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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the transition period from              to             
Commission File Number 001-36285
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12893013&doc=11
RAYONIER ADVANCED MATERIALS INC.
Incorporated in the State of Delaware
I.R.S. Employer Identification No. 46-4559529
1301 RIVERPLACE BOULEVARD, SUITE 2300
JACKSONVILLE, FL 32207
(Principal Executive Office)
Telephone Number: (904) 357-4600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x        NO o

Indicate by check mark whether the registrant has submitted electronically 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 x       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  x
 
Accelerated filer  o
Non-accelerated filer  o
 
Smaller reporting company o
 
 
Emerging growth company o

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

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

The registrant had 49,799,883 shares of common stock, $.01 par value per share, outstanding as of May 6, 2019.




Table of Contents

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


Table of Contents

Part I.
Financial Information

Item 1.
Financial Statements

Rayonier Advanced Materials Inc.
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Unaudited)
(Dollars in thousands, except per share amounts)
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
Net Sales
$
482,780

 
$
521,992

Cost of Sales
(465,585
)
 
(441,640
)
Gross Margin
17,195

 
80,352

 
 
 
 
Selling, general and administrative expenses
(28,560
)
 
(23,192
)
Duties
(4,517
)
 
(8,327
)
Other operating income (expense), net
(2,587
)
 
(2,576
)
Operating Income (Loss)
(18,469
)
 
46,257

Interest expense
(14,774
)
 
(14,994
)
Interest income and other, net
651

 
842

Other components of pension and OPEB, excluding service costs
1,467

 
2,194

Income (Loss) Before Income Taxes
(31,125
)
 
34,299

Income tax (expense) benefit (Note 15)
9,075

 
(9,844
)
Net Income (Loss) Attributable to Rayonier Advanced Materials Inc.
(22,050
)
 
24,455

Mandatory convertible stock dividends
(3,365
)
 
(3,403
)
Net Income (Loss) Available to Rayonier Advanced Materials Inc.
Common Stockholders
$
(25,415
)
 
$
21,052

 
 
 
 
Earnings Per Share of Common Stock (Note 12)
 
 
 
Basic earnings (loss) per share
$
(0.52
)
 
$
0.41

Diluted earnings (loss) per share
$
(0.52
)
 
$
0.38

 
 
 
 
Comprehensive Income (Loss):
 
 
 
Net Income (Loss)
$
(22,050
)
 
$
24,455

Other Comprehensive Income (Loss), net of tax (Note 10)
 
 
 
Foreign currency translation adjustments
(5,352
)
 
7,749

Unrealized gain on derivative instruments
7,872

 
1,272

Net gain from pension and postretirement plans
1,891

 
2,397

Total other comprehensive income
4,411

 
11,418

Comprehensive Income (Loss)
$
(17,639
)
 
$
35,873

See Notes to Condensed Consolidated Financial Statements.

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Rayonier Advanced Materials Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
 
March 30, 2019
 
December 31, 2018
Assets
Current Assets
 
 
 
Cash and cash equivalents
$
67,991

 
$
108,966

Accounts receivable, net (Note 2)
201,734

 
222,377

Inventory (Note 3)
346,831

 
321,377

Prepaid and other current assets
68,337

 
63,372

Total current assets
684,893

 
716,092

 
 
 
 
Property, Plant and Equipment (net of accumulated depreciation of $1,418,310 at March 30, 2019 and $1,388,234 at December 31, 2018)
1,365,826

 
1,381,039

Deferred Tax Assets
413,211

 
406,957

Intangible Assets, net
50,708

 
52,460

Other Assets
140,773

 
122,538

Total Assets
$
2,655,411

 
$
2,679,086

 
 
 
 
Liabilities and Stockholders’ Equity
Current Liabilities
 
 
 
Accounts payable
$
167,861

 
$
192,740

Accrued and other current liabilities (Note 5)
134,358

 
151,356

Current maturities of long-term debt (Note 6)
15,263

 
15,012

Current liabilities for disposed operations (Note 7)
11,368

 
11,310

Total current liabilities
328,850

 
370,418

 
 
 
 
Long-Term Debt (Note 6)
1,207,667

 
1,173,157

Long-Term Liabilities for Disposed Operations (Note 7)
149,477

 
149,344

Pension and Other Postretirement Benefits
238,805

 
238,958

Deferred Tax Liabilities
27,491

 
28,016

Other Non-Current Liabilities
23,030

 
12,322

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Stockholders’ Equity
 
 
 
Preferred stock, 10,000,000 shares authorized at $0.01 par value, 1,725,000 issued and outstanding as of March 30, 2019 and December 31, 2018, aggregate liquidation preference $172,500
17

 
17

Common stock, 140,000,000 shares authorized at $0.01 par value, 49,798,884 and 49,291,130 issued and outstanding, as of March 30, 2019 and December 31, 2018, respectively
498

 
493

Additional paid-in capital
397,606

 
399,490

Retained earnings
433,256

 
462,568

Accumulated other comprehensive income (loss) (Note 10)
(151,286
)
 
(155,697
)
Total Stockholders’ Equity
680,091

 
706,871

Total Liabilities and Stockholders’ Equity
$
2,655,411

 
$
2,679,086


See Notes to Condensed Consolidated Financial Statements.

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Rayonier Advanced Materials Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
Operating Activities
 
 
 
Net income (loss)
$
(22,050
)
 
$
24,455

Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Depreciation and amortization
36,358

 
36,742

Stock-based incentive compensation expense
3,931

 
2,480

Amortization of capitalized debt costs, discount and premium
183

 
254

Deferred income tax
(9,572
)
 
8,680

Net periodic benefit cost of pension and postretirement plans
1,609

 
1,647

Gain on foreign currency exchange
6,230

 
(4,020
)
Other
(4,221
)
 
1,566

Changes in operating assets and liabilities:
 
 
 
Receivables
23,314

 
2,662

Inventories
(25,963
)
 
(55,433
)
Accounts payable
(19,430
)
 
33,809

Accrued liabilities
(5,068
)
 
(5,139
)
All other operating activities
(9,366
)
 
(10,543
)
Contributions to pension and other postretirement benefit plans
(2,406
)
 
(2,870
)
Expenditures for disposed operations
(423
)
 
(1,774
)
Cash Provided by (Used for) Operating Activities
(26,874
)
 
32,516

 
 
 
 
Investing Activities
 
 
 
Capital expenditures
(31,378
)
 
(29,002
)
Cash Used for Investing Activities
(31,378
)
 
(29,002
)
 
 
 
 
Financing Activities
 
 
 
Borrowings from revolving credit facility
38,000

 

Repayments of revolving credit facility
(3,000
)
 

Repayment of debt
(2,340
)
 
(1,661
)
Dividends paid on common stock
(5,095
)
 
(3,938
)
Dividends paid on preferred stock
(3,450
)
 
(3,450
)
Proceeds from the issuance of common stock

 
121

Common stock repurchased
(5,810
)
 
(3,050
)
Cash Provided by (Used for) Financing Activities
18,305

 
(11,978
)
 


 
 
Cash and Cash Equivalents

 
 
Change in cash and cash equivalents
(39,947
)
 
(8,464
)
Net effect of foreign exchange on cash and cash equivalents
(1,028
)
 
1,305

Balance, beginning of year
108,966

 
96,235

Balance, end of period
$
67,991

 
$
89,076


See Notes to Condensed Consolidated Financial Statements.

