2018
ANNUAL
R E PO R T
2018 Letter to Stockholders
Fellow Stockholders:
2018 was a very successful year for Rayonier Advanced Materials
as we both began the successful integration of the Tembec
acquisition as well as continued repositioning the Company for
long-term growth through our Four Strategic Pillars. The creation
of sustainable value for our stockholders is a continuous journey
and we are confident we are on the right road.
Before discussing our strategy for the future, let me share a
few highlights. Our financial performance was very solid. We
generated strong year-over-year improvement in revenue,
adjusted net income and adjusted free cash flows. Adjusted net
income per share of $1.74 was up 74% over prior year. Through
Cost Transformation initiatives and Tembec-related synergies
achieved by our team, we drove $53 million of improvements that
largely overcame headwinds such as price and volume pressures,
isolated reliability issues, and duties imposed on our lumber and
newsprint products sold into the U.S. as well as dissolving wood
pulp sold into China, and weakness in the lumber markets in the
back half of the year.
As we look back at 2018, it is also important that we reflect on
the past. In early 2015, facing market and inflation headwinds
and almost $1 billion in spin-off related debt, we commenced
an ambitious four-year program to transform our business by
sustainably reducing costs by $140 million. In 2018, the final year
of this program, we achieved $25 million in savings and reached
our $140 million Cost Transformation goal. As we progressed over
the four-year period, this initiative allowed us to build cash, reduce
debt and, in 2016, prudently access equity markets in a way that
enabled our acquisition of Tembec in late 2017.
Our 2015 Cost Transformation program was a major step
forward. Through this initiative, our team developed a culture
and competencies in continuous improvement we now bring to
everything we do--and the confidence to move forward boldly
through 2020 and beyond.
With this success to draw upon, when we acquired Tembec in 2017
we also announced our roadmap for the future, which we call our
Four Strategic Pillars of Growth. The goal of our Four Pillars is to
generate $155 million in incremental EBITDA by year-end 2020.
Our Four Pillars are:
• Rapidly reshaping the Company’s cost position
• Maximizing earnings by optimizing product and market mix
• Developing a pipeline of customer-valued new product and
service offerings
• Creating a faster growing business with disciplined and
balanced capital allocation
Also, driven by our robust cash generation, we employed a
disciplined capital allocation strategy (Pillar Four) across three
target areas: $45 million in debt reduction, $37 million in strategic
capital investments in our business and $72 million in return of
capital to our stockholders through dividends and stock buybacks.
On March 7, 2019, we held an Investor Day at the New York
Stock Exchange, where we talked to stockholders, analysts and
industry participants about our strategy for growing profitability
and building value for our stockholders. At this conference, we
discussed our history, each of our businesses, how sustainability fits
into everything we do, and the Four Pillars and how they will drive
our future growth.
A key focus of Investor Day was describing our new Go-to-Market
Strategy to grow profitability and value in our core High Purity
Cellulose (HPC) business, and how it is a part of our Four Pillars.
This new strategy has emerged out of the fact that, despite our
great success in reducing cost in recent years, this achievement
has been more than offset by several years of price declines and
cost inflation in our core business. Our Go-to-Market Strategy
is comprised of several initiatives in two main areas—Asset
Optimization and Commercial Actions.
Through Asset Optimization we will streamline and narrow the
range of products we make at each of our HPC facilities to respond
to growth in certain segments and declines in others, improve
quality and reduce cost. Our Commercial Actions include specific
initiatives relating to how we market and sell our high purity
products to ensure that we can generate margins and EBITDA that
allow us to re-invest in our business and provide a good return for
our stockholders.
Detailed materials from our Investor Day, as well as our newly-
published 2019 Sustainability Report, are available on our web site.
I encourage you to review them.
With a full year of Tembec ownership under our belts, we have
transformed One Company into One Team. Our employees did
a great job in 2018, but there remains much more to do to meet
the promise of our Four Pillars by the end of 2020, the profitability
improvement objectives of our Go-to-Market Strategy, and the
opportunities and challenges before us due to continuing global
change. We are confident that our direction is the right one to
create and grow long-term value for our stockholders.
Sincerely,
In 2018, we began executing on each of these Four Pillars, with
highlights including $28 million in Tembec-related synergy savings
achieved (Pillar One), nearly double our first-year objective.
PAUL G. BOYNTON
Chairman, President and
Chief Executive Officer
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of exchange on which registered
Common stock, par value $0.01 per share
New York Stock Exchange
8.00% Series A Mandatory Convertible Preferred Stock, par value $0.01 per share
New York Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act: None
NO
NO
NO
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES
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
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
NO
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
NO
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES
The aggregate market value of the Common Stock of the registrant held by non-affiliates at the close of business on June 30, 2018 was $857,934,441 based on the closing
sale price as reported on the New York Stock Exchange.
The registrant had 49,277,270 shares of Common Stock, $.01 par value per share, outstanding as of February 22, 2019.
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the 2019 annual meeting of the stockholders
are incorporated by reference in Part III hereof. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal
year ended December 31, 2018.
Table of Contents
Item
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
8.
9.
9A.
9B.
10.
11.
12.
13.
14.
15.
16.
Part I
Business....................................................................................................................................................
Risk Factors..............................................................................................................................................
Unresolved Staff Comments ....................................................................................................................
Properties..................................................................................................................................................
Legal Proceedings ....................................................................................................................................
Mine Safety Disclosures...........................................................................................................................
Part II
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ......................................................................................................................................
Selected Financial Data............................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations...................
Quantitative and Qualitative Disclosures about Market Risk ..................................................................
Financial Statements and Supplementary Data........................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................
Controls and Procedures...........................................................................................................................
Other Information.....................................................................................................................................
Part III
Directors, Executive Officers and Corporate Governance.......................................................................
Executive Compensation..........................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence.........................................
Principal Accounting Fees and Services ..................................................................................................
Part IV
Exhibits, Financial Statement Schedules .................................................................................................
Form 10-K Summary ...............................................................................................................................
Page
2
8
17
18
18
20
21
23
24
40
41
41
41
42
43
43
43
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43
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44
i
Note About Forward-Looking Statements
Certain statements in this Annual Report on Form 10-K (this “Report”) regarding anticipated financial, business, legal or
other outcomes including business and market conditions, outlook and other similar statements relating to Rayonier Advanced
Materials’ (“the Company” ) 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. The
following risk factors and those contained in Item 1A — Risk Factors, 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.
Amounts contained in this Report may not always add due to rounding.
Part I
When we refer to “we,” “us,” “our,” “the Company,” or “Rayonier Advanced Materials” 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 8 of this Report.
Risks Relating to the Business
• The businesses we operate are highly competitive and many of them are cyclical, 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 35 percent of our 2018 sales, 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 business, financial condition and results of
operations.
• The availability of, and prices for, wood fiber could materially impact our business, results of operations and financial condition.
• We are subject to risks associated with doing business outside of the United States.
• Our operations require substantial capital.
• 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, especially with respect to China, Canada and as a result of “Brexit”, could adversely affect our
ability to access certain markets and otherwise impact our results of operations.
• 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
financial results and how we conduct business.
• The potential impacts of climate change and 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.
• The 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 cybersecurity 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.
1
• The phase-out of the London Inter Bank Office Rate (“LIBOR”) as an interest rate benchmark could result in an increase to
our borrowing costs.
• 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 Inc. (“Tembec”) acquisition and meet our financial objectives therefrom,
and any future acquisitions we may make, may affect our results.
Risks Related to the Company’s Common Stock and Certain Corporate Matters
• Your percentage of ownership in the Company may be diluted in the future.
• Our common stock ranks junior to our Mandatory Convertible Preferred Stock, Series A (the “Preferred Stock”) with respect
to dividends and amounts payable in the event of our liquidation.
• Certain provisions of the Preferred Stock could prevent or delay an acquisition of the Company, which could decrease the
price of our common stock.
• Certain provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, could prevent
or delay an acquisition of the Company, which could decrease the price of our common stock.
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 U.S. Securities and Exchange Commission (the “SEC”), including those on Forms
10-Q, 10-K, 8-K and other reports. Details on each of the above risk factors are more specifically described in Item 1A - Risk
Factors.
Note About Non-GAAP Financial Measures
A “non-GAAP financial measure” is generally defined as a numerical measure of a company’s historical or future performance
that excludes or includes amounts, or is subject to adjustments, so as to be different from the most directly comparable measure
calculated and presented in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). This Report 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 7 — 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 non-GAAP measures an alternative to financial measures determined in accordance with GAAP. The
principal limitation of these non-GAAP financial measures is they may exclude significant expense 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 expense and income items are excluded or included in determining these non-GAAP financial measures.
In order to compensate for these limitations, reconciliations of the non-GAAP financial measures we use to their most directly
comparable GAAP measures are provided. 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.
Item 1. Business
Rayonier Advanced Materials Inc. is a global leader of cellulose-based technologies, including high purity cellulose
specialties, a natural polymer commonly found in cell phone and computer screens, filters and pharmaceuticals. Prior to June
27, 2014, we consisted of Rayonier Inc.’s (“Rayonier’s”) wholly-owned performance fibers business, the global leader in the
production of cellulose specialties. On that date, holders of Rayonier common shares received one share of our common stock
for every three Rayonier common shares held on the record date. This resulted in our separation from Rayonier and the start of
our business as an independent, publicly traded company.
2
Starting from a tree and building upon more than 90 years of experience in cellulose chemistry, we provide our customers
high quality cellulose specialties pulp products that make up the essential building blocks for their products while providing
exceptional service and value.
On November 17, 2017, we completed the acquisition of Tembec which manufactures cellulose specialties, commodity
products, forest products, pulp and paper (the “Acquisition”). The Acquisition created a combined company with leading positions
across the cellulose specialties product spectrum, including acetate, ethers, high-strength viscose, filtration and other cellulose
specialties, as well as adding complementary assets in the forest products, pulp and paper businesses. Consequently, we now
operate in the following business segments:
• High Purity Cellulose
Forest Products
•
Pulp
•
Paper
•
See Note 19 - Segment and Geographical Information of our consolidated financial statements for more information.
With the completion of the Acquisition, we announced a strategy to grow EBITDA and drive long-term value for our
stockholders. Our plan focuses on the following four strategic pillars:
• Cost Transformation - driving sustainable cost reductions by fostering a culture of continuous improvement.
• New Products - expanding our business by developing next generation cellulose fibers and other value-added products
utilizing our cellulose processing technology, expertise and co-products. We have made significant progress in developing
and applying proprietary technologies to new products in many of the end-market segments we serve.
• Market Optimization - maximizing the profitability of our existing products and assets by optimizing the intersection
of our customers’ needs, our manufacturing capabilities and transportation costs to drive higher value for our customers
and our Company.
•
Investments - delivering a capital allocation strategy that maximizes our risk adjusted returns. We intend to de-lever our
balance sheet through EBITDA growth and repayment of indebtedness with a target net leverage ratio of 2.5 times
EBITDA. In conjunction with this de-leveraging, we will allocate capital across high return investments in our facilities,
acquisitions and other external investments to grow profitability, as well as return capital to stockholders through stock
buybacks and dividends.
High Purity Cellulose
The High Purity Cellulose segment, and in particular the cellulose specialties product line, is the primary driver of our
profitability. Cellulose specialties are natural polymers, used as raw materials to manufacture a broad range of consumer-oriented
products such as cigarette filters, liquid crystal displays, impact-resistant plastics, thickeners for food products, pharmaceuticals,
cosmetics, high-tenacity rayon yarn for tires and industrial hoses, food casings, paints and lacquers. We manufacture products
tailored to the precise and demanding chemical and physical specifications of our customers, achieving industry-leading purity
and product functionality. Our ability to consistently manufacture high-quality cellulose specialties products is the result of our
proprietary production processes, intellectual property, and more than ninety years of technical expertise and knowledge of
cellulosic chemistry.
Additionally, a significant portion of our production capacity is dedicated to manufacturing high-purity commodity products
for viscose and absorbent materials applications. Commodity viscose is a raw material required for the manufacture of viscose
staple fibers which are used in woven applications such as rayon 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, typically
referred to as fluff fibers, 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. Cellulose specialties typically
contain over 95 percent cellulose, while commodity products typically contain less than 95 percent cellulose.
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Products
Cellulose Specialties
Cellulose specialties are a natural polymer primarily derived from either wood or cotton and are used as a principal raw
material to manufacture a broad range of products. Cellulose specialties generally command a price premium and earn higher
margins relative to other commodity wood pulp products. Typically, product pricing is set annually in the fourth quarter for the
following year based on discussions with customers and the terms of contractual arrangements. Cellulose specialties are a
dissolving wood pulp product which target a combination of high purity and high viscosity. Unlike other wood pulps used for
their physical properties, cellulose specialties are sought after for the unique chemical properties they impart on downstream
products.
Derived from wood, our cellulose specialties require high levels of purity, consistency and process knowledge. Our products
play a significant role in our customers’ manufacturing processes, which require cellulose specialties of high purity and uniformity
for efficient production. Therefore, our customers demand products of the highest quality. As a result, our products are custom-
engineered and manufactured to each customers’ unique specifications and require a stringent qualification process; our quality
and consistency allow our customers to operate more efficiently and cost-effectively.
One of our key competitive advantages is our unique ability to leverage our global manufacturing asset base to provide our
customers greater supply chain security for cellulose specialties fibers. With our four facilities and five manufacturing lines
capable of producing cellulose specialties, we are the only cellulose specialties producer in the world with flexibility to use both
hardwood and softwood fibers, kraft and sulfite cooking processes, and a variety of proprietary chemical treatments to provide
customized product functionality. Additionally, we possess significant process knowledge: the understanding of wood fiber
properties and their modification under a sequence of chemical processes, accumulated and developed over 90 years of practical
application to satisfy a variety of customer needs. This process knowledge, combined with our manufacturing scale and flexibility
and knowledge of customers’ applications and specifications, makes us the industry’s most adaptable modifier of cellulose fibers.
Commodity Products
We can easily shift our High Purity Cellulose segment manufacturing assets between commodity viscose and absorbent
materials production to take advantage of market conditions and generate the most attractive margins.
Commodity viscose is primarily sold to producers of viscose staple fibers which in turn are used primarily to manufacture
rayon fibers which are widely used in the clothing and textile industries. Shifts in fashion styles and textile fiber blending have
increased demand for viscose staple fibers. Additionally, variability in cotton linter supply and increasing environmental concerns
about cotton production have resulted in viscose staple producers shifting volume away from cotton linter pulp to wood-based
dissolving pulp.
Absorbent materials, or fluff fibers, are typically used in consumer products such as baby diapers. These fibers provide a
medium for fluid acquisition, distribution and retention in the products in which they are incorporated. Pricing for commodity
products is typically referenced to published indexes or based on publicly available spot market prices.
Competition
Cellulose Specialties
Significant intellectual property, capital investment and technical expertise are needed to design and manufacture customized
cellulose specialties fibers to exacting customer specifications. The product must be formulated to achieve the desired
characteristics including parameters for purity, viscosity, brightness, reactivity and other physical properties. Product qualification
time can be lengthy, extending six to twenty-four months. Resulting customer relationships are typically long-term, and are based
on an understanding of our customers’ production processes and technical expertise which we utilize to help solve our customers’
production issues and support new product development. Further, establishing a production line and obtaining the necessary
production technologies requires substantial capital and ongoing maintenance expenditures.
Product performance, technical service and price are principal methods of competition in cellulose specialties. Product
performance is primarily determined by the chemical attributes of the pulp, including purity, viscosity and uniformity of the
cellulose specialties. Our processes, which are a key element of our intellectual property, are capable of generating cellulose
specialties purity levels in excess of 98 percent as well as the highest levels of viscosity derived from wood pulp.
We compete with both domestic and foreign producers in cellulose specialties. Competitors include GP Cellulose, Borregaard,
Bracell, Sappi, Nippon, Cosmo Specialty Fibers and Aditya Birla Group. Some competitors use both wood and cotton linter
4
fibers, as a source of cellulose fibers. Our multiple manufacturing lines, processes and intellectual property allow us to compete
in more segments of the cellulose specialties market than any of our competitors.
Commodity Products
The principal method of competition in commodity products is price, as purity and uniformity are less critical differentiators.
We compete with both domestic and foreign producers of commodity products.
For commodity viscose, many competitors derive their commodity viscose from either wood or cotton. Although cellulose
specialties can generally be sold to meet commodity viscose demand, the reverse is not typically true. However, in recent years
commodity viscose has continued to supplant cotton as the preferred raw material input for viscose staple fiber production. For
commodity viscose, major competitors include Sappi, Aditya Birla Group, Lenzing and Bracell.
For absorbent materials, major competitors include GP Cellulose, Domtar and International Paper.
Forest Products
We manufacture and market high-quality construction-grade softwood lumber in North America through our seven sawmills
located in Canada.
Approximately 59 percent of our sales are exported from Canada to the U.S. On December 28, 2017, the United States
Department of Commerce (“USDOC”) issued a determination for countervailing and anti-dumping duties (collectively, the
“Duties”) of approximately 20 percent on imports of softwood lumber from Canada. On January 3, 2018, the USDOC issued
orders to the United States Customs and Border Protection to collect the Duties on softwood lumber imports from Canada.
Products
We manufacture finished dimensional lumber (2 by 4’s, 2 by 8’s, etc.) primarily made of spruce, pine, or fir, used in the
construction of residential and multi-family homes, light industrial and commercial facilities, and the home repair and remodel
markets. Wood chips, a by-product of the lumber manufacturing process, are used as raw materials in our High Purity Cellulose,
Pulp and Paper facilities in Canada. Additionally, bark and sawdust are used for fuel in several of our operations.
Competition
The principal method of competition in the Forest Products segment is price, which is based on individual sawmill efficiency,
the availability of competitively-priced raw materials, demand for wood products used in the construction of residential and
multi-family homes as well as demand from the repair and remodel of existing homes. Residential and multi-family home
construction is influenced by demographic factors such as population growth, employment, consumer confidence, consumer
income, availability of financing and interest rate levels, and the supply and pricing of existing homes on the market. Repair and
remodel activity is affected by the size and age of existing housing inventory and access to home equity financing and other
credit.
Our significant competitors include West Fraser Timber Ltd., Resolute Forest Products, Weyerhauser, Georgia Pacific,
Interfor, Canfor, Eacom and other producers of softwood lumber in North America.
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 annually produce
570,000 metric tons of high-yield pulp.
Products
We produce high-yield pulps at our Matane and Temiscaming plants in Quebec, primarily from hardwood aspen and maple
species. These pulps are used by paper manufacturers to produce paperboard products, printing and writing papers and a variety
of other paper grades.
Competition
The principal method of competition in the Pulp segment is price. Price is impacted by the balance between supply and
demand as affected by global economic conditions, changes in consumption and capacity, the level of customer and producer
5
inventories, and fluctuations in currency exchange rates. To a lesser extent, quality and service are also considered competitive
determinants.
Significant competitors include Millar Western, West Fraser, Paper Excellence, Estonia Cell and Winstone.
Paper
We manufacture paperboard and newsprint. Paperboard, produced in the Temiscaming plant in Quebec, is used for printing
documents, brochures, promotional materials, packaging, paperback book or catalog covers, file folders, tags, and tickets.
Newsprint, produced in the Kapuskasing plant in Ontario, is a paper grade used for 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 annually produce 180,000 metric tons of paperboard
and 205,000 metric tons of newsprint.
Products
Products in the Paper business include:
•
Paperboard, produced in the Temiscaming plant, is used for packaging, printing documents, brochures, promotional
materials, paperback book or catalog covers, file folders, tags and tickets.
• Newsprint, produced in the Kapuskasing plant, is a paper grade used to print newspapers, advertising materials and
other publications.
Competition
The principal method of competition in the Paper segment is price. Price is impacted by the balance between supply and
demand as affected by global economic conditions, changes in consumption and capacity, the level of customer and producer
inventories, and fluctuations in currency exchange rates. To a lesser extent, quality and service are also considered competitive
determinants, particularly for paperboard.
For paperboard, our significant competitors include Westrock, Metsa, Clearwater, and Sappi.
For newsprint, our significant competitors include Resolute Forest Products, White Birch Paper, Kruger, as well as
independent producers.
Raw Materials and Input Costs
All our manufacturing operations require significant amounts of wood fiber, in the form of logs or wood chips, as a raw
material and energy to produce our products. Additionally, our High Purity Cellulose, Pulp and Paper manufacturing processes
require significant amounts of chemicals. These raw materials and input costs are subject to significant changes in prices as a
result of weather conditions, supply and demand. To control cost, we continually pursue reductions in usage and costs of key
supplies, services and raw materials. We do not foresee any material constraints in the near term from pricing or availability.
Wood
Our Canadian Forest Products operations rely on the consistent supply of substantial quantities of logs. Substantially all
timberlands in Canada are government-owned and the right to harvest timber is acquired through provincially-granted licenses.
Licenses grant the holder the right to harvest, for a fee, up to a specified quantity of timber annually. Government objectives in
granting licenses include responsible management of timber, soils, wildlife, water and fish resources and the preservation of
biodiversity and the protection of cultural values. The objectives also include achieving the fullest possible economic utilization
of the forest resources and employment in local communities. In addition, license holders are required to replant the trees harvested
to ensure re-establishment of the forest after harvesting. Reforestation projects are planned and supervised by our forest resource
management staff and subject to approval by relevant government authorities. Our timber harvesting operations are performed
directly or carried out by independent contractors under our forest resource management supervision.
In Canada, the High Purity Cellulose, Pulp and Paper plants are supplied with wood chips produced as a by-product from
the lumber manufacturing process.
In the U.S. and France, we supply wood chips to our High Purity Cellulose plants through the purchase of chips from lumber
producers or produce chips through our wood chipping facilities.
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Chemicals
Chemicals, which include caustic soda (sodium hydroxide), sulfuric acid, ammonia, sodium chlorate and various specialty
chemicals, are purchased under negotiated supply agreements with third parties. The prices for these products are impacted by
various factors including supply and demand, environmental regulation, energy prices and overall economic conditions.
Energy
Our energy is primarily produced through the burning of lignin and other residual biomass in recovery and power boilers
located at our plants. However, our manufacturing facilities still utilize significant amounts of fuel oil, natural gas and purchased
electricity to supplement their energy requirements. In addition, energy prices impact our transportation costs for delivery of raw
materials to our manufacturing facilities and delivery of our finished products to customers.
Intellectual Property
Substantially all of our intellectual property relates to our High Purity Cellulose segment. We own patents, trademarks and
trade secrets, and have developed significant know-how, particularly in the production of high purity cellulose, which we deem
important to our operations. We intend to protect our intellectual property, including, when appropriate, filing patent applications
for inventions that we deem important to our business and operations. Our U.S. patents generally have a duration of 20 years
from the date of filing. We also require key employees to enter into non-compete agreements as appropriate.
Seasonality
Our financial results are not significantly affected by seasonal changes.
Customers
No single customer accounted for more than 10 percent of our consolidated net sales during the year ended December 31,
2018. See Note 19 — Segment and Geographical Information of our consolidated financial statements for more information on
our major customers.
Research and Development
Research and development capabilities and activities are focused on the High Purity Cellulose segment. The quality and
consistency of our cellulose specialties and research and development capabilities create a significant competitive advantage;
they are important factors in achieving an optimal value for our cellulose specialties products. Our research and development
efforts are primarily directed at further developing products and technologies, improving the quality of cellulose fiber grades,
improving manufacturing efficiency and environmental controls and reducing fossil fuel consumption. We continue to grow our
research and development activities to develop and market additional new products and applications.
We spent $6 million, $4 million and $4 million on research and development for the years ended December 31, 2018, 2017
and 2016, respectively.
Environmental Matters
Our manufacturing operations are subject to significant federal, state, provincial and local environmental regulations. For
a more detailed discussion, see Item 1A — Risk Factors, Item 3 — Legal Proceedings, Item 7 — Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Environmental Regulation. Additionally, see Note 9 — Liabilities
for Disposed Operations and Note 20 — Commitments and Contingencies of our consolidated financial statements for more
information.
Employee Relations
We currently employ approximately 4,200 people in the United States, Canada and France. See Note 20 — Commitments
and Contingencies of our consolidated financial statements for more information. We believe relations with our employees are
satisfactory.
Availability of Reports and Other Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and
amendments to those reports filed or furnished pursuant to Sections 13(a) or 14 of the Securities Exchange Act of 1934 are made
available to the public free of charge in the Investor Relations section of our website www.rayonieram.com, shortly after we
electronically file such material with, or furnish them to, the SEC. All reports we file with or furnish to the SEC are also available
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free of charge on the SEC’s website, https://www.sec.gov. Our corporate governance guidelines and charters of all committees
of our board of directors are also available on our website.
Item 1A. Risk Factors
Our operations are subject to a number of risks and events 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 this Report
and our other filings and submissions to the SEC. 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.
Business and Operating Risks
The businesses we operate are highly competitive and many of them are cyclical, which may result in fluctuations in pricing
and volume that can adversely affect our business, financial condition and results of operations.
Competition, demand fluctuations and cyclicality are the most significant drivers of sales volumes and pricing for our products.
We face significant competition from domestic and foreign producers in virtually all of our businesses. For example, our cellulose
specialties product line has seen increased cellulose specialties production capacity from our competitors, some of whom have
lower raw material, wood and production costs than us, combined with demand weakness, particularly in the acetate grades, which
have collectively driven cellulose specialties sales prices down substantially over the past several years. Likewise, volumes have
declined meaningfully over the past two years due to these factors. There can be no assurance these declines will not continue
into the near future.
With respect to demand for cellulose specialties, and in particular our acetate grades, the majority of these acetate grades are
used to manufacture acetate tow, which is used to make the filter component of a cigarette. Significant increases in cigarette costs
and potential actions taken by the United States and other countries to discourage smoking, such as tax increases on tobacco
products, policy changes and future legislation, may have a material adverse effect on the demand for tobacco products. For
example, actions by the Chinese government to curb corruption and limit smoking in public buildings have had some impact on
cigarette consumption. Additionally, increased use of e-cigarettes, electronically heated tobacco products and smokeless tobacco
products, by way of example, may affect demand for traditional cigarettes.
Our lumber, paper, high yield pulp and paper-related commodity businesses are highly cyclical and influenced by a variety
of factors. These include periods of excess product supply due to industry capacity increases, periods of decreased demand due
to reduced economic activity or market conditions, inventory de-stocking by customers and fluctuations in currency exchange
rates. These factors may cause significant price changes over a short period, as we saw in 2018 in our lumber business. To address
these factors, we have in the past, and may in the future, elect to schedule production curtailments and shutdowns to address, for
example, unfavorable economic conditions, reduced demand for our products or the end products of our customers, lack of
economically viable fiber in Canada, reduced market prices and other factors. In particular, our lumber, newsprint and high yield
pulp businesses have been the subject of curtailments and shutdowns in the past.
In sum, continued competitive pressures and demand weakness, as well as the cyclicality of our commodity businesses,
may have a material impact on our future sales prices and volumes and, therefore, our business, financial condition and results
of operations.
Our ten largest customers represent approximately 35 percent of our 2018 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.
While we are not dependent on any single customer or group of customers, our ten largest customers accounted for
approximately 35 percent of revenue in 2018. Due to the highly competitive nature of our businesses, we regularly bid for new
business and to retain/renew existing business and, as such, we are subject to the potential for meaningful revenue and volume
gains and losses.
In addition, some of the industries in which our end-use customers participate, such as construction, home building, publishing,
packaging, automotive and textiles, are cyclical in nature, thus posing risks to us which are beyond our control. These industries
are highly competitive and may experience overcapacity and reductions in end use demand, each of which may affect demand for
and pricing of our products. The consequences of this could include the reduction, delay or cancellation of customer orders.
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We are also subject to credit risk associated with these customers. If one or more of our ten largest customers were to become
bankrupt, insolvent or otherwise were unable to pay for its products, we may incur significant write-offs of accounts that may
have a material adverse effect on our business, financial condition and results of operations.
Although we continue to strive to broaden and diversify our customer base, a significant portion of our revenue is derived
from these ten customers, and the loss of all or a substantial portion of sales to any of these customers, or significant, unfavorable
changes to pricing or terms contained in contracts with them, could materially affect our business, financial condition or results
of operations. See Note 19 — Segment and Geographical Information of our consolidated financial statements for more information
on our major customers.
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.
Any of our major manufacturing facilities, or a significant portion of any of these facilities, could cease operations unexpectedly
or suffer a material disruption to all or a portion of its operations due to a number of events, including:
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unscheduled outages or downtime due to the need for unexpected maintenance or equipment failure, such as for
portions of our facilities that produce steam and electricity (such as boilers and turbines), pollution control equipment,
and equipment directly used to manufacture our products;
prolonged power interruptions or failures;
explosion of a boiler or other pressure vessel;
interruptions in the supply of raw materials, including chemicals and wood fiber;
disruptions to or failures of the transportation infrastructure, such as roads, bridges, railroad tracks and tunnels, as
well as lack of availability of rail, trucking and ocean shipping equipment and service from third party transportation
providers;
interruption or material reduction of water supply;
a chemical spill or release or other event causing risks to the environment or human health and safety;
information technology system failures and cybersecurity incidents;
fires, floods, windstorms, earthquakes, hurricanes or other similar catastrophes, such as the hurricanes which impacted
our Jesup, Georgia and Fernandina Beach, Florida plants in 2017;
labor interruptions, such as the strike at our Temiscaming, Quebec facility in 2014;
terrorism or threats of terrorism; and
other operational problems resulting from these and other risks.
Some of these matters are discussed in more detail in other sections of this Item 1A-Risk Factors. Depending on the nature,
extent and length of any operational interruption, the event could materially affect our business, financial condition and results of
operations.
Changes in raw material and energy availability and prices could affect our results of operations and financial condition.
Raw material costs and energy, such as chemicals, oil and natural gas and electricity are a significant operating expense. The
cost of these inputs can be volatile and are susceptible to rapid and substantial increases due to factors beyond our control, such
as lack of availability, changing economic and weather conditions, political or other unrest or instability in energy-producing
nations, and supply and demand considerations. For example, caustic soda, a key manufacturing input in our high purity cellulose
business, has historically had significant price volatility. Similarly, the price of oil and natural gas (including its pipeline
transportation element) is subject to fluctuations based on market and other factors. In contracts for certain of our products, pricing
is set annually or otherwise not subject to change for a contractually-agreed period of time, so in some cases we may have limited
ability to pass along fluctuations in these input costs once the contract price for the relevant period has been established. In addition,
industrial and other policies of the governments and governmental agencies having jurisdiction over our facilities may change,
due to changes in political leadership or otherwise, which also could adversely impact the cost of energy and its transportation.
