:
 
 
 
 
 
 
 
Net Income
$
37,936

 
$
15,672

 
$
115,781

 
$
29,887

Other Comprehensive Income, net of tax (Note 9)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2,014
)
 

 
(10,265
)
 

Unrealized gain on derivative instruments
6,126

 

 
(936
)
 

Net gain from pension and postretirement plans
2,398

 
2,032

 
7,193

 
6,093

Total other comprehensive income
6,510

 
2,032

 
(4,008
)
 
6,093

Comprehensive Income
$
44,446

 
$
17,704

 
$
111,773

 
$
35,980

See Notes to Condensed Consolidated Financial Statements.

1



Rayonier Advanced Materials Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
 
September 29, 2018
 
December 31, 2017
Assets
Current Assets
 
 
 
Cash and cash equivalents
$
105,976

 
$
96,235

Accounts receivable, net (Note 2)
197,931

 
181,298

Inventory (Note 3)
332,058

 
302,086

Prepaid and other current assets
87,074

 
66,918

Total current assets
723,039

 
646,537

 
 
 
 
Property, Plant and Equipment (net of accumulated depreciation of $1,392,487 for 2018 and $1,309,192 for 2017)
1,378,379

 
1,407,762

Deferred Tax Assets
377,047

 
402,846

Intangible Assets, net
54,212

 
59,869

Other Assets
135,093

 
125,597

Total Assets
$
2,667,770

 
$
2,642,611

 
 
 
 
Liabilities and Stockholders’ Equity
Current Liabilities
 
 
 
Accounts payable
$
147,992

 
$
157,925

Accrued and other current liabilities (Note 4)
136,266

 
127,040

Current maturities of long-term debt (Note 5)
12,425

 
9,425

Current liabilities for disposed operations (Note 6)
14,534

 
13,181

Total current liabilities
311,217

 
307,571

 
 
 
 
Long-Term Debt (Note 5)
1,191,979

 
1,232,179

Long-Term Liabilities for Disposed Operations (Note 6)
148,287

 
150,905

Pension and Other Postretirement Benefits
201,460

 
212,810

Deferred Tax Liabilities
28,722

 
32,607

Other Non-Current Liabilities
9,249

 
12,783

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Stockholders’ Equity
 
 
 
Preferred stock, 10,000,000 shares authorized at $0.01 par value, 1,725,000 issued and outstanding as of September 29, 2018 and December 31, 2017, aggregate liquidation preference $172,500
17

 
17

Common stock, 140,000,000 shares authorized at $0.01 par value, 51,062,175 and 51,717,142 issued and outstanding, as of September 29, 2018 and December 31, 2017, respectively
511

 
517

Additional paid-in capital
398,859

 
392,353

Retained earnings
457,628

 
377,020

Accumulated other comprehensive income (loss) (Note 9)
(80,159
)
 
(76,151
)
Total Stockholders’ Equity
776,856

 
693,756

Total Liabilities and Stockholders’ Equity
$
2,667,770

 
$
2,642,611


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 29, 2018
 
September 23, 2017
Operating Activities
 
 
 
Net income
$
115,781

 
$
29,887

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
107,521

 
63,884

Stock-based incentive compensation expense
10,146

 
6,489

Amortization of capitalized debt costs, discount and premium
942

 
1,401

Deferred income tax
30,748

 
18,499

Gain on bargain purchase
(19,458
)
 

Unrealized gain on derivative instrument

 
(16,149
)
Net periodic benefit cost of pension and postretirement plans
4,097

 
7,608

Gain on foreign currency exchange
(6,525
)
 

Other
5,317

 
2,841

Changes in operating assets and liabilities:
 
 
 
Receivables
(17,861
)
 
(5,244
)
Inventories
(33,306
)
 
11,797

Accounts payable
(1,873
)
 
15,255

Accrued liabilities
4,562

 
6,004

All other operating activities
(25,854
)
 
(9,211
)
Contributions to pension and other postretirement benefit plans
(8,326
)
 
(12,019
)
Expenditures for disposed operations
(5,549
)
 
(3,418
)
Cash Provided by Operating Activities
160,362

 
117,624

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(92,591
)
 
(44,075
)
Proceeds from sale of resin operations
16,143

 

Other
5

 

Cash Used for Investing Activities
(76,443
)
 
(44,075
)
 
 
 
 
Financing Activities
 
 
 
Repayment of debt
(34,141
)
 
(4,398
)
Dividends paid on common stock
(11,030
)
 
(6,124
)
Dividends paid on preferred stock
(10,350
)
 
(10,350
)
Proceeds from the issuance of common stock
452

 

Common stock repurchased
(17,784
)
 
(153
)
Cash Used for Financing Activities
(72,853
)
 
(21,025
)
 


 
 
Cash and Cash Equivalents

 
 
Change in cash and cash equivalents
11,066

 
52,524

Net effect of foreign exchange on cash and cash equivalents
(1,325
)
 

Balance, beginning of year
96,235

 
326,655

Balance, end of period
$
105,976

 
$
379,179


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.    Basis of Presentation and New Accounting Pronouncements
Basis of Presentation
The unaudited condensed consolidated financial statements and notes thereto of Rayonier Advanced Materials Inc. (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 Securities and Exchange Commission (“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 Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC.
New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases. The update requires entities to recognize assets and liabilities arising from finance and operating leases and to classify those finance and operating lease payments in the financing or operating sections, respectively, of the statement of cash flows. It is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of this standard on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Tax Effects from AOCI. This guidance permits the reclassification of certain pension or other post employment benefit dangling debits and credits (“dangles”) from Accumulated Other Comprehensive Income (Loss) (“AOCI”) to retained earnings. The applicable dangles are those recorded as a result of H.R.1, passed on December 22, 2017 (the "Tax Cuts and Jobs Act"), which reduced the U.S. federal tax rate applicable to the Company. The ASU is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company has approximately $22 million in applicable dangling debits recorded in AOCI and has not yet determined whether or not it will reclassify this amount.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as amended and/or clarified by ASU Nos. 2016-08, 2016-10, 2016-12, and 2016-20, a comprehensive new revenue recognition standard. The core principle is that a company should recognize revenue when it transfers control of goods or services to customers for an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. The Company adopted the standard on a modified retrospective basis in the first quarter of 2018, generally recognizing revenue when it transfers control at a point in time. The adoption did not have a material impact to the individual financial statement line items on the Company’s consolidated financial statements because the new standard is not materially different than its previous revenue recognition practices. The following is a discussion of our revenue recognition policy effective January 1, 2018.
Accounting Policy
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of the Company's contracts have a single performance obligation to transfer products. Accordingly, the Company recognizes revenue when title and risk of loss have been transferred to the customer. Generally, title passes upon delivery to the customer at the agreed upon location. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products and is generally based upon contractual arrangements with customers or published indices. The Company sells its products both directly to customers and through distributors and agents typically under agreements with payment terms less than 90 days.
The Company has elected to account for shipping and handling as activities to fulfill the promise to transfer the goods. As such, shipping and handling costs incurred are recorded in cost of sales. The Company has elected to exclude from net sales any value add, sales and other taxes which it collects concurrent with revenue-producing activities. These accounting policy elections are consistent with the manner in which the Company historically recorded shipping and handling fees and taxes.