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


1.    Basis of Presentation and New Accounting Pronouncements
Basis of Presentation
The unaudited condensed consolidated financial statements and notes thereto of Rayonier Advanced Materials Inc. (the “Company”) have been prepared in accordance with 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 financial statements and notes reflect all adjustments (all of which are normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. These statements and notes should be read in conjunction with the financial statements and supplementary data included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 1, 2019.
Recently Adopted Accounting Pronouncements
Leases
The Company adopted Accounting Standards Update 2016-02, Leases, as amended, as of January 1, 2019. The standard requires the recognition of right of use (“ROU”) assets and lease liabilities to be reported on the balance sheet, but did not change the manner in which expenses are recorded in the income statement. The Company has adopted the lease guidance using the cumulative effect adjustment approach, which requires prospective application at the adoption date and elected certain practical expedients permitted under the transition guidance. The practical expedients allow for the carry forward of the historical lease classification of existing leases and eliminates the need to reassess any lease classification of expired leases and initial direct costs. The Company also elected the short-term lease practical expedient. The Company does not record ROU assets or lease liabilities for short-term leases. In addition, the Company utilized the portfolio approach to group leases with similar characteristics and did not use hindsight to determine the lease term. For leases that include other costs, such as maintenance and other services, in addition to lease cost, the Company is separating lease and non-lease components when determining the ROU assets and lease liabilities.
Adoption of the new standard resulted in the recording of a ROU lease assets and lease liability of $10 million and $11 million, respectively, and the reversal of deferred rent liability balances. See Note 4Leases for additional information.
Subsequent Events
Events and transactions subsequent to the balance sheet date have been evaluated for potential recognition and disclosure through May 9, 2019, the date these financial statements were available to be issued. The following subsequent events warranting disclosure were identified.
On April 12, 2019, the Company’s Board of Directors declared a second quarter cash dividend of $2.00 per share of mandatory convertible preferred stock. The preferred stock dividend will be paid on May 15, 2019 to mandatory convertible preferred stockholders of record as of May 1, 2019.
2.    Accounts Receivable, Net
As of March 30, 2019 and December 31, 2018, the Company’s accounts receivable included the following:
 
March 30, 2019
 
December 31, 2018
Accounts receivable, trade
$
157,592

 
$
169,496

Accounts receivable, other (a)
46,212

 
54,943

Allowance for doubtful accounts
(2,070
)
 
(2,062
)
Total accounts receivable, net
$
201,734

 
$
222,377

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

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Table of Contents
Rayonier Advanced Materials Inc.

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

3.    Inventory
As of March 30, 2019 and December 31, 2018, the Company’s inventory included the following:
 
March 30, 2019
 
December 31, 2018
Finished goods
$
209,483

 
$
215,233

Work-in-progress
22,828

 
21,478

Raw materials
105,068

 
73,715

Manufacturing and maintenance supplies
9,452

 
10,951

Total inventory
$
346,831

 
$
321,377


4.     Leases
The Company accounts for leases in accordance with ASC Topic 842, Leases, which was adopted on January 1, 2019. See Note 1Basis of Presentation and New Accounting Pronouncements, for additional information on the adoption. The Company’s operating and finance leases are primarily for corporate offices, warehouse space, rail cars and equipment. As of March 30, 2019, the Company’s leases have remaining lease terms of 1 year to 9 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 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 restricted 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 March 30, 2019 was 5.7 percent. The weighted average discount rate used in determining the finance lease ROU assets and liabilities as of March 30, 2019 was 7.0 percent.
The Company’s operating and finance lease cost is as follows:
 
 
 
 
Three Months Ended
 
 
 
 
March 30, 2019
Operating Leases
 
 
 
 
   Operating lease expense
 
 
 
$
1,465

Finance Leases
 
 
 
 
   Amortization of ROU assets
 
 
 
$
129

   Interest
 
 
 
54

Total
 
 
 
$
1,648

As of March 30, 2019, the weighted average remaining lease term is 4.8 years and 7.7 years for operating leases and financing leases, respectively. Cash provided by operating activities includes approximately $1.0 million from operating lease payments made during the three months ended March 30, 2019. Finance lease cash flows were immaterial during the three months ended March 30, 2019.
The Company’s finance leases are included as debt and the maturities for the remainder of 2019 and the next four years and thereafter are included in Note 6Debt and Finance Leases. The Company’s balance sheet includes the following operating

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Table of Contents
Rayonier Advanced Materials Inc.

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

lease assets and liabilities:
 
Balance Sheet Classification
 
March 30, 2019
Right-of-use assets
Other assets
 
$
18,465

Lease liabilities, current
Accrued and other current liabilities
 
4,256

Lease liabilities, non-current
Other non-current liabilities
 
14,632

 
 
 
 
As of March 30, 2019, operating lease maturities for the remainder of 2019 through 2023 and thereafter are as follows:
 
 
 
March 30, 2019
Remainder of 2019
 
 
$
3,930

2020
 
 
4,907

2021
 
 
4,160

2022
 
 
3,900

2023
 
 
3,332

Thereafter
 
 
1,544

Total minimum lease payments
 
 
$
21,773

Less: imputed interest
 
 
(2,885
)
Present value of future minimum lease payments
 
 
$
18,888


5.    Accrued and Other Current Liabilities
As of March 30, 2019 and December 31, 2018, the Company’s accrued and other current liabilities included the following:
 
March 30, 2019
 
December 31, 2018
Accrued customer incentives and prepayments
$
39,183

 
$
43,907

Accrued payroll and benefits
32,334

 
30,695

Accrued interest
9,843

 
3,170

Foreign currency forward contracts
6,392

 
16,767

Accrued property and other taxes
11,684

 
10,663

Other current liabilities
34,922

 
46,154

Total accrued and other current liabilities
$
134,358

 
$
151,356


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Table of Contents
Rayonier Advanced Materials Inc.

