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4: EX-32.0 Certification -- §906 - SOA'02 HTML 25K
10: R1 Cover Page HTML 78K
11: R2 Consolidated Statements of Income (Loss) HTML 130K
12: R3 Consolidated Statements of Comprehensive Income HTML 55K
(Loss)
13: R4 Consolidated Balance Sheets HTML 124K
14: R5 Consolidated Balance Sheets (Parenthetical) HTML 34K
15: R6 Consolidated Statements of Cash Flows HTML 125K
16: R7 Basis of Presentation and New Accounting HTML 29K
Pronouncements
17: R8 Discontinued Operations HTML 62K
18: R9 Accounts Receivable, Net HTML 32K
19: R10 Inventory HTML 32K
20: R11 Leases HTML 93K
21: R12 Accrued and Other Current Liabilities HTML 36K
22: R13 Debt and Finance Leases HTML 50K
23: R14 Environmental Liabilities HTML 36K
24: R15 Derivatives Instruments HTML 52K
25: R16 Fair Value Measurements HTML 61K
26: R17 Accumulated Other Comprehensive Income (Loss) HTML 53K
27: R18 Stockholders' Equity HTML 131K
28: R19 Earnings Per Share of Common Stock HTML 70K
29: R20 Incentive Stock Plans HTML 51K
30: R21 Employee Benefit Plans HTML 66K
31: R22 Income Taxes HTML 31K
32: R23 Segment and Geographical Information HTML 75K
33: R24 Commitments and Contingencies HTML 34K
34: R25 Supplemental Disclosures of Cash Flows Information HTML 31K
35: R26 Basis of Presentation and New Accounting HTML 36K
Pronouncements (Policies)
36: R27 Discontinued Operations (Tables) HTML 63K
37: R28 Accounts Receivable, Net (Tables) HTML 32K
38: R29 Inventory (Tables) HTML 33K
39: R30 Leases (Tables) HTML 58K
40: R31 Accrued and Other Current Liabilities (Tables) HTML 35K
41: R32 Debt and Finance Leases (Tables) HTML 51K
42: R33 Environmental Liabilities (Tables) HTML 30K
43: R34 Derivatives Instruments (Tables) HTML 51K
44: R35 Fair Value Measurements (Tables) HTML 59K
45: R36 Accumulated Other Comprehensive Income (Loss) HTML 53K
(Tables)
46: R37 Stockholders' Equity (Tables) HTML 123K
47: R38 Earnings Per Share of Common Stock (Tables) HTML 73K
48: R39 Incentive Stock Plans (Tables) HTML 48K
49: R40 Employee Benefit Plans (Tables) HTML 61K
50: R41 Segment and Geographical Information (Tables) HTML 71K
51: R42 Supplemental Disclosures of Cash Flows Information HTML 31K
(Tables)
52: R43 Discontinued Operations - Narrative (Details) HTML 39K
53: R44 Discontinued Operations - Income (Loss) from HTML 61K
Discontinued Operations (Details)
54: R45 Discontinued Operations - Other Discontinued HTML 31K
Operations Information (Details)
55: R46 Accounts Receivable, Net - Schedule of Accounts HTML 35K
Receivable (Details)
56: R47 Inventory (Details) HTML 35K
57: R48 Leases - Narrative (Details) HTML 43K
58: R49 Leases - Components of Lease Expense (Details) HTML 35K
59: R50 Leases - Balance Sheet Components (Details) HTML 36K
60: R51 Leases - Lease Maturity (Details) HTML 42K
61: R52 Accrued and Other Current Liabilities (Details) HTML 45K
62: R53 Debt and Finance Leases - Summary of Debt HTML 78K
(Details)
63: R54 Debt and Finance Leases - Narrative (Details) HTML 31K
64: R55 Debt and Finance Leases - Schedule of Maturities HTML 34K
of Long-term Debt (Details)
65: R56 Environmental Liabilities - Analysis of Activity HTML 40K
(Details)
66: R57 Environmental Liabilities - Narrative (Details) HTML 27K
67: R58 Derivatives Instruments - Derivative Instruments HTML 36K
Classified as Cash Flow Hedges (Details)
68: R59 Derivatives Instruments - After-tax Amounts of HTML 35K
Unrealized Gain in AOCL Related to Hedge
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69: R60 Fair Value Measurements (Details) HTML 49K
70: R61 Fair Value Measurements - Narrative (Details) HTML 37K
71: R62 Fair Value Measurements - Measurement Inputs HTML 36K
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72: R63 Accumulated Other Comprehensive Income (Loss) HTML 75K
(Details)
73: R64 Stockholders' Equity - Stockholders' Equity HTML 80K
(Details)
74: R65 Stockholders' Equity - Narrative (Details) HTML 41K
75: R66 Earnings Per Share of Common Stock - Schedule of HTML 87K
Earnings Per Share, Basic and Diluted (Details)
76: R67 Earnings Per Share of Common Stock - Schedule of HTML 32K
Antidilutive Securities Excluded from Computation
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77: R68 Incentive Stock Plans - Narrative (Details) HTML 38K
78: R69 Incentive Stock Plans - Schedule of Outstanding HTML 90K
Awards (Details)
79: R70 Employee Benefit Plans - Narrative (Details) HTML 26K
80: R71 Employee Benefit Plans (Details) HTML 53K
81: R72 Income Taxes (Details) HTML 35K
82: R73 Segment and Geographical Information - Segment HTML 71K
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.01 par value
iRYAM
iNew
York Stock Exchange
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.
iYesx No
o
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).
iYesx No o
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.
Large accelerated filer
o
iAccelerated
filer
x
Non-accelerated filer
o
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ix
The
registrant had i63,971,163 shares of common stock, $.01 par value per share, outstanding as of August 1, 2022.
Investment
in GreenFirst equity securities (Note 10)
i—
i38,510
Prepaid
and other current assets
i80,596
i50,597
Total
current assets
i701,462
i776,120
Property,
Plant and Equipment (net of accumulated depreciation of $i1,678,696 at June 25, 2022 and $i1,642,442
at December 31, 2021)
i1,165,346
i1,146,162
Deferred
Tax Assets
i333,720
i335,119
Intangible
Assets, net
i27,928
i31,432
Other
Assets
i153,685
i156,191
Total
Assets
$
i2,382,141
$
i2,445,024
Liabilities
and Stockholders’ Equity
Current Liabilities
Accounts payable
$
i183,876
$
i169,456
Accrued
and other current liabilities (Note 6)
i148,232
i136,124
Debt
due within one year (Note 7)
i34,966
i37,680
Current
environmental liabilities (Note 8)
i11,291
i11,303
Total
current liabilities
i378,365
i354,563
Long-Term
Debt (Note 7)
i870,487
i891,031
Long-Term
Environmental Liabilities (Note 8)
i159,682
i159,919
Pension
and Other Postretirement Benefits
i163,690
i170,317
Deferred
Tax Liabilities
i20,686
i20,485
Other
Long-Term Liabilities
i28,392
i34,366
Commitments
and Contingencies (Note 18)
i
i
Stockholders’
Equity
Common stock, ii140,000,000/
shares authorized at $ii0.01/ par value, ii63,971,163/
and ii63,738,409/ issued and outstanding, as of June 25,
2022 and December 31, 2021, respectively
(Dollar amounts in thousands unless otherwise stated)
1. iBasis
of Presentation and New Accounting Pronouncements
i
Basis of Presentation
The unaudited consolidated financial statements and notes thereto of Rayonier Advanced Materials Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion
of management, these consolidated financial statements and notes reflect all adjustments (all of which are normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. These statements and notes should be read in conjunction with the consolidated financial statements and supplementary data included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 1, 2022.