4


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

Contract Estimates
The nature of certain of the Company's contracts gives rise to variable consideration, which may be constrained, including volume-based rebates to certain customers. The Company issues rebates to customers when they purchase a certain volume level, primarily retrospective volume-based rebates, which are applied retroactively to prior purchases. The Company estimates the level of volumes based on anticipated purchases at the beginning of the period and records a rebate accrual for each purchase toward the requisite rebate volume. These estimated rebates are included in the transaction price of the Company's contracts with customers as a reduction to net sales and are included in accrued customer incentives and prepayments in the consolidated balance sheets (see Note 4 - Accrued and Other Current Liabilities). This methodology is consistent with the manner in which the Company historically estimated and recorded volume-based rebates.
The majority of the Company's revenue is derived from contracts (i) with an original expected length of one year or less and (ii) for which it recognizes revenue at the amount in which it has the right to invoice as product is delivered. The Company has elected the practical expedient not to disclose the value of remaining performance obligations associated with these types of contracts.
The Company has certain contracts which contain performance obligations which are not significant in the context of the contract with the customer. The Company has elected the practical expedient not to assess whether these promised goods or services are performance obligations.
Contract Balances
Contract liabilities primarily relate to prepayments received from the Company's customers before revenue is recognized and volume rebates payable to customers. These amounts are included in accrued customer incentives and prepayments in the consolidated balance sheets (see Note 4 - Accrued and Other Current Liabilities). The Company does not have any material contract assets as of September 29, 2018.
Disaggregated Revenue
In general, the Company's product-lines within its segments are aligned according to the nature and economic characteristics of its products and customer relationships and provide meaningful disaggregation of each business segment's results of operations. Disaggregation of net sales by business segment and product-line are included in Note 14 - Segment Information.
Recently Adopted Accounting Pronouncements
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments.  The update was issued to reduce diversity in practice regarding the presentation of eight specific types of cash receipts and cash payments in the statement of cash flows. The update is effective for fiscal years beginning after December 15, 2017. The Company adopted the update as of January 1, 2018. The adoption did not have a material impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits. The update was issued to improve the presentation of net periodic pension and post retirement benefit cost. The Company adopted the provisions of this guidance in the first quarter of 2018 using the retrospective method. As a result of this update, the Company presented the components of periodic pension and post retirement costs, other than service costs, separately outside of operating income in “Other components of net periodic benefit costs” on the condensed consolidated statement of income. The Company presented the service costs component of net periodic benefit cost in cost of sales and selling, general and administrative expense, which correlates with the related employee compensation costs arising from services rendered during the period. Also in accordance with the new guidance, only the service cost component of the net periodic benefit cost are eligible for capitalization in assets. The update resulted in a change to previously reported amounts, with an increase in 2017 operating income of $1 million for the third quarter and $3 million year-to-date, which was offset by a corresponding increase in other components of net periodic benefits costs of $1 million for the quarter and $3 million year-to-date, reflecting the impact of presenting interest cost, expected return on plan assets, amortization of prior service costs and actuarial gains and losses components in non-operating income. The adoption of this guidance had no impact on previously reported net income.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation. The update provides guidance on how to account for changes to the terms or conditions of stock compensation awards. It is effective for fiscal years beginning after December 15, 2017. The Company adopted the update as of January 1, 2018. The adoption did not have a material impact on the Company’s consolidated financial statements.

5


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The update provides guidance to better align the financial reporting for hedging activities with the economic objectives of those activities. For public business entities, it is effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The update requires a modified retrospective transition method which will result in the recognition of a cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. The Company elected to early adopt the new guidance as of January 1, 2018. The adoption did not have a material impact on the Company’s consolidated financial statements.
Adjustment to Gain on Bargain Purchase
In connection with the acquisition of Tembec Inc. (“Tembec”) on November 17, 2017 (the “Acquisition”), the Company recognized a $317 million preliminary gain on bargain purchase, which represented the excess of the estimated fair value of the net assets acquired and liabilities assumed over the total purchase consideration. The final bargain purchase gain is subject to adjustment during the measurement period of the transaction, pending finalization of the valuations of acquired assets and liabilities no later than one year from the purchase date.
During the first nine months of 2018, the Company determined that provisional amounts included in the preliminary valuation required adjustments to reflect new information obtained. As a result, in the second quarter of 2018, the Company recorded an increase in the bargain purchase gain of $15 million, including the removal of a $13 million tax reserve related to a previously disposed location and $2 million for the favorable settlement of a contingent liability. In the third quarter of 2018, the Company sold its resins operations, which was included in its High Purity Cellulose segment, to a third party for approximately $18 million resulting in a gain of approximately $7 million. The sale of the resins operations is subject to working capital adjustments which could impact the recognized gain. These non-operating gains were included in the adjustment to gain on bargain purchase on the condensed consolidated statements of income.
Subsequent Events
Events and transactions subsequent to the balance sheet date have been evaluated for potential recognition and disclosure through November 8, 2018, the date these financial statements were available to be issued. The following subsequent events warranting disclosure were identified.
On October 4, 2018, the Company’s board of directors declared a fourth quarter cash dividend of $2.00 per share of mandatory convertible preferred stock and $0.07 per share of common stock. The preferred stock dividend will be paid on November 15, 2018 to mandatory convertible preferred stockholders of record as of November 1, 2018. The common stock dividend is payable on December 31, 2018 to common stockholders of record on December 17, 2018.
2.    Accounts Receivable, Net
As of September 29, 2018 and December 31, 2017, the Company’s accounts receivable included the following:
 
September 29, 2018
 
December 31, 2017
Accounts receivable, trade
$
145,343

 
$
134,523

Accounts receivable, other (a)
53,393

 
47,368

Allowance for doubtful accounts
(805
)
 
(593
)
Total accounts receivable, net
$
197,931

 
$
181,298

(a)
Accounts receivable, other consists primarily of value added/consumption taxes, grants receivable and accrued billings due from government agencies.

6


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

3.    Inventory
As of September 29, 2018 and December 31, 2017, the Company’s inventory included the following:
 
September 29, 2018
 
December 31, 2017
Finished goods
$
223,149

 
$
190,140

Work-in-progress
20,468

 
18,889

Raw materials
77,875

 
82,940

Manufacturing and maintenance supplies
10,566

 
10,117

Total inventory
$
332,058

 
$
302,086

4.    Accrued and Other Current Liabilities
As of September 29, 2018 and December 31, 2017, the Company’s accrued and other current liabilities included the following:
 
September 29, 2018
 
December 31, 2017
Accrued customer incentives and prepayments
$
41,528

 
$
53,522

Accrued payroll and benefits
31,730

 
33,133

Accrued interest
10,196

 
3,188

Other current liabilities
52,812

 
37,197

Total accrued and other current liabilities
$
136,266

 
$
127,040

5.    Debt and Capital Leases
As of September 29, 2018 and December 31, 2017, the Company’s debt and capital leases include the following:
 
September 29, 2018
 
December 31, 2017
U.S. Revolver of $100 million maturing in November 2022, $91 million available after taking into account outstanding letters of credit, bearing interest at LIBOR plus 2.00% at September 29, 2018
$