While we often use various strategies to mitigate the potential impact of this pricing volatility, such as long term contracting and
the purchase of derivative commodity contracts, the impact of raw material and energy pricing increases could materially adversely
affect our business, financial condition and results of operations.
The availability of, and prices for, wood fiber may significantly impact our business, results of operations and financial
condition.
Wood fiber is the single largest raw material in the manufacturing process for virtually all of our products. Many factors can
impact its availability and pricing: One key factor is whether the land on which the timber is grown is owned by private parties
or governmental entities. For example, fiber for our U.S. and French facilities is primarily harvested from privately-held lands,
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while fiber for our Canadian facilities is primarily harvested from lands owned or controlled by the governments of the provinces
of Ontario and Quebec, respectively, which are often referred to as “Crown lands”. In 2018, approximately 90 percent of the
Company’s fiber requirements in Canada were sourced from Crown lands. The Company’s current agreements with provincial
authorities grant timber “tenures” for terms varying from five to 20 years and may be subject to renewals every five years. In
Canada, the Company currently manages approximately 25 million acres (ten million hectares) of Crown lands for timber
production. The price and availability of this Canadian fiber depends, in large part, on the Company’s ability to replace or renew
these agreements on acceptable terms or enter into acceptable alternative fiber supply arrangements with provincial authorities.
The terms of any replacement, renewal or alternative arrangement are based on legislative and regulatory provisions as well as
governmental policy. Therefore, changes in legislation, regulatory regimes or policy in the provinces in which we operate may
reduce the availability of fiber and increase costs through the imposition of additional and more stringent harvesting, rehabilitation
and silvicultural standards or the alteration of fee structures. Although we expect these agreements to be extended in the ordinary
course as they come up for renewal, there can be no assurance that they will be renewed, extended or replaced in the future on
acceptable terms, or at all, or that the amount of timber that the Company is permitted to harvest will not decrease.
Also, Aboriginal communities in Canada, often referred to as “First Nations”, have claimed substantial portions of land in
various provinces based on claims of Aboriginal title or traditional/historical interest. Canadian courts have recognized that
Aboriginal people may possess rights in respect of land used or occupied by their ancestors and have encouraged the federal and
provincial governments and Aboriginal people to resolve rights claims through the negotiation of treaties. We operate in territories
in which Aboriginal people assert these types of rights and interests. To accommodate the traditional activities of these communities
during forestry planning and operations, the Company has concluded agreements, and is currently negotiating other agreements,
with many First Nations communities and other agreements are in development. These agreements support an approach of active
engagement with Aboriginal communities that serves to ensure the identification of issues and facilitates constructive problem-
solving.
Regulatory developments and environmental litigation also have caused, and may cause in the future, significant reductions
in the amount of timber available for commercial harvest from non-Crown lands in Canada and privately-owned lands in the U.S.
and France, thereby increasing prices for these sources of wood fiber. In Canada, for example, future legislation and policy changes,
litigation advanced by environmental groups and Aboriginal communities concerning rights and limitations on harvesting and use
of timberlands, the protection of endangered species, the promotion of forest diversity and the response to and prevention of
wildfires could also affect wood fiber supply, pricing and availability.
In addition, much of the wood fiber we use is sourced by or from third party contractors who harvest, chip and/or truck the
fiber to our manufacturing facilities, either as logs for lumber and chipping, or as chips directly to our manufacturing facilities.
Another key factor in fiber supply and pricing is the availability of experienced logging and fiber transportation contractors in the
areas in which our manufacturing facilities are located. Moreover, to the extent that fiber must be sourced from greater distances
from our facilities due to unavailability of more proximate fiber, this could also impact pricing due to additional transportation
cost. Significant reduction in the availability of experienced contractors could also impact wood fiber supply, pricing and
availability.
Finally, natural conditions, such as weather, timber growth cycles and restrictions on access to timberlands for harvesting (for
example, due to prolonged wet or cold conditions) may also limit the availability and increase the price of wood, as may other
factors, including damage by fire, insect infestation, disease, prolonged drought and natural disasters such as wind storms and
hurricanes. For example, during the past two years we have seen more frequent wet weather in the Southeastern U.S. region from
which we source our fiber, which can result in reduced availability of supply and higher prices, especially for hardwoods. It is
unclear whether these conditions will persist into the future.
In sum, any sustained decrease in harvestable lands or wood supply, or increase in fiber prices, whether sourced from Crown
lands in Canada or from private parties in Canada, the U.S. or France, or changes in the logging and transportation supply base,
or significant changes to historically customary natural conditions, could materially increase our costs and thereby materially
impact our business, financial condition and results of operations.
We are subject to risks associated with doing business outside of the United States.
We have significant manufacturing facilities outside of the United States, in Canada and France, and a significant portion of
our sales are to customers and customer locations outside of the United States, including Canada, China, Japan, South Korea, the
European Union and other international markets. Sales to customers outside of the United States made up approximately 63
percent of our revenue in 2018. The manufacture and sale of our products in non-U.S. markets results in risks that are inherent
in conducting business under international laws, regulations and customs. We expect international sales will continue to contribute
significantly to our financial condition and future growth. The risks associated with our business outside the United States include:
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• maintaining and governing international subsidiaries and managing international operations;
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the need to comply with, changes in and reinterpretations of, the laws, regulations and enforcement priorities of the
countries in which we manufacture and sell our products;
responsibility to comply with anti-bribery laws such as the U.S. Foreign Corrupt Practices Act and similar anti-
bribery laws in other jurisdictions;
trade protection laws, policies and measures and other regulatory requirements affecting trade and investment,
including loss or modification of exemptions for taxes and tariffs, imposition of new tariffs and duties and import
and export licensing requirements, as discussed below in more detail;
repatriating cash from foreign countries to the United States;
changes in tax laws and their interpretations in the countries in which we do business, including the potential impact
on the value of recorded or future deferred tax assets and liabilities;
product damage or losses incurred during shipping;
political instability and actual or anticipated military or political conflicts;
economic instability, inflation, recessions and interest rate and currency exchange rate fluctuations, as discussed
below in more detail;
uncertainties regarding non-U.S. judicial systems, rules and procedures; and
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These and other risks of doing business outside of the United States could adversely affect our business, financial condition
and results of operations.
Our operations require substantial capital.
We require substantial capital for ongoing maintenance, repair and replacement of existing facilities and equipment. Although
we maintain our production equipment with regular scheduled maintenance, key pieces of equipment and systems, some of which
are large in scale, may need to be repaired or replaced periodically. Moreover, some of the facilities we acquired as part of the
Tembec acquisition in 2017 have deferred capital expenditures due to Tembec’s cash flows limitations in recent years, which may
require the Company to make additional investments. The costs of repairing or replacing such equipment and the associated
downtime of the affected production line could adversely affect our financial condition and results of operations. In addition, new
or existing environmental regulations at times require additional capital expenditures for compliance. We believe our capital
resources are currently adequate to meet our current projected operating needs, capital expenditures and other cash requirements.
However, if for any reason we are unable to provide for our operating needs, capital expenditures and other cash requirements on
reasonable economic terms, we could experience an adverse effect on our business, financial condition and results of operations.
Currency fluctuations may have a negative impact on our business, financial condition and results of operations.
We have manufacturing operations in the United States, Canada and France. The Company also sells its products all over the
world, in either U.S dollars, Canadian dollars or Euros. As a result, the Company is exposed to movements in foreign currency
exchange rates, and its earnings are affected by increases or decreases in the value of the U.S. dollar and in the value of the Canadian
dollar and Euro relative to the U.S. dollar. In addition to ordinary course currency fluctuations, specific events such as Brexit
have had, and could in the future have, impact on currency valuation. The Company’s risk management policy allows management,
with oversight from the Audit Committee of its Board of Directors, to hedge a significant portion of its exposure to fluctuations
in foreign currency exchange rates. To accomplish this, the Company has used, and may in the future continue to use, derivative
instruments, such as currency options and foreign exchange forward contracts, to mitigate its exposure to fluctuations in foreign
currency exchange rates, but there can be no assurance that the Company will be protected against substantial foreign currency
fluctuations or that such fluctuations will not have a material adverse 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.
We manufacture our products in the United States, Canada and France, and sell them into more than 40 countries. Our financial
results are highly dependent on our ability to sell our products globally. Trade barriers such as tariffs, countervailing and dumping
duties, quotas and similar restrictions on trade have in the past, and could in the future, result in materially reduced revenues and
profitability. Examples of the effects of such restrictions on trade and tariffs on our business in China, Canada and as a result of
“Brexit” are set forth below.
China
In 2018, the Company had total sales of $361 million of products shipped to customers in China and, of this amount, $222
million were of products manufactured in the United States. The continuing uncertainty, volatility and trade tensions, tariffs and
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negotiations between China and the U.S. have impacted our business in China and could do so in the future. On September 17,
2018, the U.S. Trade Representative (“USTR”) announced that an additional 10 percent tariff would be imposed on more than
5,700 tariff lines, effective September 24, 2018. Absent an agreement between the U.S, and China or action by the USTR, tariffs
on these lines will increase to 25 percent on April 1, 2019. On September 24, 2018, in retaliation for the U.S. tariffs, China
announced a five percent tariff on approximately $60 billion in U.S. products exported to China, which includes all wood pulp
sold by the Company from the U.S. into China. The Chinese government has also indicated the potential for additional retaliation
in response to the U.S. tariffs, which could take the form of additional tariffs on U.S. products exported by the Company into
China, or other actions such as quotas or other limitations on Chinese purchases from U.S.-based companies, including the Company.
While the Company is exploring alternatives to serve its Chinese customers from its non-U.S. facilities, failure of the U.S. and
Chinese governments to reach acceptable agreements regarding trade, as well as continued trade volatility and additional trade-
related actions by the Chinese government, could have a material impact on our business, financial condition and results of
operations.
In April of 2014, China’s Ministry of Commerce (“MOFCOM”) issued a final determination assessing a 17.2 percent duty
on imports of our lower purity commodity viscose dissolving pulp into China from our Jesup, Georgia and Fernandina Beach,
Florida plants in the United States, and a 13 percent duty for similar imports into China from our plant in Temiscaming (Quebec),
Canada. This product is primarily utilized to produce viscose staple fiber for use in the manufacture of fabrics. MOFCOM’s final
determination has remained in place for five years, but may be extended for an additional five years at the discretion of MOFCOM.
If extended beyond its original 2019 expiration, MOFCOM’s duty could have an adverse effect on our sales of commodity viscose
dissolving pulp into China.
Canada
The Company operates six softwood lumber mills in Ontario and Quebec, Canada and, in 2018, sold approximately $179
million of softwood lumber into the United States from Canada. The United States and Canada have a history dating to the early
1980s of trade disputes relating to the export of softwood lumber from Canada into the United States. Each dispute has been
resolved via agreement or litigation, which generally involved some combination of duties and/or quotas as well as a return of all
or most of the duties previously paid by Canadian softwood lumber producers. In October of 2015, a ten-year Softwood Lumber
Agreement (the “SLA”) between the United States and Canada, which resolved the 2001-2006 lumber dispute between the countries,
expired. No agreement was reached to extend or renew it, and as a result, after a one-year cooling off period the United States
commenced a dumping investigation of lumber exports from Canada into the U.S. In 2017, anti-dumping and countervailing duties
were assessed by the United States Department of Commerce (“Commerce”) on lumber exported into the United States, with the
Company being assigned an anti-dumping duty rate of 6 percent and a countervailing duty rate of 14 percent. These duties are
being legally challenged by Canada under both the North American Free Trade Agreement (“NAFTA”) and World Trade
Organization (“WTO”) dispute resolution processes. The Company paid approximately $26 million in lumber duties in 2018, but
expects to eventually receive most of these duties back in the event of a favorable ruling under the NAFTA or WTO process or a
settlement of the dispute. No assurances can be given that the duties will be overturned or repaid through the legal process or a
negotiated settlement, or that lumber pricing, which as of December 31, 2018 was at very low levels in the United States, will be
sufficient to substantially offset their impact.
In 2017, the United States, Mexico and Canada began a process for the renegotiation of the North American Free Trade
Agreement (“NAFTA”), and on September 30, 2018, the USTR announced a new treaty to replace NAFTA with a treaty called
the U.S.-Mexico-Canada Agreement (“USMCA”), which was signed by the parties on December 1, 2018. However, USMCA
must be ratified by the U.S. Congress before it can go into effect. The Company manufactures various products in the United
States and Canada, sells various products to customers in all three countries, and purchases various products and services from
suppliers and contractors in all three countries. While it is unclear whether and when the U.S. Congress will approve USMCA,
the Company does not believe USMCA, if ratified in its current form, will have a material impact on the business, financial
condition or results of operations of the Company.
“Brexit”
The Company does not currently operate any manufacturing facilities, have any significant sales to customers, or have any
major supply chain relationships, in Great Britain. As such, with respect to the exit of Great Britain from the European Union
(“EU”), whether under a negotiated agreement with the EU or pursuant to a “hard” exit absent such an agreement, the Company
does not expect Brexit to have a material impact on its business, financial condition or results of operations. However, the Company
does have manufacturing facilities in the EU (in France) and in 2018 had $360 million of sales to customers in the EU, so to the
extent that Brexit impacts the EU’s economy generally, specific regions of the EU or specific companies located in the EU, no
assurances can be given that such events would not have a material impact on the Company’s business, financial condition or
results of operations.
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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 depends on transportation services provided by third parties, both domestically and internationally. We rely on
these providers for transportation of the products we manufacture as well as delivery of raw materials to our manufacturing
facilities. A significant portion of the products we manufacture and raw materials we use are transported by railroad or trucks,
and internationally by ship.
If any of our transportation providers were to fail to deliver the goods we manufacture in a timely manner, or damaged them
during transport, we may be unable to sell those products at full value, or at all. Similarly, if any of these providers were to fail
to deliver raw materials to us in a timely manner, we may be unable to timely manufacture our products in response to customer
demand. Finally, if any of the ports we commonly use for international shipping, or the port system generally, were to suffer work
stoppages, slowdowns or strikes, we could be adversely impacted.
Our business is subject to extensive environmental laws, regulations and permits that may restrict or adversely affect how
we conduct business and our financial results.
Our plants are subject to stringent environmental laws, regulations and permits that may limit operations and production.
Many of our operations are subject to stringent environmental laws, regulations and permits that contain conditions governing
how we operate our facilities including how much and, in some cases, what types of products we can produce. These laws,
regulations and permits, now and in the future, may restrict our current production, limit our ability to increase production and
impose significant costs on our operations with respect to environmental compliance. It is expected that, overall, costs will likely
increase over time as environmental laws, regulations and permit conditions become more stringent, and as the expectations of
the communities in which we operate become more demanding.
Environmental laws, regulations and permits are constantly changing and are generally becoming more restrictive. Laws,
regulations, permits and related judicial decisions and administrative interpretations affecting our business are subject to change,
and new laws and regulations are frequently enacted. These laws and regulations may limit, prohibit or affect, among other things,
air emissions, wastewater discharges, receiving water quality, remedial standards for contaminated property and groundwater, and
the type of chemicals we use in our manufacturing processes. Over time, the complexity and stringency of these laws and regulations
have increased and the enforcement of these laws and regulations has intensified. Environmental regulatory authorities have
pursued a number of initiatives which, if implemented, could impose additional operational and pollution control obligations on
industrial facilities like ours, especially in the area of air emissions and wastewater and storm water control. See Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of Operations - Environmental Regulation for further
information. Environmental laws and regulations will likely continue to become more restrictive and over time could adversely
affect our business, financial condition and results of operations.
Environmental groups, Aboriginal communities (in Canada) and interested individuals may seek to delay or prevent a variety
of operations. We expect that environmental groups, Aboriginal communities and interested individuals will intervene with
increasing frequency in the regulatory processes in areas where we operate plants and manage and operate timberlands. External
engagement with these groups and communities are requirements of our licenses to manage and operate timberlands in Quebec
and Ontario, and in the case of Aboriginal communities are often required by treaty. Delays, restrictions and increased cost caused
by the intervention of these groups or interested individuals could adversely affect our operating results. In addition to intervention
in regulatory proceedings, interested groups and individuals may file or threaten to file lawsuits that seek to prevent us from
obtaining permits, implementing capital improvements or pursuing operating plans. For example, in March 2014, litigation was
commenced in federal court by the Altamaha Riverkeeper (“ARK”) alleging violations of federal and state environmental laws
relating to permitted wastewater discharges from our Jesup plant (although it was dismissed by the court on summary judgment
in 2015), and in January of 2016 the same group brought an action in the Georgia Office of Administrative Hearings against the
Georgia Environmental Protection Division of the Natural Resources (“EPD”) in opposition to the issuance by EPD of a renewed
wastewater treatment permit for our Jesup plant. While these proceedings have been decided, to date, largely in the Company’s
favor, we expect continuing attempts at legal intervention by ARK and others. See Item 3 - Legal Proceedings for a description
of the pending legal proceedings with ARK.
We currently own or may acquire properties that require environmental remediation or otherwise are subject to environmental
and other liabilities. We currently own, may have liability at formerly operated manufacturing facilities that we do not currently
own, and may acquire additional facilities in the future, which are subject to environmental liabilities, such as remediation of soil,
sediment and groundwater contamination and other liabilities. The cost of assessment and remediation of contaminated properties
could be substantial and adversely affect financial results. These costs could include, without limitation, costs of investigation
and assessment, corrective measures, installation of pollution control equipment and other remediation and closure costs, as well
as third-party claims for property damage and personal injury as a result of alleged violations of, or liabilities arising out of,
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environmental laws and regulations. Although we believe we currently have adequate liabilities recorded, legal requirements
relating to assessment and remediation of contaminated properties continue to become more stringent and there can be no assurance
actual expenditures will not exceed current liabilities and forecasts, or that other presently unknown liabilities will not be discovered
in the future. See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Environmental
Regulation and Note 9 - Liabilities for Disposed Operations.
The potential impacts of climate change, and climate-related governmental initiatives, remain uncertain at this time.
The potential longer-term impacts of climate change to the business and operations of the Company, both positive and negative,
are unclear. There are numerous international, federal and state-level initiatives and proposals to address domestic and global
climate issues. Within the United States, Canada and France, most of these would or currently regulate and/or tax, in one fashion
or another, the production of carbon dioxide and other “greenhouse gases” to facilitate the reduction of carbon compound emissions
to the atmosphere, and provide tax and other incentives to produce and use more “clean energy.”
In 2015, the U.S. Environmental Protection Agency (the “EPA”) issued its final Clean Power Plan rule to regulate greenhouse
gas (“GHG”) emissions from electric power plants. The regulation is not directed at industry generally, but has very broad
requirements that could affect fuel and energy prices for industrial energy consumers. Further, the rule directs states to customize
their regulations, which could lead to different results in different states and create additional uncertainty. The rule was legally
challenged by a number of states, industry groups and environmental organizations. In February 2016, the U.S. Supreme Court
granted a stay of its implementation while the rule is reviewed by lower courts. In October 2017, the EPA took steps to begin the
regulatory process to repeal the Clean Power Plan. If not otherwise repealed or invalidated by the courts, it is unclear what impact
this rule would have on our operations.
In December 2015, the United States signed the Paris Agreement on climate change (the “Paris Agreement”), which was
entered into under the auspices of the 1992 U.N. Framework Convention on Climate Change (the “UN Framework”), a treaty
signed by the U.S. and ratified by the U.S. Senate. The Paris Agreement includes national targets for greenhouse gas emissions
reductions and other provisions designed to reduce greenhouse gas emissions worldwide and provide financial incentives to
developing nations to discourage greenhouse gas emissions. As of December 31, 2017, 197 countries have signed the Paris
Agreement and approximately 175 have ratified it, but on June 1, 2017 President Trump announced that the United States would
withdraw from the agreement, a process that will take four years.
The federal government of Canada has indicated its intent to regulate priority air pollutants and GHGs under the Clean Air
Act and the Canadian Environmental Protection Act. Under the proposed targets, The Company’s Canadian pulp and paper mills
may be required to reduce air pollutants, such as particulate matter (“PM”), sulphur oxides (“SOx”) emissions, nitrogen oxides
(“NOx”) and GHGs. While industry consultations are ongoing with the federal government, the cost of making any such reductions
is currently unknown; however, the requirements associated with PM, SOx and NOx are not expected to be material to the Company
given its current operations and pollution control systems. In lieu of the Canadian federal programs, both Ontario and Quebec (as
well as France) have implemented “cap and trade” programs and, at this time, only the Company’s Temiscaming site in Québec
was a net purchaser of credits under these programs in 2018. However, in July of 2018, the newly elected provincial government
in Ontario terminated Ontario’s cap and trade program, which would instead subject the province to the federal Canadian
requirements. In any case, the impact of the cost of GHG credits to suppliers to the Company may be reflected in the cost of wood,
other raw materials and energy purchased by the Company. To date, the cost of GHG credits purchased by our business has not
been material, though no assurances can be given that they will not substantially increase in the future, and especially in Canada
after 2020, because the law and cost of GHG credits after such date is currently not known.
Additional business and regulatory initiatives may be implemented to address GHG emissions and other climate-change-
related concerns. If such initiatives are implemented we may be required to incur additional capital expenditures, increased operating
costs for wood fiber or raw materials, and/or mitigating expenses, such as carbon taxes or other charges, to address and comply
with any such initiatives. No assurance can be given that the increased costs associated with compliance of future GHG-related
requirements will not have a material adverse effect on our business, financial condition and results of operations.
Our failure to maintain satisfactory labor relations could have a material adverse effect on our business.
As of December 31, 2018, approximately 75 percent of our global work force is unionized. As a result, we are required to
negotiate the wages, benefits and other terms of employment with these employees collectively. Our financial results could be
adversely affected if labor negotiations resulted in substantially higher compensation costs or materially restricted how we run
our operations. In addition, our inability to negotiate acceptable contracts with any of these unions as existing agreements expire
could result in strikes or work stoppages by the affected workers. Four of our collective bargaining agreements, representing
approximately 24 percent of our employees, either have expired in 2018 and have not yet been renewed, or are scheduled to expire
in 2019 in their ordinary course, and negotiations relating to new agreements have commenced or will commence shortly. While
14
we do not expect any significant labor interruptions, if our unionized employees were to engage in a strike or other work stoppage
at one or more of our major facilities, we could experience a significant disruption of our operations, which could materially affect
our business, financial condition and results of operations.
We are dependent upon attracting and retaining key personnel, the loss of whom could adversely affect our business.
We believe our success depends, to a significant extent, upon our ability to attract and retain key senior management and
operations management personnel. Changing demographics and labor work force trends may result in the loss of knowledge and
skills as experienced workers retire. Furthermore, some of our facilities are in relatively remote locations, which can adversely
impact our ability to recruit and retain employees. Our failure to retain these key personnel and recruit qualified replacements for
retiring employees could adversely affect our business, financial condition or results of operations.
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.
We have an active research and development program to develop new products and new applications for our existing products.
However, there can be no assurance this program will be successful, either from a product development or commercialization
perspective, or that any particular invention, product or development, or the program as a whole, will lead to significant revenue
or profit generation. Moreover, some of our new products and new applications may not contain intellectual property that can be
protected under applicable law. Failure to generate meaningful revenue and profit from our research and product development
efforts could adversely affect our business, financial condition and results of operations in the future.
The 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 cybersecurity breaches, could adversely impact the Company.
Like most companies, the Company has been, and expects in the future to continue to be, subject to attempted cyberattacks.
Cyberattacks or cybersecurity breaches could compromise the Company’s intellectual property and confidential business
information, cause a disruption to the Company’s operations, or harm the Company’s reputation. The Company’s information
technology systems, some of which are dependent on services provided by third parties, serve an important role in the efficient
operation of its business. This role includes ordering and managing equipment, parts and raw materials from suppliers, managing
inventory, managing the processes we use to produce finished products, facilitating order entry and fulfillment and processing of
transactions, summarizing and reporting financial results, facilitating internal and external communications, administering human
resources functions, retaining certain personal information and providing other processes necessary to manage our business. While
the Company has implemented and maintains what it believes to be appropriate cybersecurity policies, programs, controls and
systems, there can be no assurance a cyberattack would not be successful, or that such a cybersecurity breach will not occur. Such
an event could have a material adverse impact on the Company’s results of operations and financial condition.
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 a qualified non-contributory defined benefit pension plan, which covers many of our salaried and hourly employees
in the United States. The Federal Pension Protection Act of 2006 requires certain capitalization levels be maintained in each of
these benefit plans. Our non-U.S. pension plans, while currently fully funded, will also require periodic contributions to ensure
that applicable legal requirements are met. Because it is unknown what the investment return on pension assets will be in future
years or what interest rates may be at any point in time, no assurances can be given that applicable law will not require us to make
future material plan contributions. In addition, it is possible new or additional accounting rules and changes to actuarial requirements
(for example, if life expectancy assumptions for participants are increased) may also result in the need for additional contributions
to the plans. Any such contributions could adversely affect our financial condition. See Item 7 - Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Use of Estimates for additional
information about these plans, including funding status.
We have debt obligations that could adversely affect our business and our ability to meet our obligations.
As of December 31, 2018, our total combined indebtedness was approximately $1.2 billion. This significant amount of debt
could have important consequences to us and our investors, including:
requiring a substantial portion of our cash flows from operations to make interest payments on this debt;
•
• making it more difficult to satisfy debt service and other obligations;
•
increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs and limit
the future availability of debt financing;
15
•
•
•
•
•
increasing our vulnerability to general adverse economic and industry conditions;
reducing the cash flows available to fund capital expenditures and other corporate purposes and to grow our
business;
limiting our flexibility in planning for, or reacting to, market or other changes in our businesses and industry;
placing us at a competitive disadvantage to our competitors that may not be as highly leveraged with debt; and
limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise,
pay cash dividends or repurchase common stock.
To the extent we incur additional indebtedness, the risks described above could increase. In addition, our actual cash
requirements in the future may be greater than expected. Our cash flows from operations may not be sufficient to repay all of the
outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable
terms, or at all, to refinance our debt.
The phase-out of LIBOR as an interest rate benchmark in 2021 may impact our borrowing costs.
The reporting of financial information used to determine LIBOR is scheduled to cease in 2021. As of December 31, 2018,
we had approximately $599 million in term loan indebtedness with interest payment terms based on LIBOR, which matures in
either 2022 or 2024, as applicable, after the phase-out of LIBOR. Under the terms of these loans, if LIBOR is no longer calculated,
interest on the loans would be determined by using a comparable or successor widely-published alternative rate designated by the
administrative agent. We have not yet been advised by the administrative agent of its selected alternative rate. While we do not
believe that a change from LIBOR to an alternative rate will have a material impact on our borrowing costs or ability to access
capital, no assurances relating to the potential impact can be provided at this time.
Challenges in the commercial and credit environments may materially adversely affect our future access to capital.
Our ability to issue debt or equity or enter into other financing arrangements on acceptable terms could be materially adversely
affected if there is a material decline in the pricing or sales volume for our products, or if significantly unfavorable changes in
economic conditions occur. Volatility in the world financial markets could increase borrowing or other costs of capital or affect
our ability to gain access to the capital markets, which could have a material adverse effect on our competitive position, business,
financial condition, results of operations and cash flows.
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.
We may need to seek additional financing for general corporate purposes. For example, we may need to increase our investment
in research and development activities, make strategic investments in our facilities or require funding to invest in joint ventures
or make acquisitions. We may be unable to obtain desired additional financing on terms favorable to us, if at all. For example,
during periods of volatile credit markets, there is a risk that lenders, even those with strong balance sheets and sound lending
practices, could fail or refuse to honor their credit commitments and obligations, including but not limited to extending credit up
to the maximum permitted by a credit facility and otherwise accessing capital and/or honoring loan commitments. If our lenders
are unable to fund borrowings under their loan commitments or we are unable to borrow, it could be difficult to replace such loan
commitments on similar terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund growth
opportunities, successfully develop or enhance products or respond to competitive pressures, any of which could negatively affect
our business. If we raise additional funds through the issuance of equity securities, our stockholders will experience dilution of
their ownership interest. If we raise additional funds by issuing debt, the terms of such debt may subject us to limitations on our
operations and ability to pay dividends due to restrictive covenants in addition to those that are expected to be in place pursuant
to our existing indebtedness.
The inability to effectively integrate the Tembec acquisition, and any future acquisitions we may make, may affect our
results.
As part of our growth strategy, we may pursue acquisitions of complementary businesses and product lines, such as the
November 2017 acquisition of Tembec Inc., and invest in joint ventures. The ability to grow through acquisitions or other
investments depends upon our ability to identify, negotiate, complete and integrate suitable acquisitions or joint venture
arrangements. For example, we have disclosed our synergy and business objectives relating to our acquisition of Tembec Inc. and
achievement of these synergies and objectives is subject to a number of uncertainties, including risks attendant to successfully
and effectively consolidating each company’s technologies, organizations, processes, controls, policies and operations. If we fail
to successfully integrate the acquisition of Tembec Inc., or any future acquisition we may make, our business, financial condition
and results of operations could be materially adversely affected.
16
Risks Related to the Company’s Common Stock and Certain Corporate Matters
Your percentage of ownership in the Company may be diluted in the future.
In the future, your percentage ownership in the Company may be diluted because of equity issuances for acquisitions, capital
market transactions or other corporate purposes, including equity awards we will grant to our directors, officers and employees.
Our employees have options to purchase shares of our common stock and we anticipate our compensation committee will grant
additional stock options or other stock-based awards to our employees. Such awards will have a dilutive effect on our earnings
per share, which could adversely affect the market price of our common stock. From time to time, we will issue additional options
or other stock-based awards to our employees under our employee benefits plans.
In addition, our amended and restated certificate of incorporation authorizes us to issue, without the approval of our
stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative,
participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions,
as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the
voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right to
elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions.
Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect
the residual value of the common stock. In particular, note that, on August 10, 2016, the Company issued 1,725,000 shares of
Mandatory Convertible Preferred Stock, Series A (the “Preferred Stock”), as more fully described in that certain Registration
Statement on Form S-3 (File No. 333-209747) and Prospectus filed with the SEC on February 26, 2016, as amended by that certain
Prospectus Supplement dated August 4, 2016 (the “Prospectus Supplement”). As a result of this offering, unless earlier converted,
the Preferred Stock will automatically convert to common stock of the Company on a mandatory conversion date expected to be
August 15, 2019, at a conversion rate described in the Prospectus Supplement. See Note 12 - Stockholders' Equity (Deficit) of
our consolidated financial statements for more information on the Preferred Stock.