As a result of the sale of its lumber and newsprint assets in August 2021 to GreenFirst Forest Products, Inc. (“GreenFirst”), the Company
presents the results for those operations as discontinued operations. Unless otherwise stated, information in these notes to consolidated financial statements relates to continuing operations. The Company presents businesses that represent components as discontinued operations when they meet the criteria for held for sale or are sold, and their disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results. See Note 2 —Discontinued Operationsfor additional information.
i
New
or Recently Adopted Accounting Pronouncements
There have been no new or recently adopted accounting pronouncements impacting the Company’s unaudited consolidated interim financial statements.
iSubsequent Events
Events and transactions subsequent to the consolidated balance sheets date have been evaluated for potential recognition and disclosure
through the date of issuance of these Consolidated Financial Statements. No subsequent events were identified.
5
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
2. iDiscontinued
Operations
On August 28, 2021, the Company completed the sale of its lumber and newsprint facilities and certain related assets located in Ontario and Québec Canada, to GreenFirst for $i232 million, paid in cash, i28.7 million
shares of GreenFirst’s common stock and a credit note issued to the Company by GreenFirst in the amount of CAD $i8 million (approximately USD $i5 million
after present value discount). The Company recently sold the GreenFirst common shares for $i43 million. Prior to the sale, the GreenFirst common shares were accounted for at fair value, with changes in fair value recorded in the Consolidated Statements of Income and Comprehensive Income. See Note 10 — Fair Value Measurements for additional information.
The
cash received at closing was preliminary and subject to final purchase price and other sale-related adjustments. During the first quarter of 2022, the Company trued-up certain sale-related items with GreenFirst for a total net cash outflow of $i3 million, as previously disclosed. Pursuant to the terms of the asset purchase agreement, GreenFirst and the
Company continue efforts to finalize the closing inventory valuation adjustment.
In connection with the transaction, the parties entered into a Transition Services Agreement ("TSA") whereby the Company would provide certain transitional services to GreenFirst, including information technology, accounting, treasury and other services following the closing of the transaction. The transitional services have been completed and the TSA was terminated during the second quarter of 2022.
i
Income
from discontinued operations is comprised of the following:
Selling,
general and administrative expenses and other
i1,953
(i10,428)
i1,495
(i18,894)
Operating
income
i2,279
i114,987
i1,648
i170,256
Interest
expense (b)
i—
(i2,703)
i—
(i5,317)
Other
non-operating income
(i4)
i368
(i9)
i713
Income
from discontinued operations before income taxes
i2,275
i112,652
i1,639
i165,652
Income
tax benefit (expense)
(i599)
i1,279
(i434)
(i62,538)
Income
from discontinued operations, net of taxes
$
i1,676
$
i113,931
$
i1,205
$
i103,114
(a) There
were iino/
intercompany sales for the three and six months ended June 25, 2022 and $i10 million and $i22 million
for three months and six months ended June 26, 2021, respectively.
(b) The Company allocated interest expense to discontinued operations based on the total portion of debt not attributable to other operations repaid as a result of the transaction.
Other discontinued operations information is as follows:
(a) Accounts
receivable, other consists primarily of value added/consumption taxes, grants receivable and accrued billings due from government agencies.
The
Company’s operating and finance leases are primarily for corporate offices, warehouse space, rail cars and equipment. As of June 25, 2022, the Company’s leases have remaining lease terms of i1 year to i14.4
years with standard renewal and termination options available at the Company’s discretion. Certain equipment leases have purchase options at the end of the term of the lease, which are not included in the right of use (“ROU”) assets as it is not reasonably certain that the Company will exercise such options. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company uses its incremental borrowing rate in determining the present value of lease payments unless the lease provides an implicit or explicit
interest rate. The weighted average discount rate used in determining the operating lease ROU assets and liabilities as of June 25, 2022 and December 31, 2021 was i7.7 percent and i7.6
percent, respectively. The weighted average discount rate used in determining the finance lease ROU assets and liabilities as of June 25, 2022 and December 31, 2021 was ii7.0/
percent.
7
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
iThe Company’s operating and finance lease cost is as follows:
As
of June 25, 2022, the weighted average remaining lease term is i5.3 years and i4.3 years for operating leases and financing leases, respectively. As of December 31,
2021, the weighted average remaining lease term is i5.3 years and i4.9 years for operating leases and finance leases, respectively. Cash used in operating activities includes approximately $i2
million and $i3 million from operating lease payments made during the six months ended June 25, 2022 and June 26, 2021, respectively. Finance lease cash flows were immaterial during the six months ended June 25, 2022 and June 26, 2021.
As of June 25, 2022 and December
31, 2021, assets acquired under finance leases of $i2 million and $i2 million, respectively, are reflected in Property, Plant and Equipment, net. The
Company’s finance leases are included as debt and the maturities for the remainder of 2022 and the next four years and thereafter are included in Note 7 — Debt and Finance Leases.
iThe Company’s consolidated balance sheet includes the following operating lease assets and liabilities:
(a)
Includes CAD $i25 million (approximately $i20 million) associated with funds received in 2021 for the Canada Emergency Wage Subsidy (“CEWS”). All CEWS claims
are subject to mandatory audit. The Company will recognize amounts from these claims in income at the time that there is sufficient evidence that it will not be required to repay such amounts.
7. iDebt and Finance Leases
i
The
Company’s debt and finance leases included the following:
ABL Credit Facility due 2025, $i108
million available, bearing interest of approximately i1.63% LIBOR plus i2.25%, interest rate of i3.88%
at June 25, 2022
$
i—
$
i—
Senior
Secured Notes due 2026 at a fixed interest rate of i7.625%
i475,000
i475,000
Senior
Notes due 2024 at a fixed interest rate of i5.5%
i349,185
i369,185
Canadian
dollar, fixed interest rate term loans with rates ranging from i5.5% to i6.86% and maturity dates ranging from July 2022 through April 2028, secured by certain assets of the
Temiscaming mill
i60,167
i65,451
Other
loans (a)
i21,150
i18,280
Short-term
factoring facility-France
i5,398
i7,118
Finance
lease obligation
i1,965
i2,138
Total
debt principal payments due
i912,865
i937,172
Less:
Debt premium, original issue discount and issuance costs, net
(i7,412)
(i8,461)
Total
debt
i905,453
i928,711
Less:
Debt due within one year
(i34,966)
(i37,680)
Long-term
debt
$
i870,487
$
i891,031
(a)
Loans for energy and bioethanol projects in France.