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

6.    Debt and Finance Leases
As of March 30, 2019 and December 31, 2018, the Company’s debt and finance leases include the following:
 
March 30, 2019
 
December 31, 2018
U.S. Revolver of $100 million maturing in November 2022, $56 million available after taking into account outstanding letters of credit, bearing interest at LIBOR plus 2.00%, interest of 4.49% at March 30, 2019
$
35,000

 
$

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 March 30, 2019

 

Term A-1 Loan Facility borrowings maturing through November 2022 bearing interest at LIBOR plus 2.00%, interest rate of 4.50% at March 30, 2019
160,000

 
160,000

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 March 30, 2019
438,875

 
438,875

Senior Notes due 2024 at a fixed interest rate of 5.50%
495,647

 
495,647

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
91,029

 
91,304

Other loans
3,625

 
3,777

Finance lease obligation
3,049

 
3,124

Total debt principal payments due
1,227,225

 
1,192,727

Less: Debt premium, original issue discount and issuance costs, net
(4,295
)
 
(4,558
)
Total debt
1,222,930

 
1,188,169

Less: Current maturities of long-term debt
(15,263
)
 
(15,012
)
Long-term debt
$
1,207,667

 
$
1,173,157

As of March 30, 2019, debt and finance lease payments due during the remainder of 2019 and the next four years and thereafter are as follows:
 
Finance Lease Payments
 
 
Debt Principal Payments
Remaining 2019
$
386

 
 
$
10,822

2020
515

 
 
20,375

2021
515

 
 
12,515

2022
515

 
 
224,600

2023
515

 
 
10,634

Thereafter
1,503

 
 
945,230

Total principal payments
$
3,949

 
 
$
1,224,176

Less: Imputed interest
(900
)
 
 
 
Present value minimum finance lease payments
$
3,049

 
 
 

7.    Liabilities for Disposed Operations
An analysis of the liabilities for disposed operations for the three months ended March 30, 2019 is as follows:
Balance, December 31, 2018
$
160,654

Increase in liabilities
271

Payments
(423
)
Foreign currency adjustments
343

Balance, March 30, 2019
160,845

Less: Current portion
(11,368
)
Long-term liabilities for disposed operations
$
149,477

In addition to the estimated liabilities, the Company is subject to the risk of reasonably possible additional liabilities in excess of the established reserves due to potential changes in circumstances and future events, including, without limitation, changes to current laws and regulations; changes in governmental agency personnel, direction, philosophy and/or enforcement policies; developments in remediation technologies; increases in the cost of remediation, operation, maintenance and monitoring of its disposed operations sites; changes in the volume, nature or extent of contamination to be remediated or monitoring to be undertaken; the outcome of negotiations with governmental agencies and non-governmental parties; and changes in accounting rules or interpretations. Based on information available as of March 30, 2019, 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 sites and other applicable liabilities. Further, this estimate excludes reasonably possible liabilities which are not currently estimable primarily due to the factors discussed above.
Subject to the previous paragraph, the Company believes established liabilities are sufficient for probable costs expected to be incurred over the next 20 years with respect to its disposed operations. However, no assurances are given they will be sufficient for the reasons described above, and additional liabilities could have a material adverse effect on the Company’s financial position, results of operations and cash flows.
8.    Derivative Instruments
The Company’s earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates. The Company allows for the use of derivative financial instruments to manage interest rate and foreign currency exchange rate exposure, but does not allow derivatives to be used for speculative purposes.  
All derivative instruments are recognized on the consolidated balance sheets at their fair value and are either designated as a hedge of a forecasted transaction or undesignated. Changes in the fair value of a derivative designated as a hedge are recorded in other comprehensive income until earnings are affected by the hedged transaction and are then reported in current earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings.
Interest Rate Risk
The Company’s primary debt obligations utilize variable-rate LIBOR, exposing the Company to variability in interest payments due to changes in interest rates. The Company entered into interest rate swap agreements to reduce the volatility of financing costs, achieve a desired proportion of fixed-rate versus floating-rate debt and to hedge the variability in cash flows attributable to interest rate risks caused by changes in the LIBOR benchmark.
The Company designated the swaps as cash flow hedges and is assessing their effectiveness using the hypothetical derivative method in conjunction with regression. Effective gains and losses, deferred to accumulated other comprehensive income (loss)  (“AOCI”), are reclassified into earnings over the life of the associated hedge.

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Table of Contents
Rayonier Advanced Materials Inc.

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

Foreign Currency Exchange Rate Risk
Foreign currency fluctuations affect investments in foreign subsidiaries and foreign currency cash flows related to third party purchases, product shipments, and foreign-denominated debt. The Company is also exposed to the translation of foreign currency earnings to the U.S. dollar. Management uses foreign currency forward contracts to selectively hedge its foreign currency cash flow exposure and manage risk associated with changes in currency exchange rates. The Company’s principal foreign currency exposure is to the Canadian dollar, and to a lesser extent, the euro.
The notional amounts of outstanding derivative instruments as of March 30, 2019 and December 31, 2018 are presented below.
 
 
March 30, 2019
 
December 31, 2018
Interest rate swaps (a)
 
$
200,000

 
$
200,000

Foreign exchange forward contracts (b)
 
$
371,828

 
$
388,930

Foreign exchange forward contracts (c)
 
$
94,358

 
$
125,979

(a) Maturity date of December 2020
(b) Various maturity dates through March 2020
(c) Various maturity dates in 2020, 2022 and 2028
The fair values of derivative instruments included in the consolidated balance sheet as of March 30, 2019 and December 31, 2018 are provided in the below table. See Note 9Fair Value Measurements for additional information related to the Company’s derivatives.
 
 
Balance Sheet Location
 
March 30, 2019
 
December 31, 2018
Assets:
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest rate swaps
 
Other current assets
 
$
898

 
$
1,194

Interest rate swaps
 
Other assets
 
252

 
937

Foreign exchange forward contracts
 
Other current assets
 
553

 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
Other current assets
 
82

 
7

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
Other current liabilities
 
(6,243
)
 
(16,408
)
Foreign exchange forward contracts
 
Other non-current liabilities
 
(982
)
 
(3,105
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange forward contracts
 
Other current liabilities
 
(150
)
 
(360
)
Total derivatives
 
 
 
$
(5,590
)
 
$
(17,735
)
The effects of derivatives designated as hedging instruments, the related changes in AOCI and the gains and losses in income for the three months ended March 30, 2019 and March 31, 2018 are presented below.