Our common stock ranks junior to the Preferred Stock with respect to dividends and amounts payable in the event of our
liquidation.
Our common stock ranks junior to our Preferred Stock with respect to the payment of dividends and amounts payable in the
event of our liquidation, dissolution or winding-up. This means, unless full cumulative dividends have been paid or set aside for
payment on all outstanding Preferred Stock for all past dividend periods and the then current dividend period, subject to certain
exceptions, no dividends may be declared or paid on our common stock. Likewise, in the event of our voluntary or involuntary
liquidation, dissolution or winding-up, no distribution of our assets may be made to holders of our common stock until we have
paid to Preferred Stock holders a liquidation preference equal to $100.00 per share plus accrued and unpaid dividends.
Certain provisions of the Preferred Stock could prevent or delay an acquisition of the Company, which could decrease the
price of our common stock.
Certain terms of our Preferred Stock could make it more difficult or more expensive for a third party to acquire the Company.
For example, as more fully described in the Prospectus Supplement, if a fundamental change (including, certain consolidation or
merger involving us) were to occur on or prior to August 15, 2019, holders of our Preferred Stock may have the right to convert
their Preferred Stock, in whole or in part, at a fundamental change conversion rate and be entitled to receive a fundamental change
dividend make-whole amount equal to the present value of all remaining dividend payments on their Preferred Stock, plus
accumulated and unpaid dividends, if any. These features of the Preferred Stock could increase the cost of acquiring us or otherwise
discourage a third party from acquiring the Company.
Item 1B. Unresolved Staff Comments
None.
17
Item 2.
Properties
The following table details the significant properties we owned or leased at December 31, 2018:
Segment/Location
Annual Production Capacity
Owned/Leased
High Purity Cellulose Facilities (a):
Jesup, Georgia, United States
Fernandina Beach, Florida, United States
Temiscaming, Quebec, Canada
Tartas, France
Forest Products Group Facilities (b):
La Sarre, Quebec, Canada
Bearn, Quebec, Canada
Chapleau, Ontario, Canada
Cochrane, Ontario, Canada
Hearst, Ontario, Canada
330,000 metric tons of cellulose specialties or
commodity products
245,000 metric tons of commodity products
155,000 metric tons of cellulose specialties or
commodity products
150,000 metric tons of cellulose specialties or
commodity products
140,000 metric tons of cellulose specialties or
commodity products
135,000 thousand board feet of lumber
110,000 thousand board feet of lumber
135,000 thousand board feet of lumber
160,000 thousand board feet of lumber
110,000 thousand board feet of lumber
Huntsville, Ontario, Canada
15,000 thousand board feet of lumber
Kapuskasing, Ontario, Canada
105,000 thousand board feet of lumber
Pulp Facilities (a):
Temiscaming, Quebec, Canada
Matane, Quebec, Canada
300,000 metric tons of high-yield pulp
270,000 metric tons of high-yield pulp
Paper Facilities (a):
Kapuskasing, Ontario, Canada
205,000 metric tons of newspaper
Temiscaming, Quebec, Canada
180,000 metric tons of paperboard
Wood Chipping Facilities (a):
Offerman, Georgia, United States
880,000 short green tons of wood chips
Collins, Georgia, United States
780,000 short green tons of wood chips
Eastman, Georgia, United States
350,000 short green tons of wood chips
Barnesville, Georgia, United States
350,000 short green tons of wood chips
Quitman, Georgia, United States
200,000 short green tons of wood chips
Corporate and Other:
Jacksonville, Florida, United States
Corporate Headquarters
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
(a) During 2018, these facilities produced at or near capacity levels for most of the year.
(b) Capacity represents targeted production for these facilities. On average, these facilities produce at approximately 80 percent
of capacity due to economic conditions, wood availability, and downtime.
Our manufacturing facilities are maintained through ongoing capital investments, regular maintenance and equipment
upgrades. As a result, production capacities may vary from the amounts listed above.
Item 3.
Legal Proceedings
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
18
some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance, business
interruption and general liability. While there can be no assurance, the ultimate outcome of these actions, either individually or in
the aggregate, is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash
flows, except as may be noted below.
Jesup Plant Permit
On January 27, 2016, the Altamaha Riverkeeper (“ARK”) filed a Petition for Hearing in the Office of Administrative Hearings
for the State of Georgia, captioned Altamaha Riverkeeper, Inc. v. Environmental Protection Division (the “EPD”), Georgia
Department of Natural Resources, in which ARK appealed the issuance by the EPD to the Company of a new permit for the
treatment and discharge of waste water from the Jesup mill, which was to go into effect March 1, 2016. In the petition, ARK
claims, among other things, that the issuance of the permit by the EPD would violate Georgia’s narrative water quality standard,
a rule promulgated by the Georgia Department of Natural Resources Board pursuant to certain provisions of the Clean Water Act
and the Georgia Water Quality Control Act. The petition seeks to have the permit invalidated and modified as demanded by ARK.
On February 16, 2016, the Company moved to legally intervene, as a party-in-interest, in this matter (because the EPD, as the
permit issuer, is the named defendant) and its petition was granted by the administrative law judge (“ALJ”). The trial was held in
June of 2016, and on September 30, 2016 the ALJ issued her decision. While the ALJ rejected many of ARK’s claims, she held
there existed a reasonable potential for the Company’s treated effluent discharged to the Altamaha River to cause a violation of
Georgia’s narrative water quality standard, but only under low (rather than “normal”) river flow conditions. As such, the ALJ
reversed the issuance of the new permit by EPD and remanded the matter back to the EPD for consideration and issuance of a
permit that comports with this ruling.
The Company strongly disagreed with the decision and appealed it, as did the EPD. The appeal was heard in the Superior
Court of Wayne County, Georgia and on March 17, 2017 the Superior Court Judge issued an order reversing ALJ’s decision and
ordering the permit affirmed as issued by the EPD. ARK appealed this decision to the Georgia Court of Appeals. Before the Court
of Appeals ruled, on March 27, 2018 the Georgia Department of Natural Resources Board (the “Board”) voted to clarify the
language of the narrative water quality standard at issue in this litigation. The language clarification adopted by the Board confirmed
and essentially ratified the Superior Court’s decision. On June 13, 2018, the Court of Appeals issued its opinion affirming the
Superior Court’s decision, and remanded the case to the ALJ to apply the standard advocated by the Company and articulated by
the Superior Court, as affirmed by the Court of Appeals, to the issuance of the Permit. To provide certainty to the Company while
this matter is on remand to the ALJ, the Company and the EPD have entered into a consent order requiring the Company to continue
to operate under the conditions of the Permit.
ARK has filed a petition asking the Georgia Supreme Court to hear its appeal of the Court of Appeals decision, and the
Company and EPD have filed papers opposing the petition. Granting of certiorari in this case is discretionary on the part of the
Georgia Supreme Court. The Company believes the decisions of both the Superior Court and Court of Appeals are legally sound,
and we await the decision of the Georgia Supreme Court on ARK’s certiorari petition.
Stockholder Lawsuit
On August 17, 2017, the City of Warren General Employees’ Retirement System filed a putative class action complaint against
the Company, Paul Boynton, our CEO, and Frank Ruperto, our CFO, in the United States District Court, Middle District of
Tennessee, Nashville Division. The plaintiffs allege the Company made false statements in filings with the U.S. Securities and
Exchange Commission (“SEC”) and other public statements related to certain litigation with Eastman Chemical, a customer of
the Company, in third quarter and fourth quarter 2015, in violation of §§10(b) and 20(a) of the Securities Exchange Act of 1934,
causing unspecified damages to stockholders of the Company who purchased stock in the Company between October 29, 2014
and August 19, 2015. The applicable Eastman litigation was resolved via settlement in 2015. The Company was served with the
complaint on August 28, 2017. On November 13, 2017, the Court appointed the Michigan Carpenters’ Pension Fund and Local
295 IBT Employer Group Pension Trust Fund as lead plaintiff, and a law firm to act as lead counsel. On January 10, 2018, the
Company and the individual defendants filed a motion to dismiss the case for improper venue or, in the alternative, asked the court
to transfer it to the U. S. District Court for the Middle District of Florida. Per the court scheduling order, the lead plaintiff filed a
consolidated amended complaint (the “CAC”) on January 12, 2018. The CAC added Benson Woo, former CFO of the Company,
as an additional defendant.
On June 15, 2018, the U.S. District Court for the Middle District of Tennessee granted the Company’s motion to transfer the
case to the Middle District of Florida, and on July 16, 2018 the Company filed a motion to dismiss the case. We await the court’s
decision. The Company strongly disagrees with the allegations set forth in the complaint, believes the lawsuit is without merit and
will continue to vigorously defend itself in this matter.
In a related matter, on August 16, 2018, the Company received a derivative demand letter on behalf of Russell K. Carlisle, a
purported stockholder, demanding that the Company’s Board of Directors investigate and take action on behalf of the Company
19
against the individual defendants named in the City of Warren lawsuit and certain current and former members of the Board of
Directors of the Company. The demand alleges substantially similar facts as those set forth in the City of Warren action, and claims
them to be breaches of fiduciary duties owed to the Company by the individual defendants in City of Warren and members of the
Company’s Board of Directors during the alleged class period described in the case. The Company, the individuals named and
Mr. Carlisle have agreed to toll any action on the derivative claim pending the decision of the U.S. District Court on the Company’s
motion to dismiss the City of Warren suit.
Item 4.
Mine Safety Disclosures
Not applicable.
20
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Our common stock is traded on the New York Stock Exchange under the trading symbol “RYAM”.
Holders
The number of record holders of our common stock at February 22, 2019 was 4,371.
Dividends
Dividends per share data can be found in Item 6 — Selected Financial Data and Note 12 — Stockholders' Equity (Deficit) of
our consolidated financial statements.
Issuer Purchases of Equity Securities
The following table provides information regarding our purchases of Rayonier Advanced Materials common stock during the
quarter ended December 31, 2018:
Period
September 30 to November 3 ..................
November 4 to December 1 (a) ...............
December 2 to December 31 ...................
Total ....................................................
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
— $
1,768,409
$
— $
1,768,409
—
14.14
—
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares That
May Yet Be
Purchased Under the
Plans or Programs
— $
1,768,409
$
— $
1,768,409
85,294,000
60,294,000
60,294,000
(a) The shares were repurchased under the accelerated share repurchase ("ASR") agreement entered into on November 8, 2018
with JPMorgan Chase Bank, National Association ("JPMorgan"), for the repurchase of an aggregate of $25 million of the
Company's common stock. The ASR was implemented under the Company's share repurchase authorization of up to $100
million, which was declared by the Board of Directors on January 29, 2018. As of December 31, 2018, there was
approximately $60 million of share repurchase authorization remaining under the program. Refer to Note 12 — Stockholders'
Equity (Deficit) for additional information.
Securities Authorized for Issuance under Equity Compensation Plans
See Part III, Item 12 of this report for information relating to our equity compensation plans.
Stock Performance Graph
The following graph compares the performance of Rayonier Advanced Material’s common stock (assuming reinvestment of
dividends) with a broad-based market index, Standard & Poor’s (“S&P”) Small Cap 600, and an industry-specific index, the S&P
500 Materials Index. The initial date on the graph, June 27, 2014, reflects the date we separated from our former parent Rayonier.
The table and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such
information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of
1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
21
The data in the following table was used to create the previous graph:
6/27/2014
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
Rayonier Advanced Materials ...
S&P Small Cap 600...................
S&P 500 Materials Index ..........
$
$
$
100
100
100
$
$
$
61
103
99
$
$
$
27
101
91
$
$
$
44
128
106
$
$
$
60
144
131
$
$
$
32
132
112
Sales of Unregistered Securities
During 2018, we did not issue or sell any unregistered securities.
22
Item 6.
Selected Financial Data
The following financial data should be read in conjunction with our consolidated financial statements. For 2014, the balance
sheet represents our financial position as of December 31, 2014 and the statement of income and statement of cash flows are
presented as if the performance fibers business of Rayonier and an allocable portion of its corporate costs had been combined with
us for the year ended December 31, 2014.
(millions of dollars except per share amounts)
Statement of Income Data:
Net Sales .................................................................. $
Gross margin (a) ......................................................
Operating income (a) ...............................................
Net income ...............................................................
Diluted earnings per share of common stock (b) ..... $
Dividends declared per share of common stock ...... $
Balance Sheet Data:
Total assets............................................................... $
Property, plant and equipment, net ..........................
Total debt .................................................................
Stockholders’ equity (deficit)...................................
Statement of Cash Flows Data:
Cash provided by operating activities...................... $
Cash used for investing activities ............................
Cash provided by (used in) financing activities.......
Capital expenditures.................................................
Non-GAAP Measures (c):
EBITDA................................................................... $
Adjusted EBITDA.................................................... $
Adjusted Free Cash Flows ....................................... $
2018
2017 (d)
2016
2015
2014
2,134
$
344
198
128
1.96
0.28
2,679
1,381
1,188
707
247
(116)
(116)
(132)
380
364
152
$
$
$
$
$
$
$
961
143
61
325
5.81
0.28
2,643
1,408
1,241
694
130
(277)
(84)
(75)
480
212
65
$
$
$
$
$
$
$
$
869
186
143
73
1.55
0.28
1,422
801
783
212
232
(87)
80
(89)
235
226
147
$
$
$
$
$
$
$
$
941
209
127
55
1.30
0.28
1,279
804
858
(17)
202
(78)
(89)
(78)
209
238
124
$
$
$
$
$
$
$
$
958
227
66
32
0.75
0.14
1,293
843
934
(62)
188
(90)
(31)
(75)
149
267
113
(a) The Company adopted Accounting Standards Update (“ASU”) No. 2017-07, Compensation-Retirement Benefits, on January
1, 2018 using the retrospective method. As a result, gross margin and operating income was restated to reflect a $4 million,
$5 million, $7 million and $3 million decrease in cost of sales during the years ended December 31, 2017, 2016, 2015 and
2014, respectively. In addition, selling, general and administrative expenses decreased by $1 million for each of the years
ended December 31, 2017, 2016 and 2015. The offsetting increases are reflected in non-operating income with no change to
the previously reported net income.
(b) For the years ended December 31, 2018, 2017 and 2016, basic and diluted earnings per share include the impact of dividends
on the Company’s Preferred Stock. See Note 12 — Stockholders' Equity (Deficit) of our consolidated financial statements for
more information. In conjunction with the separation from Rayonier Inc., 42,176,565 shares of our common stock were
distributed to Rayonier shareholders on June 27, 2014.
(c) EBITDA, adjusted EBITDA and adjusted free cash flows are non-GAAP measures. See “Note about Non-GAAP Financial
Measures” on page 2 for limitations associated with non-GAAP measures. Also see Item 7 — Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Performance and Liquidity Indicators for definitions of these
non-GAAP measures as well as a reconciliation of EBITDA, adjusted EBITDA and adjusted free cash flows to their most
directly comparable GAAP financial measure.
(d) On November 17, 2017, the Company acquired all of the outstanding common shares of Tembec for an aggregate purchase
price of approximately $317 million Canadian dollars cash and 8.4 million shares of the Company’s common stock, par value
$0.01 per share. See Note 3 — Tembec Acquisition, for a summary of assets and liabilities assumed in the acquisition and the
unaudited pro forma net income for the years ended December 31, 2017 and 2016.
23
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are transforming our business and growing EBITDA to drive long-term value for our stockholders. Our plan centers on
the following four Strategic Pillars of Growth:
• Cost Transformation - driving sustainable cost reductions by fostering a culture of continuous improvement.
• New Products - expanding our business by developing next generation cellulose fibers and other value-added products
utilizing our cellulose processing technology, expertise and co-products. We have made significant progress in developing
and applying proprietary technologies to new products in many of the end-market segments we serve.
• Market Optimization - maximizing the profitability of our existing products and assets by optimizing the intersection of
our customers’ needs, our manufacturing capabilities and transportation costs to drive higher value for our customers and
our Company.
•
Investments - delivering a capital allocation strategy that maximizes our risk adjusted returns. We intend to de-lever our
balance sheet through EBITDA growth and repayment of indebtedness with a target net leverage ratio of 2.5 times
EBITDA. In conjunction with this de-leveraging, we will allocate capital across high return investments in our facilities,
acquisitions and other external investments to grow profitability, as well as return capital to stockholders through stock
buybacks and dividends.
On November 17, 2017, we acquired Tembec which was engaged in the manufacture of cellulose specialties, commodity
products, forest products, pulp and paper. The Acquisition created a combined company with leading positions with 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. We now operate in the following business segments:
• High Purity Cellulose
•
•
•
Forest Products
Pulp
Paper
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 by contract for a duration of at
least one year based on discussions with customers. 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 chemicals and energy, a majority of which are by-products, are included in the high purity cellulose segment. In
September 2018, we sold our resin operations for approximately $17 million.
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 annual production to commodity products.
Wood fiber, chemicals, and energy represent approximately 27 percent, 17 percent and 6 percent, respectively, of the per
metric ton cost of sales. 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
24
Canadian High Purity Cellulose, Pulp and 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 annual production capacity of
approximately 770 million board feet of lumber.
Wood and energy represents approximately 46 percent and 5 percent, respectively, of the per million board feet cost of sales.
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 pulp is typically referenced to published indexes
marketed through our internal sales team. Our two production facilities located in Canada have the capacity to annually 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. 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 annually 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 3 percent, respectively, of the per
metric ton cost of sales. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation
costs represent the remaining cost of sales.
Outlook
High Purity Cellulose
In 2019, we expect stability in cellulose specialties markets. Cellulose specialty sales prices are anticipated to decline
approximately 1 percent from 2018 primarily due to a contract acquired from Tembec and excludes any impact of Chinese duties.
Cellulose specialty sales volumes are expected to decline approximately 1 percent primarily due to weakness in the acetate market.
Commodity product sales prices are expected to increase in 2019. Commodity product sales volumes are expected to increase by
over 75,000 metric tons as a result of improved operational reliability and initiatives to reduce inventory levels. Inflation is
expected to be approximately 3 percent, driven primarily by higher wood and transportation costs, offset by the expected impact
of the Strategic Pillars of Growth in 2019. Excluding the impact of the sale of the resin operations, adjusted EBITDA for the
segment is expected to be flat in 2019, with the second half accounting for approximately 55 percent of EBITDA.
Forest Products
Lumber futures prices have improved from their lows in December and our lumber prices are expected to improve as the year
progresses. Longer-term, the U.S. housing market remains a key driver of lumber sales prices and we are well positioned to benefit
from these long-term trends. In addition, softwood lumber duties of approximately 20 percent on sales to the U.S. are expected
to continue throughout 2019. Benefits from capital investments and cost reductions are also expected to provide incremental
profitability in 2019. We will aggressively manage the asset utilization of and investment in the segment, including potentially
taking downtime as deemed necessary, if market conditions warrant.
25
Pulp
High-yield pulp prices are expected to be lower in the first quarter of 2019 compared to fourth quarter of 2018 due to weaker
demand, specifically from China. Over the medium term, solid global demand for pulp, reduced recycled fiber imports
to China, and global industry production at or near capacity continue to support pulp prices above historical averages. With no
significant new capacity expected in the pulp markets through 2020, supply-demand dynamics should continue to yield positive
market conditions and strong segment results in 2019.
Paper
In 2019, paperboard prices are expected to remain stable while newsprint sales prices are expected to decline as a result of the
reversal of duties in 2018.
Capital Allocation and Investment
We anticipate spending approximately $95 million to $105 million in maintenance capital expenditures across all segments
in 2019. In addition, we anticipate spending approximately $28 million on high-return strategic projects in 2019.
We also expect to increase the percentage of our cash flow directed toward debt repayment due to weaker commodity forest
products and paper markets. We anticipate the continued return of capital to shareholders through our common stock dividend
and the opportunistic repurchase of common shares.
Reconciliation of Non-GAAP measures
For a reconciliation of EBITDA to net income, see Item 7 — Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Performance and Liquidity Indicators.
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 to disclose contingent assets and liabilities in our consolidated financial statements. 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.
Revenue Recognition
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.
Shipping and Handling Costs
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.
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 7 — Accrued and Other Current Liabilities). This methodology is consistent with the manner in which the
Company historically estimated and recorded volume-based rebates.
26
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 are payable to customers. These amounts are included in accrued customer incentives and prepayments in the
consolidated balance sheets. The Company does not have any material contract assets as of December 31, 2018.
Property, Plant & Equipment
Depreciation expense is computed using the units-of-production method for our High Purity Cellulose, Pulp and Paper plant
and equipment and the straight-line method for all other property, plant and equipment over the useful economic lives of the assets
involved. The total units of production used to calculate depreciation expense is determined by factoring annual production days,
based on normal production conditions, by the economic useful life of the asset involved. The physical life of equipment, however,
may be shortened by economic obsolescence caused by environmental regulation, competition or other causes. We depreciate our
non-production assets, including office, lab, and transportation equipment, using the straight-line depreciation method over 3 to
25 years. Buildings and land improvements are depreciated using the straight-line method over 15 to 35 years and 5 to 30 years,
respectively. We believe these depreciation methods are the most appropriate, versus other generally accepted accounting methods,
as they most closely match revenues with expenses.
Gains and losses on the retirement of assets are included in operating income. Long-lived assets are reviewed annually for
impairment or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of assets that are held and used is measured by net undiscounted cash flows expected to be generated by the asset.
Property, plant and equipment are grouped for purposes of evaluating recoverability at the combined plant level, the lowest level
for which independent cash flows are identifiable. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying value exceeds the fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.
Environmental liabilities associated with disposed operations
At December 31, 2018, we had $161 million of accrued liabilities for environmental costs relating to disposed operations.
Numerous cost assumptions are used in estimating these obligations. Factors affecting these estimates include changes in the
nature or extent of contamination, changes in the content or volume of the material discharged or treated in connection with one
or more impacted sites, requirements to perform additional or different assessment or remediation, changes in technology that
may lead to additional or different environmental remediation strategies, approaches and work-plans, discovery of additional or
unanticipated contaminated soil, groundwater or sediment on or off-site, changes in remedy selection, changes in law or
interpretation of existing law and the outcome of negotiations with governmental agencies or non-governmental parties. We
periodically review our environmental liabilities and also engage third-party consultants to assess our ongoing remediation of
contaminated sites. Quarterly, we review our environmental liabilities related to assessment activities and remediation costs and
adjust them as necessary. Liabilities for financial assurance, monitoring and maintenance activities and other activities are assessed
annually. A significant change in any of these estimates could have a material effect on the results of our operations. See Note 9
— Liabilities for Disposed Operations of our consolidated financial statements for more information.
Determining the adequacy of pension and other postretirement benefit assets and liabilities
Our defined benefit pension and postretirement plans for employees in the U.S., Canada and France require numerous estimates
and assumptions to determine the proper amount of pension and postretirement liabilities and annual expense to record in our
financial statements. The key assumptions include discount rate, return on assets, salary increases, health care cost trends, mortality
rates, longevity and service lives of employees. Although authoritative guidance on how to select most of these assumptions
exists, we exercise some degree of judgment when selecting these assumptions based on input from our actuary and other advisors.
Different assumptions, as well as actual versus expected results, would change the periodic benefit cost and funded status of the
benefit plans recognized in the financial statements.
Our long-term return plan assets assumption was established based on historical long-term rates of return on broad equity and
bond indices, discussions with our actuary and investment advisors and consideration of the actual historical annualized rate of
27
returns. In determining future pension obligations, we select a discount rate based on information supplied by our actuary. The
actuarial rates are developed by models which incorporate high-quality (AA rated), long-term corporate bond rates into their
calculations. The weighted average discount rate increased from 3.55 percent at December 31, 2017 to 3.99 percent at December 31,
2018.
Our defined pension plans were underfunded by $174 million at December 31, 2018. The funded status declined in 2018 due
to lower than expected investment performance on our plan assets, increased service and interest costs, partially offset by slightly
higher discount rates. In 2019, pension expense is expected to increase due primarily to lower expected return on plan assets and
higher amortization of actuarial losses partially offset by an increase in the assumed discount rate. Future pension expense will
be impacted by many factors including actual investment performance, changes in discount rates, timing of contributions and other
employee related matters. See Note 16 — Employee Benefit Plans of our consolidated financial statements for more information.
In 2018, we made mandatory contributions and benefit payments to plan participants of approximately $13 million. We expect
to make mandatory and benefit payments to plan participants of approximately $12 million. Future mandatory contribution
requirements will vary depending on actual investment performance, changes in valuation assumptions, interest rates and legal
requirements to maintain a certain funding status.
The sensitivity of pension expense and projected benefit obligation related to our pension plans to changes in economic
assumptions is highlighted below:
Change in Assumption
50 bp decrease in discount rate
50 bp increase in discount rate
50 bp decrease in long-term return on assets
50 bp increase in long-term return on assets
Impact on (in millions):
Effect on December 31,
2018 Projected Benefit
Obligation
Increase (Decrease)
$63
$(58)
Effect on 2019 Pension
Expense
(Decrease)/Increase
$4
$(4)
$4
$(4)
Realizability of both recorded and unrecorded tax assets and tax liabilities
We have recorded certain deferred tax assets we believe will 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. The strongest form of positive evidence is the evaluation of
adjusted historical earnings and future earnings projections within the applicable carryforward periods. This evidence supports
the realizability of all recorded deferred tax assets. 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.
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 18 — Income Taxes
of our consolidated financial statements for more information.
Business Combinations
We allocate the total purchase price of assets acquired and liabilities assumed based on their estimated fair value as of the
business combination date. In developing estimates of fair values for long-lived assets, including identifiable intangible assets,
we utilize a variety of inputs including forecasted cash flows, anticipated growth rates, discount rates, estimated replacement costs
and depreciation and obsolescence factors. Determining the fair value for specifically identified intangible assets such as customer
lists and trade-names involves judgment. We may refine our estimates and make adjustments to the assets acquired and liabilities
assumed over a measurement period, not to exceed one year. Upon the conclusion of the measurement period or the final
determination of the values of assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments are
28
charged to the consolidated statements of income. Subsequent actual results of the underlying business activity supporting the
specifically identified intangible assets could change, requiring us to record impairment charges or adjust their economic lives in
future periods.
New Accounting Standards
See Note 2 — Summary of Significant Accounting Policies and New Accounting Pronouncements of our consolidated financial
statements for a discussion of recently issued accounting pronouncements that may affect our financial results and disclosures in
future periods.
Summary of our results of operations for the three years ended December 31:
Financial Information (in millions, except percentages)
2018
2017
2016
Net Sales ............................................................................................. $
Cost of Sales .......................................................................................
Gross Margin.....................................................................................
Selling, general and administrative expenses ...................................
Duties................................................................................................
Other operating expense, net ............................................................
Operating Income .............................................................................
Interest expense ................................................................................
Interest income and other, net...........................................................
Other components of net periodic benefit costs ...............................
Gain on bargain purchase .................................................................
Gain on derivative instrument ..........................................................
Gain on debt extinguishment ............................................................
Income Before Income Taxes............................................................
Income Tax Expense.........................................................................
Net Income ......................................................................................... $
Gross Margin % ..................................................................................
Operating Margin %............................................................................
Effective Tax Rate %...........................................................................
$
$
2,134
(1,790)
344
(108)
(26)
(12)
198
(60)
4
9
20
—
1
172
(44)
128
16.1%
9.3%
25.4%
Results of Operations, Year Ended December 31, 2018 versus December 31, 2017
Net sales by segment were as follows:
$
$
961
(818)
143
(79)
(1)
(2)
61
(40)
2
(3)
317
8
—
345
(20)
325
14.9%
6.4%
5.7%
Net Sales (in millions)
High Purity Cellulose ....................................................................................................... $
Forest Products.................................................................................................................
Pulp...................................................................................................................................
Paper.................................................................................................................................
Eliminations .....................................................................................................................
Total Net Sales................................................................................................................... $
1,192
$
356
346
310
(70)
2,134
$
2018
2017
869
(683)
186
(37)
—
(6)
143
(35)
1
(6)
—
—
9
112
(39)
73
21.4%
16.5%
34.9%
867
34
38
29
(7)
961
Net sales increased $1,173 million, or 122 percent, in 2018 compared to 2017. The increase was primarily due to the inclusion
of Tembec’s operations for the full year in 2018, compared to approximately a month and a half during 2017. For further assessment
of changes in net sales, see the discussion of operating results by segment.
29
Operating income by segment was as follows:
Operating income (in millions)
High Purity Cellulose ................................................................................................. $
Forest Products ...........................................................................................................
Pulp .............................................................................................................................
Paper ...........................................................................................................................
Corporate ....................................................................................................................
Total operating income ...............................................................................................
$
2018
2017
112
$
25
95
31
(65)
198
$
120
—
4
(1)
(62)
61
Operating income for 2018 increased $137 million, or 222 percent, over the prior year. The increase was primarily due to the
inclusion of Tembec’s operations for the full year in 2018, compared to approximately a month and a half during 2017. For further
assessment of changes of operating income, see the discussion of Operating Results by Segment discussion below.
Non-operating Expenses
Interest expense for 2018 increased $20 million over the same prior year. The increase was due to realizing a full year of
interest expense from the debt acquired to finance the Tembec acquisition in addition to slightly higher LIBOR rates on our variable-
rate debt. For additional information, see Note 8 — Debt and Capital Leases.
Interest income and other, net, increased during the year ended December 31, 2018 when compared to the prior year. In
addition, our net periodic benefit cost was also favorable due to our expected return on assets during 2018. See Note 16 —
Employee Benefit Plans as well as the foreign exchange gain on the re-measurement of certain debt instruments.
We recognized a $20 million increase to the gain on bargain purchase during 2018 primarily from tax-related adjustments
from finalizing the purchase price allocation of the Acquisition. See Note 3 — Tembec Acquisition.
Income Tax Expense
Our effective tax rate for the years ended December 31, 2018 and December 31, 2017 was 25.4 percent and 5.7 percent,
respectively. The increase in 2018 is due primarily to higher taxable income and the absence the $317 million of nontaxable bargain
purchase gain recorded in 2017. An additional nontaxable gain was recorded in 2018 but the impact was not as significant. See
Note 18 — Income Taxes of our consolidated financial statements for more information.
Operating Results by Segment
The Acquisition occurred on November 17, 2017 and, as such, the results of operations for Tembec have been included in our
results from that date. In the following analyses, changes in sales and operating income for the segments from 2017 to 2018 that
are due to the operations of Tembec for the period from January 1, 2018 through November 16, 2018 are included in the column
identified as “Acquisition.”