/
9
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
On May 13, 2022, the Company repurchased $i20 million
of its i5.5% Senior Notes due 2024 (the “Unsecured Notes”) through open-market transactions and retired such Unsecured Notes for approximately $i20 million in cash.
i
As of June 25, 2022, debt payments due during the remainder of 2022, the next four years and thereafter are as follows:
Debt Principal Payments
Remainder of 2022
$
i30,111
2023
i10,527
2024
i360,320
2025
i11,174
2026
i485,563
Thereafter
i13,205
Total
principal payments
$
i910,900
/
8. iEnvironmental
Liabilities
i
An analysis of liabilities for the six months ended June 25, 2022 is as follows:
In
addition to the estimated liabilities, the Company is subject to the risk of reasonably possible additional liabilities in excess of the established reserves due to potential changes in circumstances and future events, including, without limitation, changes to current laws and regulations; changes in governmental agency personnel, direction, philosophy and/or enforcement policies; developments in remediation technologies; increases in the cost of remediation, operation, maintenance and monitoring of its environmental liability sites; changes in the volume, nature or extent of contamination to be remediated or monitoring to be undertaken; the outcome of negotiations with governmental agencies and non-governmental parties; and changes in accounting rules or interpretations. Based on information available as of June 25, 2022, the
Company estimates this exposure could range up to approximately $i85 million, although no assurances can be given that this amount will not be exceeded given the factors described above. These potential additional costs are attributable to several sites and other applicable liabilities. Further, this estimate excludes reasonably possible liabilities which are not currently estimable primarily due to the factors discussed above.
Subject to the previous
paragraph, the Company believes established liabilities are sufficient for probable costs expected to be incurred over the next i20 years with respect to its environmental liabilities. However, no assurances are given they will be sufficient for the reasons described above, and additional liabilities could have a material adverse effect on the Company’s financial position, results of operations and cash flows.
10
Rayonier
Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
9. iDerivative Instruments
The Company’s earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates. The
Company allows for the use of derivative financial instruments to manage interest rate and foreign currency exchange rate exposure but does not allow derivatives to be used for speculative purposes.
All derivative instruments are recognized on the consolidated balance sheets at their fair value and are either designated as a hedge of a forecasted transaction or undesignated. Changes in the fair value of a derivative designated as a hedge are recorded in 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.
In December 2020, the Company terminated all outstanding
derivative instruments, which had been previously designated as hedging instruments and had various maturity dates through 2028. Accumulated gains and losses associated with these instruments were deferred as a component of accumulated other comprehensive income (loss) to be recognized in earnings as the underlying hedged transactions occur and affect earnings.
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.
There were no derivatives designated as hedging instruments during the three and six months ended June 25, 2022. iThe
effects of derivatives designated as hedging instruments, the related changes in AOCI and the gains and losses in income for the three and six months ended June 26, 2021, is as follows:
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
10. iFair Value Measurements
i
The
following table presents the carrying amount, estimated fair values and categorization under the fair value hierarchy for financial instruments held by the Company, using market information and what management believes to be appropriate valuation methodologies:
The
Company uses the following methods and assumptions in estimating the fair value of its financial instruments:
Cash and cash equivalents — Cash and cash equivalents are all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase and the carrying amount is equal to fair market value. The Company had $i2 million of money
market funds as of June 25, 2022, measured using level 1 inputs. The Company did inot have money market funds as of December 31, 2021.
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.
/
Investment in GreenFirst shares — The Company received i28,684,433 common shares of GreenFirst in connection with the sale of the lumber and newsprint
assets to GreenFirst, which the Company was required to hold for a minimum of six months following the close of the transaction. Accordingly, prior to February 28, 2022, the fair value of these shares reflected a discount for lack of marketability (“DLOM”) given the restriction on sale by the Company. The primary inputs in the fair value estimate during the minimum holding period were expected term, dividend yield, volatility and risk-free rate. All inputs to the DLOM were observable. GreenFirst is based in Canada and currently does not pay a dividend. On May 2, 2022, the Company sold the i28,684,433
for $i43 million. The shares sale agreement contains a purchase price protection clause whereby the Company is entitled to participate in further share price appreciation under certain circumstances over the next i18
months.
i
The following were the key inputs at each measurement date:
Net
comprehensive loss on derivative instruments, net of tax
i157
(i2,853)
Balance,
end of period
(i690)
(i1,019)
Foreign
currency translation adjustments:
Balance, beginning of year
(i6,774)
i11,145
Foreign
currency translation adjustment, net of tax of $i0 and $i0
(i15,864)
(i6,221)
Balance,
end of period
(i22,638)
i4,924
Accumulated
other comprehensive income (loss), end of period
$
(i96,281)
$
(i136,045)
(a)The
AOCI components for defined benefit pension and post-retirement plans are included in the computation of net periodic benefit cost. See Note 15— Employee Benefit Plans for additional information.
/
(b)Reclassifications of foreign currency exchange contracts are recorded in cost of sales, other operating income or non-operating income as appropriate. See Note 9 —Derivative Instruments for additional information.
13
Rayonier
Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
12. iStockholders' Equity
i
An
analysis of stockholders’ equity is shown below (share amounts not in thousands):
(a)
Repurchased to satisfy the tax withholding requirements related to the issuance of stock under the Rayonier Advanced Materials Incentive Stock Plan.
/
14
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
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 $i100 million. During the three and six months ended June 25, 2022, and June 26, 2021, the Company did not repurchase any common shares under this buyback program. As of June 25, 2022, there was approximately $i60
million of share repurchase authorization remaining under the program. The Company does not expect to utilize any further authorization in the near future.
Shareholder Rights Plan
On March 21, 2022, the Company adopted a shareholder rights plan (the “Rights Agreement”) whereby a significant penalty is imposed upon any person or group which acquires beneficial ownership of i10%
or more of the Company Common Stock without the approval of the Board of Directors (the “Board”). Also on this date, the Board declared a dividend of ione preferred share purchase right (a “Right”) for each outstanding share of common stock of the Company, par value $i0.01
per share (“Company Common Stock”), which was paid to Company stockholders of record as of the close of business on March 31, 2022.
The Rights trade with, and are inseparable from, shares of the Company Common Stock. Each Right will allow its holder to purchase from the Companyioneone-hundredth of a share of Series A Junior Participating Preferred Stock for $i35.00, once the Rights become exercisable. This portion of a Preferred Share will give the stockholder approximately the same dividend, voting and liquidation rights as would one share of Company Common Stock. The Rights will not be exercisable until 10 days after the public announcement or public disclosure that a person or group has become an “Acquiring Person” by obtaining beneficial ownership of i10%
or more of the outstanding Company Common Stock (including certain derivative positions), subject to certain exceptions. The Rights will expire on March 20, 2023.