 
$

Multi-currency Revolver of $150 million maturing in November 2022, $125 million available after taking into account outstanding letters of credit, bearing interest at LIBOR plus 2.00% at September 29, 2018

 

Term A-1 Loan Facility borrowings maturing through November 2022 bearing interest at LIBOR plus 2.00%, interest rate of 4.22% at September 29, 2018
160,000

 
180,000

Term A-2 Loan Facility borrowings maturing through November 2024 bearing interest at LIBOR plus 1.65 (after consideration of 0.60% patronage benefit), interest rate of 4.47% at September 29, 2018
438,875

 
450,000

Senior Notes due 2024 at a fixed interest rate of 5.50%
506,412

 
506,412

Canadian dollar, fixed interest rate term loans with rates ranging from 5.50% to 6.86% and maturity dates ranging from March 2020 through April 2028, secured by certain assets of the Temiscaming plant
96,420

 
100,881

Other loans
4,118

 
5,946

Capital lease obligation
3,197

 
3,409

Total debt principal payments due
1,209,022

 
1,246,648

Less: Debt premium, original issue discount and issuance costs
(4,618
)
 
(5,044
)
Total debt
1,204,404

 
1,241,604

Less: Current maturities of long-term debt
(12,425
)
 
(9,425
)
Long-term debt
$
1,191,979

 
$
1,232,179


7


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

During the nine months ended September 29, 2018, the Company made $20 million and $11 million in principal repayments on the Term A-1 Loan Facility and Term A-2 Loan Facility, respectively.
As of September 29, 2018, debt and capital lease payments due during the next five years and thereafter are as follows:
 
Capital Lease
 
 
 
Minimum Lease Payments
 
Less: Interest
 
Net Present Value
 
Debt Principal Payments
Remaining 2018
$
129

 
$
56

 
$
73

 
$
1,095

2019
515

 
209

 
306

 
13,425

2020
515

 
187

 
328

 
20,849

2021
515

 
163

 
352

 
12,724

2022
515

 
138

 
377

 
190,253

Thereafter
2,018

 
257

 
1,761

 
967,479

Total principal payments
$
4,207

 
$
1,010

 
$
3,197

 
$
1,205,825


6.    Liabilities for Disposed Operations
An analysis of the liabilities for disposed operations for the nine months ended September 29, 2018 is as follows:
Balance, December 31, 2017
$
164,086

Expenditures charged to liabilities
(5,549
)
Increase to liabilities
4,837

Change in currency rate
(553
)
Balance, September 29, 2018
162,821

Less: Current portion
(14,534
)
Long-term liabilities for disposed operations
$
148,287

In addition to the estimated liabilities, the Company is subject to the risk of reasonably possible additional liabilities in excess of the established reserves due to potential changes in circumstances and future events, including, without limitation, changes to current laws and regulations; changes in governmental agency personnel, direction, philosophy and/or enforcement policies; developments in remediation technologies; increases in the cost of remediation, operation, maintenance and monitoring of its disposed operations sites; changes in the volume, nature or extent of contamination to be remediated or monitoring to be undertaken; the outcome of negotiations with governmental agencies and non-governmental parties; and changes in accounting rules or interpretations. Based on information available as of September 29, 2018, the Company estimates this exposure could range up to approximately $67 million, although no assurances can be given that this amount will not be exceeded given the factors described above. These potential additional costs are attributable to several sites and other applicable liabilities. Further, this estimate excludes reasonably possible liabilities which are not currently estimable primarily due to the factors discussed above.
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. However, no assurances are given they will be sufficient for the reasons described above, and additional liabilities could have a material adverse effect on the Company’s financial position, results of operations and cash flows.
7.    Derivative Instruments
The Company’s earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates. The Company allows for the use of derivative financial instruments to manage interest rate and foreign currency exchange rate exposure, but does not allow derivatives to be used for speculative purposes.  
All derivative instruments are recognized on the consolidated balance sheets at their fair value and are either designated as a hedge of a forecasted transaction or undesignated. Changes in the fair value of a derivative designated as a hedge are recorded in

8


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

other comprehensive income until earnings are affected by the hedged transaction, and are then reported in current earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings.
Interest Rate Risk
The Company’s primary debt obligations utilize variable-rate LIBOR, exposing the Company to variability in interest payments due to changes in interest rates. The Company entered into interest rate swap agreements to reduce the volatility of financing costs, achieve a desired proportion of fixed-rate versus floating-rate debt and to hedge the variability in cash flows attributable to interest rate risks caused by changes in the LIBOR benchmark.
The Company designated the swaps as cash flow hedges and is assessing their effectiveness using the hypothetical derivative method in conjunction with regression. Effective gains and losses, deferred to AOCI, are reclassified into earnings over the life of the associated hedge.
Foreign Currency Exchange Rate Risk
Foreign currency fluctuations affect investments in foreign subsidiaries and foreign currency cash flows related to third party purchases, product shipments, and foreign-denominated debt. The Company is also exposed to the translation of foreign currency earnings to the U.S. dollar. Management uses foreign currency forward contracts to selectively hedge its foreign currency cash flow exposure and manage risk associated with changes in currency exchange rates. The Company’s principal foreign currency exposure is to the Canadian dollar, and to a lesser extent, the euro.
The notional amounts of outstanding derivative instruments as of September 29, 2018 and December 31, 2017 are presented below.
 
 
September 29, 2018
 
December 31, 2017
Interest rate swaps (a)
 
$
200,000

 
$
200,000

Foreign exchange forward contracts (b)
 
$
398,248

 
$
240,591

Foreign exchange forward contracts (c)
 
$
96,810

 
$

(a) Maturity date of December 2020
(b) Monthly maturity dates through September 2019
(c) Various maturity dates in 2020, 2022 and 2028

9


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

The fair values of derivative instruments included in the consolidated balance sheet as of September 29, 2018 and December 31, 2017 are provided in the below table. See Note 8Fair Value Measurements for additional information related to the Company’s derivatives.
 
 
Balance Sheet Location
 
September 29, 2018
 
December 31, 2017
Assets:
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest rate swaps
 
Other current assets
 
$
1,332

 
$

Interest rate swaps
 
Other assets
 
2,624

 
749

Foreign exchange forward contracts
 
Other current assets
 
1,293

 

Foreign exchange forward contracts
 
Other assets
 
756

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
Other current assets
 
68

 
427

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
Other current liabilities
 
(4,662
)
 

Total derivatives
 
 
 
$
1,411

 
$
1,176

The effects of derivative instruments designated as cash flow hedges, the related changes in AOCI and the gains and losses in income for the three and nine months ended September 29, 2018 are presented below. The Company did not have any derivatives designated as hedges during the three and nine months ended September 23, 2017.
 