High Purity Cellulose
($ in million)
Net Sales
Operating Income
Average Sales Prices ($ per metric ton):
Cellulose Specialties
Commodity Products
Sales Volumes (thousands of metric tons):
Cellulose Specialties
Commodity Products
$
$
$
$
2018
2017
$
$
$
$
1,192
112
1,334
818
624
298
867
120
1,460
733
453
250
30
Changes in High Purity Cellulose net sales are as follows:
Net Sales (in millions)
Changes Attributable to:
2017
Price
Volume/Mix
Acquisition
2018
Cellulose specialties
Commodity products and other
Other sales (a)
Total Net Sales
$
$
$
662
183
22
867
$
(51) $
16
—
(35) $
(a) Other sales include sales of electricity, resins, lignin and other by-products to third parties.
6
(1)
13
8
$
213
$
39
95
832
244
116
$
347
$
1,192
Excluding the Acquisition, cellulose specialties sales prices declined in 2018 approximately 4 percent due to lower contracted
pricing, as expected. Cellulose specialties and commodity product sales volumes, excluding the impact of the Acquisition, increased
primarily due to the timing of revenue recognition.
Changes in High Purity Cellulose operating income are as follows:
Operating Income (in millions)
Gross Margin Changes Attributable to:
2017
Price
Volume/
Sales Mix
(a)
Cost
Acquisition
SG&A and
other
2018
Operating Income
$
120
$
(35)
$
13
$
(11)
$
44
$
(19)
$
Operating Margin %
13.8%
(3.6)%
1.4%
(1.3)%
0.7%
(1.6)%
112
9.4%
(a) Volume/Sales Mix computed based on contribution margin.
Operating income decreased $8 million or 7 percent in 2018 as the Acquisition and increased sales volumes were more than
offset by lower sales prices and higher costs. Costs increased $11 million in 2018 due to higher, one-time energy costs caused by
the unusually cold weather in the southeastern U.S. in January, higher wood and chemical costs, and lower production. These
costs were partially offset by lower depreciation, lower costs to achieve Cost Transformation savings and the impact of the inventory
write-up to fair market value of $6 million. Additionally, 2017 was negatively impacted by $5 million of higher costs for the
idling of our production facilities in the southeast U.S. from Hurricane Irma. Selling, general and administrative and other costs
increased due to the Acquisition and our share of the loss related to the start-up the lignin joint-venture of $4 million.
Forest Products
(in millions)
Net Sales........................................................................................................................
Operating income.........................................................................................................
Average Sales Prices ($ per thousand board feet):
Lumber ........................................................................................................................
$
$
$
Sales Volumes (millions of board feet):
Lumber ........................................................................................................................
2018
2017
$
$
$
356
25
471
604
34
—
460
56
31
Changes in Forest Products net sales are as follows:
Net Sales (in millions)
Changes Attributable to:
2017
Price
Vol/Mix/Other
(a)
Acquisition
2018
Lumber .............................................. $
Other sales (a)....................................
Total Net Sales ................................ $
26
8
34
$
$
(5) $
—
(5) $
2
4
6
$
$
262
59
321
$
$
285
71
356
(a) Other sales include sales of logs, wood chips, and other by-products to third-parties and other segments.
Net sales increased during 2018 primarily due to the Acquisition. In addition, prices declined due to lower demand in the
latter part of the year offset by slightly higher volumes.
Changes in Forest Products operating income are as follows:
Operating Income (in millions)
Gross Margin Changes Attributable to:
2017
Price
Volume/
Sales Mix
(a)
Cost
Acquisition
SG&A and
other
2018
Operating Income.......... $
Operating Margin %......
— $
(5)
$
2
$
2
$
55
$
(29)
$
—% (17.2)%
8.6%
5.7%
18.0%
(8.1)%
25
7.0%
(a) Volume/Sales Mix computed based on contribution margin.
Operating income for Forest Products increased $25 million during 2018 primarily due to the Acquisition’s impact on gross
margin of $55 million. Excluding the impact of the Acquisition on gross margin, prices declined as a result of demand weakness
in the lumber market, partially offset by slightly higher sales volumes. Costs were lower as the absence of the 2017 inventory
write-up to fair value of $5 million was partially offset by higher costs from the market-related downtime and the write-down of
inventories to current net realizable value as a result of lower sales prices in December 2018. The change in SG&A and other is
a result of the increase of duties paid for lumber sold into the United States of approximately $26 million in 2018 and higher costs
as a result of the Acquisition.
Pulp
(in millions)
Net Sales .........................................................................................................................
Operating income ..........................................................................................................
Average Sales Prices ($ per metric tons) (a):
High-yield pulp .............................................................................................................
$
$
$
Sales Volumes (in thousands of metric tons) (a):
High-yield pulp .............................................................................................................
2018
2017
$
$
$
346
95
665
482
38
4
616
58
(a) Average sales prices and volumes for external sales only. The Pulp segment sold approximately 65 thousand MTs of high-yield pulp for
$26 million to the Paper segment for the production of paperboard during 2018.
Changes in Pulp net sales are as follows:
Net Sales (in millions)
2017
Price
Changes Attributable to:
Volume/Mix
Acquisition
2018
High-yield pulp ............................... $
38
$
4
$
(2) $
306
$
346
Net sales for Pulp increased during 2018 primarily due to the Acquisition. Excluding the Acquisition, prices were favorable
due to higher demand for virgin fiber, partly offset by lower paperboard volume.
32
Changes in Pulp operating income are as follows:
Operating Income (in millions)
Gross Margin Changes Attributable to:
2017
Price
Volume/
Sales Mix
(a)
Cost
Acquisition
SG&A and
other
Operating Income........... $
Operating Margin % ......
4
$
4
$
(1)
$
4
$
91
$
(7)
$
10.5%
8.5%
(1.5)%
10.0%
2.0%
(2.0)%
2018
95
27.5%
(a) Computed based on contribution margin.
Operating income for Pulp increased $91 million during 2018 primarily due to the Acquisition’s impact on gross margin of
$91 million. Excluding the impact of the Acquisition on gross margin, prices increased as a result of higher demand for virgin
fiber as a result of reduced recycled fiber imports in China, partially offset by slightly lower sales volumes as the markets weakened
in December 2018. Costs were lower as the absence of the 2017 inventory write-up to fair value of $6 million was partially offset
by higher costs from lower production, in addition to increased wood costs. The change in SG&A and other is a result of the
Acquisition.
Paper
(in millions)
Net Sales .....................................................................................................................
Operating income ......................................................................................................
Average Sales Prices ($ per metric ton):
Paperboard..............................................................................................................
Newsprint ...............................................................................................................
$
$
$
$
Sales Volumes (in metric tons):
Paperboard..............................................................................................................
Newsprint ...............................................................................................................
2018
2017
$
$
$
$
310
31
1,130
592
174
191
29
(1)
1,132
513
17
21
Changes in Paper net sales are as follows:
Net Sales (in millions)
2017
Price
Changes Attributable to:
Volume/Mix
Acquisition
2018
Paperboard........................................ $
Newsprint .........................................
Total Net Sales ............................... $
19
10
29
$
$
— $
2
2
$
2
(1)
1
$
$
176
101
277
$
$
197
113
310
Net sales for Paper increased during 2018 due primarily to the Acquisition.
Changes in Paper operating income are as follows:
Operating Income (in millions)
Gross Margin Changes Attributable to:
2017
Price
Volume/
Sales Mix
(a)
Cost
Acquisition
SG&A and
other
2018
Operating Income.......... $
Operating Margin %......
(1)
$
2
$
— $
4
$
37
$
(11)
$
(3.3)%
6.5%
(0.1)%
12.1%
(1.7)%
(3.5)%
31
10.0%
(a) Computed based on contribution margin.
Operating income for Paper increased $32 million during 2018 primarily due to the Acquisition’s impact on gross margin of
$37 million. Excluding the impact of the Acquisition on gross margin, prices increased primarily as a result of duties on newsprint
imported into the U.S. Costs were lower as the absence of the 2017 inventory write-up to fair value of $6 million was partially
offset by higher pulp costs for paperboard and lower production at newsprint and paperboard. The change in SG&A and other is
primarily a result of the Acquisition.
33
Corporate
(in millions)
Operating loss ............................................................................................................
$
2018
2017
(65) $
(62)
The operating loss for Corporate increased $3 million from 2017. Excluding the $34 million in one-time acquisition related
costs in 2017, the loss increased $37 million in 2018 primarily as a result of the inclusion of the Acquisition for the full year.
Results of Operations, Year Ended December 31, 2017 versus December 31, 2016
Net sales by segment were as follows:
Net Sales (in millions)
High Purity Cellulose................................................................................................ $
Forest Products..........................................................................................................
Pulp ...........................................................................................................................
Paper..........................................................................................................................
Eliminations ..............................................................................................................
Total Net Sales............................................................................................................
$
2017
2016
867
$
34
38
29
(7)
961
$
869
—
—
—
—
869
Net sales increased $92 million in 2017 compared to 2016. The increase was primarily due to the Acquisition. For further
analysis of net sales, see the below discussion of changes in net sales by segment.
Operating income by segment was as follows:
Operating Income (in millions)
High Purity Cellulose ................................................................................................. $
Forest Products ...........................................................................................................
Pulp .............................................................................................................................
Paper ...........................................................................................................................
Corporate ....................................................................................................................
Total Operating Income..............................................................................................
$
2017
2016
120
$
—
4
(1)
(62)
61
$
176
—
—
—
(33)
143
Operating income was $61 million in 2017 compared to $143 million in 2016, a decrease of $82 million. The decrease was
primarily due to a reduction in gross margin combined with increased selling, general and administrative expenses and other costs
associated with the Acquisition. For further analysis, see the below discussion of changes in operating income.
Non-operating Expenses
Interest expense was $40 million for 2017, compared to $35 million in the prior year. Interest expense increased in 2017 due
to lower average debt balances, more than offset by higher LIBOR interest rates on floating rate debt and the increased amortization
of deferred financing costs as a result of the refinancing of the Company’s term loans. See Note 8 — Debt and Capital Leases of
our consolidated financial statements for more information.
In connection with the acquisition of Tembec, we recognized a gain on bargain purchase primarily as a result of the elimination
of Tembec’s valuation allowance associated with certain deferred tax assets. As a result of the refinancing of Tembec’s debt, we
expect future taxable income will be adequate to realize the benefit of the tax assets. See Note 3 — Tembec Acquisition of our
consolidated financial statements for more information.
In connection with the acquisition of Tembec, we entered into a foreign currency collar, a derivative, as an economic hedge
of the anticipated cash flows denominated in Canadian dollars. The derivative was not deemed a hedge for accounting purposes
and, as a result, we recorded a realized gain on derivative instrument of $8 million in 2017. See Note 10 — Derivative Instruments
of our consolidated financial statements for more information.
34
Income Tax Expense
Our effective tax rate for 2017 was 5.7 percent compared to 34.9 percent in 2016. The decrease is primarily due to the non-
taxable gain on bargain purchase partially offset by the impact of the U.S. tax reform legislation and certain non-deductible
acquisition related costs. See Note 18 — Income Taxes of our consolidated financial statements for more information.
Changes in net sales by segment are as follows:
Net Sales (in millions)
High Purity Cellulose:
Cellulose specialties ............................... $
Commodity products and other ..............
Forest Products .........................................
Pulp ...........................................................
Paper .........................................................
Eliminations..............................................
Total Net Sales ..................................... $
869
$
2016
Price
Volume/Mix
Acquisition
2017
Changes Attributable to:
$
695
174
—
—
—
—
(28) $
16
—
—
—
—
(12) $
(30) $
(5)
—
—
—
—
(35) $
25
20
34
38
29
(7)
139
$
$
662
205
34
38
29
(7)
961
For 2017, sales were $961 million compared to $869 million in the prior year, an increase of $92 million, or 11 percent.
Excluding the impact of Tembec sales of $139 million since closing November 17, 2017, sales decreased $47 million or 5 percent
compared to the prior year. The $47 million decrease in net sales was driven by a decline in cellulose specialties sales prices of
4 percent, as expected, and a 4 percent decline in cellulose specialties sales volumes primarily due to the impacts of Hurricane
Irma and an operational disruption at a major customer. Additionally, commodity sales volumes decreased 3 percent due to discrete
production issues and the impact of Hurricane Irma. These declines were partially offset by improved commodity sales prices
due to stronger commodity markets resulting in higher sales prices for both commodity viscose and absorbent materials.
Changes in operating income are as follows:
Operating Income (in millions)
Gross Margin Changes Attributable to:
2016
Price
Volume/
Sales Mix (a)
Cost
Acquisition
SG&A
and other
2017
Operating Income ..... $
Operating Margin %.
143
$
(12)
$
(21)
$
(17)
$
— $
(32)
$
16.5%
(1.2)%
(1.9)%
(2.1)%
(1.6)%
(3.4)%
61
6.3%
(a) Computed based on contribution margin.
For 2017, operating income was $61 million compared to $143 million in the prior year, a decrease of $82 million. The
decrease reflects lower cellulose specialties sales prices, lower cellulose specialties and commodity sales volumes, partially offset
by higher commodity product sales prices, as previously discussed. Costs increased $17 million as savings from cost transformation
were more than offset by costs incurred to achieve additional future savings, higher production expenses due to sales mix, chemical
prices and production issues, as well as, investments in customer product development. The operating income from Tembec was
break-even since closing November 17, 2017, due to the inventory write-up to fair value of $23 million and Acquisition related
costs of $3 million. Selling, general and administrative expenses and other increased as a result of approximately $31 million of
Acquisition related costs.
Liquidity and Capital Resources
Cash flows from operations have historically been our primary source of liquidity and capital resources. We believe our cash
flows from operations and availability under our revolving credit facility, as well as our ability to access the capital markets, if
necessary or desirable, will be adequate to fund our operations and anticipated long-term funding requirements, including capital
expenditures, dividend payments, defined benefit plan contributions, repayment of debt maturities and authorized share
repurchases.
During 2018, our Board of Directors declared, and we paid, cash dividends on our Preferred Stock of approximately $14
million. Additionally, our Board of Directors declared, and we paid, quarterly cash dividends of $0.07 per share, totaling $0.28
per share, on our common stock for the year ended December 31, 2018 of approximately $15 million.
35
The declaration and payment of future preferred and common stock dividends will be at the discretion of the Board of Directors
and will be dependent upon our financial condition, results of operations, capital requirements and other factors the Board of
Directors deems relevant. In addition, certain of our debt facilities may restrict the declaration and payment of dividends, depending
upon our then current compliance with certain covenants.
On January 29, 2018, the Board of Directors authorized a $100 million common stock share buyback, which we believe provides
another option to maximize long-term shareholder value as we execute on a disciplined and balanced capital allocation strategy.
During 2018, we repurchased and retired 2,570,449 shares of common stock under this buyback program at an average price of
$15.44 per share, excluding commissions, for an aggregate purchase price of approximately $40 million.
In connection with the Tembec acquisition in 2017, we entered into an amended and restated credit agreement that refinanced,
restated and replaced the credit facilities under our previous credit agreements. The amended and restated credit facility consists
of a $230 million senior secured five-year term loan, a $450 million senior secured seven-year term loan, a $100 million revolving
credit facility and a multi-currency revolving credit facility in a U.S. Dollar equivalent amount of $150 million (collectively, the
"Credit Facilities"). The lenders under the Credit Facilities have a first priority security interest in substantially all present and
future material U.S. assets, excluding the Fernandina Beach, Florida plant’s real property and the assets of certain non-guarantor
subsidiaries. The non-guarantor subsidiaries had assets of $1,291 million, revenue of $1,322 million, covenant EBITDA of $241
million and liabilities of $861 million as of and for the year ended December 31, 2018. The Credit Facilities contain various
customary covenants. At December 31, 2018, we were in compliance with all covenants. See Note 8 — Debt and Capital Leases
of our consolidated financial statements for more information.
A summary of liquidity and capital resources is shown below (in millions of dollars):
As of December 31,
2018
2017
2016
Cash and cash equivalents (a) ......................................................................... $
Availability under the Revolving Credit Facility (b) ......................................
Total debt (c) ...................................................................................................
Stockholders’ equity........................................................................................
Total capitalization (total debt plus equity).....................................................
$
109
217
1,188
707
1,895
$
96
216
1,241
694
1,935
326
229
783
212
995
Debt to capital ratio.........................................................................................
63%
64%
79%
(a) Cash and cash equivalents consisted of cash, money market deposits and time deposits with original maturities of 90 days or
less.
(b) Amounts available under the revolving credit facility has been reduced by standby letters of credit of approximately $33
million, $34 million and $21 million at December 31, 2018, 2017 and 2016, respectively. See Note 20 — Commitments and
Contingencies of our consolidated financial statements for additional information.
(c) See Note 8 — Debt and Capital Leases of our consolidated financial statements for more information.
Cash Flows (in millions of dollars)
The following table summarizes our cash flows from operating, investing and financing activities for each of the three years
ended December 31:
Cash Provided by (Used for):
Operating activities ......................................................................................... $
Investing activities .......................................................................................... $
Financing activities ......................................................................................... $
2018
2017
2016
247
$
(116) $
(116) $
130
$
(277) $
(84) $
232
(87)
80
Cash Provided by Operating Activities
Cash provided by operating activities during 2018 increased $117 million compared to the prior year period, due primarily
to increased net income, excluding the impact of the gain on bargain purchase due to the Acquisition, and from the timing of
accounts payable payments. The increases were partially offset by higher inventories and accounts receivable.
Cash provided by operating activities in 2017 decreased $102 million when compared to the prior year primarily due to
decreased net income after the non-cash reduction to net income from the gain on bargain purchase, as well as an increase in
working capital requirements.
36
Cash Used for Investing Activities
Cash used for investing activities during 2018 decreased by $161 million due to the absence of the cash used to fund the
Acquisition, offset by proceeds of approximately $16 million received from the sale of our resin operations. The lower cash used
for investing activities during 2018 was also offset by $57 million of higher capital spending requirements, including increased
strategic spending, as a result of the Acquisition.
Cash used for investing activities during 2017 increased $190 million when compared to the prior year as a result of the
Acquisition, partly offset by a decrease in capital spending and a gain on derivative instrument.
Cash Provided by (Used for) Financing Activities
Cash used for financing activities during 2018 increased $32 million when compared to the prior year primarily due to $40
million of common stock that was repurchased under the Company's share repurchase authorization of up to $100 million, which
was declared by the Board of Directors on January 29, 2018. In addition, approximately $3 million was used to pay employee
minimum tax withholding requirements in lieu of receiving common shares from incentive stock plans. These increases were
partially offset by lower debt repayments in 2018 when compared to the debt repayments, net of new borrowings, during 2017.
In addition, debt issuance costs of $7 million were incurred in 2017. See Note 8 — Debt and Capital Leases and Note 12 —
Stockholders' Equity (Deficit) for additional information. Dividends were approximately $2 million higher in 2018 due to the
inclusion of the 8.4 million shares issued in connection with the November 2017 Tembec acquisition.
Cash used for financing activities of $84 million changed by $164 million in 2017 when compared to the prior year primarily
due to the payoff of our old credit facilities and the payment of Tembec’s senior notes, partially offset by cash provided by the
issuance of new debt in conjunction with the Acquisition. See Note 8 — Debt and Capital Leases of our consolidated financial
statements for more information.
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: EBITDA, adjusted EBITDA and adjusted free cash flows. These measures are not defined by U.S. Generally Accepted
Accounting Principles (“GAAP”) and the discussion of EBITDA, adjusted EBITDA and adjusted free cash flows is not intended
to conflict with or change any of the GAAP disclosures 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 and adjusted EBITDA as performance measures and
adjusted free cash flows as a liquidity measure. See “Note about Non-GAAP Financial Measures” on page 2 for limitations
associated with non-GAAP measures.
EBITDA is defined by SEC rules as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is
defined by the Company as EBITDA before acquisition related costs, inventory write-up to fair value, gain on bargain purchase,
severance expense, gain on derivative instrument, non-cash impairment, one-time separation and legal costs, insurance recovery,
environmental liability adjustments and gain on debt extinguishment. EBITDA and adjusted EBITDA are not necessarily indicative
of results that may be generated in future periods.
37
Below is a reconciliation of Net Income to EBITDA and adjusted EBITDA for the five years ended December 31 (in millions
of dollars):
Net Income to EBITDA and Adjusted EBITDA
Reconciliations
Net Income................................................................................. $
Depreciation and amortization ..............................................
Interest expense, net ..............................................................
Income tax expense ...............................................................
EBITDA.....................................................................................
Gain on bargain purchase......................................................
Severance expense ................................................................
Acquisition related costs .......................................................
Inventory write-up to fair value ............................................
Gain on derivative instrument...............................................
Gain on debt extinguishment ................................................
Non-cash impairment charge ................................................
One-time separation and legal costs......................................
Insurance recovery ................................................................
Environmental reserve adjustments ......................................
2018
2017
2016
2015
2014
128
148
60
44
380
(20)
4
—
—
—
—
—
—
—
—
$
325
$
97
38
20
480
(317)
—
34
23
(8)
—
—
—
—
—
$
73
88
35
39
235
$
55
89
37
28
209
—
—
—
—
—
(9)
—
—
—
—
—
—
—
—
—
—
28
2
(1)
—
32
86
22
9
149
—
—
—
—
—
—
—
26
(3)
95
Adjusted EBITDA...................................................................... $
364
$
212
$
226
$
238
$
267
EBITDA and Adjusted EBITDA for 2018 increased from the prior year period primarily due to increased earnings as a result
of the Acquisition.
EBITDA for 2017 increased compared to 2016 primarily due to the gains on bargain purchase and a derivative instrument,
partially offset by acquisition related costs and the inventory write-up to fair value. Adjusted EBITDA for 2017 decreased from
2016 primarily due to lower net income driven by lower sales prices and volumes for our cellulose specialties and commodity
products volumes and increased costs, partially offset by the impact of EBITDA from the Acquisition.
EBITDA for 2016 increased compared to 2015 primarily from the non-cash impairment charge which occurred in 2015.
Adjusted EBITDA for 2016 decreased from 2015 due to lower cellulose specialties sales prices and volumes partially offset by
cost improvements from the Company’s Cost Transformation.
Adjusted free cash flows is defined as cash provided by operating activities adjusted for capital expenditures excluding strategic
capital expenditures. Adjusted free cash flows, as defined by the Company, is a non-GAAP measure of cash generated during a
period which is available for dividend distribution, debt reduction, strategic capital expenditures and acquisitions and repurchase
of the Company’s common stock. Adjusted free cash flows is not necessarily indicative of the adjusted free cash flows that may
be generated in future periods.
Below is a reconciliation of cash flows from operations to adjusted free cash flows for the five years ended December 31 (in
millions of dollars):
Cash Flows from Operations to Adjusted Free Cash
Flows Reconciliation
2018
2017
2016
2015
2014
Cash flows from operations ................................................... $
Capital expenditures (a) ....................................................
Adjusted free cash flows........................................................ $
247
(95)
152
$
$
130
(65)
65
$
$
232
(85)
147
$
$
202
(78)
124
$
$
188
(75)
113
(a) Capital expenditures exclude strategic capital expenditures which we deem discretionary. Strategic capital for the years ended
December 31, 2018, 2017 and 2016 were $37 million, $11 million and $4 million, respectively. There was no strategic capital
expenditures for the year ended December 31, 2015. Strategic capital totaled $13 million for the purchase of timber deeds
and $2 million for the purchase of land for the year ended December 31, 2014.
38
Adjusted free cash flows in 2018 increased primarily from higher cash provided by operating activities, partly offset by
increased capital expenditure requirements from the Acquisition.
Adjusted free cash flows in 2017 decreased from 2016 primarily due to decreased cash flows from operations were partially
offset by lower capital expenditures.
Adjusted free cash flows in 2016 increased over 2015 as increased cash flows from operations were partially offset by increased
capital expenditures.
Off Balance Sheet Arrangements
We utilize off-balance sheet arrangements to provide credit support for certain suppliers and vendors in case of their default
on critical obligations, collateral for certain of our self-insurance programs and guarantees for the completion of our remediation
of environmental liabilities. These arrangements consist of standby letters of credit and surety bonds. As part of our ongoing
operations, we also periodically issue guarantees to third parties. Off-balance sheet arrangements are not considered a source of
liquidity or capital resources and do not expose us to material risks or material unfavorable financial impacts. See Note 20 —
Commitments and Contingencies of our consolidated financial statements for more information.
Contractual Financial Obligations
Information regarding the letters of credit, surety bonds and other guarantees as of December 31, 2018 is hereby incorporated
by reference to Note 20 — Commitments and Contingencies of our consolidated financial statements.
The following table aggregates our contractual financial obligations as of December 31, 2018 and anticipated cash spending
by period:
Contractual Financial Obligations (in millions)
Long-term debt, including current maturities .................... $
Interest payments on long-term debt and capital lease
obligations (a).................................................................
Purchase obligations (b).....................................................
Postretirement obligations (c) ............................................
Capital lease obligations ....................................................
Operating leases (d) ...........................................................
Total
2019
2020-2021
2022-2023 Thereafter
Payments Due by Period
1,190
$
14
$
32
$
200
$
315
503
27
3
14
61
171
3
—
5
118
128
6
1
5
103
100
5
1
3
944
33
104
13
1
1
Total contractual cash obligations................................. $
2,052
$
254
$
290
$
412
$
1,096
(a) Projected interest payments for variable-rate debt were calculated based on outstanding principal amounts and interest rates
as of December 31, 2018. See Note 8 — Debt and Capital Leases for additional information.
(b) Purchase obligations primarily consist of payments expected to be made on natural gas, steam energy and wood chip purchase
contracts. Purchase obligations exclude arrangements the Company can cancel without penalty.
(c) Amounts include estimated postretirement benefit payments and do not include pension funding obligations. See Note 16 -
Employee Benefit Plans, for additional information on our pension and postretirement benefit plans.
(d) Operating leases primarily consist of the office lease for our corporate headquarters and machinery and equipment.
Environmental Regulation
We are subject to stringent environmental laws and regulations concerning air emissions, wastewater discharges, waste
handling and disposal, and assessment and remediation of environmental contamination, which impact both our current ongoing
operations and 18 former operating facilities or third party-owned sites classified as disposed operations. These include the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 and similar state laws and regulations impacting U.S. facilities, as well as requirements
relating to ancillary matters such as financial assurance of the Company’s legal obligations for facility closure and post-closure
care. Similar laws and legal requirements also impact current and former operating sites in Canada and France, respectively.
39
Management closely monitors our environmental responsibilities and believes we are in material compliance with current
requirements. In addition to ongoing compliance with laws and regulations, our facilities operate in accordance with various
permits, which are issued by state and federal environmental agencies. Many of these permits impose operating conditions on us
which require significant expenditures to ensure compliance. Upon renewal and renegotiation of these permits, the issuing agencies
often seek to impose new or additional conditions in response to new environmental laws and regulations, or more stringent
interpretations of existing laws and regulations. In addition, under many federal environmental laws, private citizens and
organizations, such as environmental advocacy groups, have the right to legally challenge permitting and other decisions made
by regulatory agencies.
Our operations are subject to constantly changing environmental requirements, and interpretations of existing requirements,
which are often impacted by new policy initiatives, new and amended legislation and regulation, negotiations involving state and
federal governmental agencies and various other stakeholders, as well as, at times, litigation. For additional information, see Item
1A — Risk Factors for a discussion of the potential impact of environmental risks on our business, and Item 3 — Legal Proceedings,
for a discussion of any environmental-related litigation.
Ongoing Operations
During 2018, 2017 and 2016, we spent the following for capital projects related to environmental compliance for ongoing
operations:
(in millions)
Boiler MACT (a)
2018
2017
2016
$
— $
— $
10
(a) Represents spending required as a result of a regulation originally promulgated in 2012 (and later re-promulgated after
litigation), which imposes more stringent emissions limits on certain air pollutants from industrial boilers. This project was
completed in 2016.
The Company’s future spending requirements in the area of environmental compliance could change significantly based on
the passage of new environmental laws and regulations.
Disposed Operations
For information and details relating to our disposed operations and estimated liabilities relating thereto, see Item 1A — Risk
Factors and Note 9 — Liabilities for Disposed Operations of our consolidated financial statements for more information.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Market and Other Economic Risks
We are exposed to various market risks, primarily changes in interest rates, currency 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. See Note 10 — Derivative Instruments for additional information.
We manage our foreign currency exposures by balancing certain assets and liabilities denominated in foreign currencies and
through the use of foreign currency forward contracts. The principal objective of such contracts is to minimize the potential
volatility and financial impact of changes in foreign currency exchange rates. The counterparties to these contractual agreements
are major financial institutions with which we generally have other financial relationships. We are exposed to credit loss in the
event of nonperformance by these counterparties. However, given their size and financial strength, we do not anticipate
nonperformance by the counterparties. We do not utilize financial instruments for trading or other speculative purposes.
The prices, sales volumes and margins of the commodity products of our High Purity Cellulose segment and all the products
of the Forest Products, Pulp and Paper segments have historically been cyclically affected by economic and market shifts,
fluctuations in capacity, and changes in foreign currency exchange rates. In general, these products are commodities that are widely
available from other producers; because these products have few distinguishing qualities from producer to producer, competition
is based primarily on price, which is determined by supply relative to demand. The overall levels of demand for the products we
manufacture, and consequently our sales and profitability, reflect fluctuations in end user demand. Our cellulose specialties product
prices are impacted by market supply and demand, raw material and processing costs, changes in global currencies and other
40
factors. They are not directly correlated to commodity paper pulp prices. In addition, a majority of our cellulose specialties
products are under long-term contracts that expire between 2019 and 2021.
As of December 31, 2018, we had $603 million of 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 $6 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. We have 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 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 December 31, 2018 was $541 million compared
to the $587 million principal amount. We use quoted market prices to estimate the fair value of our fixed-rate debt. Generally,
the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise.
We may periodically enter into commodity forward contracts to fix some of our energy costs that are subject to price volatility
caused by weather, supply conditions, political and economic variables and other unpredictable factors. Such forward contracts
partially mitigate the risk of changes to our gross margins resulting from an increase or decrease in these costs. Forward contracts
which are derivative instruments are reported in the consolidated balance sheets at their fair values, unless they qualify for the
normal purchase normal sale ("NPNS") exception and such exception has been elected. If the NPNS exception is elected, the fair
values of such contracts are not recognized on the balance sheet.
Item 8.