15
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
13. iEarnings
Per Share of Common Stock
i
The following table provides details of the calculations of basic and diluted earnings per share (share and per share amounts not in thousands):
The Company’s total stock-based compensation for the three months ended June 25, 2022, and June 26, 2021 was expense of $i4 million and $i1
million, respectively. Stock based compensation expense for the six months ended June 25, 2022 and June 26, 2021 was $i7 million and $i385 thousand,
respectively.
The Company made new grants of restricted stock units and performance-based stock units to certain employees during the first six months of 2022. The 2022 restricted stock unit awards cliff vest after ithree years. The 2022 performance-based stock unit awards measure total shareholder return (“TSR”) on an absolute basis and relative to peers. Participants can earn between
i0 and i250
percent of the target award. Performance below the threshold for the absolute TSR would result in a izero payout for the TSR metric. There is a performance-based stock award and cash unit stock award that will be measured using the same objectives but paid and accounted for separately. As required by Accounting Standards Codification 718, Compensation-Stock Compensation, the portion of the
award to be settled in cash is classified as a liability and remeasured to fair value at the end of each reporting period until settlement.
16
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
In March 2022, the performance-based share units granted in 2019 vested without meeting the performance thresholds, resulting in no stock units being awarded and no shares of common stock issued.
i
The
following table summarizes the activity on the Company’s incentive stock awards for the six months ended June 25, 2022:
The Company has defined benefit pension and other long-term and postretirement plans covering certain union and non-union employees, primarily in the U.S. and Canada. The defined benefit pension plans are closed to new participants. The liabilities for these plans are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events.
During 2019, the Company settled certain Canadian pension liabilities through the purchase of annuity contracts with an insurance company. The settlement resulted
in the recognition of a $ii1/ million
loss during the three and six months ended June 26, 2021. Additionally, the Company recorded an additional $ii1/ million
loss during the three and six months ended June 25, 2022, related to the final asset surplus distribution to the plans’ participants. The settlements were recognized in “Other components of net periodic benefit costs” in the Consolidated Statements of Income and Comprehensive Income (Loss) for the three and six months ended June 26, 2021, and in “Other components of net periodic benefit costs” in the Consolidated Statements of Income for the three and six months ended June 25, 2022.
17
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
i
The
components of net periodic benefit costs from these plans that have been recorded are shown in the following table:
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 and amortization of losses are included in other components of pension and OPEB, excluding service cost on the consolidated statement of income.
16. iIncome Taxes
The
Company’s effective tax rate on the loss from continuing operations for the three and six months ended June 25, 2022, was an expense of i18 percent and i12
percent, respectively, compared to an effective tax benefit rate of i153 percent and i77
percent on the loss from continuing operations for the three and six months ended June 26, 2021.
The current quarter and year to date June 25, 2022 effective rate differs from the federal statutory rate of 21 percent primarily due to disallowed interest deductions in the U.S. and nondeductible executive compensation, partially offset by US tax credits and tax return to accrual adjustments.
The effective tax rate benefit for the three and six months ended June 26, 2021 differs from the federal statutory rate primarily due to a tax benefit recognized by remeasuring the Company’s Canadian deferred tax assets
at a higher Canadian blended statutory rate. The statutory tax rate is higher as a result of changing the allocation of income between the Canadian provinces as a result of the sale of Forest Products and Newsprint. Other factors impacting the effective benefit rate are return to accrual adjustments and tax credits, partially offset by nondeductible interest expense in the U.S. and lower tax deductions on vested stock compensation.
The Company’s deferred tax assets include approximately $i18 million
of disallowed U.S. interest deductions that the Company does not believe it will be able to realize, including $i7 million recognized as a reduction to tax expense in the six months ended June 26, 2022. In December of 2019 the American Institute of Certified Public Accountants (“AICPA”) issued Technical Questions and Answers (“TQA”) 3300.01-02 which asserts that certain material evidence regarding the realizability
of disallowed U.S. interest deductions should be ignored when assessing the need for a valuation allowance. In strict
18
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
compliance with the AICPA’s TQA, the Company has not recognized a valuation allowance on a portion of the deferred tax assets generated from disallowed interest.
The Company has a $i21 million receivable
related to a U.S. federal tax refund, which is expected to be collected within the next twelve months.
There has been a $i1 million increase to the balance of unrecognized tax benefits reported at December 31, 2021.
17. iSegment
and Geographical Information
The Company operates in the following business segments: High Purity Cellulose, Paperboard, High-Yield Pulp and Corporate. The Corporate operations consist primarily of senior management, accounting, information systems, human resources, treasury, tax and legal administrative functions that provide support services to the operating business units. The Company allocates a portion of the cost of maintaining these support functions to its operating units.
The Company evaluates the performance of its segments based on operating income. Intersegment sales consist primarily of High-Yield
Pulp sales to Paperboard. Intersegment sales prices are at rates that approximate market for the respective operating area.
i
Net sales, disaggregated by product-line, was comprised of the following:
The Company has no material changes to the purchase obligations presented in Note 21 — Commitments and Contingencies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 1, 2022, that are outside the normal course of business for the six months ended June 25, 2022. The Company’s purchase obligations continue to primarily consist of
commitments for the purchase of natural gas, steam energy, wood chips, and electricity contracts entered into within the normal course of business.
The Company leases certain buildings, machinery and equipment under various operating leases. See Note 5 — Leases, for additional information.
Litigation and Contingencies
Duties on Canadian softwood lumber sold to the U.S. The Company previously operated isix
softwood lumber mills in Ontario and Quebec, Canada and exported softwood lumber into the United States from Canada. In connection with these exports, the Company paid approximately $i112 million in softwood lumber duties through August 28, 2021, recorded as expense in the periods incurred. The Company currently has a $i22 million
long-term receivable associated with the December 2020 and 2021 determinations of the revised rates for the 2017, 2018 and 2019 periods. Cash is not expected to return to the Company until final resolution of the softwood lumber dispute, which remains subject to legal challenges and to USDOC further administrative review processes covering periods after December 31, 2019. As part of the sale of its lumber assets, the Company retained all rights and obligations to softwood lumber duties, generated or incurred through the closing date of the transaction.
Other. In addition to the above, 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.
Guarantees
and Other
The Company provides financial guarantees as required by creditors, insurance programs and various governmental agencies. As of June 25, 2022, the Company had net exposure of $i38 million from various standby letters of credit, primarily for financial assurance relating to environmental
remediation, credit support for natural gas and electricity purchases, and guarantees related to foreign retirement plan obligations. These standby letters of credit represent a contingent liability. The Company would only be liable upon its default on the related payment obligations. The letters of credit have various expiration dates and will be renewed as required.
The Company had surety bonds of $i89
million as of June 25, 2022, primarily to comply with financial assurance requirements relating to environmental remediation and post closure care, to provide collateral for the Company’s workers’ compensation program, and to guarantee taxes and duties for products shipped internationally. These surety bonds expire at various dates and are expected to be renewed annually as required.