 
Three Months Ended September 29, 2018
 
 
Derivatives in Cash Flow Hedging Relationships
 
Gain (Loss) Recognized in OCI on Derivative
 
Gain (Loss) Reclassified from AOCI into Income
 
Location on Statement of Income
Interest rate swaps
 
$
530

 
$
74

 
Interest Expense
Foreign exchange forward contracts
 
5,002

 
60

 
Other operating income (expense), net
Foreign exchange forward contracts
 
1,399

 
(1,399
)
 
Cost of sales
Foreign exchange forward contracts
 
1,570

 
1,529

 
Interest income and other, net
 
 
 
 
 
 
 
 
 
Nine Months Ended September 29, 2018
 
 
Derivatives in Cash Flow Hedging Relationships
 
Gain (Loss) Recognized in OCI on Derivative
 
Gain (Loss) Reclassified from AOCI into Income
 
Location on Statement of Income
Interest rate swaps
 
$
3,095

 
$
(112
)
 
Interest Expense
Foreign exchange forward contracts
 
(5,406
)
 
1,188

 
Other operating income (expense), net
Foreign exchange forward contracts
 
1,466

 
(1,466
)
 
Cost of sales
Foreign exchange forward contracts
 
181

 
973

 
Interest income and other, net

10


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

The effects of derivative instruments not designated as hedging instruments on the statement of income for the three and nine months ended September 29, 2018 and September 23, 2017 were as follows:
 
 
 
 
Three Months Ended
 
Nine Months Ended
Derivatives Not Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized in Income on Derivative
 
September 29, 2018
 
September 23, 2017
 
September 29, 2018
 
September 23, 2017
Foreign exchange contracts
 
Other operating income (expense), net
 
$
(250
)
 
$

 
$
(3,791
)
 
$

Foreign currency collar
 
Other non-operating income
 

 
14,087

 

 
16,149

The after-tax amounts of unrealized gains (losses) in AOCI related to hedge derivatives at September 29, 2018 and December 31, 2017 are presented below:
 
 
September 29, 2018
 
December 31, 2017
Interest rate cash flow hedges
 
$
3,086

 
$
619

Foreign exchange cash flow hedges
 
(3,403
)
 

The amount of future reclassifications from AOCI will fluctuate with movements in the underlying markets.
8.    Fair Value Measurements
The following table presents the carrying amount, estimated fair values and categorization under the fair value hierarchy for financial instruments held by the Company at September 29, 2018 and December 31, 2017, using market information and what management believes to be appropriate valuation methodologies:
 
September 29, 2018
 
December 31, 2017
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Assets:
 
Level 1
 
Level 2
 
 
Level 1
 
Level 2
Cash and cash equivalents
$
105,976

 
$
105,976

 
$

 
$
96,235

 
$
96,235

 
$

Interest rate swaps (a)
3,956

 

 
3,956

 
749

 

 
749

Foreign currency forward contracts (a)
2,117

 

 
2,117

 
427

 

 
427

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities (b):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (a)
4,662

 

 
4,662

 

 

 

Fixed-rate long-term debt
601,806

 

 
589,486

 
606,529

 

 
611,308

Variable-rate long-term debt
599,400

 

 
602,993

 
631,666

 

 
635,946

(a) These items represent derivative instruments.
(b) Liabilities exclude capital lease obligation.
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.
Derivative instruments — The fair value is calculated based on standard valuation models using quoted prices and market observable data of similar instruments. The interest rate derivatives are based on the LIBOR swap rate, which is observable at commonly quoted intervals for the full term of the swap and therefore is considered Level 2. The foreign currency derivatives are contracts to buy foreign currency at a fixed rate on a specified future date. The foreign exchange rate is observable for the full term of the swap and is therefore considered Level 2. See Note 7Derivative Instruments for additional information related to the derivative instruments.

11


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

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.

9.    Accumulated Other Comprehensive Income (Loss)
The components of AOCI are as follows:
 
Nine Months Ended
 
September 29, 2018
 
September 23, 2017
Unrecognized components of employee benefit plans, net of tax:
 
 


Balance, beginning of year
$
(81,638
)
 
$
(110,080
)
Other comprehensive gain (loss) before reclassifications

 

Income tax on other comprehensive loss

 

Reclassifications to earnings: (a)
 
 
 
Amortization of losses
8,907

 
8,989

Amortization of prior service costs
429

 
572

Amortization of negative plan amendment
(115
)
 
(115
)
Income tax on reclassifications
(2,028
)
 
(3,353
)
Net comprehensive gain (loss) on employee benefit plans, net of tax
7,193

 
6,093

Balance, end of quarter
(74,445
)
 
(103,987
)
 
 
 
 
Unrealized gain (loss) on derivative instruments, net of tax:
 
 
 
Balance, beginning of year
619

 

Other comprehensive income before reclassifications
(664
)
 

Income tax on other comprehensive income
281

 

Reclassifications to earnings: (b)
 
 
 
Interest rate contracts
112

 

Foreign exchange contracts
(695
)
 

Income tax on reclassifications
30

 

Net comprehensive gain (loss) on derivative instruments, net of tax
(936
)
 

Balance, end of quarter
(317
)
 

 
 
 
 
Foreign currency translation adjustments:
 
 
 
Balance, beginning of year
4,868

 

Foreign currency translation adjustment
(10,265
)
 

Balance, end of quarter
(5,397
)
 

 
 
 
 
Accumulated other comprehensive income (loss), end of quarter
$
(80,159
)
 
$
(103,987
)
(a)
The AOCI components for defined benefit pension and post-retirement plans are included in the computation of net periodic benefit cost. See Note 12Employee Benefit Plans for additional information.
(b)
Reclassifications of interest rate contracts are recorded in interest expense. Reclassifications of foreign currency exchange contracts are recorded in cost of sales, other operating income or non-operating income as appropriate. See Note 7Derivative Instruments for additional information.

12


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

10.    Earnings Per Share of Common Stock
The following table provides details of the calculations of basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 23, 2017
 
September 29, 2018
 
September 23, 2017
Net income
$
37,936

 
$
15,672

 
$
115,781

 
$
29,887

Preferred Stock dividends
(3,441
)
 
(3,441
)
 
(10,284
)
 
(10,057
)
Net income available for common stockholders
$
34,495

 
$
12,231

 
$
105,497

 
$
19,830

 
 
 
 
 
 
 
 
Shares used for determining basic earnings per share of common stock
50,603,498

 
42,427,437

 
51,005,206

 
42,388,762

Dilutive effect of:
 
 
 
 
 
 
 
Stock options
3,620

 

 
4,127

 

Performance and restricted stock
1,266,588

 
1,025,228

 
1,297,024

 
896,066

Preferred stock
11,371,718

 
12,582,057

 
11,371,718

 

Shares used for determining diluted earnings per share of common stock
63,245,424

 
56,034,722

 
63,678,075

 
43,284,828

Basic earnings per share (not in thousands)
$
0.68

 
$
0.29

 
$
2.07

 
$
0.47

Diluted earnings per share (not in thousands)
$
0.60

 
$
0.28

 
$
1.82

 
$
0.46

Anti-dilutive instruments excluded from the computation of diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 23, 2017
 
September 29, 2018
 
September 23, 2017
Stock options
263,184

 
376,434

 
263,184

 
376,434

Performance and restricted stock
11,687

 
7,612

 
398,576

 
13,025

Preferred stock

 

 

 
12,582,057

Total anti-dilutive instruments
274,871

 
384,046

 
661,760

 
12,971,516

On January 29, 2018, the Board of Directors authorized a share buyback program pursuant to which the Company may, from time to time, purchase shares of its common stock with an aggregate purchase price of up to $100 million. During the nine months ended September 29, 2018, the Company repurchased and retired 802,040 shares of common stock under this buyback program at an average price of $18.32 per share, excluding commissions, for an aggregate purchase price of approximately $15 million. The repurchase and retirement of these shares was included in the calculation of weighted-average shares outstanding at September 29, 2018.