Financial Statements and Supplementary Data
Our consolidated financial statements and related financial statement schedule, together with the report of independent
registered accounting firm, appear at pages F-1 through F-48 of this Annual Report on Form 10-K for the year ended December
31, 2018.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Rayonier Advanced Materials management is responsible for establishing and maintaining adequate disclosure controls and
procedures. Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
“Exchange Act”)) are designed with the objective of ensuring that information required to be disclosed in reports filed under the
Exchange Act, such as this annual report on Form 10-K, is (1) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Because of the inherent limitations in all control systems, no control evaluation can provide absolute assurance all control
exceptions and instances of fraud have been prevented or detected on a timely basis. Even systems determined to be effective can
provide only reasonable assurance their objectives are achieved.
Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this annual report on
Form 10-K, our management, including the Chief Executive Officer and Chief Financial Officer, concluded the design and operation
of the disclosure controls and procedures were effective as of December 31, 2018.
Internal Control over Financial Reporting
With regard to our internal control over financial reporting as defined in paragraph (f) of Rule 13a-15(f), see Management’s
Report on Internal Control over Financial Reporting on page F-2, followed by the Reports of Independent Registered Public
Accounting Firm on page F-3, included in Item 8 — Financial Statements and Supplementary Data of this annual report on Form
10-K.
41
For the year ended December 31, 2018, based upon the evaluation required by paragraph (d) of Rule 13a-15, there were no
changes in our internal control over financial reporting that would materially affect or are reasonably likely to materially affect
our internal control over financial reporting.
Item 9B.
Other Information
None.
42
Certain information required by Part III is incorporated by reference from the Company’s definitive Proxy Statement to be
filed with the SEC in connection with the solicitation of proxies for the Company’s 2019 Annual Meeting of Stockholders (the
“Proxy Statement”). We will make the Proxy Statement available on our website at www.rayonieram.com as soon as it is filed
with the SEC.
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this Item with respect to directors, executive officers and corporate governance is incorporated
by reference from the sections entitled “Election of Directors,” “Commitment to Best Corporate Governance Practice,” “Executive
Officers” and “Report of the Audit Committee” in the Proxy Statement. The information required by this Item with respect to
disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act is incorporated
by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Our Standard of Ethics and Code of Corporate Conduct, which is applicable to our principal executive officer and financial
and accounting officers, is available on our website, www.rayonieram.com. Any amendments to or waivers of the Standard of
Ethics and Code of Corporate Conduct will also be disclosed on our website.
Item 11.
Executive Compensation
The information called for by Item 11 is incorporated herein by reference from the section and subsections entitled
“Compensation Discussion & Analysis,” “Summary Compensation Tables,” “Grants of Plan-Based Awards,” “Outstanding Equity
Awards at Fiscal Year-End,” “Option Exercises and Stock Vested,” “Pension Benefits,” “Non-qualified Deferred Compensation,”
“Potential Payments Upon Termination or Change in Control,” “Director Compensation,” “Compensation Discussion & Analysis
- Compensation Committee Interlocks and Insider Participation; Processes and Procedures” and “Compensation Discussion &
Analysis - Report of the Compensation and Management Development Committee” in the Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information called for by Item 12 is incorporated herein by reference from the sections entitled “Security Ownership of
Certain Beneficial Owners,” “Stock Ownership of Directors and Executive Officers” and “Appendix E - Equity Compensation
Plan Information” in the Proxy Statement.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information called for by Item 13 is incorporated herein by reference from the section and subsections entitled “Election
of Directors,” “Commitment to Best Corporate Governance Practice - Board Independence and Governance Principles” and
“Commitment to Best Corporate Governance Practice - Related Person Transactions” in the Proxy Statement.
Item 14.
Principal Accounting Fees and Services
The information called for by Item 14 is incorporated herein by reference from the subsection entitled “Report of the Audit
Committee - Information Regarding Independent Registered Public Accounting Firm” in the Proxy Statement.
43
Part IV
Item 15.
Exhibits, Financial Statement Schedules
(a)
1. Consolidated Financial Statements.
For a list of the consolidated financial information included herein, see page F-1.
2. Financial Statement Schedules.
All other schedules have been omitted as the required information is not applicable or the information is presented in the
Consolidated Financial Statements or notes thereto under Item 8 herein. The following consolidated financial statement
schedule is included in Item 8:
Schedule II-Valuation and Qualifying Accounts
3. List of Exhibits.
(b) Exhibits.
See Item 15(a)(3).
(c) Financial Statement Schedule.
See Item 15(a)(2).
Item 16.
Form 10-K Summary
None.
Exhibit No. Description
2.1
2.2
2.3
3.1
3.2
3.3
4.1
Separation and Distribution Agreement between
Rayonier Advanced Materials Inc. and Rayonier Inc.,
dated as of May 28, 2014
Arrangement Agreement by and between Tembec Inc.
and Rayonier Advanced Materials Inc. dated as of
May 24, 2017*
Amending Agreement, dated as of July 23, 2017, to
the Arrangement Agreement by and between Tembec
Inc. and Rayonier Advanced Materials Inc. dated as of
May 24, 2017
Location
Incorporated herein by reference to Exhibit 2.1 to the
Registrant’s Amendment No. 4 to the Registration
Statement on Form 10 filed on May 29, 2014
Incorporated herein by reference to Exhibit 2.1 to the
Registrant’s Form 8-K filed on May 25, 2017
Incorporated herein by reference to Exhibit 2.1 to the
Registrant’s Form 8-K filed on July 24, 2017
Amended and Restated Certificate of Incorporation of
Rayonier Advanced Materials Inc.
Incorporated herein by reference to Exhibit 3.1 to the
Registrant’s Form 8-K filed on June 30, 2014
Certificate of Designations of 8.00% Series A
Mandatory Convertible Preferred Stock of Rayonier
Advanced Materials Inc., filed with the Secretary of
State of the State of Delaware and effective August
10, 2016
Incorporated herein by reference to Exhibit 3.1 to the
Registrant’s Form 8-K filed on August 10, 2016
Amended and Restated Bylaws of Rayonier Advanced
Materials Inc.
Incorporated herein by reference to Exhibit 3.2 to the
Registrant’s Form 8-K filed on June 30, 2014
Indenture among Rayonier A.M. Products Inc., the
guarantors party thereto from time to time and Wells
Fargo Bank, National Association, as Trustee, dated as
of May 22, 2014
Incorporated herein by reference to Exhibit 4.1 to the
Registrant’s Amendment No. 4 to Registration
Statement on Form 10 filed on May 29, 2014
44
Exhibit No. Description
4.2
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Form of certificate representing the Registrant’s
8.00% Series A Mandatory Convertible Preferred
Stock
Transition Services Agreement, dated as of June 27,
2014, by and between Rayonier Inc. and Rayonier
Advanced Materials Inc.
Tax Matters Agreement, dated as of June 27, 2014, by
and among Rayonier Inc., Rayonier Advanced
Materials Inc., Rayonier TRS Holdings Inc. and
Rayonier A.M. Products Inc.
Employee Matters Agreement, dated as of June 27,
2014, by and between Rayonier Inc. and Rayonier
Advanced Materials Inc.
Intellectual Property Agreement, dated as of June 27,
2014, by and between Rayonier Inc. and Rayonier
Advanced Materials Inc.
Credit Agreement, dated as of June 24, 2014, among
Rayonier A.M. Products Inc., Rayonier Advanced
Materials Inc. (following its joinder thereto), the
subsidiary loan parties from time to time party thereto
(following their joinder thereto), the lenders from time
to time party thereto and Bank of America, N.A., as
administrative agent
First Amendment, dated as of June 5, 2017, among
Rayonier A.M. Products Inc., as Borrower, Rayonier
Advanced Materials Inc., as Designated Borrower,
Holdings and as a Guarantor, th10.6e Subsidiary Loan
Parties party thereto, the Lenders party thereto, and
Bank of America, N.A., as administrative agent and
collateral agent
First Restatement Agreement, dated as of August 17,
2017, among Rayonier Advanced Materials Inc., as
Holdings, Rayonier A.M. Products Inc. and Rayonier
Performance Fibers, LLC, as Borrowers, certain
subsidiaries of Rayonier Advanced Materials Inc.
party thereto, the lenders and L/C issuers party thereto
and Bank of America, N.A., as Administrative Agent
Location
Incorporated herein by reference to Exhibit A to
Exhibit 3.1 to the Registrant’s Form 8-K filed on
August 10, 2016
Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Form 8-K filed on June 30, 2014
Incorporated herein by reference to Exhibit 10.2 to the
Registrant’s Form 8-K filed on June 30, 2014
Incorporated herein by reference to Exhibit 10.3 to the
Registrant’s Form 8-K filed on June 30, 2014
Incorporated herein by reference to Exhibit 10.4 to the
Registrant’s Form 8-K filed on June 30, 2014
Incorporated herein by reference to Exhibit 10.5 to the
Registrant’s Form 8-K filed on June 30, 2014
Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Form 8-K filed on June 6, 2017
Incorporated hereby by referenced to Exhibit 10.1 to
the Registrant’s Form 8-K filed on August 18, 2017
Rayonier Advanced Materials Inc. Incentive Stock
Plan, as amended effective May 23, 2016**
Incorporated herein by reference to Appendix C to the
Registrant’s Proxy Statement filed on April 8, 2016
Rayonier Advanced Materials Inc. 2017 Incentive
Stock Plan, effective May 22, 2017**
Incorporated herein by referenced to Appendix B to
the Registrant’s Proxy Statement filed on April 7,
2017
Rayonier Advanced Materials Inc. 2017 Incentive
Stock Plan, effective December 15, 2017**
Incorporated herein by reference to Exhibit 10.10 to
the Registrant’s Form 10-K filed on March 1, 2018
Rayonier Advanced Materials Inc. 2017 Incentive
Stock Plan (as amended effective December 15,
2017)**
Incorporated herein by reference to Appendix A to the
Registrant’s Proxy Statement filed on April 6, 2018
Form of Rayonier Advanced Materials Inc. Incentive
Stock Plan Restricted Stock Award Agreement,
effective 2015**
Incorporated herein by reference to Exhibit 10.11 to
the Registrant’s Form 10-K filed on February 27,
2015
45
Exhibit No. Description
Form of Rayonier Advanced Materials Inc. Incentive
Stock Plan Restricted Stock Unit Award Agreement,
effective 2017**
Location
Incorporated herein by reference to Exhibit 10.12 to
the Registrant’s Form 10-K filed on March 1, 2018
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
Form of Rayonier Advanced Materials Inc. Incentive
Stock Plan Supplemental Terms Applicable to the
2017 Equity Award Grant**
Incorporated herein by reference to Exhibit 10.11 to
the Registrant’s Form 10-K filed on February 24,
2017
Form of Rayonier Advanced Materials Inc. Incentive
Stock Plan Supplemental Terms Applicable to the
2018 Equity Award Grant**
Form of Rayonier Advanced Materials Inc. Incentive
Stock Plan Supplemental Terms Applicable to the
2019 Equity Award Grant**
Description of Rayonier Advanced Materials Inc.
2017 Performance Share Award Program**
Description of Rayonier Advanced Materials Inc.
2018 Performance Share Award Program**
Description of Rayonier Advanced Materials Inc.
2019 Performance Share Award Program**
Incorporated herein by reference to Exhibit 10.15 to
the Registrant’s Form 10-K filed on March 1, 2018
Filed herewith
Incorporated herein by reference to Exhibit 10.13 to
the Registrant’s Form 10-K filed on February 24,
2017
Incorporated herein by reference to Exhibit 10.18 to
the Registrant’s Form 10-K filed on March 1, 2018
Filed herewith
Agreement between Rayonier Advanced Materials
Inc. and Paul G. Boynton Regarding Special Stock
Grant, dated May 28, 2014**
Incorporated herein by reference to Exhibit 10.6 to the
Registrant’s Amendment No. 4 to the Registration
Statement on Form 10 filed on May 29, 2014
Amendment dated March 23, 2015 to Agreement
between Rayonier Advanced Materials Inc. and Paul
G. Boynton Regarding Retention Award**
Incorporated herein by reference to Exhibit 10.2 to the
Registrant’s Form 10-Q filed on May 1, 2015
Rayonier Advanced Materials Inc. Non-Equity
Incentive Plan, as amended effective May 23, 2016**
Incorporated herein by reference to Appendix B to the
Registrant’s Proxy Statement filed on April 8, 2016
Rayonier Advanced Materials Inc. Executive
Severance Pay Plan, as amended effective March 1,
2017**
Incorporated herein by reference to Exhibit 10.17 to
the Registrant’s Form 10-K filed on February 24,
2017
Rayonier Advanced Materials Inc. Non Change In
Control Executive Severance Plan**
Trust Agreement for Rayonier Advanced Materials
Inc. Legal Resources Trust, dated June 28, 2014, by
and between Rayonier Advanced Materials Inc. and
Wells Fargo Bank, National Association**
Rayonier Advanced Materials Inc. Excess Benefit
Plan, effective June 27, 2014**
Incorporated herein by reference to Exhibit 10.20 to
the Registrant’s Form 10-K filed on February 26,
2016
Incorporated herein by reference to Exhibit 10.23 to
the Registrant’s Form 10-Q/A filed on September 4,
2014
Incorporated herein by reference to Exhibit 10.24 to
the Registrant’s Form 10-Q/A filed on September 4,
2014
Rayonier Advanced Materials Inc. Excess Savings and
Deferred Compensation Plan, effective June 28,
2014**
Incorporated herein by reference to Exhibit 10.25 to
the Registrant’s Form 10-Q/A filed on September 4,
2014
Form of Rayonier Advanced Materials Inc. Excess
Savings and Deferred Compensation Plan
Agreements, effective June 28, 2014**
Incorporated herein by reference to Exhibit 10.18 to
the Registrant’s Form 10-K filed on February 27,
2015
Retirement Plan for Salaried Employees of Rayonier
Advanced Materials Inc., effective June 27, 2014**
Incorporated herein by reference to Exhibit 10.26 to
the Registrant’s Form 10-Q/A filed on September 4,
2014
Rayonier Advanced Materials Inc. Investment and
Savings Plan for Salaried Employees, effective
January 1, 2015**
Incorporated herein by reference to Exhibit 10.24 to
the Registrant’s Form 10-K filed on February 24,
2017
46
Exhibit No. Description
Amendment to Rayonier Advanced Materials Inc.
Investment and Savings Plan for Salaried Employees,
effective January 1, 2015**
Location
Incorporated herein by reference to Exhibit 10.25 to
the Registrant’s Form 10-K filed on February 24,
2017
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
Amendment to Rayonier Advanced Materials Inc.
Investment and Savings Plan for Salaried Employees,
effective January 1, 2016**
Incorporated herein by reference to Exhibit 10.26 to
the Registrant’s Form 10-K filed on February 24,
2017
Amendment to Rayonier Advanced Materials Inc.
Investment and Savings Plan for Salaried Employees,
effective January 1, 2016**
Incorporated herein by reference to Exhibit 10.27 to
the Registrant’s Form 10-K filed on February 24,
2017
Amendment to Rayonier Advanced Materials Inc.
Investment and Savings Plan for Salaried Employees,
effective October 1, 2016**
Incorporated herein by reference to Exhibit 10.28 to
the Registrant’s Form 10-K filed on February 24,
2017
Amendment to Rayonier Advanced Materials Inc.
Investment and Savings Plan for Salaried Employees,
effective February 13, 2017**
Incorporated herein by reference to Exhibit 10.29 to
the Registrant’s Form 10-K filed on February 24,
2017
Form of Indemnification Agreement between
Rayonier Advanced Materials Inc. and individual
directors or officers**
Form of Rayonier Advanced Materials Inc. Outside
Directors Compensation Program/Cash Deferral
Option Agreement**
Chemical Cellulose Purchase and Sale Agreement,
effective as of January 1, 2016, between Rayonier
A.M. Sales and Technology Inc. and Eastman
Chemical Company***
Amendment No. 1 to Chemical Cellulose Purchase
and Sale Agreement by and between Rayonier A.M.
Sales and Technology Inc. and Eastman Chemical
Company, effective as of November 18, 2017***
Cellulose Specialties Agreement, effective as of
January 1, 2012, by and between Rayonier
Performance Fibers, LLC and Nantong Cellulose
Fibers Co., Ltd.***
Amendment No. 1 to Cellulose Specialties
Agreement, effective as of January 1, 2012, by and
between Rayonier Performance Fibers, LLC and
Nantong Cellulose Fibers Co., Ltd.***
Amendment No. 2 to Cellulose Specialties
Agreement, effective as of December 31, 2014, by and
between Rayonier Performance Fibers, LLC and
Nantong Cellulose Fibers Co., Ltd.***
Amendment No. 3 to Chemical Cellulose Agreement,
dated effective as of January 1, 2016, between
Nantong Cellulose Fibers Co., Ltd. and Rayonier
A.M. Sales and Technology Inc.***
Amended and Restated Cellulose Specialties
Agreement, effective as of January 1, 2012, by and
between Rayonier Performance Fibers, LLC and
Daicel Corporation***
Amendment No. 1 to Amended and Restated
Cellulose Specialties Agreement, effective as of
February 15, 2013, by and between Rayonier
Performance Fibers, LLC and Daicel Corporation***
47
Incorporated herein by reference to Exhibit 10.5 to the
Registrant’s Amendment No. 4 to the Registration
Statement on Form 10 filed on May 29, 2014
Incorporated herein by reference to Exhibit 10.22 to
the Registrant’s Form 10-K and filed on February 27,
2015
Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Form 8-K filed on December 1, 2015
Incorporated herein by reference to Exhibit 10.33 to
the Registrant’s Form 10-K filed on February 24,
2017
Incorporated herein by reference to Exhibit 10.9 to the
Registrant’s Amendment No. 4 to the Registration
Statement on Form 10 filed on May 29, 2014
Incorporated herein by reference to Exhibit 10.10 to
the Registrant’s Amendment No. 4 to the Registration
Statement on Form 10 filed on May 29, 2014
Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Form 8-K filed on October 20, 2014
Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Form 8-K filed on September 23, 2015
Incorporated herein by reference to Exhibit 10.11 to
the Registrant’s Amendment No. 4 to the Registration
Statement on Form 10 filed on May 29, 2014
Incorporated herein by reference to Exhibit 10.12 to
the Registrant’s Amendment No. 4 to the Registration
Statement on Form 10 filed on May 29, 2014
Location
Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Form 8-K filed on March 17, 2016
Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Form 8-K filed on August 3, 2017
Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Form 8-K filed on July 24, 2017
Incorporated herein by reference to Exhibit 10.2 to the
Registrant’s Form 8-K filed on July 24, 2017
Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Form 8-K filed on February 20, 2018
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Furnished herewith
Filed herewith
Exhibit No. Description
10.46
10.47
10.48
10.49
10.50
21
23.1
24
31.1
31.2
32
101
Amendment No. 2 to Daicel - Rayonier Amended
Chemical Specialties Agreement, effective as of
January 1, 2016, between Daicel Corporation and
Rayonier A.M. Sales and Technology Inc.***
Amendment No. 3 to Daicel - Rayonier Amended
Chemical Specialties Agreement, effective as of
January 1, 2017 between Daicel Corporation and
Rayonier A. M. Sales and technology Inc.***
Support and Voting Agreement, dated as of July 23,
2017, by and between Rayonier Advanced Materials
Inc., Oaktree Value Equity Fund, L.P. and Oaktree
Value Equity Fund-SP, L.P.
Support and Voting Agreement, dated as of July 23,
2017, by and between Rayonier Advanced Materials
Inc., Bennett Restructuring Fund, L.P. and Bennett
Offshore Restructuring Fund, Inc.
Agreement by and among Rayonier Advanced
Materials Inc., Marcato Capital Management L.P.,
Marcato International Master Fund, Ltd., Marcato
Encore Master Fund, Ltd. and Matthew Hepler, dated
February 18, 2018
Subsidiaries of the registrant
Consent of Grant Thornton LLP
Powers of attorney
Chief Executive Officer’s Certification Pursuant to
Rule 13a-14(a)/15d-14(a) and pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Chief Financial Officer’s Certification Pursuant to
Rule 13a-14(a)/15d-14-(a) and pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Certification of Periodic Financial Reports Under
Section 906 of the Sarbanes-Oxley Act of 2002
The following financial information from our Annual
Report on Form 10-K for the fiscal year ended
December 31, 2017, formatted in Extensible Business
Reporting Language (“XBRL”), includes: (i) the
Consolidated Statements of Income and
Comprehensive Income for the Years Ended
December 31, 2017, 2016 and 2015; (ii) the
Consolidated Balance Sheets as of December 31, 2017
and 2016; (iii) the Consolidated Statements of Cash
Flows for the Years Ended December 31, 2017, 2016
and 2015; and (iv) the Notes to the Consolidated
Financial Statements
* The exhibits to the Arrangement Agreement have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-
K. The Company will furnish copies of any such schedules and exhibits to the U.S. Securities and Exchange Commission upon
request.
** Management contract or compensatory plan.
*** Portions of this exhibit have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934.
48
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
Signatures
Rayonier Advanced Materials Inc.
(Registrant)
By:
/s/ FRANK A. RUPERTO
Frank A. Ruperto
Chief Financial Officer and
Senior Vice President, Finance and Strategy
(Duly Authorized Officer and Principal Financial Officer)
Date: March 1, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
49
Signature
Title
Date
/s/ PAUL G. BOYNTON
Paul G. Boynton
(Principal Executive Officer)
/s/ FRANK A. RUPERTO
Frank A. Ruperto
(Principal Financial Officer)
/s/ JOHN P. CARR
John P. Carr
(Principal Accounting Officer)
*
C. David Brown, II
*
Charles E. Adair
*
DeLyle W. Bloomquist
*
Julie A. Dill
*
Mark E. Gaumond
*
Matthew P. Hepler
*
James F. Kirsch
*
Thomas I. Morgan
*
Lisa M. Palumbo
Chairman of the Board, President
and Chief Executive Officer
March 1, 2019
Chief Financial Officer and Senior
Vice President, Finance and Strategy
March 1, 2019
Chief Accounting Officer and Vice
President, Controller
March 1, 2019
Lead Director
Director
Director
Director
Director
Director
Director
Director
Director
*By:
/s/ FRANK A. RUPERTO
Frank A. Ruperto
(Attorney-In-Fact)
March 1, 2019
50
Index to Financial Statements
Management’s Report on Internal Control over Financial Reporting ............................................................................
Reports of Independent Registered Public Accounting Firm .........................................................................................
Consolidated Statements of Income and Comprehensive Income for the Three Years Ended December 31, 2018 ......
Consolidated Balance Sheets as of December 31, 2018 and 2017 .................................................................................
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2018 .............................................
Notes to Consolidated Financial Statements ..................................................................................................................
Index to Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts ..........................................................................................................
All other financial statement schedules have been omitted because they are not applicable, the required matter is
not present, or the required information has been otherwise supplied in the financial statements or the notes thereto.
Page
F- 2
F- 3
F- 5
F- 6
F- 7
F- 8
F- 48
F- 1
Management’s Report on Internal Control over Financial Reporting
The management of Rayonier Advanced Materials Inc. and its subsidiaries is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as
amended). Our system of internal controls over financial reporting is designed to provide reasonable assurance to the Company’s
management and Board of Directors regarding the preparation and fair presentation of the financial statements for external purposes
in accordance with accounting principles generally accepted in the United States of America.
Because of the inherent limitations of internal control over financial reporting, misstatements due to error or fraud may not
be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Rayonier Advanced Materials Inc.’s management, under the supervision of the Chief Executive Officer and Chief Financial
Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this
assessment, we used the framework included in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework). Based on our evaluation under the criteria set forth in Internal
Control — Integrated Framework, management concluded that our internal control over financial reporting was effective as of
December 31, 2018.
Grant Thornton LLP, the independent registered public accounting firm that audited the Company’s consolidated financial
statements, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2018.
The report on the Company’s internal control over financial reporting as of December 31, 2018, is on page F-4.
F- 2
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Rayonier Advanced Materials Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Rayonier Advanced Materials Inc. (a Delaware corporation)
and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of income and
comprehensive income, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes
and financial statement schedule included under Item 15 (a) (collectively referred to as the “financial statements”). In our opinion,
the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and
2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”), and our report dated March 1, 2019 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2016.
Jacksonville, Florida
March 1, 2019
F- 3
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Rayonier Advanced Materials Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Rayonier Advanced Materials Inc. (a Delaware corporation) and
subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in the 2013 Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based
on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2018, and our report
dated March 1, 2019 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Jacksonville, Florida
March 1, 2019
F- 4
Rayonier Advanced Materials Inc.
Consolidated Statements of Income and Comprehensive Income
For the Years Ended December 31,
(Dollars in thousands, except per share amounts)
Net Sales ......................................................................................................... $
Cost of Sales ...................................................................................................
Gross Margin.................................................................................................
2,134,413
(1,790,244)
344,169
$
$
961,333
(818,281)
143,052
868,731
(682,573)
186,158
2018
2017
2016
Selling, general and administrative expenses ...............................................
Duties............................................................................................................
Other operating expense, net (Note 17)........................................................
Operating Income .........................................................................................
Interest expense ............................................................................................
Interest income and other, net.......................................................................
Other components of net periodic benefit income (expense) .......................
Gain on bargain purchase (Note 3)...............................................................
Gain on derivative instrument (Note 10) ......................................................
Gain on debt extinguishment ........................................................................
Income Before Income Taxes........................................................................
Income tax expense (Note 18).......................................................................
Net Income Attributable to Rayonier Advanced Materials Inc................
Mandatory convertible stock dividends ........................................................
Net Income Available to Rayonier Advanced Materials Inc.
Common Stockholders................................................................................ $
(108,184)
(25,921)
(12,422)
197,642
(60,408)
5,017
8,723
20,449
—
786
172,209
(43,793)
128,416
(13,800)
(79,387)
(939)
(1,274)
61,452
(40,447)
2,350
(2,995)
316,555
7,780
—
344,695
(19,731)
324,964
(13,800)
(37,157)
—
(5,684)
143,317
(34,627)
737
(5,670)
—
—
8,844
112,601
(39,315)
73,286
(5,404)
114,616
$
311,164
$
67,882
Earnings Per Share of Common Stock (Note 14)
Basic earnings per share ............................................................................... $
Diluted earnings per share ............................................................................ $
2.27
1.96
$
$
7.17
5.81
$
$
1.61
1.55
Comprehensive Income:
Net Income ..................................................................................................... $
Other Comprehensive Income (Loss), net of tax (Note 13)
Foreign currency translation adjustments.....................................................
Unrealized gain (loss) on derivative instruments .........................................
Net gain (loss) from pension and postretirement plans ................................
Total other comprehensive income (loss) ................................................
Comprehensive Income ................................................................................ $
128,416
$
324,964
$
73,286
(13,353)
(12,241)
(31,527)
(57,121)
71,295
4,868
619
28,442
33,929
$
358,893
$
—
—
(460)
(460)
72,826
The Company retrospectively adopted ASU 2017-07 Compensation - Retirement Benefits on January 1, 2018. See Note 2 - Summary of
Significant Accounting Policies and New Accounting Pronouncements for additional information.
See Notes to Consolidated Financial Statements.
F- 5
Rayonier Advanced Materials Inc.
Consolidated Balance Sheets
As of December 31,
(Dollars in thousands, except common share amounts)
Assets
Current Assets
Cash and cash equivalents
Accounts receivable, net (Note 4)
Inventory (Note 5)
Prepaid and other current assets
Total current assets
Property, Plant and Equipment, Net (Note 6)
Deferred Tax Assets (Note 18)
Intangible Assets, Net
Other Assets
Total Assets
Current Liabilities
Accounts payable
Liabilities and Stockholders’ Equity
Accrued and other current liabilities (Note 7)
Current maturities of long-term debt (Note 8)
Current liabilities for disposed operations (Note 9)
Total current liabilities
Long-Term Debt (Note 8)
Non-Current Liabilities for Disposed Operations (Note 9)
Pension and Other Postretirement Benefits (Note 16)
Deferred Tax Liabilities (Note 18)
Other Non-Current Liabilities
Commitments and Contingencies (Note 20)
Stockholders’ Equity (Note 12)
2018
2017
$
108,966
$
222,377
321,377
63,372
716,092
96,235
181,298
302,086
66,918
646,537
1,381,039
1,407,762
406,957
52,460
122,538
402,846
59,869
125,597
$
2,679,086
$
2,642,611
$
192,740
$
151,356
15,012
11,310
370,418
157,925
127,040
9,425
13,181
307,571
1,173,157
1,232,179
149,344
238,958
28,016
12,322
150,905
212,810
32,607
12,783
Preferred stock, 10,000,000 shares authorized at $0.01 par value, 1,725,000 and 1,725,000
issued and outstanding as of December 31, 2018 and 2017, respectively, aggregate
liquidation preference $172,500
17
17
Common stock, 140,000,000 shares authorized at $0.01 par value, 49,291,130 and
51,717,142 issued and outstanding, as of December 31, 2018 and 2017, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss) (Note 13)
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
493
399,490
462,568
(155,697)
706,871
517
392,353
377,020
(76,151)
693,756
$
2,679,086
$
2,642,611
See Notes to Consolidated Financial Statements.
F- 6
Rayonier Advanced Materials Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31,
(Dollars in thousands)
Operating Activities
Net income .......................................................................................................... $
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization..........................................................................
Stock-based incentive compensation expense ..................................................
Amortization of capitalized debt costs and debt discount ................................
Deferred income taxes ......................................................................................
Gain on bargain purchase .................................................................................
Increase in liabilities for disposed operations...................................................
Gain on debt extinguishment ............................................................................
Net periodic benefit cost of pension and postretirement plans.........................
Loss from sale/disposal of property, plant and equipment ...............................
Gain on foreign currency exchange..................................................................
Other .................................................................................................................
Changes in operating assets and liabilities:
Receivables .......................................................................................................
Inventories ........................................................................................................
Accounts payable..............................................................................................
Accrued liabilities.............................................................................................
All other operating activities ............................................................................
Contributions to pension and other postretirement benefit plans .......................
Expenditures for disposed operations .................................................................
Cash Provided by Operating Activities.........................................................
Investing Activities
Acquisition of Tembec, net of cash acquired ......................................................
Capital expenditures............................................................................................
Proceeds from sale of resins operations ..............................................................
Realized gain on derivative instrument...............................................................
Other....................................................................................................................
Cash Used for Investing Activities.................................................................
Financing Activities
Issuance of mandatory convertible preferred stock ............................................
Issuance of debt...................................................................................................
Repayment of debt ..............................................................................................
Dividends paid on common stock .......................................................................
Dividends paid on preferred stock ......................................................................
Proceeds from the issuance of common stock ....................................................
Repurchase of common stock .............................................................................
Debt issuance costs .............................................................................................
Other....................................................................................................................
Cash (Used for) Provided by Financing Activities.......................................
2018
2017
2016
128,416
$
324,964
$
73,286
148,416
13,007
835
20,637
(19,071)
7,285
(786)
5,460
3,186
(12,170)
3,888
(40,738)
(22,861)
34,610
5,145
(3,884)
(12,579)
(11,852)
246,944
—
(132,209)
16,233
—
10
(115,966)
—
—
(45,270)
(15,058)
(13,800)
451
(42,780)
—
—
(116,457)
96,963
8,986
3,377
30,280
(316,555)
256
—
10,264
2,032
(2,335)
(1,303)
(4,699)
3,033
16,215
(2,865)
(19,324)
(13,722)
(5,795)
129,772
(210,164)
(75,042)
—
7,780
—
(277,426)
—
680,000
(729,958)
(12,693)
(13,800)
14
(157)
(7,025)
—
(83,619)
88,274
7,217
1,919
45,199
—
5,298
(8,844)
11,702
2,422
—
(3,429)
31,266
7,041
(2,048)
167
(4,338)
(13,135)
(9,772)
232,225
—
(88,703)
—
—
2,143
(86,560)
166,609
—
(71,031)
(11,840)
(3,641)
388
—
—
(798)
79,687
Cash and Cash Equivalents
Change in cash and cash equivalents ..................................................................
Net effect of foreign exchange on cash and cash equivalents.............................
Balance, beginning of year..................................................................................
Balance, end of year............................................................................................ $
14,521
(1,790)
96,235
108,966
$
(231,273)
853
326,655
96,235
$
225,352
—
101,303
326,655
See Notes to Consolidated Financial Statements.
F- 7
1.
Nature of Operations and Basis of Presentation
Nature of Operations
Rayonier Advanced Materials Inc. (“the Company”) is a leading manufacturer of high purity cellulose products, lumber, pulp
and paper products. The following describes the Company’s operating segments:
High Purity Cellulose
The Company, through its four production facilities located in the United States (“U.S.”), Canada and France, manufactures
and markets high purity cellulose, which is sold as either cellulose specialties or commodity products. Cellulose specialties are
primarily used in dissolving chemical applications that require a highly purified form of cellulose. Commodity products are used for
commodity viscose and absorbent materials applications. 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. Sales of resins, chemicals, and energy, a majority of which are by-products
of the manufacturing process, are included in the high purity cellulose segment.
Forest Products
The Company, through its seven sawmills in Canada, manufactures and markets 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 wood chips, manufactured as a by-product
of the lumber manufacturing process, are used in the Company’s Canadian High Purity Cellulose, Pulp and Paper plants.
Pulp
The Company, through its two production facilities in Canada, manufactures and markets high-yield pulp products. High-
yield pulp is used by paper manufacturers to produce paperboard, packaging, printing and writing papers and a variety of other
paper products.
Paper
The Company, through its two production facilities in Canada, manufactures and markets paper products consisting of
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.
Basis of Presentation
Principles of Consolidation
The consolidated financial statements include the accounts and operations of the Company and its wholly owned, majority
owned and controlled subsidiaries. The Company applies the equity method of accounting for investments in which it has an
ownership interest from 20 percent to 50 percent or exercises significant influence over the related investee’s operations. All
significant intercompany accounts and transactions are eliminated in consolidation.
Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation.
Fiscal Year
The Company’s fiscal year end is the last day of the calendar year. For interim reporting periods, the Company uses the last
Saturday of the fiscal quarter.
F- 8
Subsequent Events
Events and transactions subsequent to the balance sheet date have been evaluated for potential recognition and disclosure
through March 1, 2019, the date these financial statements were available to be issued. The following subsequent events warranting
disclosure were identified:
On January 7, 2019, our board of directors declared a first quarter 2019 cash dividend of $2.00 per share of our mandatory
convertible preferred stock. The dividend was paid on February 15, 2019 to mandatory convertible preferred stockholders of
record as of February 1, 2019.
On February 20, 2019, the Company declared a first quarter 2019 cash dividend of $0.07 per share of common stock. The
dividend is payable on March 29, 2019 to stockholders of record on March 15, 2019.
2.
Summary of Significant Accounting Policies and New Accounting Pronouncements
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and to disclose contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting period. There are risks inherent
in using estimates and therefore, actual results could differ from those estimates.
Translation of Foreign Currency
Assets and liabilities of consolidated subsidiaries whose functional currency is other than the U.S. dollar are translated into
U.S. dollars using currency exchange rates at the balance sheet date. Revenues and expenses are translated using the average
currency exchange rates during the period. Foreign currency translation gains and losses are reported as a component of accumulated
other comprehensive income (loss) (“AOCI”). Gains and losses resulting from foreign currency transactions are included in
operating results as incurred.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and other investments that are highly liquid with original maturities of three
months or less when purchased.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at invoiced amounts and do not bear interest. The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company's
allowance is established based on historical patterns of accounts receivable collections and general economic conditions.
Outstanding accounts receivable balances are reviewed quarterly or more frequently when circumstances indicate a review is
warranted, for example if there is a significant change in the aging of the Company’s receivables or a customer’s financial condition.
Write-offs are recorded at the time a customer receivable is deemed uncollectible and collection efforts have been exhausted.
Inventory
Finished goods, work-in-process and raw materials inventories are valued at the lower of cost, as determined on the first-in,
first-out basis, or market. Manufacturing and maintenance supplies are valued at average cost. Inventory costs include material,
labor and manufacturing overhead. The need for a provision for estimated losses from obsolete, excess or slow-moving inventories
is reviewed periodically.
F- 9
Property, Plant, Equipment and Depreciation
Property, plant and equipment additions are recorded at cost, including applicable freight, interest, construction and installation
costs. The Forest Products segment production related plant and equipment are depreciated using the straight-line method over
3 to 20 years. High Purity Cellulose, Pulp and Paper production related plant and equipment are depreciated using the units-of-
production method. The total units of production used to calculate depreciation expense is determined by factoring annual
production days, based on normal production conditions, by the economic useful life of the asset involved. Production related
assets under capital leases are depreciated using the straight-line method over the related lease term. The Company depreciates
its non-production assets, including office, lab and transportation equipment, using the straight-line depreciation method over 3
to 25 years. Buildings and land improvements are depreciated using the straight-line method over 15 to 35 years and 5 to 30 years,
respectively. Depreciation expense reflected in cost of sales in the Consolidated Statements of Income was $138 million, $94
million and $85 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Gains and losses on the retirement of assets are included in operating income. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of
assets that are held and used is measured by net undiscounted cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value exceeds the
fair value of the assets, which is based on a discounted cash flows model. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less cost to sell.
Maintenance Costs
The Company performs scheduled inspections, repairs and maintenance of plant machinery and equipment at the Company’s
High Purity, Pulp and Paper manufacturing facilities during a full plant shutdown. Costs associated with these planned outage
periods are referred to as shutdown costs and are incurred to ensure the long-term reliability and safety of the manufacturing
operations. Shutdown costs are accounted for using the deferral method, under which expenditures related to shutdown are
capitalized in other assets when incurred and amortized to production costs on a straight-line basis over the period benefited, or
the period of time until the next scheduled shutdown which can generally range from one year to eighteen months. Shutdown costs
are classified as working capital in operating activities in the consolidated statements of cash flows. As of December 31, 2018
and 2017 the Company had $12 million and $8 million, respectively, in shut down costs capitalized in other current assets.
Intangible Assets
The Company has definite-life intangible assets which it acquired through a business combination. The definite-life intangible
assets consist of customer lists and trade-names and are amortized over their estimated useful lives generally for periods ranging
from 8 to 15 years. The Company evaluates the recovery of its definite-life intangible assets by comparing the net carrying value
of the asset group to the undiscounted net cash flows expected to be generated from the use and eventual disposition of that asset
group when events or changes in circumstances indicate that its carrying amount may not be recoverable. If the carrying amount
of the asset group is not recoverable, the fair value of the asset group is measured, and, if the carrying amount exceeds the fair
value, an impairment loss is recognized.
F- 10
The Company’s definite-lived intangible assets are summarized as follows (in thousands):
December 31, 2018
Customer Lists
Trade Names
Total Definite-Lived Intangibles
Customer Lists
Trade Names
Total Definite-Lived Intangibles
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Weighted-Average
Remaining Life
51,680 $
8,604
60,284 $
(7,179) $
(645)
(7,824) $
44,501
7,959
52,460
6.9 years
13.9 years
8.0 years
December 31, 2017
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Weighted-Average
Remaining Life
51,680 $
9,004
60,684 $
(745) $
(70)
(815) $
50,935
8,934
59,869
7.9 years
14.9 years
8.9 years
$
$
$
$
Total amortization expense related to definite-lived assets was $7 million and $1 million for the years ended December 31,
2018 and 2017. For the year ended 2016 there was no amortization expense related to definite-lived assets. As of December 31,
2018, amortization expense for the years ended December 31, 2019 through 2023 is expected to be $7 million per year and $17
million for all remaining years thereafter.
Equity Method Investment
The Company holds a 45 percent interest in LignoTech Florida LLC (“LTF”), a joint venture accounted for under the equity
method of accounting. Borregaard, a public company in Norway traded on the Oslo Exchange, owns the remaining 55 percent
interest. LTF purchases sulfite liquor from the Company’s Fernandina Beach, Florida plant and converts it to purified lignins and
ligno-sulfonates which are used in concrete, textile dyes, pesticides, batteries and other products.
The Company recorded $2 million of lignin sales to the LTF joint venture during the year ended December 31, 2018. The
Company records its share of net earnings and losses on the investment within “Other operating expense, net” in the Consolidated
Statements of Income and Comprehensive Income.
The Company is jointly and severally liable for financing agreements related to the entity. See Note 20 — Commitments and
Contingencies for further discussion.
Capitalized Interest
Interest from external borrowings are capitalized on major projects with an expected construction period of one year or longer.
The interest costs are added to the cost of the underlying basis of the property, plant and equipment and amortized over the useful
life of the assets. For the years ended December 31, 2018 and 2017 there was no interest capitalized to property, plant and equipment.
Interest capitalized to property, plant and equipment was $1 million for 2016.
F- 11
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the
measurement date. A three-level hierarchy that prioritizes the inputs used to measure fair value was established 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, such as quoted prices for similar assets and
liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or
other inputs that are observable or can be corroborated by observable market data.
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. This includes certain pricing models, discounted cash flows methodologies and similar techniques
that use significant unobservable inputs.
Derivative Instruments
Derivatives are recognized on the consolidated balance sheets at fair value and are classified according to their asset or liability
position and the expected timing of settlement. Changes in the fair values of derivatives are recorded in net earnings or other
comprehensive income based on whether the instrument is designated and effective as a hedge transaction and, if so, the type of
hedge transaction. Gains or losses on derivative instruments reported in AOCI are reclassified to earnings in the period the hedged
item affects earnings. If the underlying hedged transaction ceases to exist, any associated amounts reported in AOCI are reclassified
to earnings at that time. Any ineffectiveness is recognized in earnings in the current period.
Revenue Recognition
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.
Shipping and Handling Costs: 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 concurrently with revenue-producing activities.
These accounting policy elections are consistent with the manner in which the Company has historically recorded shipping and
handling fees and taxes.
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 7 - Accrued and Other Current Liabilities). This methodology is consistent with the manner
in which the Company has 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 when 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.
F- 12
Contract Balances: Contract liabilities primarily relate to prepayments received from the Company's customers before revenue
is recognized and volume rebates are payable to customers. These amounts are included in accrued customer incentives and
prepayments in the consolidated balance sheets (see Note 7 - Accrued and Other Current Liabilities). The Company does not have
any material contract assets as of December 31, 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 19 - Segment
and Geographical Information.
Environmental Costs
The Company has established liabilities to assess, remediate, maintain and monitor sites related to disposed operations from
which no current or future benefit is discernible. These obligations are established based on projected spending over the next 20
years and require significant estimates to determine the proper amount at any point in time. The projected period, from 2019
through 2039, reflects the time during which potential future costs are both estimable and probable. As new information becomes
available, these cost estimates are updated and the recorded liabilities are adjusted appropriately. Environmental liabilities are
accounted for on an undiscounted basis and are reflected in current and non-current liabilities for disposed operations in the
consolidated balance sheets.
Employee Benefit Plans
The determination of expense and funding requirements for the Company’s defined benefit pension and postretirement health
care and life insurance plans are largely based on a number of actuarial assumptions. The key assumptions include discount rate,
return on assets, salary increases, health care cost trends, mortality rates, longevity and service lives of employees.
The components of periodic pension and post retirement costs, other than service costs, are presented separately outside of
operating income in “Other components of net periodic benefit costs” on the consolidated statement of income. The service costs
component of net periodic benefit cost are presented 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. Only the service cost
component of the net periodic benefit cost are eligible for capitalization in assets.
Changes in the funded status of the Company’s plans are recorded through comprehensive income in the year in which the
changes occur. Actuarial gains and losses, which occur when actual experience differs from actuarial assumptions, are reflected
in stockholders’ equity, net of taxes. If actuarial gains and losses exceed ten percent of the greater of plan assets or plan liabilities,
the Company will amortize them over the average future service period of employees.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards and tax credit carryforwards.
Deferred tax assets and liabilities are measured pursuant to tax laws using rates expected to apply to taxable income in the years
in which the temporary differences are expected to be recovered or settled. The Company records a valuation allowance to reduce
the carrying amounts of deferred tax assets if it is more likely than not such deferred tax assets will not be realized. Interest expense
and penalties, if applicable, related to unrecognized tax benefits are recorded in income tax expense.
The Company’s income tax returns are subject to audit 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, the Company records a
tax benefit for an uncertain tax position if it is more-likely-than-not to be realized upon ultimate settlement of the issue. The
Company records a liability for an uncertain tax position that does not meet this criterion. The Company adjusts its liabilities for
unrecognized tax benefits 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 becomes available.
F- 13
New Accounting Pronouncements
New Accounting Pronouncements Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02, Leases, on the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees
and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases
based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine
whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease,
respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than
12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for in a manner similar to
the accounting under existing guidance for operating leases today. The new standard requires lessors to account for leases using
an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
ASC 842 supersedes the previous leases standard, Accounting Standards Codification (“ASC”) Topic 840, "Leases”. It is effective
for fiscal years beginning after December 15, 2018. The Company will adopt ASU 2016-02 utilizing the modified retrospective
transition method through a cumulative-effect adjustment at the beginning of its first quarter of 2019. While the Company is
currently evaluating the impact of adopting ASU 2016-02, based on the lease portfolio as of December 31, 2018, the Company
anticipates the adoption of this ASU will result in the recognition of operating lease assets and liabilities of approximately $10
million to $15 million.
In October 2018, FASB issued ASU 2018-17, Inclusion of the Secured Over Night Financing Rate (“SOFR”) Overnight Index
Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The update expands the lists of eligible
benchmark interest rates to include OIS based on SOFR to facilitate the marketplace transition away from LIBOR. The effective
date for public entities that have already adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities, is fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
While the Company is assessing the potential impacts of the standard update, it does not expect the adoption to have a material
impact on its consolidated financial statements.
Recently Adopted Accounting Pronouncements
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which was
adopted on January 1, 2018, using the modified retrospective basis. The core principle of ASC 606 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 adoption of the new revenue recognition
guidance did not materially affect our Consolidated Statement of Operations, Consolidated Balance Sheet, or Consolidated
Statement of Cash Flows. See additional detail on our revenue recognition policies above within this note.
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 postretirement 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 presents the components of periodic
pension and postretirement 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 impact on a retrospective basis resulted in an
increase in gross margin and operating income of $4 million for the year ended December 31, 2017 and an increase to gross margin
and operating income of $5 million and $6 million, respectively, for the year ended December 31, 2016. The offsets resulted in
corresponding increases in other components of net periodic benefit income (expense) when compared to previously reported
amounts. The adoption of this guidance had no impact on 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.
F- 14
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.
In February 2018, the FASB issued ASU No. 2018-02, No. 2018-02, Income Statement—Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 was issued
to provide narrow-scope guidance for entities that are required to apply the provisions of Topic 220, Income Statement—Reporting
Comprehensive Income, and have items of other comprehensive income for which the related tax effects are presented in other
comprehensive income as required by GAAP. The amendments in ASU 2018-02 allow a reclassification from accumulated other
comprehensive income to retained earnings for dangling tax effects resulting from H.R. 1 passed on December 22, 2017 (the “Tax
Cuts and Jobs Act”). Consequently, the amendments eliminate the dangling tax effects resulting from the Tax Cuts and Jobs Act
and will improve the usefulness of information reported to financial statement users. However, because the amendments only
relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the
effect of a change in tax laws or rates be included in income from continuing operations is not affected. The majority of the
Company dangles were recorded as a result of H.R. 1 passed on December 22, 2017 which reduced the Company’s U.S. federal
income tax rate. In the fourth quarter of 2018, the Company adopted ASU No. 2018-02 and reclassified the dangling credit resulting
from the Tax Cuts and Jobs Act of approximately $22.4 million from AOCI to its opening January 1, 2018 retained earnings. As
of December 31, 2018, a dangling credit of approximately $0.6 million remains in AOCI.
3.
Tembec Acquisition
On November 17, 2017, the Company acquired all of the outstanding common shares of Tembec Inc. (“Tembec”) for an
aggregate purchase price of approximately $317 million Canadian dollars cash and 8.4 million shares of the Company’s common
stock, par value $0.01 per share (the “Acquisition”).
The purchase consideration was calculated as follows:
Total Tembec shares receiving stock consideration ..................................................................................
Exchange ratio...........................................................................................................................................
Total Company stock issued to Tembec shareholders...............................................................................
Company’s closing share price on November 17, 2017............................................................................ $
Total value of Company shares issued.................................................................................................... $
Total cash consideration paid to Tembec shareholders in U.S. dollars...................................................
Total purchase consideration to Tembec shareholders ........................................................................ $
33,200,000
0.2542
8,439,452
16.73
141,192
249,233
390,425
November 17, 2017
The Acquisition was accounted for as a business combination. Under this accounting, the assets acquired and liabilities assumed
are presented based on estimates of fair value which is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date.
On the Acquisition date, the Company recognized a gain on bargain purchase primarily as a result of the elimination of
Tembec’s valuation allowance associated with certain deferred tax assets. Due to the refinancing of Tembec’s debt, the Company
expects future taxable income will be adequate to realize the benefit of the tax assets. The Company finalized the valuation and
completed the purchase consideration allocation within the measurement period which ended on November 17, 2018.
F- 15
The total purchase consideration as allocated at the acquisition date, along with the final measurement period adjustments,
are presented below:
Current assets
Property, plant and equipment
Deferred tax assets
Definite-life intangibles (a)
Other assets
Current liabilities
Assumed long-term debt (b)
Pension and other postretirement benefits
Other long-term liabilities
Estimated fair value of net assets acquired
Gain on bargain purchase
$
$
November 17, 2017
Adjustments
November 17, 2018
$
383,066
$
— $
628,027
389,321
60,684
70,868
(167,244)
(508,531)
(96,278)
(52,933)
706,980
316,555
$
$
7,418
15,926
(400)
—
(668)
—
—
(1,827)
20,449
20,449
$
$
383,066
635,445
405,247
60,284
70,868
(167,912)
(508,531)
(96,278)
(54,760)
727,429
337,004
(a) The Company acquired definite-life intangibles of $52 million for customer lists and $9 million for trade-names which are
being amortized over 8 years and 15 years, respectively.
(b) Refer to Note 8 — Debt and Capital Leases for a description of the assumed debt.
During the measurement period, the Company determined that provisional amounts included in the preliminary valuation
required adjustments to reflect new information obtained. As a result, the Company recorded an increase in the bargain purchase
gain of approximately $20 million. The gain included the removal of a $15 million tax reserve related to a previously disposed
location, $2 million for the favorable settlement of a contingent liability, and a $7 million gain on the Company’s sale of its resins
operations to a third party for approximately $17 million. The resins operations was included in the High Purity Cellulose segment
and is subject to working capital adjustments. These non-operating gains were included in gain on bargain purchase on the
consolidated statements of income. There were no measurement period adjustments in the fourth quarter 2017.
Tembec’s operating results contributed net revenue of $139 million and no operating income for the period from the acquisition
date of November 17, 2017 to December 31, 2017. The Company recognized $34 million of acquisition related expenses in
operating expense during 2017.
The following presents the unaudited pro forma consolidated financial information of the Company as if the acquisition of
Tembec was completed on January 1, 2016. The unaudited pro forma financial information includes adjustments for (i) depreciation
on acquired property, plant and equipment of $15 million for the pro forma years ended 2017 and 2016; (ii) amortization of
intangible assets recorded at the date of the transactions of $7 million for the pro forma years ended 2017 and 2016; (iii) the
elimination of acquisition related costs of $49 million and the fair value write-up of inventory of $23 million for the pro forma
year ended 2017; (iv) the elimination of interest expense related to Tembec debt that was paid off, net of interest expense associated
with financing the acquisition of $38 million and $26 million for the pro forma years ended 2017 and 2016, respectively; (v) the
elimination of the gain on bargain purchase for the pro forma year ended 2017, and (vi) total weighted average shares outstanding
related to the acquisition. This information is presented for informational purposes only and does not purport to be indicative of
the results of future operations or the results that would have occurred had the transaction taken place on January 1, 2016.
Unaudited pro forma net revenue ............................................................................. $
Unaudited pro forma net income attributable to the Company ................................ $
Unaudited pro forma basic net income per share ..................................................... $
Unaudited pro forma diluted net income per share .................................................. $
2,122,000
111,000
1.92
1.76
$
$
$
$
2,044,000
99,000
1.85
1.78
Years Ended December 31,
2017
2016
F- 16
4.
Accounts Receivable
The Company’s accounts receivable included the following for the years ended December 31:
Accounts receivable, trade ............................................................................................ $
Accounts receivable, other (a).......................................................................................
Allowance for doubtful accounts ..................................................................................
Total accounts receivable, net .................................................................................. $
2018
2017
169,496
$
54,943
(2,062)
222,377
$
134,523
47,368
(593)
181,298
(a) Accounts receivable, other consists primarily of value added/consumption taxes, grants receivable and accrued billings due
from government agencies.
5.
Inventory
The Company’s inventory included the following for the years ended December 31:
Finished goods............................................................................................................... $
Work-in-progress...........................................................................................................
Raw materials ................................................................................................................
Manufacturing and maintenance supplies .....................................................................
215,233
$
21,478
73,715
10,951
Total inventory.......................................................................................................... $
321,377
$
190,140
18,889
82,940
10,117
302,086
2018
2017
6.
Property, Plant and Equipment
The Company’s property, plant and equipment included the following for the years ended December 31:
2018
2017
Land and land improvements ........................................................................................ $
Buildings........................................................................................................................
Machinery and equipment .............................................................................................
Other ..............................................................................................................................
Construction in progress................................................................................................
Total property, plant and equipment, gross...............................................................
Accumulated depreciation .............................................................................................
Total property, plant and equipment, net .................................................................. $
23,225
$
248,719
2,406,523
23,139
67,667
2,769,273
(1,388,234)
1,381,039
$
18,336
241,831
2,377,210
21,704
57,873
2,716,954
(1,309,192)
1,407,762
F- 17
7.
Accrued and Other Current Liabilities
The Company’s accrued and other current liabilities included the following for the years ended December 31:
Accrued customer incentives and prepayments
Accrued payroll and benefits
Accrued interest
Foreign currency forward contracts
Accrued property taxes
Other current liabilities
$
43,907
$
30,695
3,170
16,767
10,663
46,154
Total accrued and other current liabilities
$
151,356
$
53,522
33,133
3,188
—
988
36,209
127,040
2018
2017
F- 18
8.
Debt and Capital Leases
The Company’s debt and capital leases include the following for the years ended December 31:
2018
2017
— $
—
—
—
160,000
180,000
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 December 31, 2018............................................................................. $
Multi-currency Revolver of $150 million maturing in November 2022, $126 million
available after taking into account outstanding letters of credit, bearing interest at
LIBOR plus 2.00% at December 31, 2018................................................................
Term A-1 Loan Facility borrowings maturing through November 2022 bearing
interest at LIBOR plus 2.00%, interest rate of 4.50% at December 31, 2018...........
Term A-2 Loan Facility borrowings maturing through November 2024 bearing
interest at LIBOR plus 2.25% (after consideration of 0.60 patronage benefit),
interest rate of 4.75% at December 31, 2018 ............................................................
Senior Notes due 2024 at a fixed interest rate of 5.50%...............................................
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 ...............................................................
Other loans ....................................................................................................................
Capital Lease obligation................................................................................................
Total principal payments due ........................................................................................
Less: debt premium, original issue discount and issuance costs..............................
Total debt.......................................................................................................................
Less: Current maturities of long-term debt ..............................................................
Long-term debt.............................................................................................................. $
438,875
495,647
91,304
3,777
3,124
1,192,727
(4,558)
1,188,169
(15,012)
1,173,157
$
Debt and capital lease payments due during the next five years and thereafter are as follows:
Capital Lease
2019
2020
2021
2022
2023
Thereafter
Total payments
5.50% Senior Notes due 2024
Minimum
Lease
Payments
515
$
$
515
515
515
515
1,503
$
4,078
$
Less:
Interest
Net
Present
Value
$
306
328
352
377
405
1,356
209
187
163
138
110
147
954
$
3,124
$ 1,189,603
On May 22, 2014, the Company issued $550 million in aggregate principal amount of 5.50 percent 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. During the first quarter of 2016, the Company repurchased in the open market $44 million of the Senior
Notes and retired them for $34 million plus accrued and unpaid interest. In connection with the retirement of these Senior Notes,
the Company recorded a gain in other income of approximately $9 million, which includes the write-off of $1 million of unamortized
debt issuance costs in the first quarter of 2016.
F- 19
450,000
506,412
100,881
5,946
3,409
1,246,648
(5,044)
1,241,604
(9,425)
1,232,179
Debt
Principal
Payments
13,751
$
19,690
12,358
189,095
10,513
944,196
During the fourth quarter of 2018, the Company repurchased in the open market $11 million of the Senior Notes and retired
them for $10 million plus accrued and unpaid interest. In connection with the retirement of these Senior Notes, the Company
recorded a gain in other income of approximately $1 million, which includes the write-off of unamortized debt issuance costs.
Prior to June 1, 2019, the Company may redeem some or all of the Senior Notes at a redemption price of 100 percent of the
principal amount, plus accrued and unpaid interest, plus a “make-whole” premium. 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.
The indenture governing the Senior Notes contains various customary covenants that limit the ability of the Company and its
restricted subsidiaries, as defined by the Senior Notes, to take certain specified actions, subject to certain 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 December 31, 2018,
the Company was in compliance with all covenants under the Senior Notes.
Senior Secured Credit Facilities
On November 17, 2017, the Company entered into an amended and restated credit agreement that refinanced, restated and
replaced the credit facilities established by its previous credit agreement. The new credit facilities (collectively the “Credit Facility”)
consists of a $230 million senior secured five year term loan (the “Term A-1 Loan Facility”), a $450 million senior secured seven
year term loan (the “Term A-2 Loan Facility” and together with the Term A-1 Facility, the “Term Loan Facilities”), a $100 million
revolving credit facility (the “U.S. Revolver”), and a multi-currency revolving credit facility in a U.S. Dollar equivalent amount
of $150 million (the “Multicurrency Revolver” and together with the U.S. Revolver, the “Revolving Credit Facility”). The lenders
under the Credit Facilities have a first priority security interest in substantially all present and future material assets, excluding
the Fernandina Beach, Florida plant’s real property.
The loans under the Credit Facility bear interest at either (a) a base rate plus an applicable margin ranging between 1.00
percent and 1.75 percent or (b) an adjusted LIBOR rate plus an applicable margin ranging between 2.00 percent and 2.75 percent.
The applicable margin for borrowings under the Credit Facility is based on a consolidated total net leverage-based pricing grid.
The Revolving Credit Facility has a five-year term, maturing in November 2022. As of December 31, 2018, the Company
had no outstanding balance on the Revolving Credit Facility. At December 31, 2018, the Company had $217 million of available
borrowings under the Revolving Credit Facility, net of $33 million used to secure its outstanding letters of credit. There were no
revolving credit borrowings outstanding at December 31, 2017.
During 2018, the Company made principal debt repayments on the Term A-1 Loan and Term A-2 Loan of $20 million and
$11 million, respectively.
The Credit Facility contains a number of covenants that limit the ability of the Company and its restricted subsidiaries, as
defined by the Credit Facility, to take certain specified actions, subject to certain 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 Facility, 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. Additionally, the Credit Facility contains 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. At December 31, 2018, the Company was in compliance
with all covenants under the Credit Facility.
F- 20
Debt Assumed in Tembec Acquisition
The Company assumed certain debt as part of the Tembec Acquisition and recorded the related liabilities at their fair values.
Subsequent to the Acquisition, the Company repaid Tembec’s senior secured notes for $375 million plus accrued and unpaid
interest.
9.
Liabilities for Disposed Operations
The Company’s liabilities for disposed operations relate to sawmills, pulp, paper and wood treating plants which have ceased
operations other than environmental investigation and remediation activities. The Company owns or has liability for eighteen
sites that are subject to various federal, state or provincial statutes, including but not limited to, the Resource Conservation and
Recovery Act (“RCRA”), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”)
and the Environmental Protection Act in the United States, and similar laws in Canada and France, related to the investigation and
remediation of environmentally-impacted sites.
The Company estimates its environmental liabilities based on its current interpretation of environmental laws and regulations
when it is probable a liability has been incurred and the amount of such liability is estimable. The Company calculates estimates
based on a number of factors, including the application and interpretation of current environmental laws, regulations and other
requirements; reports and advice of internal and third-party environmental specialists; and management’s knowledge and experience
with these and similar types of environmental matters. These estimates include potential costs for investigation, assessment,
remediation, ongoing operation and maintenance (where applicable), and post-remediation monitoring of the sites, as well as the
cost of legally-required financial assurance relating to the Company’s obligations on an undiscounted basis, generally for a period
of 20 years. These environmental liabilities do not include potential third-party recoveries to which the Company may be entitled
unless they are probable and estimable.
The following table provides detail for specific sites where current estimates exceed 10 percent of the total liabilities for
disposed operations at December 31, 2018, 2017, or 2016. An analysis of the activity of the liabilities for disposed operations for
the years ended December 31, 2018 and 2017 is as follows:
December
31, 2016
Liability
Liabilities
Assumed in
Acquisition
Increase
(Decrease)
to Liabilities
December
31, 2017
Liability
Payments
Payments
Increase
(Decrease)
to Liabilities
(a)
December
31, 2018
Liability
Port Angeles,
Washington ............ $
39,310
$
— $
(698) $
5,055
$
43,667
$
(935) $
2,067
$
Augusta, Georgia .......
Baldwin, Florida ........
All other sites .............
22,887
26,772
63,941
—
—
16,715
(1,508)
(902)
(2,687)
Total.........................
152,910
$
16,715
$
(5,795) $
(204)
(4,700)
105
256
21,175
21,170
78,074
(929)
(4,613)
(5,489)
164,086
$ (11,966) $
108
687
5,672
8,534
44,799
20,354
17,244
78,257
160,654
Less: Current portion .
(13,781)
Non-Current portion... $ 139,129
(13,181)
$ 150,905
(11,310)
$ 149,344
(a) Included in the Increase (Decrease) to Liabilities during the year ended December 31, 2018 is a $1 million decrease of the
liability due to foreign currency gain.
F- 21
A brief description of the above identified sites is as follows:
Port Angeles, Washington — The Company operated a 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 2000, and several voluntary interim soil clean-up actions have been performed during this
time. In addition, the Company may be liable under CERCLA for “natural resource damages” caused by releases from the site.
As a result of an agreed order with the Washington State Department of Ecology (“Ecology”), the remainder of the MTCA regulatory
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 off-
site areas may be necessary and, as a result, current cost estimates and the corresponding liability could change. In October 2018,
the Company received comments from Ecology on its second feasibility study submitted in March 2018. The Company is currently
evaluating the impact of the comments on its proposed remediation plan and cost estimates and expects to complete its evaluation
and resubmit the feasibility study in the second quarter of 2019. During 2017, the estimated liability increased by approximately
$4 million primarily due to the re-evaluation of the remediation’s cost estimate. During 2018 the estimated liability increased by
approximately $1 million due to changes in the Company’s remediation cost estimates, partly offset by payments made during the
year.
Augusta, Georgia — The Company operated a wood treatment plant at this site from 1928 to 1988. This site operates under
a 10 year hazardous waste permit renewed and issued pursuant to RCRA in 2015. Ongoing remediation activities currently consist
primarily of groundwater recovery and treatment. Current cost estimates and the corresponding liability could vary if recovery
or discharge volumes change or if changes to current remediation activities are required in the future. During 2018 and 2017, the
Company decreased the estimated liability by approximately $1 million and $2 million, respectively, due to payments and a decrease
in the estimated costs related to the site’s operation and maintenance.
Baldwin, Florida — The Company operated a wood treatment plant at this site from 1954 to 1987. This site operates under
a 10 year hazardous waste permit renewed and issued pursuant to RCRA in 2017. Ongoing remediation activities currently consist
primarily of groundwater recovery and treatment. Additional remedial activities may be necessary in the future and, therefore,
current cost estimates and the corresponding liability could change. During 2017, the Company decreased the estimated liability
by approximately $6 million due to payments and a decrease in the estimated costs related to the site’s remediation plan. During
2018, the Company decreased the reserve by approximately $5 million due to payments during the year, which was offset by an
increase in the remediation cost estimates.
In addition to the estimated liabilities, the Company is subject to the risk of reasonably possible additional liabilities in excess
of the established liabilities 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 or enforcement policies;
developments in remediation technologies; increases in the cost of remediation, operation, maintenance and monitoring of its
disposed operations sites and providing financial assurance relating thereto; changes in the volume, nature or extent of contamination
to be remediated or monitoring to be undertaken; the outcome of negotiations with governmental agencies or non-governmental
parties; and changes in accounting rules or interpretations. Based on information available as of December 31, 2018, the Company
estimates this exposure could range up to approximately $69 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 of the above sites
and other applicable liabilities. This estimate excludes liabilities which would otherwise be considered reasonably possible but
for the fact that they are not currently estimable primarily due to the factors discussed above.
Subject to the previous paragraph, the Company believes its estimates of 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 these estimates of
liabilities 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.
10.
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 (1) designated
as a hedge of a forecasted transaction or (2) undesignated. Changes in the fair value of a derivative designated as a hedge are
F- 22
recorded in 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 assesses 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. Ineffective gains and losses are classified to earnings immediately. There was no hedge ineffectiveness
during 2018 or 2017.
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 may use foreign currency forward contracts to selectively hedge its foreign currency
cash flows 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 and maturity dates of outstanding derivative instruments as of December 31, 2018 and 2017 are
presented below. The Company did not use any derivative instruments during the year ended December 31, 2016.
Interest rate swaps (a)................................................................................
Foreign currency contracts (b)...................................................................
Foreign cross-currency contracts (c) .........................................................
December 31, 2018
December 31, 2017
$
$
$
200,000
388,930
125,979
$
$
$
200,000
240,591
—
(a) Maturity date of December 2020
(b) Various maturity dates through December 2019
(c) Various maturity dates in 2020, 2022 and 2028
F- 23
The fair values of derivative instruments included in the consolidated balance sheet as of December 31, 2018 and 2017 are
provided in the below table. See Note 11 — Fair Value Measurements for additional information related to the Company’s
derivatives.
Balance Sheet Location
December 31,
2018
December 31,
2017
Assets:
Derivatives designated as hedging instruments:
Interest rate swaps
Other current assets
$
1,194
$
Interest rate swaps
Other assets
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts
Other current assets
937
7
Liabilities:
Derivatives designated as hedging instruments:
Foreign exchange forward contracts
Foreign exchange forward contracts
Other current liabilities
Other non-current liabilities
(16,408)
(3,105)
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts
Other current liabilities
Total derivatives
(360)
(17,735) $
$
—
749
427
—
—
—
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 years ended December 31, 2018 and 2017 were as follows:
Derivatives in Cash Flow
Hedging Relationships
Gain (Loss)
Recognized in OCI
on Derivative
(Effective Portion)
Gain (Loss) Reclassified from AOCI
into Income
(Effective Portion)
Gain (Loss) Recognized in Income on
Derivative (Ineffective Portion and
Amount Excluded from Effectiveness
Testing)
Interest rate swaps...............
Foreign currency contracts..
Foreign currency contracts..
Foreign currency contracts..
$
$
$
$
December 31, 2018
1,446
(23,603)
3,843
(4,672)
Interest expense
Other operating
expense, net
Cost of sales
Interest income and
other, net
$
$
$
$
64
752
(3,843)
(3,599)
December 31, 2017
Interest rate swaps...............
$
749
Interest expense
$
—
$
$
—
—
—
—
—
The effects of derivative instruments not designated as hedging instruments on the statement of income for the years ended
December 31, 2018 and 2017 were as follows:
Derivatives Not Designated as
Hedging Instruments
Location of Gain (Loss) Recognized in
Income on Derivative
December 31, 2018 December 31, 2017
Foreign exchange contracts
Other operating income (expense), net
Foreign currency collar
Interest income and other income
(expense), net
$
$
(3,009) $
— $
427
7,780
The after-tax amounts of unrealized gains in AOCI related to hedge derivatives at December 31, 2018 and 2017 are
presented below:
Unrealized gains from interest rate cash flow hedges .....................................
Unrealized gains from foreign currency cash flow hedges .............................
$
$
December 31, 2018
December 31, 2017
619
1,663
$
(13,285) $
—
F- 24
The amount of future reclassifications from AOCI will fluctuate with movements in the underlying markets.
11.
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 December 31, 2018 and 2017, using market information and what management
believes to be appropriate valuation methodologies discussed in further detail below:
December 31, 2018
December 31, 2017
Carrying
Amount
Fair Value (c)
Level 1
Level 2
Carrying
Amount
Fair Value (c)
Level 1
Level 2
Assets:
Cash and cash equivalents ............................. $ 108,966
Interest rate swaps (a) .................................... $
2,131
Foreign currency forward contracts (a).......... $
7
Liabilities (b):
Foreign currency forward contracts (a).......... $
19,873
Fixed-rate long-term debt .............................. $ 585,824
Variable-rate long-term debt .......................... $ 599,221
$
$
$
$
$
$ 108,966
$
— $
96,235
— $
— $
2,131
7
$
$
749
427
$
$
$
96,235
$
— $
— $
—
749
427
— $
19,873
$
— $
— $
—
— $ 541,267
— $ 602,652
$ 606,529
$ 631,666
$
$
— $ 611,308
— $ 635,946
(a) These items represent derivative instruments.
(b) Liabilities excludes capital lease obligation.
(c) The Company did not have Level 3 assets or liabilities at December 31, 2018 and 2017.
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 10 — Derivative Instruments for
additional information related to the derivative instruments.
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.
F- 25
12.
Stockholders' Equity (Deficit)
An analysis of stockholders’ equity (deficit) for each of the three years ended December 31 is shown below (share amounts
not in thousands):
Common Stock
Preferred Stock
Shares
Par
Value
Shares
Par
Value
Additional
Paid in
Capital
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
(Deficit)
Balance, December 31, 2015
42,872,435
$ 429
— $ — $
70,213
$
21,839
$
(109,620) $
(17,139)
Net income
Other comprehensive loss, net of tax
Issuance of preferred stock
Issuance of common stock under
incentive stock plans
Stock-based compensation
Excess tax deficit on stock-based
compensation
—
—
—
—
—
—
—
— 1,725,000
422,941
—
—
4
—
—
—
—
—
—
—
—
—
—
—
Repurchase of common stock
(33,471)
Common stock dividends ($0.28 per
share)
Preferred stock dividends ($2.11 per
share)
—
—
Balance, December 31, 2016
43,261,905
433
1,725,000
Net income
Other comprehensive loss, net of tax
—
—
Common stock issued at Acquisition
8,439,452
Issuance of common stock under
incentive stock plans
Stock-based compensation
Repurchase of common stock
Common stock dividends ($0.28 per
share)
Preferred stock dividends ($8.00 per
share)
27,131
—
(11,346)
—
—
—
—
84
—
—
—
—
—
—
—
—
—
—
—
—
Balance, December 31, 2017
51,717,142
517
1,725,000
Net income
Other comprehensive income, net of tax
Issuance of common stock under
incentive stock plans
Stock-based compensation
—
—
301,560
—
—
—
3
—
Repurchase of common stock
(2,727,572)
(27)
ASU 2018-02 adoption
Common stock dividends ($0.28 per
share)
Preferred stock dividends ($8.00 per
share)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance, December 31, 2018
49,291,130
$ 493
1,725,000
$
Series A Mandatory Convertible Preferred Stock
—
—
17
—
—
—
—
—
—
17
—
—
—
—
—
—
—
17
—
—
—
—
—
—
—
—
17
—
—
166,592
(4)
7,217
(1,228)
(388)
—
—
73,286
—
—
—
—
—
—
(12,507)
(3,641)
—
(460)
—
—
—
—
—
—
—
73,286
(460)
166,609
—
7,217
(1,228)
(388)
(12,507)
(3,641)
$ 242,402
$
78,977
$
(110,080) $
211,749
—
—
141,108
14
8,986
(157)
—
—
324,964
—
—
—
—
—
(13,121)
(13,800)
—
33,929
—
—
—
—
—
—
324,964
33,929
141,192
14
8,986
(157)
(13,121)
(13,800)
$ 392,353
$
377,020
$
(76,151) $
693,756
—
—
448
13,007
(6,318)
—
—
—
128,416
—
—
—
(36,435)
22,425
(15,058)
(13,800)
—
(57,121)
—
—
—
(22,425)
—
—
$ 399,490
$
462,568
$
(155,697) $
128,416
(57,121)
451
13,007
(42,780)
—
(15,058)
(13,800)
706,871
On August 4, 2016, the Company completed a registered public offering of 1,725,000 shares of the Company’s 8.00% Series
A Mandatory Convertible Preferred Stock (the “Preferred Stock”), at a public offering price of $100.00 per share. Net proceeds
were $167 million after deducting underwriting discounts, commissions and expenses.
F- 26
Each share of the Preferred Stock will automatically convert into shares of common stock, subject to anti-dilution and other
adjustments, on the mandatory conversion date, which is expected to be August 15, 2019. The number of shares of common stock
issuable on conversion will be determined based on the volume-weighted average price of the Company’s common stock over
a 20 trading day period immediately prior to the mandatory conversion date (“Applicable Market Value”). If the Applicable Market
Value for our common stock is greater than $15.17 or less than $12.91, the conversion rate per share of Preferred Stock will
be 6.5923 or 7.7459, respectively. If the Applicable Market Value is between $15.17 and $12.91, the conversion rate per share of
Preferred Stock will be between 6.5923 and 7.7459. Subject to certain restrictions, at any time prior to August 15, 2019, holders
of the Preferred Stock may elect to convert all or a portion of their shares into common stock at the minimum conversion rate
of 6.5923 shares of common stock per share of Preferred Stock, subject to adjustment.
Preferred Stock holders have no voting rights unless dividends on the Preferred Stock have not been declared and paid for six
or more dividend periods. In those circumstances, holders will be entitled to vote for the election of a total of two additional
members of the Company’s Board of Directors.
Dividends on the Preferred Stock are payable on a cumulative basis if and when they are declared by our Board of Directors.
If declared, dividends will be paid at an annual rate of 8.00% of the liquidation preference of $100 per share. Dividend payment
dates are February 15, May 15, August 15 and November 15 of each year, through August 15, 2019. Dividends may be paid in
cash or, subject to certain limitations, in shares of common stock or any combination of cash and shares of common stock. The
terms of the Preferred Stock provide that, unless full cumulative dividends have been paid or set aside for payment on all outstanding
Preferred Stock for all prior dividend periods, no dividends may be declared or paid on common stock.
Common Stock Buyback
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 2018, the
Company repurchased and retired 2,570,449 shares of common stock under this buyback program at an average price of $15.44 per
share, excluding commissions, for an aggregate purchase price of approximately $40 million.
F- 27
13.
Accumulated Other Comprehensive Income (Loss)
AOCI was comprised of the following for the three years ended December 31:
Unrecognized components of employee benefit plans, net of tax:
Balance, beginning of year
Other comprehensive gain (loss) before reclassifications
Income tax on other comprehensive loss
2018
2017
2016
$
(81,638) $
(53,278)
12,160
(110,080) $
26,050
(5,731)
(109,620)
(12,917)
—
Reclassifications to earnings: (a)
Amortization of losses
Amortization of prior service costs
Amortization of negative plan amendment
Income tax on reclassifications
Net comprehensive gain (loss) on employee benefit plans, net of tax
ASU 2018-02 adoption (c)
Balance, end of year
Unrealized gain on derivative instruments, net of tax:
Balance, beginning of year
Other comprehensive income before reclassifications
Income tax on other comprehensive income
Reclassifications to earnings: (b)
Interest rate contracts
Foreign exchange contracts
Income tax on reclassifications
Net comprehensive gain on derivative instruments, net of tax
Balance, end of year (b)
Foreign currency translation:
Balance, beginning of year
Foreign currency translation, net of tax effects of $0, $0, and $0
Balance, end of year
11,877
572
(153)
(2,705)
(31,527)
(22,425)
(135,590)
619
(22,985)
5,372
(64)
6,690
(1,254)
(12,241)
(11,622)
4,868
(13,353)
(8,485)
11,984
763
(153)
(4,471)
28,442
—
(81,638)
11,581
775
(153)
254
(460)
—
(110,080)
—
749
(130)
—
—
—
619
619
—
4,868
4,868
—
—
—
—
—
—
—
—
—
—
—
Accumulated other comprehensive income (loss), end of year
$
(155,697) $
(76,151) $
(110,080)
(a) The AOCI components for defined benefit pension and post-retirement plans are included in the computation of net periodic
pension cost. See Note 16 — Employee Benefit Plans for additional information.
(b) Reclassifications of interest rate contracts are recorded in interest expense, and reclassifications of foreign currency exchange
contracts are recorded in other operating income. Additional details about the reclassifications related to derivative instruments
is included in Note 10 —Derivative Instruments. There were no reclassifications to earnings for derivative instruments during
the year ended December 31, 2017.
(c) Represents a reclassification to retained earnings from the adoption of ASU No. 2018-02. See Note 2 — Summary of Significant
Accounting Policies and New Accounting Pronouncements for additional information.
F- 28
14.
Earnings per Share of Common Stock
Basic earnings per share (“EPS”) is calculated by dividing net income available for common stockholders by the weighted-
average number of shares of common stock outstanding during the year. Diluted EPS is calculated by dividing net income by the
weighted-average number of shares of common stock outstanding adjusted to include the potentially dilutive effect of outstanding
stock options, performance shares, restricted shares and Preferred Stock.
In connection with the acquisition of Tembec in November 2017, the Company issued 8.4 million shares of common stock
as part of the consideration to Tembec shareholders. These shares were included in the calculation of weighted-average shares
outstanding at December 31, 2017. Refer to Note 3— Tembec Acquisition for more information.
The following table provides details of the calculations of basic and diluted EPS for the three years ended December 31:
Net income
Less: Preferred Stock dividends
Net income available for common stockholders
2018
2017
2016
$
$
128,416
(13,800)
114,616
$
$
324,964
(13,800)
311,164
$
$
73,286
(5,404)
67,882
Shares used for determining basic earnings per share of common stock
50,602,480
43,416,868
42,279,811
Dilutive effect of:
Stock options
Performance and restricted shares
Preferred Stock
Shares used for determining diluted earnings per share of common stock
Basic earnings per share (not in thousands)
Diluted earnings per share (not in thousands)
1,307
1,431,794
13,361,678
65,397,259
—
1,113,866
11,371,718
55,902,452
—
422,962
4,443,048
47,145,821
$
$
2.27
1.96
$
$
7.17
5.81
$
$
1.61
1.55
Anti-dilutive instruments excluded from the computation of diluted earnings per share:
Stock options
Performance and restricted shares
Preferred Stock
Total
15.
Incentive Stock Plans
2018
260,033
398,004
—
2017
373,058
798
—
2016
399,012
90,399
—
658,037
373,856
489,411
As of December 31, 2018, the Company had two stock-based incentive plans. The Rayonier Advanced Materials Inc. Incentive
Stock Plan (the “Prior Plan”) provided for the grant of incentive stock options, non-qualified stock options, stock appreciation
rights, performance shares, restricted stock, and restricted stock units, subject to certain limitations. The Company no longer issues
shares under the Prior Plan. The Rayonier Advanced Materials Inc. 2017 Incentive Stock Plan (the “2017 Plan”) provides for up
to 4.8 million shares to be granted for stock options, non-qualified stock options, stock appreciation rights, performance shares,
restricted stock, and restricted stock units. Under the 2017 Plan, shares available for issuance may be increased by any shares of
common stock subject to awards under the Prior Plan that, in whole or in part, are forfeited, terminated or expire unexercised,
settled in cash in lieu of stock, or released from a reserve for failure to meet the maximum payout under a program. At December 31,
2018, approximately 3.6 million shares were available for future grants under the 2017 Plan.
During the year ended December 31, 2018, the Company made new grants of restricted stock units and performance-based
stock units to certain employees. The 2018 restricted stock unit awards vest over three years. The 2018 performance-based stock
unit awards are measured against an internal return on an 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 awarded
F- 29
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.
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 288,703 shares of common stock with an intrinsic value of $6 million at
the vest date.
The Company recognizes stock-based compensation expense on a straight-line basis over the service period of the award.
The Company’s total stock-based compensation cost, including allocated amounts, for the years ended December 31, 2018, 2017
and 2016 was $13 million, $9 million and $7 million, respectively. These amounts may not reflect the cost of current or future
equity awards.
Total stock-based compensation expense was allocated for the years ended December 31 as follows:
Selling, general and administrative expenses.................................................................... $
Cost of sales.......................................................................................................................
11,994
1,013
Total stock-based compensation expense ..................................................................... $
13,007
$
$
7,991
995
8,986
$
$
6,330
887
7,217
2018
2017
2016
The Company’s employee stock option compensation program generally provides accelerated vesting (i.e., a waiver of the
remaining period of service required to earn an award) for awards held by employees at the time of their retirement. Stock-based
compensation expense for stock option awards is recognized over the shorter of: (1) the service period (i.e., the stated period of
time required to earn the award); or (2) the period beginning at the start of the service period and ending when an employee first
becomes eligible for retirement.
Fair Value Calculations by Award
All restricted stock and performance share awards are presented for Rayonier Advanced Materials stock only. Option awards
include Rayonier Advanced Materials awards held by employees of its former parent Rayonier Inc.
Non-Qualified Employee Stock Option Awards
Stock options are granted with an exercise price equal to the market value of the underlying stock on the grant date. They
generally vest ratably over three years and have a maximum term of 10 years and two days from the grant date.
The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model. The Company
has elected to value each grant in total and recognize the expense for stock options on a straight-line basis over three years. During
the years ended December 31, 2018, 2017 and 2016, no options were granted.
A summary of the Company’s stock option activity is presented below for the year ended December 31, 2018:
Stock Options
Options
Weighted
Average Exercise
Price
Weighted
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic Value
Outstanding at January 1, 2018................................
Forfeited...................................................................
Exercised..................................................................
Expired.....................................................................
Outstanding at December 31, 2018..........................
Options vested and expected to vest ........................
Options exercisable at December 31, 2018..............
373,058
$
—
(26,045)
(60,400)
286,613
286,613
286,613
$
$
$
F- 30
32.25
—
17.34
29.77
34.23
34.23
34.23
3.03
3.0
3.0
$
$
$
—
—
—
A summary of additional information pertaining to stock options granted to employees is presented below:
Intrinsic value of options exercised ............................................................................ $
Fair value of options vested........................................................................................ $
108
$
— $
1
210
$
$
—
444
2018
2017
2016
Restricted Stock and Stock Unit Awards
Restricted stock and stock units granted in connection with the Company’s performance share plan generally vests upon
completion of periods ranging from one to four years. The fair value of each share granted is equal to the share price of the
underlying stock on the date of grant. As of December 31, 2018, there was $5 million of unrecognized compensation cost related
to the Company’s outstanding restricted stock. This cost is expected to be recognized over a weighted average period of 1.7 years.
The following table summarizes the activity of restricted stock and stock units granted to employees for the three years ended
December 31:
Restricted stock and stock units granted .....................................................................
Weighted average price of restricted stock or units granted........................................ $
Intrinsic value of restricted stock and units outstanding ............................................. $
Fair value of restricted stock and units vested............................................................. $
2018
2017
2016
301,384
285,506
598,219
19.73
9,767
3,753
$
$
$
13.37
17,349
1,119
$
$
$
8.03
10,326
5,890
A summary of the Company’s restricted stock and stock units activity is presented below for the year ended December 31,
2018:
Outstanding at January 1, 2018...........................................................................................
Granted................................................................................................................................
Forfeited ..............................................................................................................................
Vested..................................................................................................................................
Outstanding at December 31, 2018.....................................................................................
Performance-Based Stock Unit Awards
Restricted Stock and Stock Units
Awards
848,371
301,384
(16,279)
(216,378)
917,098
Weighted
Average Grant
Date Fair Value
12.47
$
19.73
12.05
17.34
13.71
$
The Company’s performance-based stock unit awards generally vest upon completion of a three-year period. The number of
shares, if any, that are ultimately awarded is contingent upon the Company’s performance against an internal performance metric
or a combination of an internal metric and a market condition.
The performance-based stock unit awards which are measured against a market condition or incorporate market conditions
are valued using a Monte Carlo simulation model. The model generates the fair value of the market-based award or market-based
portion of the award at the grant date. The related expense is then amortized over the award’s vesting period.
As of December 31, 2018, there was $11 million of unrecognized compensation cost related to the Company’s performance-
based stock unit awards. This cost is expected to be recognized over a weighted average period of 1.65 years.
F- 31
The following table summarizes the activity of the Company’s performance-based stock units awarded to its employees for
the three years ended December 31:
Common shares of stock reserved for performance-based stock units
1,115,747
896,121
1,304,419
Weighted average fair value of performance-based
stock units granted
Intrinsic value of outstanding performance-based stock units
$
$
22.75
4,774
$
$
14.60
7,408
$
$
7.79
8,169
2018
2017
2016
A summary of the Company’s performance-based stock unit award activity is presented below for the year ended
December 31, 2018:
Outstanding at January 1, 2018
Granted
Forfeited
Vested
Outstanding at December 31, 2018
Performance-Based Stock Units
Awards
Weighted Average
Grant Date Fair
Value
1,080,067
$
449,838
(13,691)
(190,320)
1,325,894
$
11.58
22.75
11.53
17.50
14.69
The expected volatility is based on representative price returns using the stock price of several peer companies. The risk-free
rate was based on the 3-year U.S. treasury rate on the date of the award. The following chart provides a tabular overview of the
weighted average assumptions used in calculating the fair value of the awards granted for the three years ended December 31:
Expected volatility.................................................................................................................
Risk-free rate .........................................................................................................................
2018
2017
2016
68.7%
2.4%
70.2%
1.5%
74.3%
1.0%
16.
Employee Benefit Plans
Defined 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. In connection with the Acquisition, we assumed the obligations of various defined
benefit pension and other postretirement plans that were maintained by Tembec which cover certain employees, primarily in
Canada and France. The defined benefit pension plans are closed to new participants.
Defined benefit pension and other postretirement 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.
F- 32
The following tables set forth the changes in the projected benefit obligation and plan assets and reconciles the funded status
and the amounts recognized in the Consolidated Balance Sheets for the defined benefit pension and postretirement plans for the
two years ended December 31:
Change in Projected Benefit Obligation
Projected benefit obligation at beginning of year............... $
Plans assumed in Acquisition...........................................
Service cost ......................................................................
Interest cost ......................................................................
Actuarial loss (gain) .........................................................
Participant contributions ..................................................
Benefits paid.....................................................................
Effects of foreign currency exchange rates ......................
Projected benefit obligation at end of year ......................... $
Change in Plan Assets
Fair value of plan assets at beginning of year..................... $
Plans assumed in Acquisition...........................................
Actual return on plan assets .............................................
Employer contributions ....................................................
Participant contributions ..................................................
Benefits paid.....................................................................
Effects of foreign currency exchange rates ......................
Fair value of plan assets at end of year............................... $
Pension
Postretirement
2018
2017
2018
2017
1,139,177
$
414,479
$
45,449
$
—
12,428
36,365
(46,755)
1,106
(59,790)
(45,106)
1,037,425
710,466
5,646
15,926
6,852
96
(23,192)
8,904
$
1,139,177
$
—
1,724
1,332
(2,720)
360
(3,418)
(1,484)
41,243
26,838
18,884
1,249
827
(1,639)
396
(1,386)
280
$
45,449
1,000,200
$
275,955
$
— $
—
(44,639)
9,520
1,106
(59,790)
(43,071)
863,326
668,463
57,618
12,732
96
(23,192)
8,528
—
—
3,059
360
(3,419)
$
1,000,200
$
— $
—
—
—
990
396
(1,386)
—
—
Funded Status at end of year:.............................................. $
(174,099) $
(138,977) $
(41,243) $
(45,449)
Pension
Postretirement
Amounts recognized in the Consolidated Balance
Sheets consist of:
2018
2017
2018
2017
Non-current assets .............................................................. $
Current liabilities ................................................................
Non-current liabilities.........................................................
Net amount recognized .................................................. $
$
30,395
(3,767)
(200,727)
(174,099) $
$
36,605
(5,059)
(170,523)
(138,977) $
— $
(3,012)
(38,231)
(41,243) $
—
(3,162)
(42,287)
(45,449)
Net gains (losses) recognized in other comprehensive income for the three years ended December 31 are as follows:
Net gains (losses)............................................. $ (55,918) $
24,411
$ (14,101) $
2,640
$
1,639
$
1,184
2018
Pension
2017
Postretirement
2016
2018
2017
2016
F- 33
Net gains or losses and prior service costs or credits reclassified from other comprehensive income and recognized as a
component of pension and postretirement expense for the three years ended December 31 are as follows:
Amortization of losses..................................... $
Amortization of prior service (credit) cost ......
11,648
$
11,651
$
11,343
$
572
761
761
$
229
(153)
$
333
(151)
238
(139)
2018
Pension
2017
Postretirement
2016
2018
2017
2016
Net losses, prior service costs or credits and plan amendments that have not yet been included in pension and postretirement
expense for the two years ended December 31 which have been recognized as a component of AOCI are as follows:
Pension
Postretirement
2018
2017
2018
2017
Prior service cost................................................................. $
Net losses ............................................................................
Plan amendment..................................................................
Deferred income tax benefit ...............................................
Accumulated other comprehensive income (loss) ......... $
(1,681) $
(2,254) $
(172,484)
—
38,779
(135,386) $
(128,215)
—
50,907
(79,562) $
$
1,338
(2,280)
—
183
(759) $
—
(5,149)
1,491
1,582
(2,076)
For defined benefit pension plans with accumulated benefit obligations in excess of plan assets, the following table sets forth
the projected and accumulated benefit obligations and the fair value of plan assets for the years ended December 31:
Projected benefit obligation........................................................................................................ $
Accumulated benefit obligation.................................................................................................. $
Fair value of plan assets.............................................................................................................. $
764,462
736,782
559,969
$
$
$
813,411
785,435
638,414
2018
2017
The following tables set forth the components of net pension and postretirement benefit cost that have been recognized during
the three years ended December 31:
Components of Net Periodic Benefit Cost
2018
Service cost...................................................... $ 12,428
36,365
Interest cost......................................................
Expected return on plan assets ........................
(58,685)
Amortization of prior service (credit) cost ......
Amortization of losses.....................................
Net periodic benefit cost (a) ................................. $
11,648
2,328
572
Pension
2017
Postretirement
2016
2018
2017
2016
$
5,646
$
5,225
$
1,724
$
1,249
$
15,926
(25,978)
761
11,651
15,915
(23,320)
761
11,343
1,332
—
(153)
229
827
—
(151)
333
808
871
—
(139)
238
$
8,006
$
9,924
$
3,132
$
2,258
$
1,778
(a) 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 non-operating income on the consolidated statement of income as
a result of retrospectively adopting ASU No. 2017-07, Compensation - Retirement Benefits, during the first quarter of 2018.
See Note 2 - Summary of Significant Accounting Policies and New Accounting Pronouncements, for additional information
regarding the impact.
F- 34
The estimated pre-tax amounts that will be amortized from AOCI into net periodic benefit cost in 2019 are as follows:
Amortization of loss.............................................................................................................. $
Amortization of prior service cost ........................................................................................
Total amortization of accumulated other comprehensive income (loss).......................... $
Pension
Postretirement
14,283
569
14,852
$
$
81
(153)
(72)
In 2017, the Company changed its method used to determine the service and interest cost components of net periodic benefit
cost. Previously, the cost was determined using a single weighted-average discount rate derived from the yield curve. Under the
new method, known as the spot rate approach, individual spot rates along the yield curve that correspond with the timing of each
benefit payment will be used. The Company believes this change will provide a more precise measurement of service and interest
costs by improving the correlation between projected cash outflows and corresponding spot rates on the yield curve. This change
does not affect the measurement of plan obligations but generally results in lower pension expense in periods where the yield
curve is upward sloping. The Company accounted for this change prospectively as a change in accounting estimate.
The following table sets forth the weighted average principal assumptions inherent in the determination of benefit obligations
and net periodic benefit cost of the pension and postretirement benefit plans as of December 31:
Assumptions used to determine benefit obligations
at December 31:
Discount rate
Rate of compensation increase
Assumptions used to determine net periodic benefit
cost for years ended December 31:
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
Pension
Postretirement
2018
2017
2016
2018
2017
2016
3.99%
2.61%
3.55%
2.60%
3.88%
4.10%
3.82%
3.68%
3.14%
3.10%
3.85%
4.50%
3.42%
6.32%
2.61%
3.77%
7.38%
2.59%
4.03%
8.50%
4.10%
3.40%
N/A
3.68%
3.64%
N/A
3.10%
3.98%
N/A
4.50%
The estimated return on plan assets is based on historical and expected long-term rates of return on broad equity and bond
indices and consideration of the actual annualized rate of return. The Company, with the assistance of external consultants, utilizes
this information in developing assumptions for returns, risks and correlation of asset classes, which are then used to establish the
asset allocation ranges.
Assumed health care cost trends have a significant effect on the amounts reported for the postretirement benefit plans. The
following table sets forth the assumed health care cost trend rates as of December 31:
Health care cost trend rate assumed for next year......................................
Rate to which the cost trend is assumed to decline (ultimate trend rate) ...
Year that ultimate trend rate is reached ......................................................
Postretirement
2018
2017
U.S.
Canada
U.S.
Canada
7.50%
5.00%
2024
5.00%
4.50%
2019
8.00%
5.00%
2024
5.50%
4.50%
2019
The following table shows the effect of a one percentage point change in assumed health care cost trends:
Effect on:
Total of service and interest cost components....................................................................... $
Accumulated postretirement benefit obligation ....................................................................
1 Percent
Increase
Decrease
225
$
1,842
(190)
(1,604)
F- 35
Investment of Plan Assets
The Company’s Pension and Savings Plan Committee and the Audit Committee of the Board of Directors oversee the defined
benefit pension plans’ investment program. The investment approach of each defined benefit pension plan is designed to maximize
returns and provide sufficient liquidity to meet each plans obligations while maintaining acceptable risk levels. For certain defined
benefit plans, investment target allocation percentages for equity securities can range from 45 percent to 65 percent and fixed
income securities can range from 30 percent to 55 percent. For certain defined benefit plans, investments may be 100 percent
allocated to fixed income securities. All plans were within their respective targeted ranges. The Company’s weighted average
defined benefit pension plan asset allocation at December 31, 2018 and 2017, by asset category are as follows:
Asset Category
U.S. equity securities ..................................................................................................................
International equity securities.....................................................................................................
U.S. fixed income securities .......................................................................................................
International fixed income securities..........................................................................................
Other ...........................................................................................................................................
Total .......................................................................................................................................
Percentage of Plan Assets
2018
2017
22%
24%
13%
36%
5%
23%
27%
13%
34%
3%
100%
100%
Investments within the equity categories may include large capitalization, small capitalization and emerging market securities,
while the international fixed income portfolio may include emerging markets debt. Pension assets did not include a direct investment
in Rayonier Advanced Materials common stock at December 31, 2018 or 2017.
Fair Value Measurements
The following table sets forth by level, within the fair value hierarchy (see Note 2 — Summary of Significant Accounting
Policies and New Accounting Pronouncements for definition), the assets of the plans as of December 31, 2018 and 2017.
Asset Category
Mutual funds ....................................................................... $
Level 1
Level 2
Level 3
Total
172,870
$
— $
— $
172,870
Fair Value at December 31, 2018
Investments at net asset value:
Common collective trust funds ...........................................
Total assets at fair value .................................................
690,456
863,326
$
Asset Category
Mutual funds ....................................................................... $
Level 1
Level 2
Level 3
Total
161,424
$
— $
— $
161,424
Fair Value at December 31, 2017
Investments at net asset value:
Common collective trust funds ...........................................
Total assets at fair value .................................................
838,776
$
1,000,200
F- 36
The valuation methodology used for measuring the fair value of these asset categories was as follows:
Mutual funds — Net asset value in an observable market.
Common collective trust funds — Common collective trusts are measured at NAV per share, as a practical expedient for
fair value, as provided by the Plan trustee. The NAV is calculated by determining the fair value of the fund’s underlying
assets, deducting its liabilities, and dividing by the units outstanding as of the valuation date. These funds are not publicly
traded; however, in the majority of cases the unit price calculation is based on observable market inputs of the funds’
underlying assets.
There have been no changes in the methodology used during the years ended December 31, 2018 and 2017.
Cash Flows
Expected benefit payments for the next ten years are as follows:
Pension
Benefits
Postretirement
Benefits
2019........................................................................................................................................ $
2020........................................................................................................................................
2021........................................................................................................................................
2022........................................................................................................................................
2023........................................................................................................................................
$
60,105
58,726
59,666
60,527
61,327
2024 — 2028..........................................................................................................................
315,088
3,035
2,878
2,934
2,769
2,697
12,409
The Company has mandatory pension contribution requirements of $5 million in 2019 and may make additional discretionary
contributions.
Defined Contribution Plans
The Company provides defined contribution plans to all of its hourly and salaried employees. The Company’s contributions
charged to expense for these plans were $8 million, $5 million, and $5 million for the years ended December 31, 2018, 2017 and
2016, respectively.
17.
Other Operating Expense, Net
Other operating expense, net was comprised of the following for the three years ended December 31:
Environmental liability adjustments and other costs for disposed
operations (a) ........................................................................................ $
Loss on sale or disposal of property, plant and equipment ..........................
Gain on foreign exchange ............................................................................
Equity income (loss) from joint venture ......................................................
Insurance settlement.....................................................................................
Miscellaneous income (expense) .................................................................
Total other operating expense, net .......................................................... $
2018
2017
2016
(8,332) $
(3,186)
1,114
(4,359)
—
2,341
(12,422) $
(1,451) $
(2,032)
2,335
(495)
(13)
382
(1,274) $
(5,298)
(2,422)
—
—
897
1,139
(5,684)
(a) Environmental liability adjustments and other costs for disposed operations reflects the adjustments to the Company’s estimates
for environmental liability for the assessment, remediation and long-term monitoring and maintenance of the disposed
operations sites over the next 20 years and other related costs. See Note 9 — Liabilities for Disposed Operations for additional
information.
F- 37
18.
Income Taxes
Income Tax Expense
Income tax expense for the three years ended December 31 are as follows:
Current
Federal ........................................................................................................ $
Foreign .......................................................................................................
State and other ............................................................................................
Deferred
Federal ........................................................................................................
Foreign .......................................................................................................
State and other ............................................................................................
Changes in valuation allowance......................................................................
Income tax expense .................................................................................... $
2018
2017
2016
(12,384) $
(10,115)
(657)
(23,156)
4,238
(24,901)
26
(20,637)
—
(43,793) $
$
10,871
(121)
(201)
10,549
(34,635)
4,065
290
(30,280)
—
(19,731) $
5,516
—
368
5,884
(44,488)
—
(711)
(45,199)
—
(39,315)
A reconciliation of the U.S. federal statutory income tax rate to the actual income tax rate for the three years ended
December 31 is as follows:
2018
2017
2016
U.S. federal statutory income tax rate ........................................................
Nontaxable bargain purchase gain (a)......................................................
U.S. federal rate change (b) .....................................................................
Difference in foreign statutory rates
Global Intangible Low Taxed Income (Net of FTC)(c)...........................
Book tax differences related to joint venture
Favorable resolutions of uncertain tax positions
Domestic manufacturing production deduction.......................................
State credits..............................................................................................
Nondeductible executive compensation ..................................................
Adjustment to previously filed tax returns...............................................
Nondeductible transaction costs (d).........................................................
Change in state rate..................................................................................
Other ........................................................................................................
21.0%
(3.1)
—
5.8
5.4
1.5
(3.1)
—
—
0.7
(3.4)
—
—
0.6
Income tax rate as reported ........................................................................
25.4%
35.0%
(32.1)
3.2
—
—
—
—
(0.3)
—
0.4
(1.1)
1.0
(0.1)
(0.3)
5.7%
35.0%
—
—
—
—
—
—
—
(0.8)
0.6
—
—
—
0.1
34.9%
(a) The bargain purchase gain from the acquisition of Tembec of $20 million and $317 million during the years ended December
31, 2018 and 2017, respectively, was not taxable resulting in a decrease in the income tax rate (see Note 3 —Tembec Acquisition).
(b) The income tax rate for the year ended December 31, 2017 was impacted by the Tax Cuts and Jobs Act through a decrease
in the federal tax rate from 35 percent to 21 percent. Income tax expense for the re-measurement of the deferred tax assets of
$11 million was recorded during the year ended December 31, 2017. This expense is the result of previously recorded deferred
tax deductions which will now result in a lower after-tax benefit due to the reduced rate.
(c) The Company has the option to either treat taxes due on future Global Intangible Low-Taxed Income (“GILTI”) income as a
current period expense when incurred (the “period cost method”) or factor in such amounts in the Company’s measurement
F- 38
of its deferred taxes (the “deferred method”). The Company has determined it will record GILTI income as a current period
expense when incurred.
(d) The Company incurred significant costs associated with the acquisition of Tembec. Certain costs incurred are considered
facilitative to the transaction and were not deductible in 2017, resulting in an unfavorable adjustment to the income tax rate.
F- 39
Deferred Taxes
Deferred income taxes result from recording revenues and expenses in different periods for financial reporting versus tax
reporting. The nature of the temporary differences and the resulting net deferred tax liability for the two years ended December
31 were as follows:
Gross deferred tax assets:
Pension, postretirement and other employee benefits............................................................ $
Tax credit carryforwards (a)...................................................................................................
Property, plant and equipment basis differences....................................................................
Canadian pool of scientific research and experimentation deductions ("SR&ED") (a) ........
Environmental liabilities........................................................................................................
Capitalized costs ....................................................................................................................
U.S. federal and Canadian net operating losses (a) ...............................................................
State net operating losses (a)..................................................................................................
Interest carryforwards (a).......................................................................................................
Other ......................................................................................................................................
Total gross deferred tax assets ...............................................................................................
Less: valuation allowance ......................................................................................................
Total deferred tax assets after valuation allowance ...............................................................
Gross deferred tax liabilities:
Property, plant and equipment basis differences....................................................................
Intangible assets .....................................................................................................................
Other ......................................................................................................................................
Total gross deferred tax liabilities..........................................................................................
Net deferred tax asset.................................................................................................................. $
Included in: .................................................................................................................................
Deferred tax assets ................................................................................................................. $
Deferred tax liabilities............................................................................................................
$
2018
2017
58,088
$
76,467
78,550
87,253
36,583
5,275
211,939
2,942
5,820
9,737
572,654
(82,223)
490,431
(92,857)
(15,579)
(3,054)
(111,490)
378,941
406,957
(28,016)
378,941
$
$
$
49,669
77,897
97,242
79,349
36,791
6,347
212,904
2,946
11,635
1,868
576,648
(92,081)
484,567
(95,754)
(15,948)
(2,626)
(114,328)
370,239
402,846
(32,607)
370,239
(a) The following relates to tax credit carryforwards and net operating losses as of December 31, 2018:
Gross Amount
Tax Effected
Valuation
Allowance
State tax credit carryforwards.............................. $
Foreign R&D credit carryforwards ..................... $
State net operating losses..................................... $
Canada non-capital losses.................................... $
Interest limitation carryforward........................... $
Canadian pool of SR&ED ................................... $
21,328
55,139
63,404
932,363
26,457
405,088
$
$
$
$
$
$
21,328
55,139
2,942
211,939
5,820
87,253
$
$
$
$
$
$
21,074
55,139
2,942
3,068
—
—
Expiration
2019-2026
2018-2037
2018-2032
2025-2037
None
None
F- 40
Unrecognized Tax Benefits
The Company recognizes the impact of a tax position if it is “more likely than not” to prevail. As of December 31, 2018 and
December 31, 2017, there were several positions resulting in unrecognized tax benefits that, if recognized, would affect income
tax expense. During the years ended December 31, 2018, 2017 and 2016, the Company did not record material interest expense
or penalties in income tax expense. A reconciliation of the beginning and ending unrecognized tax benefits for the three years
ended December 31 is as follows:
Balance at January 1, ............................................................................................ $
Decreases related to prior year tax positions....................................................
Increases related to prior year tax positions .....................................................
Decreases related to current year tax positions ................................................
Increases related to current year tax positions .................................................
Balance at December 31, ...................................................................................... $
$
23,804
(17,872)
1,137
—
1,775
— $
—
11,171
—
12,633
8,844
$
23,804
$
—
—
—
—
2018
2017
2016
Each of our unrecognized tax benefits would decrease our effective tax rate if recognized. Total interest and penalities recorded
in unrecognized tax benefits is less than $1 million.
It is reasonably possible that within the next twelve months a number of tax positions could increase or decrease, impacting
our unrecognized tax position reserve by between a decrease of $1 million and increase of $2 million.
Tax Statutes
The following table provides detail of tax years that remain open to examination by significant taxing jurisdictions:
Taxing Jurisdiction
U.S............................................................................................................................................................
France .......................................................................................................................................................
Canada ......................................................................................................................................................
Open Tax Years
2014-2018
2015-2018
2014-2018
Tax Cuts and Jobs Act
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the
“Act”), resulting in significant modifications to existing law. The most significant impact to the Company is the reduction of the
U.S. federal corporate tax rate, effective January 1, 2018, from 35 percent to 21 percent, partially offset by the loss of the domestic
manufacturing production deduction. The Company is likely to also be impacted by 100 percent tax expensing for certain assets
in the next five years, new U.S. interest expense limitations, changes to executive compensation deductibility, tax on Global
Intangible Low-Taxed Income and a deduction for Foreign Derived Intangible Income.
The Company has completed the accounting for the effects of the Act during the fourth quarter of 2017, except for the one-
time deemed repatriation transition tax on unrepatriated foreign earnings (“Repatriation Tax”). Based on information currently
available, we estimate the Repatriation Tax will not be material. However, the Company continues to gather and analyze information
in order to complete the accounting for the effects, if any. Additionally, we made a reasonable assessment concerning whether
our executive compensation plans in effect November 2, 2017 qualified to continue to be treated under pre-Act law. That assessment
may change as guidance is issued.
19.
Segment and Geographical Information
The Company has five reportable segments: High Purity Cellulose, Forest Products, Pulp, Paper and Corporate. See Note 1
— Nature of Operations and Basis of Presentation for a description of the operating businesses. The Corporate segment consists
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 allocate the cost of maintaining these support
functions to its operating units.
F- 41
In the first quarter of 2018, the net sales of each of the Pulp and Paper operating businesses exceeded 10 percent of the
Company’s consolidated net sales, therefore, we disaggregated the previously combined segment into two separate, reportable
segments, Pulp and Paper. The 2017 segment information presented below conforms with the current presentation of reportable
segments.
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 for the respective operating area.
Net sales, disaggregated by product-line, was comprised of the following for the years ended December 31:
2018
2017
2016
Net sales:
High Purity Cellulose
Cellulose Specialties .................................................................. $
Commodity Products..................................................................
Other sales (a).............................................................................
Total High Purity Cellulose .....................................................
Forest Products
Lumber .......................................................................................
Other sales (b) ............................................................................
Total Forest Products ...............................................................
Pulp
High-yield pulp ..........................................................................
Paper
Paperboard..................................................................................
Newsprint ...................................................................................
Total Paper ...............................................................................
Eliminations.................................................................................
Total net sales ........................................................................ $
831,805
$
661,760
$
243,711
116,873
1,192,389
284,418
71,242
355,660
346,444
196,866
113,275
310,141
(70,221)
2,134,413
$
183,208
21,893
866,861
25,880
8,065
33,945
38,470
18,875
10,576
29,451
(7,394)
961,333
694,603
174,128
—
868,731
—
—
—
—
—
—
—
—
$
868,731
(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
F- 42
Operating income by segment was comprised of the following for the years ended December 31:
2018
2017 (a)
2016 (a)
Operating income:
High Purity Cellulose................................................................... $
Forest Products.............................................................................
Pulp ..............................................................................................
Paper ............................................................................................
Corporate......................................................................................
Total operating income .............................................................. $
112,308
$
24,850
95,071
31,047
(65,634)
197,642
$
120,356
(4)
4,411
(1,155)
(62,156)
61,452
$
$
175,737
—
—
—
(32,420)
143,317
(a) The Company adopted ASU 2017-07, Compensation - Retirement Benefits on January 1, 2018 using the retrospective
method. See Note 2 - Summary of Significant Accounting Policies and New Accounting Pronouncements for additional information.
Identifiable assets by segment were as follows for the years ended December 31:
Identifiable assets:.......................................................................................................
High Purity Cellulose ................................................................................................. $
Forest Products ...........................................................................................................
Pulp .............................................................................................................................
Paper ...........................................................................................................................
Corporate ....................................................................................................................
2018
2017
1,643,092
$
1,671,107
166,801
103,308
240,427
525,458
154,258
83,081
245,746
488,419
Total identifiable assets ............................................................................................ $
2,679,086
$
2,642,611
Long-life assets by country were as follows for the years ended December 31:
Long-life assets: ...........................................................................................................
United States............................................................................................................... $
Canada ........................................................................................................................
France .........................................................................................................................
829,153
$
920,503
213,338
840,315
926,774
228,985
Total long-life assets................................................................................................. $
1,962,994
$
1,996,074
2018
2017
F- 43
Depreciation and amortization and capital expenditures by segment were as follows for the years ended December 31:
Depreciation and amortization:......................................................
High Purity Cellulose ...................................................................... $
Forest Products ................................................................................
Pulp..................................................................................................
Paper ................................................................................................
Corporate .........................................................................................
2018
2017
2016
119,231
$
93,177
$
87,837
6,683
4,581
17,263
658
728
590
2,154
314
—
—
—
437
88,274
Total depreciation and amortization.............................................. $
148,416
$
96,963
$
Capital expenditures (a): .................................................................
High Purity Cellulose ...................................................................... $
Forest Products ................................................................................
Pulp..................................................................................................
Paper ................................................................................................
Corporate .........................................................................................
92,980
$
65,691
$
85,835
26,691
4,983
4,966
2,827
4,409
326
1,125
19
—
—
—
—
Total capital expenditures ............................................................. $
132,447
$
71,570
$
85,835
(a) Amounts exclude the impact of changes in capital assets purchased on account and government grants.
Geographical distribution of the Company’s sales was comprised of the following for the three years ended December 31:
United States.................................................. $
China..............................................................
Japan ..............................................................
Europe............................................................
Latin America ................................................
Other Asia......................................................
Canada ...........................................................
All other.........................................................
Sales by Destination
2018
%
2017
%
2016
%
779,699
360,862
143,577
364,024
11,868
208,878
260,448
5,057
$
36
17
7
17
1
10
12
—
336,943
253,275
123,850
114,049
11,576
78,538
41,178
1,924
$
35
26
13
12
1
8
4
1
348,570
250,044
136,817
88,191
9,876
27,280
—
7,953
40
29
16
10
1
3
—
1
Total sales ................................................. $
2,134,413
100
$
961,333
100
$
868,731
100
The Company had no significant customers representing over 10 percent of total sales for the year ended December 31, 2018.
The Company had three significant customers in its High Purity Cellulose segment which represented over 10 percent of total
sales for the years ended December 31, 2017 and 2016:
Eastman Chemical Company ................................................................................................
Nantong Cellulose Fibers, Co., Ltd.......................................................................................
Daicel Corporation ................................................................................................................
Percentage of Sales
2017
20%
15%
10%
2016
25%
17%
14%
F- 44
20.
Commitments and Contingencies
Litigation and 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.
The Company currently employs approximately 4,200 people in the United States, Canada and France. As of December 31,
2018, approximately 75 percent of the work force is unionized. As a result, the Company is required to negotiate wages, benefits
and other terms with unionized employees collectively.
As of December 31, 2018, collective bargaining agreements covering approximately 800 unionized employees had expired.
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.
Commitments
The Company leases certain buildings, machinery and equipment under various operating leases. Total rental expense for
operating leases amounted to $8 million, $6 million, and $5 million in 2018, 2017 and 2016, respectively.
At December 31, 2018, the future minimum payments under non-cancellable operating leases and purchase obligations were
as follows:
2019 ............................................................................................................................................ $
2020 ............................................................................................................................................
2021 ............................................................................................................................................
2022 ............................................................................................................................................
2023 ............................................................................................................................................
Thereafter....................................................................................................................................
Total ....................................................................................................................................... $
Operating
Leases (a)
4,669
3,019
2,299
1,641
1,081
1,016
13,725
Purchase
Obligations (b)
170,868
$
70,771
57,702
47,288
52,431
104,048
503,108
$
(a) Operating leases include leases on buildings, machinery and equipment under various operating leases.
(b) Purchase obligations primarily consist of payments expected to be made on natural gas, steam energy and wood chips purchase
contracts. Obligations reported in the table are estimates and may vary based on changes in actual price and volumes terms.
Guarantees and Other
The Company provides financial guarantees as required by creditors, insurance programs and various governmental agencies.
As of December 31, 2018, the Company had $36 million of 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 December 31, 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.
F- 45
The Company is jointly and severally liable for financing agreements related to its LTF joint venture. 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
Company’s portion of the guarantee related to LTF at December 31, 2018 was $35 million.
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 not material 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.
21.
Supplemental Disclosures of Cash Flows Information
Supplemental disclosures of cash flows information was comprised of the following for the three years ended December 31:
Cash paid (received) during the period:
Interest........................................................................................................... $
Income taxes ................................................................................................. $
59,720
12,558
$
$
35,879
5,992
$
$
35,160
(4,727)
2018
2017
2016
Non-cash investing and financing activities:
Capital assets purchased on account ............................................................. $
$
Property, plant and equipment acquired under capital leases
$
Value of stock issued for Acquisition
16,864
$
— $
— $
22.
Quarterly Results for 2018 and 2017 (Unaudited)
12,083
$
— $
$
141,192
10,155
3,697
—
March 31
June 30
September 29
December 31
Total Year
Quarter Ended
2018
Net Sales ................................. $
Gross Margin .......................... $
Operating Income ................... $
Net Income.............................. $
Basic earnings per share ......... $
Diluted earnings per share (a). $
521,992
80,352
46,257
24,455
0.41
0.38
March 25
2017
Net Sales ................................. $
Gross Margin .......................... $
Operating Income ................... $
Net Income.............................. $
Basic earnings per share ......... $
Diluted earnings per share (b). $
201,415
37,369
27,081
9,642
0.15
0.15
$
$
$
$
$
$
$
$
$
$
$
$
541,720
101,478
66,222
53,389
0.97
0.83
$
$
$
$
$
$
544,339
95,913
56,150
37,936
0.68
0.60
$
$
$
$
$
$
526,362
66,426
29,013
12,636
0.18
0.18
$
$
$
$
$
$
2,134,413
344,169
197,642
128,416
2.27
1.96
Quarter Ended
June 24
September 23
December 31 (c)
Total Year
201,226
34,297
14,470
4,573
0.03
0.03
$
$
$
$
$
$
209,717
32,119
18,774
15,672
0.29
0.28
$
$
$
$
$
$
348,975
39,267
1,127
295,077
6.31
5.01
$
$
$
$
$
$
961,333
143,052
61,452
324,964
7.17
5.81
(a) Basic and diluted earnings per share for the second, third, and fourth quarters of 2018 and year ended December 31, 2018
included the impact of the repurchase and retirement of common stock as part of the Board of Directors authorized share
buyback program. See Note 14 — Earnings per Share of Common Stock for additional information.
F- 46
(b) Basic and diluted earnings per share may include the impact of dividends on the Company’s Preferred Stock. As a result,
quarterly EPS does not crossfoot to full-year EPS. See Note 14 — Earnings per Share of Common Stock for additional
information.
(c) On November 17, 2017, the Company acquired all the outstanding common shares of Tembec Inc. for an aggregate purchase
price of $317 million Canadian dollars and 8.4 million shares of the Company’s common stock. The acquisition was accounted
for as a business combination. See Note 3—Tembec Acquisition for additional information.
F- 47
Rayonier Advanced Materials Inc.
Schedule II—Valuation and Qualifying Accounts
Years Ended December 31, 2018, 2017, and 2016
(In thousands)
Additions
Description
Allowance for doubtful accounts:
Balance at
Beginning
of Year
Charged to
Cost and
Expenses
Charged to
Other
Accounts
Acquisition Deductions
Balance at
End of
Year
Year ended December 31, 2018...... $
Year ended December 31, 2017......
Year ended December 31, 2016......
593
151
151
Allowance for sales returns:
Year ended December 31, 2018...... $
Year ended December 31, 2017......
Year ended December 31, 2016......
$
1,121
523
—
Deferred tax asset valuation
allowance:
$
1,743
$
437
—
969
598
523
$
(55) $
5
—
— $
—
—
— $
—
—
— $
—
—
(219) $
—
—
(831) $
—
—
2,062
593
151
1,259
1,121
523
Year ended December 31, 2018...... $
Year ended December 31, 2017......
Year ended December 31, 2016......
92,081
$
— $
— $
— $
20,821
19,702
—
1,119
873
—
71,722
—
(9,858) $
(1,335)
—
82,223
92,081
20,821
Self-insurance liabilities:
Year ended December 31, 2018...... $
Year ended December 31, 2017......
Year ended December 31, 2016 ......
1,289
$
348
$
— $
— $
428
589
1,660
291
—
—
—
—
(626) $
(799)
(452)
1,011
1,289
428
F- 48
Subsidiaries of Rayonier Advanced Materials Inc.
As of 12/31/2018
Name of Subsidiary
Rayonier A.M. Canada Energy LP
Rayonier A.M. Canada Enterprises Inc.
Rayonier A.M. Canada General Partnership
Rayonier A.M. Canada Industries Inc.
Rayonier A.M. Global Holdings Luxembourg SCS
Rayonier A.M. Global Investments Luxembourg SARL
Rayonier A.M. Luxembourg SARL
Rayonier Performance Fibers, LLC
Rayonier A.M. Products Inc.
Rayonier A.M. Tartas SAS
Rayonier A.M. France SAS
Exhibit 21
Place of Incorporation
Canada
Canada
Canada
Canada
Luxembourg
Luxembourg
Luxembourg
Delaware
Delaware
France
France
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We have issued our reports dated March 1, 2019, with respect to the consolidated financial statements and internal control over
financial reporting included in the Annual Report of Rayonier Advanced Materials Inc. on Form 10-K for the year ended
December 31, 2018. We consent to the incorporation by reference of said reports in the Registration Statements of Rayonier
Advanced Materials Inc. on Forms S-8 (File No. 333-197093 and File No. 333-218975) and Forms S-3 (File No. 333-212068 and
File No. 333-209747).
/s/ Grant Thornton LLP
Jacksonville, Florida
March 1, 2019
Exhibit 31.1
I, Paul G. Boynton, certify that:
Certification
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Rayonier Advanced Materials Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: March 1, 2019
/s/ PAUL G. BOYNTON
Paul G. Boynton
Chairman, President and Chief Executive Officer
Rayonier Advanced Materials Inc.
Exhibit 31.2
I, Frank A. Ruperto, certify that:
Certification
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Rayonier Advanced Materials Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: March 1, 2019
/s/ FRANK A. RUPERTO
Frank A. Ruperto
Chief Financial Officer and
Senior Vice President, Finance and Strategy
Rayonier Advanced Materials Inc.
Exhibit 32
Certification
The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that
to our knowledge:
The annual report on Form 10-K of Rayonier Advanced Materials Inc. (the "Company") for the period ended
December 31, 2018 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
1.
2.
March 1, 2019
/s/ PAUL G. BOYNTON
Paul G. Boynton
Chairman, President and Chief Executive Officer
Rayonier Advanced Materials Inc.
/s/ FRANK A. RUPERTO
Frank A. Ruperto
Chief Financial Officer and
Senior Vice President, Finance and Strategy
Rayonier Advanced Materials Inc.
BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS
Paul G. Boynton
Chairman
C. David Brown, II
Lead Director
Charles E. Adair
Director
DeLyle W. Bloomquist
Director
Julie A. Dill
Director
Mark E. Gaumond
Director
Matthew P. Hepler
Director
James F. Kirsch
Director
Thomas I. Morgan
Director
Lisa M. Palumbo
Director
SENIOR LEADERSHIP
Paul G. Boynton
Chairman,
President and Chief Executive Officer
Chris Black
Senior Vice President
Forest Products, Paper & Board Business
Dr. Erin M. Byers
Senior Vice President
High Purity and High Yield
Cellulose Business
John P. Carr
Chief Accounting Officer
and Vice President, Controller
Michael R. Herman
Senior Vice President and
General Counsel
William R. Manzer
Senior Vice President
Manufacturing Operations
James L. Posze
Senior Vice President
Human Resources
Frank A. Ruperto
Chief Financial Officer
and Senior Vice President
Finance and Strategy
May 20, 2019
4:00 p.m.
DoubleTree Hotel
1201 Riverplace Boulevard
Jacksonville, Florida 32207
TRANSFER AGENT AND REGISTRAR
Please contact Computershare for all essential
stockholder services, including:
• Change of address
• Lost dividend checks
• Changes in registered ownership
• Certificates of transfer
Inside the U.S.
Outside the U.S.
(866) 246-0322
(201) 680-6578
Rayonier Advanced Materials Inc.
c/o Computershare
P.O. Box 505000
Louisville, KY 40233-5000
Overnight correspondence should be sent to:
Computershare
462 South 4th Street
Suite 1600
Louisville, KY 40202
Online Inquiries:
https://www-us.computershare.com/investor/contact
Stockholder website:
https://www.computershare.com/investor
INVESTOR RELATIONS
Michael H. Walsh
Treasurer and Vice President, Investor Relations
(904) 357-4600
mickey.walsh@rayonieram.com
CORPORATE HEADQUARTERS
1301 RIVERPLACE BOULEVARD • SUITE 2300
JACKSONVILLE, FL 32207
WWW.RAYONIERAM.COM