LignoTech Florida (“LTF”) is a venture in which the Company owns i45
percent and its partner Borregaard ASA owns i55 percent. The Company is a guarantor of LTF’s financing agreements and, in the event of default, expects it would only be
20
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited)
(Continued)
liable for its proportional share of any repayment under the agreements. The Company’s proportion of the LTF financing agreement guarantee was $i32 million at June 25, 2022.
The Company has not recorded any liabilities
for these financial guarantees in its consolidated balance sheets, either because the Company has recorded the underlying liability associated with the guarantee or the guarantee is dependent on the Company’s own performance and, therefore, is not subject to the measurement requirements or because the Company has calculated the estimated fair value of the guarantee and determined it to be immaterial based upon the current facts and circumstances that would trigger a payment obligation.
It is not possible to determine the maximum potential amount of the liability under these potential obligations due to the unique set of facts and circumstances likely to be involved with
each provision.
As of June 25, 2022, all of the Company’s collective bargaining agreements covering its unionized employees were current.
19. iSupplemental Disclosures of Cash Flow Information
i
Supplemental
disclosures of cash flows information were comprised of the following for the six months ended:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
When we refer to “we,”“us,”“our” or “the Company,” we mean Rayonier Advanced Materials Inc. and its consolidated subsidiaries. References herein to “Notes to Consolidated Financial Statements” refer to the Notes to the Consolidated Financial Statements of Rayonier Advanced Materials Inc. included in Item 1 of this Quarterly Report on Form 10-Q (the “Report.”)
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended
to provide a reader of our consolidated financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors which may affect future results. This MD&A should be read in conjunction with our 2021 Annual Report on Form 10-K and information contained in our subsequent Forms 8-K and other reports to the U.S. Securities and Exchange Commission (the “SEC”).
We operate in the following business segments: High Purity Cellulose, Paperboard, High-Yield Pulp and Corporate.
As a result of the sale of the lumber and newsprint facilities and certain related assets completed in August 2021, the lumber and newsprint operations are presented as discontinued operations and certain prior year amounts are reclassified to conform to this presentation. Unless otherwise stated, information in this
MD&A relates to continuing operations. See Note 2 —Discontinued Operationsfor additional information on the sale.
Note About Forward-Looking Statements
Certain statements in 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 in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC, 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.
Our operations are subject to a number of risks and uncertainties including, but not limited to, those listed below. When considering an investment in our securities, you should carefully read and consider these risks, together with all other information in our Annual Report on Form 10-K for the year ended December
31, 2021 as filed with the SEC and our other filings and submissions to the SEC, which provide much more information and detail on the risks described below. If any of the events described in the following risk factors actually occur, our business, financial condition or operating results, as well as the market price of our securities, could be materially adversely affected. These risks and events include, without limitation:
22
Epidemic and Pandemic Risks
•We are subject to risks associated with epidemics and pandemics, including the COVID-19 pandemic and related impacts. The nature and extent of ongoing and future impacts of the pandemic are highly uncertain and unpredictable.
Macroeconomic
and Industry Risks
•The businesses we operate are highly competitive which may result in fluctuations in pricing and volume that can materially adversely affect our business, financial condition and results of operations.
•Changes in raw material and energy availability and prices could have a material adverse effect on our business, results of operations and financial condition.
•We are subject to material risks associated with doing business outside of the United States.
•Currency fluctuations may have a material negative impact on our business, financial condition and results of operations.
•Restrictions
on trade through tariffs, countervailing and anti-dumping duties, quotas and other trade barriers, in the United States and internationally, could materially adversely affect our ability to access certain markets.
•Our business, financial condition and results of operations could be adversely affected by disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine or other geopolitical conflict.
Business and Operational Risks
•Our ten largest customers represent approximately 40 percent of our 2021 revenue, and the loss of all or a substantial portion of our revenue from these large customers could have a material adverse effect on our business.
•A
material disruption at one of our major manufacturing facilities could prevent us from meeting customer demand, reduce our sales and profitability, increase our cost of production and capital needs, or otherwise materially adversely affect our business, financial condition and results of operation.
•The availability of, and prices for, wood fiber may have a material adverse impact on our business, results of operations and financial condition.
•Our operations require substantial capital.
•We depend on third parties for transportation services and increases in costs and the availability of transportation could materially adversely affect our business.
•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 materially 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 material negative impact on our business.
•The risk of loss of the Company’s intellectual property and sensitive data, or disruption of its manufacturing operations, in each case due to cyberattacks or cybersecurity breaches, could materially adversely impact the
Company.
Regulatory Risks
•Our business is subject to extensive environmental laws, regulations and permits that may materially restrict or adversely affect how we conduct business and our financial results.
•The Company considers and evaluates climate-related risks in three general categories; Regulatory, Transition to a low-carbon economy, and Physical risks related to climate-change.
•The potential longer-term impacts of climate-related risks remain uncertain at this time.
Financial Risks
•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 debt obligations that could materially adversely affect our business and our ability to meet our obligations.
•The phase-out of the London Inter Bank Offered Rate (“LIBOR”) as an interest rate benchmark in 2023 may impact our borrowing costs.
•Challenges in the commercial and credit environments, including material increases in interest rates, may materially adversely affect our future access to capital.
23
•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.
Company’s Common Stock and Certain Corporate Matters Risks
•Your percentage of ownership in the Company may be diluted in the future.
•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 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 Factor sin our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC.
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. Each non-GAAP measures is reconciled to each of its most directly comparable GAAP financial measures in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We believe these non-GAAP measures provide useful information to our Board of Directors, management and investors regarding certain trends relating to our financial condition
and results of operations. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses, purposes of determining management incentive compensation and budgeting, forecasting and planning purposes.
We do not consider 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.
Business
We are a global leader of cellulose-based technologies, which comprise a broad offering of high purity cellulose specialties, a natural polymer commonly used in the production of specialty chemicals and polymers for use in producing liquid crystal displays, filters, textiles and performance additives for pharmaceutical, food and other industrial applications. Starting from a tree and building upon more than 95 years of experience in cellulose chemistry, we provide high quality high-purity cellulose pulp products
that make up the essential building blocks for our customers’ products while providing exceptional service and value. We also produce unique, lightweight paperboard and a bulky, high-yield pulp for use in consumer products.
24
Recent Developments
•On May 13, 2022, we repurchased $20 million of our 5.50% Senior Notes due 2024 (the “Unsecured Notes”) through open-market transactions and retired such Unsecured Notes for approximately $20 million in cash.
•On May 2, 2022, we sold the 28,684,433
common shares of GreenFirst stock we received in connection with the sale of our lumber and newsprint assets in August 2021. The common shares were sold for $43 million. The shares sale agreement contains a purchase price protection clause whereby we are entitled to participate in further stock price appreciation under certain circumstances over the next 18 months.
•Our business has experienced a significant increase in the costs for wood, chemicals, energy and supply chain. In response, we announced a $146 per metric ton cost surcharge applicable to all shipments of our cellulose specialties, effective starting with shipments made on April 1, 2022 and later.