11.    Incentive Stock Plans
The Company’s total stock based compensation cost for the nine months ended September 29, 2018 and September 23, 2017 was $10 million and $6 million, respectively.
The Company made new grants of restricted stock units and performance-based stock units to certain employees during the first nine months of 2018. The 2018 restricted stock unit awards vest over three years. The 2018 performance-based stock unit awards are measured against an internal return on invested capital target and a synergy target set in connection with the 2017 acquisition of Tembec, Inc. Depending on performance against the targets, the awards will pay out in common stock amounts between 0 and 200 percent of the performance-based stock units awarded. The total number of common stock awards granted will be adjusted up or down 25 percent, for certain participants, based on stock price performance relative to a peer group over the term of the plan, which could result in a final common stock issuance of 0 to 250 percent of the performance-based stock units awarded.

13


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

In March 2018, the performance-based share units granted in 2015 were settled at an average of 152 percent of the performance-based stock units awarded, resulting in the issuance of approximately 288,703 shares of common stock.
The following table summarizes the activity on the Company’s incentive stock awards for the nine months ended September 29, 2018:
 
Stock Options
 
Restricted Stock and Stock Units
 
Performance-Based Stock Units
 
Options
 
Weighted Average Exercise Price
 
Awards
 
Weighted Average Grant Date Fair Value
 
Awards
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2018
373,058

 
$
32.25

 
848,371

 
$
12.47

 
1,080,067

 
$
11.58

Granted

 

 
301,384

 
19.78

 
449,838

 
22.75

Forfeited

 

 
(14,004
)
 
11.64

 
(12,247
)
 
11.42

Exercised or settled
(26,045
)
 
17.34

 
(216,378
)
 
17.34

 
(190,320
)
 
17.50

Expired or cancelled
(55,864
)
 
30.40

 

 

 

 

Outstanding at September 29, 2018
291,149

 
$
34.10

 
919,373

 
$
13.71

 
1,327,338

 
$
14.69


12.    Employee Benefit Plans
The Company has defined benefit pension and other postretirement plans covering certain union and non-union employees, primarily in the U.S., Canada and France. The defined benefit pension plans are closed to new participants. Employee defined 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.
The components of net periodic benefit costs from defined benefit plans that have been recorded are shown in the following table:
 
Pension
Postretirement
 
Three Months Ended
 
Three Months Ended
Components of Net Periodic Benefit Cost
September 29, 2018
 
September 23, 2017
 
September 29, 2018
 
September 23, 2017
Service cost
$
3,059

 
$
1,184

 
$
330

 
$
236

Interest cost
8,149

 
3,318

 
312

 
198

Expected return on plan assets
(13,695
)
 
(5,548
)
 

 

Amortization of prior service cost
143

 
190

 

 

Amortization of losses
2,913

 
2,913

 
57

 
83

Amortization of negative plan amendment

 

 
(38
)
 
(38
)
Total net periodic benefit cost
$
569

 
$
2,057

 
$
661

 
$
479

 
 
 
 
 
 
 
 
 
Pension
Postretirement
 
Nine Months Ended
 
Nine Months Ended
Components of Net Periodic Benefit Cost
September 29, 2018
 
September 23, 2017
 
September 29, 2018
 
September 23, 2017
Service cost
$
9,246

 
$
3,552

 
$
1,404

 
$
707

Interest cost
24,612

 
9,954

 
961

 
594

Expected return on plan assets
(41,347
)
 
(16,645
)
 

 

Amortization of prior service cost
429

 
571

 

 
1

Amortization of losses
8,735

 
8,739

 
172

 
250

Amortization of negative plan amendment

 

 
(115
)
 
(115
)
Total net periodic benefit cost
$
1,675

 
$
6,171

 
$
2,422

 
$
1,437


14


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

Service cost is included in cost of sales and selling, general and administrative expenses in the statements of income, as appropriate. Interest cost, expected return on plan assets, amortization of prior service cost, amortization of losses and amortization of negative plan amendment are included in other components of net periodic benefit costs on the condensed consolidated statement of income.
13.    Income Taxes
The Company’s effective tax rates for the three months ended September 29, 2018 and September 23, 2017 were 22.8 percent and 33.0 percent, respectively. The Company’s effective tax rates for the nine months ended September 29, 2018 and September 23, 2017 were 25.7 percent and 37.6 percent, respectively. The statutory rate in 2018 is 21 percent compared to 35 percent in 2017 due to the passage of the Tax Cuts and Jobs Act in December 2017 in the United States.
The current quarter and year-to-date effective rates differ from the federal statutory rate of 21 percent primarily due to different statutory tax rates of foreign operations and the U.S. taxes associated from the inclusion of certain foreign income described as Global Intangible Low-Taxed Income (“GILTI”), partially offset by a nontaxable bargain purchase adjustment included in pretax income and a return to accrual adjustment related to previously filed tax returns.
The Company has the option to either treat taxes due on future GILTI income as a current period expense when incurred (the “period cost method”) or factor in such amounts in the Company’s measurement of its deferred taxes (the “deferred method”). The Company has determined it will record GILTI income as a current period expense when incurred.
In the second quarter of 2018, a previously unrecognized tax benefit of $13 million was recognized as an adjustment to bargain purchase (see Note 1 - Basis of Presentation and New Accounting Pronouncements). There have been no other material changes to the balance of unrecognized tax benefits reported at December 31, 2017.
14.    Segment Information
The Company has currently divided its operations into five reportable segments: High Purity Cellulose, Forest Products, Pulp, Paper and Corporate. The Corporate operations consist primarily of senior management, accounting, information systems, human resources, treasury, tax and legal administrative functions that provide support services to the operating business units. The Company does not currently allocate the cost of maintaining these support functions to its operating units.
The Company evaluates the performance of its segments based on operating income. Intersegment sales consist primarily of wood chips sales from Forest Products to High Purity Cellulose, Pulp and Paper segments and high-yield pulp sales from Pulp to Paper. Intersegment sales prices are at rates that approximate market.