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Rayonier Advanced Materials Inc.

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

 
 
Three Months Ended March 30, 2019
 
 
Derivatives Designated as Hedging Instruments
 
Gain (Loss) Recognized in OCI on Derivative
 
Gain (Loss) Reclassified from AOCI into Income
 
Location on Statement of Income
Interest rate swaps
 
$
(702
)
 
$
280

 
Interest expense
Foreign exchange forward contracts
 
$
2,220

 
$
64

 
Other operating expense, net
Foreign exchange forward contracts
 
$
4,429

 
$
(4,429
)
 
Cost of sales
Foreign exchange forward contracts
 
$
2,359

 
$
1,799

 
Interest income and other, net
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
Derivatives Designated as Hedging Instruments
 
Gain (Loss) Recognized in OCI on Derivative
 
Gain (Loss) Reclassified from AOCI into Income
 
Location on Statement of Income
Interest rate swaps
 
$
1,712

 
$
(176
)
 
Interest Expense
Foreign exchange forward contracts
 
$
(224
)
 
$

 
Cost of sales
The effects of derivative instruments not designated as hedging instruments on the statement of income for the three months ended March 30, 2019 and March 31, 2018 were as follows:
 
 
 
 
 
 
 
 
 
 
Three Months Ended
Derivatives Not Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized in Income on Derivative
 
 
March 30, 2019
 
March 31, 2018
Foreign exchange forward contracts
 
Other operating income (expense), net
 
 
$
(326
)
 
$
(3,129
)
The after-tax amounts of unrealized gains (losses) in AOCI related to hedge derivatives at March 30, 2019 and December 31, 2018 are presented below:
 
 
March 30, 2019
 
December 31, 2018
Interest rate cash flow hedges
 
$
897

 
$
1,663

Foreign exchange cash flow hedges
 
$
(4,647
)
 
$
(13,285
)
The amount of future reclassifications from AOCI will fluctuate with movements in the underlying markets.
9.    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 March 30, 2019 and December 31, 2018, using market information and what management believes to be appropriate valuation methodologies:
 
March 30, 2019
 
December 31, 2018
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Assets:
 
Level 1
 
Level 2
 
 
Level 1
 
Level 2
Cash and cash equivalents
$
67,991

 
$
67,991

 
$

 
$
108,966

 
$
108,966

 
$

Interest rate swaps (a)
1,150

 

 
1,150

 
2,131

 

 
2,131

Foreign currency forward contracts (a)
635

 

 
635

 
7

 

 
7

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities (b):
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts (a)
7,375

 

 
7,375

 
19,873

 

 
19,873

Fixed-rate long-term debt
585,649

 

 
563,800

 
585,824

 

 
541,267

Variable-rate long-term debt
634,232

 

 
637,500

 
599,221

 

 
602,652

(a) These items represent derivative instruments.
(b) Liabilities exclude finance lease obligation.
The Company uses the following methods and assumptions in estimating the fair value of its financial instruments:
Cash and cash equivalents — The carrying amount is equal to fair market value.
Derivative instruments — The fair value is calculated based on standard valuation models using quoted prices and market observable data of similar instruments. The interest rate derivatives are based on the LIBOR swap rate, which is observable at commonly quoted intervals for the full term of the swap and therefore is considered Level 2. The foreign currency derivatives are contracts to buy foreign currency at a fixed rate on a specified future date. The foreign exchange rate is observable for the full term of the swap and is therefore considered Level 2. See Note 8 — 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.


9


Table of Contents
Rayonier Advanced Materials Inc.

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

10.    Accumulated Other Comprehensive Income (Loss)
The components of AOCI are as follows:
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
Unrecognized components of employee benefit plans, net of tax:
 
 


Balance, beginning of year
$
(135,590
)
 
$
(81,638
)
Reclassifications to earnings: (a)
 
 
 
Amortization of losses
2,611

 
2,969

Amortization of prior service costs
104

 
143

Amortization of negative plan amendment

 
(38
)
Income tax on reclassifications
(629
)
 
(677
)
Foreign currency adjustments
(195
)
 

Net comprehensive gain (loss) on employee benefit plans, net of tax
1,891

 
2,397

Balance, end of quarter
(133,699
)
 
(79,241
)
 
 
 
 
Unrealized gain (loss) on derivative instruments, net of tax:
 
 
 
Balance, beginning of year
(11,622
)
 
619

Other comprehensive income before reclassifications
8,306

 
1,488

Income tax on other comprehensive income
(1,885
)
 
(353
)
Reclassifications to earnings: (b)
 
 
 
Interest rate contracts
(280
)
 
176

Foreign exchange contracts
2,566

 

Income tax on reclassifications
(835
)
 
(39
)
Net comprehensive gain (loss) on derivative instruments, net of tax
7,872

 
1,272

Balance, end of quarter
(3,750
)
 
1,891

 
 
 
 
Foreign currency translation adjustments:
 
 
 
Balance, beginning of year
(8,485
)
 
4,868

Foreign currency translation adjustment, net of tax of $0 and $0
(5,352
)
 
7,749

Balance, end of quarter
(13,837
)
 
12,617

 
 
 
 
Accumulated other comprehensive income (loss), end of quarter
$
(151,286
)
 
$
(64,733
)
(a)
The AOCI components for defined benefit pension and post-retirement plans are included in the computation of net periodic benefit cost. See Note 14Employee Benefit Plans for additional information.
(b)
Reclassifications of interest rate contracts are recorded in interest expense. Reclassifications of foreign currency exchange contracts are recorded in cost of sales, other operating income or non-operating income as appropriate. See Note 8Derivative Instruments for additional information.

10


Table of Contents
Rayonier Advanced Materials Inc.