•Our fluff pulp now qualifies as an “Inspected Raw Material” by Nordic Swan Ecolabelling. The Nordic Swan Ecolabel sets
strict environmental requirements in all phases of manufacturing, including requirements for eco-friendly chemicals used in ecolabeled products. The status will appear on products made with our fluff pulp and indicates to consumers and commercial buyers that the product is sustainably produced and environmentally friendly.
•On March 21, 2022, our Board of Directors adopted a shareholder rights plan and declared a dividend of one preferred share purchase right for each outstanding share of our common stock, par value $0.01 per share. See Note 12 — Stockholders’ Equity for further information.
Market Assessment
Overall, we expect to exceed $160 million of Adjusted EBITDA for 2022, subject to ongoing supply chain constraints.Additionally,
we expect to reduce our Net Debt to $725 million by the end of the year.As we reduce this leverage ratio, we expect to refinance our Senior Notes due in June 2024.
High Purity Cellulose
Demand for cellulose specialties and commodity products remain strong. As such, average sales prices are expected to remain elevated in the third quarter. Sales volumes are expected to increase significantly as we increase productivity with the completion of all of our planned maintenance outages in the first half of 2022.However, total sales volumes remain dependent on managing ongoing supply-chain constraints. Overall, Adjusted EBITDA for the segment is expected to grow significantly in the third quarter compared to second quarter and for the full
year compared to 2021. The Company is also updating standard cellulose specialties contracts to allow for greater flexibility.
Paperboard
Paperboard prices continue to increase driven by strong demand in both commercial printing and packaging segments. Price increases are expected to offset raw material cost increases in the third quarter, while sales volumes are expected to stay consistent with prior quarter. As a result, Adjusted EBITDA is anticipated to remain stable in the coming quarter.
High-Yield Pulp
High-yield pulp markets remain positive with realized prices expected to increase in the third quarter. Sales
volumes remain dependent on production and supply chain constraints, while costs are expected to moderate slightly. Overall, Adjusted EBITDA is anticipated to improve in the coming quarter.
A Sustainable Future
For over 95 years, we have invested in renewable product offerings. As consumers demand sustainable products, our biorefinery model provides a platform to grow existing and new products to address needs of the changing economy. We remain enthusiastic about growing our biobased product offering. In the first six months of 2022, non-pulp sales in the High Purity Segment were $51 million primarily from sales of bioelectricity and lignin. We are investing in expanding our biomaterial product offering and expect to grow these sales and increase overall margins over time.
Our investment into
a bioethanol facility at our Tartas, France facility was expected to be operational in mid-2023. Given permitting delays, the project is currently behind schedule. Further updates will be provided as the schedule is finalized.
25
We also remain committed to further managing our environmental impact. Earlier this year, we established a goal to reduce carbon emissions by 40 percent by 2030, using 2020 as a base year.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements requires us to make estimates,
assumptions and judgments that affect our assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates.
For a full description of our critical accounting policies, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K. For recent accounting pronouncements see Item 1 of Part I, Financial Statements — Note 1 —Basis of Presentation and New Accounting Pronouncements for additional information.
Net sales increased by $58 million and $91 million, respectively, during the three and six months ended June 25, 2022 when compared to the same prior periods ended June 26, 2021 driven primarily by higher sales prices across all segments. For further discussion, see
Operating Results by Segment.
Operating income (loss) by segment was as follows:
The
operating results for the three and six month periods ended June 25, 2022, declined by $4 million and $20 million, respectively, when compared to the same prior year periods ended June 26, 2021, primarily due to increased costs driven by inflation on key inputs, including chemicals, wood fiber and energy costs, and lower sales volumes due to supply chain constraints and lower productions, which were offset by the higher sales prices across all segments.
Non-operating Expenses
Interest expense was flat at $16 million and increased $1 million to $33 million for the three and six months ended June 25, 2022, respectively, when compared to the same prior year period. See Note 7 — Debt and Finance Leases for
further information.
Included in non-operating expenses during the three and six months ended June 25, 2022, is a $4 million loss and $5 million gain, respectively, associated with the fair value of shares of GreenFirst received in connection with the sale of lumber and newsprint assets. See Note 10 — Fair Value Measurementsfor additional information.
Income Tax Benefit (Expense)
The effective tax rate for the second quarter 2022 loss on continuing operations was an expense of 18 percent compared to a benefit of 153 percent for the loss on continuing operations in the same quarter of 2021. The effective tax rate for the six months ended June 25, 2022, loss on continuing
operations was an expense of 12 percent compared to a benefit of 77 percent for the comparable prior year period. The 2022 effective tax rate differs from the statutory rate of 21 percent primarily due to disallowed interest deductions in the U.S. and nondeductible executive compensation, partially offset by U.S. tax credits and tax return to accrual adjustments. The 2021 effective tax rates differ from the statutory rate of 21 percent primarily due to a tax benefit recognized by remeasuring the Company’s Canadian deferred tax assets at a higher blended statutory tax rate in Canada. The statutory rate is higher as a result of changing the allocation of income between the Canadian provinces after the sale of Forest and Newsprint was completed. See Note 16 — Income Taxes for additional information.
28
Discontinued
Operations
As a result of the sale of lumber and newsprint assets, we are presenting prior year results for the Forest Products and Newsprint segments as discontinued operations.
The sale was completed on August 28, 2021. The cash received at closing was preliminary and subject to final purchase price and other sale-related adjustments. During the first quarter of 2022, the Company trued-up certain sale-related items with GreenFirst for a total net cash outflow of $3 million, as previously disclosed. No changes occurred during the second quarter of 2022 to the previously recorded gain on sale. Pursuant to the terms of the asset purchase agreement, GreenFirst and the
Company continue efforts to finalize the closing inventory valuation adjustment.
(a)
includes other sales consisting of electricity, lignin and other by-products to third-parties.
Total sales for the three months ended June 25, 2022, improved $47 million when compared to the same prior year quarter. Cellulose specialties sales volumes increased 9 percent and sales prices increased by 20 percent during the three months ended June 25, 2022, when compared to the same prior year period due to the impact of contract negotiations. Commodity product sales prices rose 10 percent while commodity product sales volumes decreased 12 percent due to lower production, supply chain constraints and lower commodities volumes in favor of higher specialties volumes. Included within net sales for the period was $24 million
of other sales, primarily from biobased energy and lignin.
(a)
includes other sales consisting of electricity, lignin and other by-products to third-parties.
29
Total sales for the six months ended June 25, 2022, improved $79 million when compared to the same prior year period. Cellulose specialties sales volumes increased 4 percent, while sales prices increased by 15 percent during the six months ended June 25, 2022, when compared to the same prior year period due to the impact of contract negotiations. Commodity product sales prices rose 21 percent driven by higher demand while commodity product sales
volumes decreased 11 percent due to lower production, supply chain constraints and lower commodities volumes in favor of higher specialties volumes. Included within net sales for the period was $51 million of other sales, primarily from biobased energy and lignin.
Changes in High Purity Cellulose operating income are as follows
(a) Sales Volume computed based on contribution margin.