15


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

Net sales, disaggregated by product-line, was comprised of the following for the three and nine months ended:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 23, 2017
 
September 29, 2018
 
September 23, 2017
High Purity Cellulose
 
 
 
 
 
 
 
Cellulose Specialties
$
217,538

 
$
167,341

 
$
625,864

 
$
482,124

Commodity Products
56,448

 
40,229

 
153,220

 
123,588

Other sales (a)
34,001

 
2,147

 
96,535

 
6,646

Total High Purity Cellulose
307,987

 
209,717

 
875,619

 
612,358

Forest Products
 
 
 
 
 
 
 
Lumber
68,713

 

 
228,686

 

Other sales (b)
17,242

 

 
53,551

 

Total Forest Products
85,955

 

 
282,237

 

Pulp
 
 
 
 
 
 
 
High-yield pulp
89,440

 

 
265,495

 

Paper
 
 
 
 
 
 
 
Paperboard
50,675

 

 
149,100

 

Newsprint
27,698

 

 
88,958

 

Total Paper
78,373

 

 
238,058

 

Eliminations
(17,416
)
 

 
(53,358
)
 

Total net sales
$
544,339

 
$
209,717

 
$
1,608,051

 
$
612,358

(a) Other sales include sales of electricity, resins, lignin and other by-products to third-parties
(b) Other sales include sales of logs, wood chips and other by-products to other segments and third-parties
Operating income by segment was comprised of the following for the three and nine months ended:
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 23, 2017
 
September 29, 2018
 
September 23, 2017
High Purity Cellulose
$
33,922

 
$
30,188

 
$
83,288

 
$
95,944

Forest Products
7,986

 

 
35,159

 

Pulp
26,035

 

 
74,970

 

Paper
13,648

 

 
23,465

 

Corporate
(25,441
)
 
(11,414
)
 
(48,252
)
 
(35,619
)
Total operating income
$
56,150

 
$
18,774

 
$
168,630

 
$
60,325

Identifiable assets by segment were as follows:
 
September 29, 2018
 
December 31, 2017
High Purity Cellulose
$
1,648,355

 
$
1,671,107

Forest Products
173,906

 
154,258

Pulp
92,469

 
83,081

Paper
256,624

 
245,746

Corporate
496,416

 
488,419

Total identifiable assets
$
2,667,770

 
$
2,642,611


16


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

15.    Commitments and Contingencies
Commitments
The following table includes the material changes to the contractual financial obligations presented in Note 20 - Commitments and Contingencies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC. The future minimum payments under these purchase obligations are presented as of September 29, 2018. The payment amounts are estimates and may vary based on changes in actual price and volumes terms.
 
Purchase Obligations
2018
$
2,594

2019
19,301

2020
6,147

2021
(85
)
2022
239

Thereafter
(878
)
Total
$
27,318

Contingencies
The Company is engaged in various legal and regulatory actions and proceedings, and has been named as a defendant in various lawsuits and claims arising in the ordinary course of its business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, the Company 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 aggregate, are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
As of September 29, 2018, collective bargaining agreements covering approximately 200 unionized employees had expired. On September 30, 2018, the collective bargaining agreement for the Company’s Temiscaming, Quebec location expired, covering approximately 600 unionized employees. In all cases, the parties have continued to work under the terms of the expired contracts while negotiations continue. While there can be no assurances, the Company expects to reach agreements with its unions. However, a work stoppage could have a material adverse effect on its business, results of operations and financial condition.
Guarantees and Other
The Company provides financial guarantees as required by creditors, insurance programs and various governmental agencies. As of September 29, 2018, the Company had net exposure of $38 million from various standby letters of credit, primarily for financial assurance relating to environmental remediation, credit support for natural gas and electricity purchases, and guarantees related to foreign retirement plan obligations. These standby letters of credit represent a contingent liability. The Company would only be liable upon its default on the related payment obligations. The letters of credit have various expiration dates and will be renewed as required.
The Company had surety bonds of $85 million as of September 29, 2018, primarily to comply with financial assurance requirements relating to environmental remediation and post closure care, to provide collateral for the Company’s workers’ compensation program, and to guarantee taxes and duties for products shipped internationally. These surety bonds expire at various dates and are expected to be renewed annually as required.
LignoTech Florida, a venture in which the Company owns 45 percent and its venture partner Borregaard ASA owns 55 percent, entered into a construction contract to build its lignin manufacturing facility and financing agreements to fund the construction of the facility, which was completed in the second quarter of 2018. The Company is a guarantor under both the construction and financing agreements. In the event of default, the Company expects it would only be liable for its proportional share as a result of an agreement with its venture partner. The remaining guarantee related to LignoTech Florida at September 29, 2018 was $33 million.

17


Rayonier Advanced Materials Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

The Company has not recorded any liabilities for these financial guarantees in its consolidated balance sheets, either because the Company has recorded the underlying liability associated with the guarantee or the guarantee is dependent on the Company’s own performance and, therefore, is not subject to the measurement requirements or because the Company has calculated the estimated fair value of the guarantee and determined it to be immaterial based upon the current facts and circumstances that would trigger a payment obligation.
It is not possible to determine the maximum potential amount of the liability under these potential obligations due to the unique set of facts and circumstances likely to be involved with each provision.
16.    Supplemental Disclosures of Cash Flows Information
Supplemental disclosures of cash flows information was comprised of the following for the nine months ended:
 
September 29, 2018
 
September 23, 2017
Cash paid (received) during the period:
 
 
 
Interest
$
37,759

 
$
19,056

Income taxes
12,834

 
5,989

Non-cash investing and financing activities:
 
 
 
Capital assets purchased on account
$
8,221

 
$
3,750

Capital lease obligation
3,197

 
3,478


18




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 Condensed 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 our 2017 Annual Report on Form 10-K and information contained in our subsequent Forms 10-Q, 8-K and other reports to the U.S. Securities and Exchange Commission (the “SEC”).
Note About Forward-Looking Statements
Certain statements in this document regarding anticipated financial, business, legal or other outcomes including 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,” “forecast,” “anticipate,” “guidance,” 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 actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties.
Our operations are subject to a number of risks and uncertainties including, but not limited to, those listed below. When considering an investment in our securities, you should carefully read and consider these risks, together with all other information in our Annual Report on Form 10-K and our other filings and submissions to the SEC, which provide much more information and detail on the risks described below. If any of the events described in the following risk factors actually occur, our business, financial condition or operating results, as well as the market price of our securities, could be materially adversely affected. These risks and events include, without limitation:
Our businesses we operate are highly competitive and many of them are cyclical, especially in commodity markets, which may result in fluctuations in pricing and volume that can adversely impact our business, financial condition and results of operations.
Our ten largest customers represent approximately 38 percent of our pro forma 2017 revenue, and the loss of all or a substantial portion of our revenue from these large customers could have a material adverse effect on our business.
A material disruption at one of our major manufacturing facilities could prevent us from meeting customer demand, reduce our sales and profitability, increase our cost of production and capital needs, or otherwise adversely affect our business, financial condition and results of operation.
Changes in raw material and energy availability and prices could affect our results of operations and financial condition.
The availability of, and prices for, wood fiber may significantly impact our business, results of operations and financial condition.
We are subject to risks associated with manufacturing and selling products and otherwise doing business outside of the United States.
Our operations require substantial capital for ongoing maintenance, repair and replacement of existing facilities and equipment.
Currency fluctuations may have a negative impact on our business, financial condition and results of operations.
Restrictions on trade through tariffs, countervailing and anti-dumping duties, quotas and other trade barriers, in the United States and internationally, could adversely affect our ability to access certain markets.