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

11.    Stockholders' Equity
An analysis of stockholders’ equity for the three months ended March 30, 2019 and March 31, 2018 is shown below (share amounts not in thousands):
 
Common Stock
 
Preferred Stock
 
Additional Paid in Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholders’
 Equity
 
Shares
 
Par Value
 
Shares
 
Par Value
 
 
Balance, December 31, 2018
49,291,130

 
$
493

 
1,725,000

 
$
17

 
$
399,490

 
$
462,568

 
$
(155,697
)
 
$
706,871

Net income (loss)

 

 

 

 

 
(22,050
)
 

 
(22,050
)
Other comprehensive income (loss),
net of tax

 

 

 

 

 

 
4,411

 
4,411

Issuance of common stock under incentive stock plans
928,601

 
9

 

 

 
(9
)
 

 

 

Stock-based compensation

 

 

 

 
3,931

 

 

 
3,931

Repurchase of common stock
(420,847
)
 
(4
)
 

 

 
(5,806
)
 

 

 
(5,810
)
Common stock dividends
($0.07 per share)

 

 

 

 

 
(3,812
)
 

 
(3,812
)
Preferred stock dividends
($2.00 per share)

 

 

 

 

 
(3,450
)
 

 
(3,450
)
Balance, March 30, 2019
49,798,884

 
$
498

 
1,725,000

 
$
17

 
$
397,606

 
$
433,256

 
$
(151,286
)
 
$
680,091

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
51,717,142

 
$
517

 
1,725,000

 
$
17

 
$
392,353

 
$
377,020

 
$
(76,151
)
 
$
693,756

Net income (loss)

 
$

 

 
$

 
$

 
$
24,455

 
$

 
$
24,455

Other comprehensive income (loss),
net of tax

 

 

 

 

 

 
11,418

 
11,418

Issuance of common stock under incentive stock plans
291,689

 
3

 

 

 
118

 

 

 
121

Stock-based compensation

 

 

 

 
2,480

 

 

 
2,480

Repurchase of common shares
(155,861
)
 
(1
)
 

 

 
(3,049
)
 

 

 
(3,050
)
Common stock dividends
($0.07 per share)

 

 

 

 

 
(3,736
)
 

 
(3,736
)
Preferred stock dividends
($2.00 per share)

 

 

 

 

 
(3,450
)
 

 
(3,450
)
Balance, March 31, 2018
51,852,970

 
$
519

 
1,725,000

 
$
17

 
$
391,902

 
$
394,289

 
$
(64,733
)
 
$
721,994

 
Series A Mandatory Convertible Preferred Stock
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.
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.

11


Table of Contents
Rayonier Advanced Materials Inc.

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

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 the three months ended March 30, 2019, the Company did not repurchase any common shares under this buyback program. As of March 30, 2019, there was approximately $60 million of share repurchase authorization remaining under the program.

12.    Earnings Per Share of Common Stock
The following table provides details of the calculations of basic and diluted earnings per share:
 
 
Three Months Ended
 
 
March 30, 2019
 
March 31, 2018
Net income (loss)
 
$
(22,050
)
 
$
24,455

Preferred Stock dividends
 
(3,365
)
 
(3,403
)
Net income (loss) available for common stockholders
 
$
(25,415
)
 
$
21,052

 
 
 
 
 
Shares used for determining basic earnings per share of common stock
 
48,986,272

 
51,127,726

Dilutive effect of:
 
 
 
 
Stock options
 

 
5,669

Performance and restricted stock
 

 
1,472,839

Preferred stock
 

 
11,371,718

Shares used for determining diluted earnings per share of common stock
 
48,986,272

 
63,977,952

Basic (loss) earnings per share (not in thousands)
 
$
(0.52
)
 
$
0.41

Diluted (loss) earnings per share (not in thousands)
 
$
(0.52
)
 
$
0.38

Anti-dilutive instruments excluded from the computation of diluted earnings per share:
 
 
Three Months Ended
 
 
March 30, 2019
 
March 31, 2018
Stock options
 
259,088

 
288,464

Performance and restricted stock
 
1,959,123

 
363

Preferred stock
 
13,078,089

 

Total anti-dilutive instruments
 
15,296,300

 
288,827


13.    Incentive Stock Plans
The Company’s total stock based compensation cost for the three months ended March 30, 2019 and March 31, 2018 was $4 million and $2 million, respectively.

12


Table of Contents
Rayonier Advanced Materials Inc.

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

The Company made new grants of restricted stock units and performance-based stock units to certain employees during the first three months of 2019. The 2019 restricted stock unit awards vest over three years. The 2019 performance-based stock unit awards are measured against an internal return on invested capital target. Depending on performance against the target, the awards will pay out in common stock amounts between 0 and 200 percent of the performance-based stock units awarded. The total number of common stock awards granted will be adjusted up or down 25 percent, for certain participants, based on stock price performance relative to a peer group over the term of the plan, which could result in a final common stock issuance of 0 to 250 percent of the performance-based stock units awarded.
In March 2019, the performance-based share units granted in 2016 were settled at an average of 246 percent of the performance-based stock units awarded, resulting in the issuance of 923,211 shares of common stock.
The following table summarizes the activity on the Company’s incentive stock awards for the three months ended March 30, 2019:
 
Stock Options
 
Restricted Stock and Stock Units
 
Performance-Based Stock Units
 
Options
 
Weighted Average Exercise Price
 
Awards
 
Weighted Average Grant Date Fair Value
 
Awards
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019
286,613

 
$
34.23

 
917,098

 
$
13.71

 
1,325,894

 
$
14.69

Granted

 

 
258,317

 
14.10

 
372,858

 
15.47

Forfeited

 

 

 

 

 

Exercised or settled

 

 
(394,877
)
 
9.46

 
(520,167
)
 
7.80

Expired or cancelled
(27,525
)
 
18.09

 

 

 

 

Outstanding at March 30, 2019
259,088

 
$
35.95

 
780,538

 
$
15.99

 
1,178,585

 
$
17.98


14.    Employee Benefit Plans
The Company has defined benefit pension and other postretirement plans covering certain union and non-union employees, primarily in the U.S., Canada and France. The defined benefit pension plans are closed to new participants. Employee defined benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events.
The components of net periodic benefit costs from defined benefit plans that have been recorded are shown in the following table:
 
Pension
Postretirement
 
Three Months Ended
 
Three Months Ended
Components of Net Periodic Benefit Cost
March 30, 2019
 
March 31, 2018
 
March 30, 2019
 
March 31, 2018
Service cost
$
2,611

 
$
3,099

 
$
465

 
$
742

Interest cost
9,624

 
8,255

 
360

 
335

Expected return on plan assets
(14,166
)
 
(13,858
)
 

 

Amortization of prior service cost
142

 
143

 
(38
)
 

Amortization of losses
2,591

 
2,912

 
20

 
57

Amortization of negative plan amendment

 

 