Operating
income declined by $4 million during the three months ended June 25, 2022, to $7 million when compared to the same prior year quarter. Sales prices for the segment increased 20 percent during the current quarter driven by a 20 percent increase for cellulose specialties and a 10 percent increase in commodity prices. Total volumes increased by 1 percent when compared to the prior year quarter due to a 12 percent decline in commodities volumes offset by a 9 percent increase in specialties volumes. Costs increased compared to the prior year periods driven by inflation on key inputs, including chemicals, wood fiber and energy costs, and higher supply-chain expenses. Offsetting higher energy costs in the current period is a $5 million favorable impact related to sales of the majority of our excess emission allowances associated with the operations in Tartas, France.
(a) Sales Volume computed based on contribution margin.
Operating
results declined by $18 million during the six months ended June 25, 2022, to an operating loss of $1 million when compared to the same prior year period. Sales prices for the segment increased 19 percent during the current period driven by a 21 percent increase in commodity prices and a 15 percent increase for cellulose specialties. Total volumes declined 2 percent during the current period driven by lower production, supply chain constraints and lower commodities volumes in favor of higher specialties volumes. Costs increased compared to the prior year periods driven by inflation on key inputs, including chemicals, wood fiber and energy costs, and higher supply chain expenses. Offsetting higher energy costs in the current period is a $10 million favorable impact related to sales of the majority of our excess emission allowances associated with the operations in Tartas, France.
Sales
for the three months ended June 25, 2022, increased $6 million compared to the three months ended June 26, 2021. During the second quarter ended June 25, 2022, sales volumes decreased 10 percent while sales prices were up 25 percent when compared to the same prior year period driven by strong demand.
Sales
for the six months ended June 25, 2022, increased $12 million compared to the six months ended June 26, 2021. During the six months ended June 25, 2022, sales volumes decreased 8 percent while sales prices were up 22 percent when compared to the same prior year period driven by strong demand.
Changes in Paperboard operating income are as follows:
Operating income
for the three months ended June 25, 2022, increased $8 million when compared to the same prior year period as higher sales prices were offset by higher raw material pulp input costs and lower sales volumes driven by lower productivity.
Operating income
for the six months ended June 25, 2022, increased $8 million when compared to the same prior year period as higher sales prices were partially offset by higher raw material pulp input costs and lower sales volumes driven by lower productivity.
(a) Average sales prices and volumes for external sales only. For each of the three month periods ended June 25, 2022 and June 26,
2021, the High-Yield Pulp segment sold 17,000 metric tons of high-yield pulp for $7 million to the Paperboard segment. For the six months ended June 25, 2022 and June 26, 2021, the High-Yield Pulp segment sold 31,000 metric tons and 34,000 metric tons of high-yield pulp for $13 million and $14 million, respectively, to the Paperboard segment.
Changes in High-Yield Pulp net sales are as follows:
Sales
for the three months ended June 25, 2022, increased $3 million compared to the three months ended June 26, 2021. High-yield pulp sales prices increased 12 percent during the three months ended June 25, 2022, when compared to the same prior year period while sales volumes remained flat.
Sales
for the six months ended June 25, 2022, decreased $2 million compared to the six months ended June 26, 2021. High-yield pulp sales prices and volumes increased 15 percent and decreased 14 percent, respectively, during the six months ended June 25, 2022, when compared to the same prior year period. Higher sales prices were partially offset by lower sales volumes driven by supply chain constraints, lower productivity and higher input costs.
Changes in High-Yield Pulp operating income are as follows:
(a) Sales Volume computed based on contribution margin.
Operating
results for the second quarter ended June 25, 2022, decreased $3 million when compared to the same prior year period. Higher sales prices were more than offset by lower productivity and higher input and supply chain costs.
(a) Sales Volume computed based on contribution margin.
Operating
results for the six months ended June 25, 2022, decreased $3 million when compared to the same prior year period. Higher sales prices were more than offset by lower sales volumes, driven by supply chain constraints, and lower productivity and higher input costs.
The
operating loss for the three and six month periods ended June 25, 2022, increased by $5 million and $7 million, respectively, when compared to the same prior year period driven by an increase in severance and variable stock-based compensation costs partially offset by favorable foreign exchange impacts.
33
Liquidity and Capital Resources
Cash flows from operations, primarily driven by operating results, have historically been our primary source of liquidity and capital resources. As operating cash flows can be negatively impacted by fluctuations in market prices
for our commodity products as well as changes in demand for our products, we maintain a key focus on cash, managing working capital closely and optimizing the timing and level of our capital expenditures.
As of June 25, 2022, we are in compliance with all financial and other customary covenants. We believe our future cash flows from operations and availability under our ABL 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, defined benefit plan contributions, and repayment of debt maturities.
The non-guarantor subsidiaries had assets of $829 million, year-to-date revenue
of $124 million, covenant EBITDA for the last twelve months is a $39 million loss and liabilities of $263 million as of June 25, 2022.
On September 6, 2019, our Board of Directors suspended our quarterly common stock dividend. No dividends have been declared since. The declaration and payment of future common stock dividends, if any, 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 deem relevant. In addition, our debt facilities place limitations on the declaration and payment of future dividends.
On January 29, 2018, our Board of Directors authorized a $100 million common stock share buyback
program. For the three months ended June 25, 2022, and June 26, 2021, we did not repurchase any common shares under this buyback program. We do not expect to utilize any further authorization in the near future.
Material Cash Requirements
Our principal contractual commitments include standby letters of credit, surety bonds, guarantees, purchase obligations and leases. We utilize arrangements such as standby letters of credit and surety bonds 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. As part of our ongoing operations, we also periodically issue
guarantees to third parties. Our purchase obligations payments are expected to be made on natural gas, steam energy and wood chips purchase contracts. There have been no material changes outside the ordinary course of business to our material cash requirements during six months ended June 25, 2022.
A summary of liquidity and capital resources is shown below (in millions of dollars):
(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 ABL Credit Facility fluctuate based on eligible accounts receivable and inventory levels. At June 25, 2022, we had $146 million of gross availability and net available borrowings of $108 million after taking into account standby letters of credit of approximately $38 million. In addition to the availability under the ABL Credit Facility, we have $18 million available under an accounts receivable factoring line of credit in France.
(c) See Note 7 —Debt and Finance Leasesof our consolidated financial statements for additional information.
34
On
May 2, 2022, we sold our GreenFirst shares for $43 million. Additionally, we expect to receive $21 million from a U.S. federal tax refund in 2022.
With our next significant maturity in early 2024, we continue to monitor the capital markets and are prepared to opportunistically refinance the Senior Notes due June 1, 2024, at the appropriate time considering market conditions and all other relevant factors.We are confident that by executing on our strategy we can obtain a refinancing at acceptable terms based on market conditions.We may also use a portion of our cash balances to opportunistically repay debt or assist in a holistic refinancing of our capital structure.
Cash Flows (in millions
of dollars)
The following table summarizes our cash flows from operating, investing and financing activities for the six months ended:
Cash flows used for operating activities of continuing operations increased by $82 million during the six months ended June 25, 2022, to $36 million when compared to the same prior year period due to changes in working capital and other items, which were influenced by the impact of the planned extensive planned maintenance outages through the second quarter.