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We depend on third parties for transportation services and increases in costs and the availability of transportation could adversely affect our business.
Our business is subject to extensive environmental laws, regulations and permits that may restrict or adversely affect our ability to conduct our business.
The impacts of climate-related initiatives remain uncertain at this time.
Our failure to maintain satisfactory labor relations could have a material adverse effect on our business.
We are dependent upon attracting and retaining key personnel, the loss of whom could adversely affect our business.
Failure to develop new products or discover new applications for our existing products, or our inability to protect the intellectual property underlying such new products or applications, could have a negative impact on our business.
Risk of loss of the Company’s intellectual property and sensitive business information, or disruption of its manufacturing operations, in each case due to cyberattacks or cyber security breaches, could adversely impact the Company.
We may need to make significant additional cash contributions to our retirement benefit plans if investment returns on pension assets are lower than expected or interest rates decline, and/or due to changes to regulatory, accounting and actuarial requirements.
We have significant debt obligations that could adversely affect our business and our ability to meet our obligations.
Challenges in the commercial and credit environments may materially adversely affect our future access to capital.
We may need additional financing in the future to meet our capital needs or to make acquisitions, and such financing may not be available on favorable terms, if at all, and may be dilutive to existing stockholders.
The inability to effectively integrate the Tembec acquisition, and any future acquisitions we may make, may affect our results.
We may not achieve the benefits anticipated from our previously-announced transformation plan.
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 further disclosures we have made or may make in our filings and other submissions to the SEC, including those on Forms 10-Q, 10-K, 8-K and other reports.
Note About Non-GAAP Financial Measures
This document contains certain non-GAAP financial measures, including Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), adjusted EBITDA, and adjusted free cash flows. These non-GAAP measures are reconciled to each of their respective most directly comparable GAAP financial measures in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We believe these non-GAAP measures provide useful information to our board of directors, management and investors regarding certain trends relating to our financial condition and results of operations. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses, purposes of determining management incentive compensation and budgeting, forecasting and planning purposes.
We do not consider these non-GAAP measures an alternative to financial measures determined in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The principal limitations of these non-GAAP financial measures are that they may exclude significant expenses and income items that are required by GAAP to be recognized in our consolidated financial statements. In addition, they reflect the exercise of management’s judgment about which expenses and income items are excluded or included in determining these non-GAAP financial measures. In order to compensate for these limitations, management provides reconciliations of the non-GAAP financial measures we use to their most directly comparable GAAP measures. Non-GAAP financial measures should not be relied upon, in whole or part, in evaluating the financial condition, results of operations or future prospects of the Company.

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Business
In November 2017, we acquired Tembec Inc. (“Tembec”) which was engaged in the manufacture of cellulose specialties, commodity products, forest products and pulp & paper (the “Acquisition”). The Acquisition created a combined company with leading positions in acetate and ethers high purity cellulose end-use markets, as well as, a more diversified earnings stream given the addition of the forest products, pulp and paper businesses. Consequently, we now operate in the following business segments:
High Purity Cellulose
We manufacture and market high purity cellulose, which is sold as either cellulose specialties or commodity products. We are the leading global producer of cellulose specialties, which are primarily used in dissolving chemical applications that require a highly purified form of cellulose. Pricing for our cellulose specialties products is typically set annually in the fourth quarter for the following year based on discussions with customers and the terms of contractual arrangements. Our commodity products, primarily consist of commodity viscose and absorbent materials. Commodity viscose is a raw material required for the manufacture of viscose staple fibers which are used in woven and non-woven applications. Absorbent materials, typically referred to as fluff fibers, are used as an absorbent medium in consumer products. Pricing for commodity products is typically referenced to published indexes or based on publicly available spot market prices. Sales of resins, chemicals, and energy, a majority of which are by-products, are included in the high purity cellulose segment.
Our four production facilities, located in the U.S., Canada and France, have a combined annual production capacity of approximately 775,000 metric tons of cellulose specialties or commodity products. Additionally, we have dedicated approximately 245,000 metric tons of production to commodity products.
Wood fiber, chemicals, and energy represent approximately 31 percent, 19 percent and 8 percent, respectively, of the per metric ton cost of sales for the nine month period ended September 29, 2018. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Forest Products
We manufacture and market high-quality construction-grade lumber in North America. The lumber, primarily spruce, pine, or fir, is used in the construction of residential and multi-family homes, light industrial and commercial facilities, and the home repair and remodel markets. The chips, manufactured as a by-product of the lumber manufacturing process, are used in our Canadian High Purity Cellulose and Pulp & Paper plants. Pricing for lumber is typically referenced to published indexes marketed through our internal sales team. Our seven production facilities located in Canada have a targeted capacity of approximately 770 million board feet of lumber.
Wood and energy represents approximately 47 percent and 5 percent, respectively, of the per million board feet cost of sales for the nine month period ended September 29, 2018. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Pulp
We manufacture and market high-yield pulp which is used by paper manufacturers to produce paperboard, packaging, printing and writing papers and a variety of other paper products. Pricing for high-yield is typically referenced to published indices marketed through our internal sales team. Our two production facilities located in Canada have the capacity to produce 570,000 metric tons of high-yield pulp.
Wood fiber, chemicals, and energy represent approximately 26 percent, 16 percent and 15 percent, respectively, of the per metric ton cost of sales for the nine month period ended September 29, 2018. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Paper
We manufacture and market paperboard and newsprint. Paperboard is used for printing documents, brochures, promotional materials, paperback book or catalog covers, file folders, tags, and tickets. Newsprint is a paper grade used to print newspapers, advertising materials and other publications.
Pricing for paperboard and newsprint is typically referenced to published indices and marketed through our internal sales team. Our two production facilities located in Canada have the capacity to produce 180,000 metric tons of paperboard and 205,000 metric tons of newsprint.
Wood fiber, chemicals, and energy represent approximately 40 percent, 11 percent and 6 percent, respectively, of the per

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metric ton cost of sales for the nine month period ended September 29, 2018. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Outlook
High Purity Cellulose

On a combined basis, cellulose specialties sales prices and volumes are anticipated to decline approximately 3 to 4 percent in 2018 from 2017 driven primarily by lower demand for acetate products. Commodity sales volumes are expected to decline 2 percent. Despite higher wood costs caused by wet weather, the sale of our resins business and an estimated $2 million fourth quarter impact of the 5 percent tariff on approximately $160 million of annual sales of cellulose specialties into China from the U.S., we expect fourth quarter adjusted EBITDA to be modestly below third quarter.

Forest Products

Lumber prices have declined significantly from the recent peak. However, we believe the market has over-corrected and expect lumber prices to rebound given the relative level of the U.S. housing starts and strong GDP growth. Industry participants have begun to take downtime which will reduce capacity and may improve market conditions. Profitability is anticipated to be break-even or at worst a modest loss in the fourth quarter.  Capital investments and cost reductions are expected to provide incremental profitability in 2019. Duties on lumber sales into the U.S. are anticipated to affect approximately 50 percent of the Company’s sales in this segment and reduce EBITDA by approximately $25 million during 2018.

Pulp

High-yield pulp prices are expected to remain near historically high levels in the fourth quarter. Strong demand for pulp, reduced recycled fiber imports to China, and global industry production at or near capacity continue to support pulp prices. With no significant new capacity expected in the pulp markets in the near-future, supply-demand dynamics should yield positive market conditions into 2019.

Paper

Paperboard markets are expected to remain stable while newsprint sales prices are expected to adjust downward with the reversal of the duties on U.S. shipments. In the fourth quarter, segment profitability is expected to be in-line with prior quarters, when taking into account the reversal of duties.