 
(38
)
Total net periodic benefit cost
$
802

 
$
551

 
$
807

 
$
1,096

Service cost is included in cost of sales and selling, general and administrative expenses in the statements of income, as appropriate. Interest cost, expected return on plan assets, amortization of prior service cost, amortization of losses and amortization of negative plan amendment are included in other components of net periodic benefit costs on the condensed consolidated statement of income.
15.    Income Taxes
The Company’s effective tax rate for the three months ended March 30, 2019 was a benefit of (29) percent, compared with an expense of 29 percent for the three months ended March 31, 2018.
The current quarter effective rate differs from the federal statutory rate of 21 percent primarily due to tax credits and excess tax deductions on vested stock compensation, partially offset by different statutory tax rates of foreign operations and nondeductible executive compensation.
There have been no material changes to the balance of unrecognized tax benefits reported at December 31, 2018.
16.    Segment Information
The Company has currently divided its operations into five reportable segments: High Purity Cellulose, Forest Products, Pulp, Paper and Corporate. The Corporate operations consist primarily of senior management, accounting, information systems, human resources, treasury, tax and legal administrative functions that provide support services to the operating business units. The Company does not currently allocate the cost of maintaining these support functions to its operating units.
The Company evaluates the performance of its segments based on operating income. Intersegment sales consist primarily of wood chips sales from Forest Products to High Purity Cellulose, Pulp and Paper segments and high-yield pulp sales from Pulp to Paper. Intersegment sales prices are at rates that approximate market.

Net sales, disaggregated by product-line, was comprised of the following:
 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
High Purity Cellulose
 
 
 
Cellulose Specialties
$
192,104

 
$
209,127

Commodity Products
73,956

 
42,747

Other sales (a)
19,949

 
30,509

Total High Purity Cellulose
286,009

 
282,383

Forest Products
 
 
 
Lumber
57,352

 
78,380

Other sales (b)
17,827

 
20,806

Total Forest Products
75,179

 
99,186

Pulp
 
 
 
High-yield pulp
69,679

 
85,155

Paper
 
 
 
Paperboard
47,337

 
47,791

Newsprint
22,636

 
27,516

Total Paper
69,973

 
75,307

Eliminations
(18,060
)
 
(20,039
)
Total net sales
$
482,780

 
$
521,992

(a) Other sales include sales of electricity, resins, lignin and other by-products to third-parties
(b) Other sales include sales of logs, wood chips and other by-products to other segments and third-parties
Operating income (loss) by segment was comprised of the following:

13


Table of Contents
Rayonier Advanced Materials Inc.

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

 
Three Months Ended
 
March 30, 2019
 
March 31, 2018
High Purity Cellulose
$
(2,793
)
 
$
21,311

Forest Products
(5,248
)
 
10,637

Pulp
10,422

 
22,711

Paper
(1,765
)
 
2,926

Corporate
(19,085
)
 
(11,328
)
Total operating income (loss)
$
(18,469
)
 
$
46,257

Identifiable assets by segment were as follows:
 
March 30, 2019
 
December 31, 2018
High Purity Cellulose
$
1,616,441

 
$
1,643,092

Forest Products
199,481

 
166,801

Pulp
102,655

 
103,308

Paper
245,059

 
240,427

Corporate
491,775

 
525,458

Total identifiable assets
$
2,655,411

 
$
2,679,086

17.    Commitments and Contingencies
Commitments
The following table includes the material changes to the contractual financial obligations presented in Note 20 — Commitments and Contingencies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC. The changes in the future minimum payments under these obligations are presented as of March 30, 2019. The payment amounts are estimates and may vary based on changes in actual price and volumes terms.
 
Purchase Obligations
Remainder of 2019
$
148

2020
1,557

2021
1,335

2022
1,150

2023
676

Thereafter
5,081

Total
$
9,947

Contingencies
The Company is engaged in various legal and regulatory actions and proceedings, and has been named as a defendant in various lawsuits and claims arising in the ordinary course of its business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, the Company has in certain cases retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance and general liability. These other lawsuits and claims, either individually or in aggregate, are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
As of March 30, 2019, collective bargaining agreements covering less than 25 unionized employees in Canada had expired. The Fernandina mill collective bargaining agreement expires in the second quarter of 2019 and is currently in negotiations. In all cases, the parties have continued to work under the terms of the expired contracts while negotiations continue. While there can be

14


Table of Contents
Rayonier Advanced Materials Inc.

Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

no assurances, the Company expects to reach agreements with its unions. However, a work stoppage could have a material adverse effect on its business, results of operations and financial condition.
Guarantees and Other
The Company provides financial guarantees as required by creditors, insurance programs and various governmental agencies. As of March 30, 2019, the Company had net exposure of $37 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 $84 million as of March 30, 2019, primarily to comply with financial assurance requirements relating to environmental remediation and post closure care, to provide collateral for the Company’s workers’ compensation program, and to guarantee taxes and duties for products shipped internationally. These surety bonds expire at various dates and are expected to be renewed annually as required.
LignoTech Florida, a venture in which the Company owns 45 percent and its venture partner Borregaard ASA owns 55 percent, entered into a construction contract to build its lignin manufacturing facility and financing agreements to fund the construction of the facility, which was completed in the second quarter of 2018. The Company is a guarantor under both the construction and financing agreements. In the event of default, the Company expects it would only be liable for its proportional share as a result of an agreement with its venture partner. The remaining guarantee related to LignoTech Florida at March 30, 2019 was $36 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 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.
18.    Supplemental Disclosures of Cash Flows Information
Supplemental disclosures of cash flows information were comprised of the following for the three months ended:
 
March 30, 2019
 
March 31, 2018
Cash paid (received) during the period:
 
 
 
Interest
$
8,234

 
$
7,678

Income taxes
$
90

 
$
6,567

Non-cash investing and financing activities:
 
 
 
Capital assets purchased on account
$
11,807

 
$
14,053

 
 
 
 

15


Table of Contents


Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
When we refer to “we,” “us,” “our” or “the Company,” we mean Rayonier Advanced Materials Inc. and its consolidated subsidiaries. References herein to “Notes to Financial Statements” refer to the Notes to the Condensed Consolidated Financial Statements of Rayonier Advanced Materials Inc. included in Item 1 of this Quarterly Report on Form 10-Q (the “Report.”)
The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors which may affect future results. Our MD&A should be read in conjunction with our 2018 Annual Report on Form 10-K and information contained in our subsequent Forms 10-Q, 8-K and other reports to the U.S. Securities and Exchange Commission (the “SEC”).
Note About Forward-Looking Statements
Certain statements in this Report regarding anticipated financial, business, legal or other outcomes including business and market conditions, outlook and other similar statements relating to the Company’s 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.
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, 2018 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:

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.

16


Table of Contents

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.
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.
Forward-looking statements are only as of the date they are made, and the Company undertakes no duty to update its forward-looking statements except as required by law. You are advised, however, to review any further disclosures we have made or may make in our filings and other submissions to the SEC, including those on Forms 10-Q, 10-K, 8-K and other reports.
Note About Non-GAAP Financial Measures
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 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
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. In 2017, we acquired Tembec which was engaged in the manufacture of cellulose specialties, commodity products, forest products and pulp & paper (the “Acquisition”). The Acquisition created a combined company with leading positions in acetate and ethers high purity cellulose end-use markets, as well as, a more diversified earnings stream given the addition of the forest products, pulp and paper businesses. We now operate in the following business segments: High Purity Cellulose, Forest Products, Pulp and Paper.

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Our plan is to grow EBITDA and drive long-term value for our stockholders. The plan focuses on the following:
Go-to-Market Strategy - designed to improve cellulose specialties price and margin and align assets to market needs and sales mix to drive long term High Purity Cellulose segment EBITDA growth
Improve our competitive positioning through 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. In addition, we will review our current portfolio of operating assets, determine market value and capture the highest value for our stockholders.
Outlook
High Purity Cellulose

The operational issues affecting High Purity Cellulose in the first quarter negatively impacts our previous guidance and therefore, such guidance should no longer be relied upon. However, we anticipate stronger performance building sequentially through the remainder of the year as the Temiscaming boiler and hardwood supply issues are addressed. Ultimately, EBITDA margins are expected to return to the high teens for the back half of 2019, subject to fluctuations in commodity prices. For full year 2019, we still expect stability in our cellulose specialties prices and volumes with each anticipated to be slightly lower by approximately 1 to 2 percent from 2018, excluding the impact of any Chinese duties on sales price. Commodity product sales volumes are expected to be modestly lower than the original forecast of a 75,000 metric ton increase over 2018 volumes.


Forest Products

Lumber prices declined during the second half of the first quarter and are expected to remain low in the second quarter, although recently announced capacity curtailments in British Columbia are expected to provide some recovery in prices during the back half of the second quarter. Longer-term, the stable U.S. housing market, both new starts and remodeling driven by resales, remains a key driver of lumber sales prices. We are well positioned to benefit from these long-term conditions. 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 and beyond.

Pulp

High-yield pulp prices are expected to remain solid albeit lower for the remainder of 2019 compared to 2018 due to weaker demand. 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 levels. With no significant new capacity expected in the pulp markets until 2021, supply-demand dynamics should continue to yield positive market conditions and historically strong segment results in 2019.


Paper

In 2019, paperboard prices may experience pressure from increased competition in the U.S., while newsprint sales prices are expected to decline due to demand weakness and the reversal of duties in 2018.

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Table of Contents



Capital Allocation and Investment

We anticipate that we will spend approximately $100 million in maintenance capital expenditures across all segments in 2019. In addition, we anticipate spending approximately $30 million on high-return strategic projects in 2019.
We expect to increase the percentage of our cash flow directed toward debt repayment in 2019. We expect to continue a return of capital to stockholders through our common stock dividend and the opportunistic repurchase of common shares as cash flow improves.


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 2018 Annual Report on Form 10-K.
Recent Accounting Pronouncements

See Item 1 of Part I, Financial Statements — Note 1 —Basis of Presentation.

Results of Operations
Financial Information
Three Months Ended
 
%
(in millions, except percentages)
March 30, 2019
 
March 31, 2018
 
Change
Net Sales
$
483

 
$
522

 
(7)%
Cost of Sales
(466
)
 
(442
)
 
 
Gross Margin
17

 
80

 
(79)%
Selling, general and administrative expenses
(28
)
 
(23
)
 
 
Duties
(5
)
 
(8
)
 
 
Other operating expense, net
(2
)
 
(3
)
 
 
Operating Income (Loss)
(18
)
 
46

 
(139)%
Interest expense
(15
)
 
(15
)
 
 
Interest income and other, net
1

 
1

 
 
Net periodic pension and OPEB income (expense),
excluding service costs
1

 
2

 
 
Income Before Income Taxes
(31
)
 
34

 
(191)%
Income Tax (Expense) Benefit
9

 
(10
)
 
 
Net Income (Loss)
$
(22
)
 
$
24

 
(192)%
 
 
 
 
 
 
Gross Margin %
4
 %
 
15
%
 
 
Operating Margin %
(4
)%
 
9
%
 
 
Effective Tax Rate %
(29
)%
 
29
%
 
 
Net sales by segment were as follows:

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Table of Contents

 
Three Months Ended
Net sales (in millions)
March 30, 2019
 
March 31, 2018
High Purity Cellulose
$
286

 
$
282

Forest Products
75

 
99

Pulp
70

 
85

Paper
70

 
76

Eliminations
(18
)
 
(20
)
Total net sales
$
483

 
$
522

Net sales decreased $39 million, down approximately 7 percent, in the first quarter of 2019 compared to the first quarter of 2018. The decrease was primarily driven by lower lumber and high-yield pulp prices as well as lower newsprint sales volumes. For further assessment of changes in net sales, see the discussion of operating results by segment.
Operating income (loss) by segment was as follows:
 
Three Months Ended
Operating income (loss) (in millions)
March 30, 2019
 
March 31, 2018
High Purity Cellulose
$
(3
)
 
$
21

Forest Products
(5
)
 
10

Pulp
10

 
23

Paper
(1
)
 
3

Corporate
(19
)
 
(11
)
Total operating income (loss)
$
(18
)
 
$
46

Operating results for the first quarter of 2019 decreased $64 million, or 139 percent, resulting in an $18 million operating loss. Sales decreased approximately 7 percent and costs of sales increased 5 percent. For further assessment of changes of operating income, see the discussion of operating results by segment.
Non-operating Expenses
Interest expense of $15 million for the first quarter of 2019 was essentially flat when compared to the same prior year period. Lower outstanding debt levels during the three months ended March 30, 2019 were partially offset by slightly higher interest rates on variable rate debt when compared to the same prior year period. See Note 6Debt and Finance Leases.
Income Tax (Expense) Benefit
The first quarter 2019 effective tax rate was a benefit of (29) percent compared to an expense of 29 percent for the same period in 2018. The first quarter 2019 effective tax rate differs from the federal statutory rate of 21 percent primarily due to tax credits and excess tax deductions on vested stock compensation, partially offset by different statutory tax rates of foreign operations and nondeductible executive compensation.
See Note 15Income Taxes for additional information.

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Table of Contents

Operating Results by Segment
High Purity Cellulose
 
Three Months Ended
(in millions)
March 30, 2019
 
March 31, 2018
Net Sales
$
286

 
$
282

Operating income (loss)
$
(3
)
 
$
21

Average Sales Prices ($ per metric ton):
 
 
 
Cellulose Specialties
$
1,284

 
$
1,375

Commodity Products
$
847

 
$
803

Sales Volumes (thousands of metric tons):
 
 
 
Cellulose Specialties
150

 
152

Commodity Products
87

 
53

Changes in High Purity Cellulose net sales are as follows:
Three Months Ended
 
 
Changes Attributable to:
 
 
Net Sales
(in millions)
March 31, 2018
Price
 
Volume/Mix/Other
 
March 30, 2019
Cellulose Specialties
$
209

 
$
(14
)
 
$
(3
)
 
$
192

Commodity Products
43

 
3

 
28

 
74

Other sales (a)
30

 

 
(10
)
 
20

Total Net Sales
$
282

 
$
(11
)
 
$
15

 
$
286

(a) Other sales consist of electricity, resins, lignin and other by-products to third-parties
Net sales increased $4 million, or 1 percent, during the three month period ended March 30, 2019 when compared to the prior year period. Cellulose specialties sales prices declined in the first quarter of 2019 approximately 7 percent due to duties on products sold in China and higher average prices in the 2018 comparable quarter due to 2017 higher priced shipments which were recognized as sales in the 2018 quarter. Cellulose specialties volumes remained at levels consistent with the same prior year period, while commodity product sales volumes increased by approximately 64 percent primarily due to improved production at the Jesup and Tartas plants, partially offset by production issues at the Temiscaming plant. Other sales declined by $10 million as a result of the sale of the resin business in September 2018.
Changes in High Purity Cellulose operating income are as follows:
Three Months Ended
 
 
Gross Margin Changes Attributable to (a):
 
 
 
 

(in millions)
March 31, 2018
Sales Price
 
Sales Volume/Mix/Other
 
Cost
 
SG&A and other
 
March 30, 2019
Operating income (loss)
$
21

 
$
(11
)
 
$
4

 
$
(20
)
 
$
3

 
$
(3
)
Operating margin %
7.4
%
 
(3.8
)%
 
1.2
%
 
(7.0
)%
 
1.0
%
 
(1.2
)%
(a) Sales Volume computed based on contribution margin.
Operating income decreased $24 million in the first quarter of 2019 to an operating loss of $3 million. The decrease was driven by lower cellulose specialties sales prices and volumes and a decline in other sales volume, partially offset by higher commodity sales prices and volumes, as discussed above. Costs increased $20 million driven by production reliability issues at both our Jesup and Temiscaming plants as well as higher wood and maintenance costs, partially offset by lower energy costs. The three month period ended March 30, 2019 was also negatively impacted by a $1 million loss associated with the lignin joint venture that began operations in the second half of 2018. Additionally, the 2018 period includes operating income of $2 million from the resins business, which was sold in September 2018.

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Table of Contents

Forest Products
 
Three Months Ended
(in millions)
March 30, 2019
 
March 31, 2018
Net Sales
$
75

 
$
99

Operating income (loss)
$
(5
)
 
$
10

Average Sales Prices ($ per thousand board feet):
 
 
 
Lumber
$
389

 
$
480

Sales Volumes (millions of board feet):
 
 
 
Lumber
147

 
163

Changes in Forest Products net sales are as follows:
Three Months Ended
March 31, 2018
 
Changes Attributable to:
 
March 30, 2019
Net Sales
(in millions)
Price
 
Volume/Mix/Other
 
Lumber
$
78

 
$
(13
)
 
$
(8
)
 
$
57

Other sales (a)
21

 

 
(3
)
 
18

Total Net Sales
$
99

 
$
(13
)
 
$
(11
)
 
$
75

(a) Other sales consist of sales of logs, wood chips, and other by-products to other segments and third-parties
Net sales decreased $24 million during the three month period ended March 30, 2019 when compared to the prior year period as average lumber sales prices declined 19 percent and lumber sales volumes were down 10 percent primarily as a result of weaker market conditions and weather and logistic issues.
Changes in Forest Products operating income are as follows:
Three Months Ended
 
 
Gross Margin Changes Attributable to (a)
 
 
 
 

(in millions)
March 31, 2018
Sales Price
 
Sales Volume/Mix/Other
 
Cost
 
SG&A and other
 
March 30, 2019
Operating income (loss)
$
10

 
$
(13
)
 
$
(6
)
 
$
2

 
$
2

 
$
(5
)
Operating margin %
10.1
%
 
(14.1
)%
 
(9.1
)%
 
3.2
%
 
2.5
%
 
(7.4
)%
(a) Sales Volume computed based on contribution margin.
Operating income decreased $15 million in the first quarter of 2019 to an operating loss of $5 million. The decline was primarily driven by lower lumber sales prices and volumes, as previously discussed. Lower costs were driven by the reversal of a portion of the inventory valuation reserve taken in the fourth quarter of 2018. SG&A and other costs improved primarily due to lower softwood lumber duties as a result of the decrease in lumber sales volumes and prices. During the three month periods ended March 30, 2019 and 2018, the Forest Products segment incurred approximately $5 million and $7 million, respectively, in softwood lumber duties.

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Table of Contents

Pulp
 
Three Months Ended
(in millions)
March 30, 2019
 
March 31, 2018
Net Sales
$
70

 
$
85

Operating income
$
10

 
$
23

Average Sales Prices ($ per metric tons) (a):
 
 
 
High-yield pulp
$
590

 
$
654

Sales Volumes (in thousands of metric tons) (a):
 
 
 
High-yield pulp
107

 
120

(a) Average sales prices and volumes for external sales only. For both three month periods ended March 30, 2019 and March 31, 2018, the Pulp segment sold approximately 16,000 MT of high-yield pulp for $7 million to the Paper segment for the production of paperboard.
Changes in Pulp net sales are as follows:
Three Months Ended
March 31, 2018
 
Changes Attributable to:
 
March 30, 2019
Net Sales
(in millions)
Price
 
Volume/Mix
 
High-yield pulp
$
85

 
$
(7
)
 
$
(8
)
 
$
70

Net sales decreased during the three months ended March 30, 2019 when compared to the same 2018 period primarily due to lower average high-yield pulp prices principally from weaker export markets. Sales volumes declined as a result of lower production from downtime at the Company’s Temiscaming facility due to weak market conditions and the timing of shipments in the period.
Changes in Pulp operating income are as follows:
Three Months Ended
 
Gross Margin Changes Attributable to (a):
 
 
 
 

(in millions)
March 31, 2018
Sales Price
 
Sales Volume/Mix
 
Cost
 
SG&A and other
 
March 30, 2019
Operating income
$
23

 
$
(7