Cash flows used for investing activities of continuing operations increased $36 million during the six months ended June 25, 2022, when compared
to the same prior year period primarily from increased capital spending related to the planned maintenance outages in the current year. Cash flows from investing activities of discontinued operations increased $49 million to an inflow of $43 million due to the proceeds from the sale of GreenFirst equity securities in the current year.
Cash flows used for financing activities increased by $14 million during the six months ended June 25, 2022, to $22 million when compared to the same prior year period, primarily due to payments of long term debt offset by borrowing related to the bioethanol project at our Tartas facility. See Note 7 —Debt and Finance Leasesand Note 12 — Stockholders' Equity, to our consolidated
financial statements for additional 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. 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. Our 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. Our management uses EBITDA and adjusted EBITDA as performance measures and adjusted free cash flows as a liquidity measure. See Item 2 — Note about Non-GAAP Financial Measures for limitations associated with non-GAAP measures.
EBITDA is defined by SEC rules as earnings before interest, taxes, depreciation and amortization. EBITDA
is not necessarily indicative of results that may be generated in future periods.
Below is a reconciliation of Income (Loss) from Continuing Operations to EBITDA from continuing operations by segment (in millions of dollars):
EBITDA from continuing operations for the three and six months ended June 25,
2022, declined by $4 million and $16 million when compared to the same periods ended June 26, 2021, driven by higher key input costs due to inflation and lower volumes, offset by higher sales prices across all segments. Adjusted EBITDA from continuing operations for the three months ended June 25, 2022 was comparable to the same quarter in 2021 at $34 million, while Adjusted EBITDA from continuing
36
operations for the six months ended June 25, 2022, decreased by $12 million primarily driven by higher key input costs due to inflation, lower volumes due to supply chain constraints and lower production, offset by higher
sales prices across all segments. For the full discussion of changes to operating income, see Management’s Discussion of Results of Operations.
Adjusted free cash flows is defined as cash provided by operating activities of continuing operations adjusted for capital expenditures, net of proceeds from sale of assets, 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 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 of continuing operations to adjusted free cash flows of continuing operations for the respective periods (in millions of dollars):
Six Months Ended
Cash Flows from Operations to Adjusted Free Cash Flows Reconciliation
Cash
provided by (used for) operating activities - continuing operations
$
(36)
$
46
Capital expenditures (a)
(71)
(43)
Adjusted Free Cash Flows - continuing operations
$
(107)
$
3
(a) Capital
expenditures exclude strategic capital expenditures which are deemed discretionary by management. Strategic expenditures for the first six months of 2022 were approximately $16 million. Strategic capital expenditures for the same period of 2021 were approximately $4 million.
Adjusted free cash flows of continuing operations declined due to changes in working capital and other items as well as higher capital expenditures. For the full discussion of operating cash flows, see Management’s Discussion and Analysis of Cash Flows.
Item
3.
Quantitative and Qualitative Disclosures About Market Risk
Market and Other Economic Risks
We are exposed to various market risks, primarily changes in interest rates, currency and commodity prices. Our objective is to minimize the economic impact of these market risks. We may 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 9 — Derivative Instruments for additional information.
We manage our foreign currency exposures by balancing certain assets and liabilities denominated in
foreign currencies. We previously have, and may do so again, used foreign currency forward contracts to manage these exposures. The principal objective of such contracts is to minimize the potential volatility and financial impact of changes in foreign currency exchange rates. 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 High-Yield Pulp segment 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 factors. While these prices are not directly correlated to commodity dissolving wood pulp and paper pulp prices, changes in commodity dissolving wood pulp and paper pulp prices may impact competitors' actions which can lead to an impact in prices for cellulose specialties products. In addition, slightly over half of our cellulose specialties contracted volumes are under multi-year contracts
that expire between 2022 and 2024.
As of June 25, 2022, we had $5 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 an immaterial increase/decrease in interest payments and expense over a 12-month period.
37
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 June 25,
2022, was $853 million compared to the $898 million carrying value of 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 4.
Controls and Procedures
Disclosure
Controls and Procedures
Our 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 quarterly report on Form 10-Q, 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 that 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 quarterly report on Form 10-Q, 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 June 25, 2022.
During the quarter ended June 25, 2022, based upon the evaluation required by paragraph (d) of SEC 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.
38
Part II.
Other Information
Item
1.
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 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.
Item 1A.
Risk Factors
In addition to the risk factors previously disclosed in our 2021 Annual Report on Form 10-K, the following
risk factor is hereby added:
Our business, financial condition and results of operations could be adversely affected by disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine or other geopolitical conflict.
The military conflict between Russia and Ukraine, along with economic sanctions placed by Western countries on certain industry sectors and parties in Russia, have negatively impacted the global economy. While we have no direct operations in Russia or Ukraine, we have significant operations in Europe which have experienced shortages in key input materials and increased costs for transportation, energy, and raw material due to this conflict. Further escalation of geopolitical tensions could result in, among other things, gas shortages in Europe and disruptions
of operations for us, our customers and our suppliers, cyberattacks, lower consumer demand, and changes to foreign exchange rates and financial markets, any of which would adversely affect our business. These impacts could also directly affect North America and adversely impact our operations in this region. In addition, the effects of the ongoing conflict could heighten many of our known risks described in this Item 1A, Risk Factors.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer
Purchases of Equity Securities
The following table provides information regarding our purchases of Rayonier Advanced Materials common stock during the quarter ended June 25, 2022:
Period
Total Number of Shares Purchased (b)
Average
Price Paid per Share
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 (a)
March 27 to April 30
—
$
—
—
$
60,294,000
May
1 to May 28
—
$
—
—
$
60,294,000
May 29 to June 25
—
$
—
—
$
60,294,000
Total
—
—
(a) As
of June 25, 2022, approximately $60 million of share repurchase authorization remains under the authorization declared by the Board of Directors on January 29, 2018.
(b) Repurchased to satisfy the tax withholding requirements related to the issuance of stock under the Rayonier Advanced Materials Incentive Stock Plan.
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
Rights Agreement dated as of March 21, 2022, between Rayonier Advanced Materials Inc. and Computershare Trust Company,
N.A., which includes the form of Certificate of Designations as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C
Certification of Periodic Financial Reports Under Section 906 of the Sarbanes-Oxley Act of 2002
Furnished herewith
101
The following financial information from our Quarterly Report on Form 10-Q for the three
and six months ended June 25, 2022 formatted in Extensible Business Reporting Language (“XBRL”), includes: (i) the Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three and Six Months Ended June 25, 2022 and June 26, 2021; (ii) the Condensed Consolidated Balance Sheets as of June 25, 2022 and December 31, 2021; (iii) the Condensed Consolidated Statements of Cash Flows for the Six months Ended June 25, 2022 and June 26, 2021 and (iv) the Notes to Condensed Consolidated Financial Statements
Pursuant to the requirements 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.