Capital Allocation and Investment

We anticipate that we will spend approximately $100 to $110 million in maintenance capital expenditures across all segments in 2018. In addition, we anticipate spending approximately $45 million on high-return strategic projects in 2018. Overall spending may be modestly below these amounts depending on timing at year-end. These strategic opportunities are predominantly focused in the High Purity Cellulose and Forest Products segments with an average pay-back of less than 2 years.
We expect to continue our dividend and share repurchases.
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.
Realizability of both recorded and unrecorded tax assets and tax liabilities
We have recorded certain deferred tax assets we believe are more likely than not to be realized in future periods. The recognition of these tax assets is based on our analysis of both positive and negative evidence about the future realization of the tax benefit of each existing deductible temporary difference or carryforward. Future realization is based on the existence of sufficient taxable income of the appropriate character, within the appropriate taxing jurisdiction (for example country, state or province), and within the carryback and carryforward periods available under the applicable tax laws. Tax assets are reviewed periodically for realizability. This review requires management to make assumptions and estimates about future profitability affecting the realization of these tax assets. If the review indicates the realizability may be less than likely, a valuation allowance is recorded.

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Our income tax returns are subject to examination by U.S. federal and state taxing authorities as well as foreign jurisdictions, including Canada and France. In evaluating the tax benefits associated with various tax filing positions, we record a tax benefit for an uncertain tax position if it is more-likely-than-not to be realized upon ultimate settlement of the issue. We record a liability for an uncertain tax position that does not meet this criterion. The liabilities for unrecognized tax benefits are adjusted in the period in which it is determined the issue is settled with the taxing authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new facts or information become available. See Note 13Income Taxes of our consolidated financial statements for more information.
For a full description of our critical accounting policies, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Annual Report on Form 10-K.
Results of Operations
Financial Information
Three Months Ended
 
%
 
Nine Months Ended
 
%
(in millions, except percentages)
September 29, 2018
 
September 23, 2017
 
Change
 
September 29, 2018
 
September 23, 2017
 
Change
Net Sales
$
544

 
$
210

 
159%
 
1,608

 
612

 
163%
Cost of Sales
(448
)
 
(178
)
 
 
 
(1,330
)
 
(509
)
 
 
Gross Margin
96

 
32

 
200%
 
278

 
103

 
170%
Selling, general and administrative expenses
(31
)
 
(12
)
 
 
 
(79
)
 
(40
)
 
 
Duties
(1
)
 

 
 
 
(21
)
 

 
 
Other operating expense, net
(8
)
 
(1
)
 
 
 
(10
)
 
(3
)
 
 
Operating Income
56

 
19

 
195%
 
168

 
60

 
180%
Interest expense
(15
)
 
(9
)
 
 
 
(45
)
 
(27
)
 
 
Interest income and other, net
2

 
(1
)
 
 
 
12

 
(1
)
 
 
Adjustment to gain on bargain purchase
6

 

 
 
 
21

 

 
 
Gain on derivative instrument

 
14

 
 
 

 
16

 
 
Income Before Income Taxes
49

 
23

 
113%
 
156

 
48

 
225%
Income Tax Expense
(11
)
 
(7
)
 
 
 
(40
)
 
(18
)
 
 
Net Income
$
38

 
$
16

 
138%
 
$
116

 
$
30

 
287%
 
 
 
 
 
 
 
 
 
 
 
 
Gross Margin %
18
%
 
15
%
 
 
 
17
%
 
17
%
 
 
Operating Margin %
10
%
 
9
%
 
 
 
10
%
 
10
%
 
 
Effective Tax Rate %
23
%
 
33
%
 
 
 
26
%
 
38
%
 
 
Net sales by segment were as follows:
 
Three Months Ended
 
Nine Months Ended
Net sales (in millions)
September 29, 2018
 
September 23, 2017
 
September 29, 2018
 
September 23, 2017
High Purity Cellulose
$
308

 
$
210

 
$
876

 
$
612

Forest Products
86

 

 
282

 

Pulp
89

 

 
265

 

Paper
78

 

 
238

 

Eliminations
(17
)
 

 
(53
)
 

Total net sales
$
544

 
$
210

 
$
1,608

 
$
612

Net sales increased $334 million, or approximately 159 percent, in the third quarter of 2018 compared to the third quarter of 2017. On a year-to-date basis, net sales were up $996 million, or 163 percent, over the prior year. The increases were primarily due to the Acquisition. For further assessment of changes in net sales, see the discussion of operating results by segment.

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Operating income (loss) by segment was as follows:
 
Three Months Ended
 
Nine Months Ended
Operating income (loss) (in millions)
September 29, 2018
 
September 23, 2017
 
September 29, 2018
 
September 23, 2017
High Purity Cellulose
$
34

 
$
30

 
$
83

 
$
96

Forest Products
8

 

 
35

 

Pulp
26

 

 
75

 

Paper
14

 

 
23

 

Corporate
(26
)
 
(11
)
 
(48
)
 
(36
)
Total operating income
$
56

 
$
19

 
$
168

 
$
60

Operating income for the third quarter of 2018 increased $37 million, or approximately 195% percent, over the prior year third quarter. Operating income for the first nine months of 2018 increased $108 million, or 180% percent, compared to the same period last year. The increases were primarily due to the Acquisition. For further assessment of changes of operating income, see the discussion of operating results by segment.
Non-operating Expenses
Interest expense for the third quarter and first nine months of 2018 increased $6 million and $18 million, respectively, over the same prior year periods. The increases in 2018 were due to higher debt balances and interest rates associated with the debt used to finance the Acquisition. See Note 5Debt and Capital Leases.
Interest income and other, net increased primarily due to the favorable impact of Tembec’s pension plans on other components of net periodic pension costs. See Note 12Employee Benefit Plans.
During the second and third quarters of 2018, provisional amounts included in the preliminary valuation of the Acquisition required adjustments to reflect new information obtained. As a result, we recognized adjustments to the gain on bargain purchase totaling approximately $21 million year-to-date. See Note 1Basis of Presentation and New Accounting Pronouncements.
Income Tax Expense
Our effective tax rate for the nine months ended September 29, 2018  and September 23, 2017 was 26 percent and 38 percent, respectively. The decrease is primarily due to lower tax rates in the United States as a result of the Tax Cuts and Jobs Act enacted in December of 2017. Additionally, the first quarter of 2017 effective tax rate was unfavorably impacted by the accounting for the 2014 employee incentive stock program, which did not pay out as a result of not meeting the required performance criteria. See Note 13Income Taxes for additional information.
Operating Results by Segment
High Purity Cellulose
 
Three Months Ended
 
Nine Months Ended
(in millions)
September 29, 2018
 
September 23, 2017
 
September 29, 2018
 
September 23, 2017
Net Sales
$
308

 
$
210

 
$
876

 
$
612

Operating income
34

 
30

 
83

 
96

Average Sales Prices ($ per metric ton):
 
 
 
 
 
 
 
Cellulose Specialties
$
1,333

 
$
1,460

 
$
1,344

 
$
1,456

Commodity Products
807

 
737

 
813

 
739

Sales Volumes (thousands of metric tons):
 
 
 
 
 
 
 
Cellulose Specialties
163

 
114

 
466

 
331

Commodity Products
70

 
54

 
188

 
167


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Changes in High Purity Cellulose net sales are as follows: