Item 1B.
Unresolved Staff Comments
None.
The following table details the material properties we owned or leased at December 31, 2019:
(a)
Capacity is based on historic average production and is not adjusted for 2019 market related downtime and/or reliability issues.
(b)
Capacity represents targeted production for these facilities. On average, these facilities produce at approximately 80 percent of capacity due to economic conditions, wood availability, and downtime.
Our manufacturing facilities are maintained through ongoing capital investments, regular maintenance and equipment upgrades. As a result, production capacities may vary from the amounts listed above.
Item 3.
Item 3.
Legal Proceedings
The Company is engaged in various legal and regulatory actions and proceedings, and has been named as a defendant in various lawsuits and claims arising in the ordinary course of its business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, the Company has in certain cases retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance, business interruption and general liability. While there can be no assurance, the ultimate outcome of these actions, either individually or in the aggregate, is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows, except as may be noted below.
Jesup Plant Permit
On January 27, 2016, the Altamaha Riverkeeper (“ARK”) filed a Petition for Hearing in the Office of Administrative Hearings for the State of Georgia, captioned Altamaha Riverkeeper, Inc. v. Environmental Protection Division (the “EPD”), Georgia Department of Natural Resources, in which ARK appealed the issuance by the EPD to the Company of a new permit for the treatment and discharge of waste water from the Jesup mill, which was to go into effect March 1, 2016. In the petition, ARK claims, among other things, that the issuance of the permit by the EPD would violate Georgia’s narrative water quality standard, a rule promulgated by the Georgia Department of Natural Resources Board pursuant to certain provisions of the Clean Water Act and the Georgia Water Quality Control Act. The petition seeks to have the permit invalidated and modified as demanded by ARK. On February 16, 2016, the Company moved to legally intervene, as a party-in-interest, in this matter (because the EPD, as the permit issuer, is the named defendant) and its petition was granted by the administrative law judge (“ALJ”). The trial was held in June of 2016, and on September 30, 2016 the ALJ issued her decision. While the ALJ rejected many of ARK’s claims, she held there existed a reasonable potential for the Company’s treated effluent discharged to the Altamaha River to cause a violation of Georgia’s narrative water quality standard, but only under low (rather than “normal”) river flow conditions. As such, the ALJ reversed the issuance of the new permit by EPD and remanded the matter back to the EPD for consideration and issuance of a permit that comports with this ruling.
The Company strongly disagreed with the decision and appealed it, as did the EPD. The appeal was heard in the Superior Court of Wayne County, Georgia and on March 17, 2017 the Superior Court Judge issued an order reversing ALJ’s decision and ordering the permit affirmed as issued by the EPD. ARK appealed this decision to the Georgia Court of Appeals. Before the Court of Appeals ruled, on March 27, 2018 the Georgia Department of Natural Resources Board (the “Board”) voted to clarify the language of the narrative water quality standard at issue in this litigation. The language clarification adopted by the Board confirmed and essentially ratified the Superior Court’s decision. On June 13, 2018, the Court of Appeals issued its opinion affirming the Superior Court’s decision, and remanded the case to the ALJ to apply the standard advocated by the Company and articulated by the Superior Court, as affirmed by the Court of Appeals, to the issuance of the Permit. To provide certainty to the Company while this matter is on remand to the ALJ, the Company and the EPD have entered into a consent order requiring the Company to continue to operate under the conditions of the Permit.
ARK filed a petition asking the Georgia Supreme Court to hear its appeal of the Court of Appeals decision, and the Company and EPD have filed papers opposing the petition. Granting of certiorari in this case is discretionary on the part of the Georgia Supreme Court and, on August 5, 2019, the Court declined ARK’s certiorari petition, which left in place the decisions of both the Superior Court and Court of Appeals. As such, this matter has now been remanded back to the ALJ for action consistent with the legal standard and instructions articulated in the Court of Appeals decision.
Stockholder Lawsuit
On August 17, 2017, the City of Warren General Employees’ Retirement System filed a putative class action complaint against the Company, Paul Boynton, our CEO, and Frank Ruperto, our CFO, in the United States District Court, Middle District of Tennessee, Nashville Division. The plaintiffs allege the Company made false statements in filings with the U.S. Securities and Exchange Commission (“SEC”) and other public statements related to certain litigation with Eastman Chemical, a customer of the Company, in third quarter and fourth quarter 2015, in violation of §§10(b) and 20(a) of the Securities Exchange Act of 1934, causing unspecified damages to stockholders of the Company who purchased stock in the Company between October 29, 2014 and August 19, 2015. The applicable Eastman litigation was resolved via settlement in 2015. The Company was served with the complaint on August 28, 2017. On November 13, 2017, the Court appointed the Michigan Carpenters’ Pension Fund and Local 295 IBT Employer Group Pension Trust Fund as lead plaintiff, and a law firm to act as lead counsel. On January 10, 2018, the Company and the individual defendants filed a motion to dismiss the case for improper venue or, in the alternative, asked the court to transfer it to the U. S. District Court for the Middle District of Florida. Per the court scheduling order, the lead plaintiff filed a consolidated amended complaint (the “CAC”) on January 12, 2018. The CAC added Benson Woo, former CFO of the Company, as an additional defendant.
On June 15, 2018, the U.S. District Court for the Middle District of Tennessee granted the Company’s motion to transfer the case to the Middle District of Florida, and on July 16, 2018 the Company filed a motion to dismiss the case. On March 29, 2019, the Court issued an order of judgment and dismissal, with prejudice, of the plaintiffs’ complaint. Plaintiffs and their counsel elected not to appeal the dismissal and this matter is now concluded.
In a related matter, on August 16, 2018, the Company received a derivative demand letter on behalf of Russell K. Carlisle, a purported stockholder, demanding that the Company’s Board of Directors investigate and take action on behalf of the Company against the individual defendants named in the City of Warren lawsuit and certain current and former members of the Board of Directors of the Company. The demand alleges substantially similar facts as those set forth in the City of Warren action, and claims them to be breaches of fiduciary duties owed to the Company by the individual defendants in City of Warren and members of the
Company’s Board of Directors during the alleged class period described in the case. The Company, the individuals named and Mr. Carlisle have agreed to toll any action on the derivative claim pending the decision of the U.S. District Court on the Company’s motion to dismiss the City of Warren suit. Given the March 29, 2019 order of judgment and dismissal of the City of Warren lawsuit by the U.S. District Court for the Middle District of Florida, it is anticipated that Mr. Carlisle and his counsel will no longer pursue this derivative claim.
Item 4.
Item 4.
Mine Safety Disclosures
Not applicable.
Part II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the New York Stock Exchange under the trading symbol “RYAM”.
Holders
The number of record holders of our common stock at February 25, 2020 was 4,166.
Dividends
Dividends per share data can be found in Item 6
Item 6.
Selected Financial Data
The following financial data should be read in conjunction with our consolidated financial statements. Amounts presented for the years ended December 31, 2019, 2018 and 2017 exclude the Matane Mill which was sold in November 2019. The Matane Mill was initially acquired as part of the November 2017 acquisition of Tembec.
(a)
For the years ended December 31, 2019, 2018, 2017 and 2016, basic and diluted earnings per share include the impact of the Company’s Preferred Stock. See Note 14 - Stockholders' Equity of our consolidated financial statements for more information.
(b)
EBITDA, adjusted EBITDA and adjusted free cash flows are non-GAAP measures. See “Note about Non-GAAP Financial Measures” on page 2 for limitations associated with non-GAAP measures. Also see Item 7
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a diversified forest products business that operates in the following business segments:
•High Purity Cellulose
•Forest Products
•Paperboard
•Pulp & Newsprint
Our High Purity Cellulose business has leading positions in the acetate and ethers high purity cellulose end-use markets. In addition, our other business segments provide a more diversified earnings stream.
As our businesses are moving though the bottom of the cycle, our financial goals for 2020 will be to aggressively control costs and preserve cash to remain compliant with debt covenants. We expect $60 to $70 million of benefits to increase EBITDA and cover fixed costs. Actions will include:
•
Operating Costs Improvements: $15 million primarily through efficiencies in supply chain and execution on continuous improvement projects in our facilities.
•
Corporate Cost Eliminations: $10 to $15 million reduction of administrative support cost structure to align with the current business environment
•
Capital Expenditure Reductions: $10 to $15 million reduction of capital expenditures with a focus on maintaining assets
•
Working Capital Improvements: $25 million benefit from reducing inventory levels and improving payment terms
If these actions are not sufficient, we will evaluate further opportunities to manage through the economic cycle. These actions may include asset sales, workforce reductions, temporary production curtailments and permanent closures.
We believe that we can manage our business through the bottom of the cycle and materially increase EBITDA through these actions to ensure that we emerge a much stronger company.
The following significant events occurred in 2019, 2018 and 2017:
•
In November 2019, we completed the sale of the Matane Mill for $175 million, resulting in net cash proceeds to the Company of approximately $158 million after expenses and other adjustments. We recognized an after-tax gain on sale of approximately $84 million and used $100 million of the proceeds to repay borrowings under our Senior Secured Credit Facilities. Included in discontinued operations is allocated interest expense, due to the required loan payments, and professional fees to sell the operation. As a result of the sale, the Matane Mill’s operating results have been classified as discontinued operations and we reorganized our operating and reportable segments to align with our new management reporting structure. See Note 3 - Discontinued Operations of our consolidated financial statements for additional information.
•
In October 2019, we settled certain Canadian pension liabilities through the purchase of annuity contracts with an insurance company. The settlement resulted in the recognition of approximately $9 million in settlement expenses which were recognized in “Other components of net periodic benefit costs” in our financial statements. See Note 18 - Employee Benefit Plans of our consolidated financial statements for additional information.
•
In September 2019, as a result of the significant decreases in the market prices for commodity products, primarily viscose, fluff, high-yield pulp, lumber, paperboard and newsprint, we amended our Senior Secured Credit Facilities. As a result of the amendment, the restrictions of our first lien secured net leverage and the interest coverage ratio tests were eased through the year ended December 31, 2021. We believe the amendment provides the runway to manage the business through these challenging economic conditions enabling us to emerge financially stronger and able to realize the earnings potential of the business. See Note 10 - Debt and Finance Leases of our consolidated financial statements for additional information.
•
In September 2019, we announced our Board of Directors determined to suspend the quarterly common stock dividend to improve cash flow.
•
In September 2018, we sold our resins business for $17 million. The sale of the resins business allowed us to divest a non-core asset and redeploy its capital. The business was originally acquired as part of our acquisition of Tembec and its results were included in our High Purity Cellulose segment. The resulting gain on sale of $7 million was treated as an adjustment to the bargain purchase gain in 2018.
•
In November 2017, we acquired Tembec (the “Acquisition”) which was engaged in the manufacture of cellulose specialties, commodity products, forest products, paperboard and pulp & newsprint. In 2017, the acquisition resulted in an initial gain on bargain purchase of $317 million primarily as a result of the elimination of Tembec’s valuation allowance associated with certain deferred tax assets. In 2018, the finalization of the purchase price allocation increased the bargain gain on purchase $20 million. The operating results of the Acquisition have been included in our results beginning November 2017. See Note 4 - Tembec Acquisition of our consolidated financial statements for additional information.
High Purity Cellulose
We manufacture and market high purity cellulose, which is sold as either cellulose specialties or commodity products. We are the leading global producer of cellulose specialties, which are primarily used in dissolving chemical applications that require a highly purified form of cellulose. Pricing for our cellulose specialties products is typically set by contract for a duration of at least one year based on discussions with customers. Our commodity products primarily consist of commodity viscose and absorbent materials. Commodity viscose is a raw material required for the manufacture of viscose staple fibers which are used in woven and non-woven applications. Absorbent materials, typically referred to as fluff fibers, are used as an absorbent medium in consumer products. Pricing for commodity products is typically referenced to published indexes or based on publicly available spot market prices. Sales of chemicals and energy, a majority of which are by-products, are included in the high purity cellulose segment.
Our four production facilities, located in the U.S., Canada and France, have a combined annual production capacity of approximately 775,000 metric tons of cellulose specialties or commodity products. Additionally, we have dedicated approximately 245,000 metric tons of annual production to commodity products.
Wood fiber, chemicals, and energy represent approximately 28 percent, 14 percent and 6 percent, respectively, of the per metric ton cost of sales. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Forest Products
We manufacture and market high-quality construction-grade lumber in North America. The lumber, primarily spruce, pine, or fir, is used in the construction of residential and multi-family homes, light industrial and commercial facilities, and the home repair and remodel markets. The chips, manufactured as a by-product of the lumber manufacturing process, are used in our Canadian High Purity Cellulose, Pulp and Newsprint plants. Pricing for lumber is typically referenced to published indexes marketed through our internal sales team. Our seven production facilities located in Canada have a targeted annual production capacity of approximately 770 million board feet of lumber.
Wood pulp and energy represents approximately 45 percent and 5 percent, respectively, of the per million board feet cost of sales. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Paperboard
We manufacture and market paperboard that is used for printing documents, brochures, promotional materials, paperback book or catalog covers, file folders, tags, and tickets.
Pricing for paperboard is typically referenced to published indices and marketed through our internal sales team. Our production facility located in Canada has the capacity to annually produce 180,000 metric tons of paperboard. Wood fiber, chemicals, and energy represent approximately 64 percent, 14 percent and 5 percent, respectively, of the per metric ton cost of sales. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Pulp & Newsprint
Pulp
We manufacture and market high-yield pulp which is used by paper manufacturers to produce paperboard, packaging, printing and writing papers and a variety of other paper products. Pricing for high-yield pulp is typically referenced to published indexes marketed through our internal sales team. Our production facility located in Canada has the capacity to annually produce 300,000 metric tons of high-yield pulp.
Wood fiber, chemicals, and energy represent approximately 20 percent, 12 percent and 11 percent, respectively, of the per metric ton cost of sales. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Newsprint
We manufacture newsprint, a paper grade used to print newspapers, advertising materials and other publications. Pricing for newsprint is typically referenced to published indices and marketed through our internal sales team. Our production facility located in Canada has the capacity to annually produce 205,000 metric tons of newsprint.
Wood fiber and chemicals represent approximately 16 percent and 4 percent, respectively, of the per metric ton cost of sales. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Outlook
Recent Developments
Action on Tariffs on Imported Goods into China
On February 18, the Tariff Commission of the State Council in China announced a notice to eliminate the tariff on certain raw material purchases by accepting application by the relevant Chinese entities for this removal beginning on March 2, 2020. The list of raw materials eligible for such tariff elimination include dissolving wood pulp (including Cellulose Specialties and viscose) and fluff pulp. Based upon our understanding of the notice and process, we believe that tariffs on our products into China will be eliminated by late first or early second quarter of 2020. We had approximately $230 million of sales from the U.S. to China in 2019.
Coronavirus
In late 2019 and early 2020, a strain of coronavirus was reported in China. In January 2020, in response to human health concerns, Chinese authorities ordered some businesses and ports closed. We have been in regular contact with our customers. To date, we have not seen a slowdown in order volumes, shipments or cash collections for our Cellulose Specialties customers. In high-yield pulp, we have seen some slowdown of orders, which is being offset by sales to other geographic regions. Given the dynamic and fluid nature of this situation, the potential financial impact, if any, cannot be reasonably estimated at this time.
Momentum in Lumber Prices
Lumber prices have seen recent improvements supported by strong housing starts of 1.6 million in December and January, representing the best housing start numbers in over a decade. Lumber index prices have improved by $45 per thousand board feet since the start of the year and the tone in the market is better. On February 3, the U.S. Department of Commerce announced a preliminary determination that combined anti-dumping and countervailing duties on the Company’s softwood lumber would fall to 8.2 percent from 20.2 percent beginning in August, as it relates to the Company, which deposited $23 million of duties in 2019. A final determination is expected in August.
High Purity Cellulose
For 2020, we expect Cellulose Specialties prices to increase approximately 2 percent on a contractual basis as a result of our decision to enhance product margins. As anticipated, Cellulose Specialties volumes are expected to decline due to a ramp down in certain contractual volumes driven by decisions not to pursue lower margin Cellulose Specialties business, a negative impact expected from sales timing and forecasted weakness in automotive end markets. Driven by the U.S.-China Trade dispute and slowing global economic growth, pricing for commodity products (primarily viscose and fluff pulp) are currently at decades lows. We expect these commodity prices to increase progressively throughout the year but on average be below the average pricing for 2019. Commodity sales volumes are expected to increase materially in 2020 due to improved operations, asset optimization and lower Cellulose Specialties volumes. Total sales volumes for the segment are expected to increase mid-single digits percent with commodity sales volumes anticipated to account for approximately 50 percent of the total sales volume in 2020. Overall, we anticipate segment EBITDA to increase modestly from last year; however, the extent of this improvement will be primarily dependent upon the level of improvement in commodity product pricing and the impact of the current health crisis in China.
Forest Products
U.S. housing starts and remodeling activity are the key drivers for lumber demand. U.S. housing starts were reported at a seasonally adjusted annual rate of 1.6 million in December and January, the highest figure in 13 years. Residential-improvement expenditures were also revised sharply higher to end 2019; as a result, demand on North American lumber mills is rebounding. This increased demand coupled with reduced supply are leading to improved pricing. Duties on lumber sales from Canada into the U.S. will continue to impact financial results. The U.S. Department of Commerce’s preliminary determination impacting these duties is expected to significantly reduce these impacts beginning in August. Since the duties started in 2017, we have paid approximately $59 million of lumber duties. Based on current market conditions and prices, we expect improved results in 2020 from 2019 performance.
Paperboard
Paperboard prices and volumes are expected to remain relatively constant in 2020. On a full year comparable basis, margins should improve as raw material costs for pulp have declined.
Pulp & Newsprint
High-yield pulp prices appear to have reached the bottom in the fourth quarter of 2019. We expect markets to improve gradually from the bottom of the cyclical lows but remain below 2018 realized prices. Newsprint prices remain challenged due to demand weakness; however, sales volumes are expected to increase due to improved productivity. Overall, the segment results are expected to be flat to slightly up in 2020, subject to the assumptions above. In addition, a significant portion of high-yield pulp sales are to China and it is unclear how the current health crisis will impact the business.
Reconciliation of Non-GAAP measures
For a reconciliation of EBITDA to net income, see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Performance and Liquidity Indicators.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities in our consolidated financial statements. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates.
New Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies and New Accounting Pronouncements of our consolidated financial statements for a discussion of recently issued accounting pronouncements that may affect our financial results and disclosures in future periods.
Revenue Recognition and Measurement
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of our contracts have a single performance obligation to transfer products. Accordingly, we recognize revenue when control has been transferred to the customer. Generally, control transfers upon delivery to a location in accordance with terms and conditions of the sale. Changes in customer contract terms and conditions, as well as the timing of orders and shipments, may have an impact on the timing of revenue recognition.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring our products and is generally based upon contractual arrangements with customers or published indices. We sell our products both directly to customers and through distributors and agents typically under agreements with payment terms less than 90 days.
The nature of our contracts may give rise to variable consideration, which may be constrained, including sales volume-based rebates to customers. We estimate the level of volumes based on anticipated purchases at the beginning of the period and record a rebate accrual for each purchase toward the requisite rebate volume. These estimated rebates are included in the transaction price as a reduction to net sales.
These methodologies are consistent with the manner in which we have historically accounted for the recognition of revenue.
Property, Plant & Equipment
Depreciation expense is computed using the units-of-production method for our High Purity Cellulose, Paperboard, Pulp & Newsprint plant and equipment and the straight-line method for all other property, plant and equipment over the useful economic lives of the assets involved. The total units of production used to calculate depreciation expense is determined by factoring annual production days, based on normal production conditions, by the economic useful life of the asset involved. The physical life of equipment, however, may be shortened by economic obsolescence caused by environmental regulation, competition or other causes. We depreciate our non-production assets, including office, lab, and transportation equipment, using the straight-line depreciation method over 3 to 25 years. Buildings and land improvements are depreciated using the straight-line method over 15 to 35 years and 5 to 30 years, respectively. We believe these depreciation methods are the most appropriate, versus other generally accepted accounting methods, as they most closely match revenues with expenses.
Gains and losses on the retirement of assets are included in operating income. Long-lived assets are reviewed annually for impairment or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets that are held and used is measured by net undiscounted cash flows expected to be generated by the asset. Property, plant and equipment are grouped for purposes of evaluating recoverability at the combined plant level, the lowest level for which independent cash flows are identifiable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Environmental liabilities
At December 31, 2019, we had $171 million of accrued liabilities for environmental costs relating to disposed operations. Numerous price, quantity, cost and probability assumptions are used in estimating these obligations. Factors affecting these estimates include changes in the nature or extent of contamination, changes in the content or volume of the material discharged or treated in connection with one or more impacted sites, requirements to perform additional or different assessment or remediation, changes in technology that may lead to additional or different environmental remediation strategies, approaches and work-plans, discovery of additional or unanticipated contaminated soil, groundwater or sediment on or off-site, changes in remedy selection, changes in law or interpretation of existing law and the outcome of negotiations with governmental agencies or non-governmental parties. We periodically review our environmental liabilities and also engage third-party consultants to assess our ongoing remediation of contaminated sites. Quarterly, we review our environmental liabilities related to assessment activities and remediation costs and adjust them as necessary. Liabilities for financial assurance, monitoring and maintenance activities and other activities are assessed annually. A significant change in any of these estimates could have a material effect on the results of our operations. See Note 11 - Environmental Liabilities of our consolidated financial statements for more information.
Determining the adequacy of pension and other postretirement benefit assets and liabilities
Our defined benefit pension and postretirement plans for employees in the U.S., Canada and France require numerous estimates and assumptions to determine the proper amount of pension and postretirement liabilities and annual expense to record in our financial statements. The key assumptions include discount rate, return on assets, salary increases, health care cost trends, mortality rates, longevity and service lives of employees. Although authoritative guidance on how to select most of these assumptions exists, we exercise some degree of judgment when selecting these assumptions based on input from our actuary and other advisors. Different assumptions, as well as actual versus expected results, would change the periodic benefit cost and funded status of the benefit plans recognized in the financial statements.
Our long-term return plan assets assumption was established based on historical long-term rates of return on broad equity and bond indices, discussions with our actuary and investment advisors and consideration of the actual historical annualized rate of returns. In determining future pension obligations, we select a discount rate based on information supplied by our actuary. The actuarial rates are developed by models which incorporate high-quality (AA rated), long-term corporate bond rates into their calculations. The weighted average discount rate decreased from 3.99 percent at December 31, 2018 to 3.46 percent at December 31, 2019.
Our defined pension plans were underfunded by $163 million at December 31, 2019. The funded status declined in 2019 due to lower than expected investment performance on our plan assets, increased service and interest costs, partially offset by slightly higher discount rates. In 2020, pension expense is expected to increase due primarily to lower expected return on plan assets and higher amortization of actuarial losses partially offset by an increase in the assumed discount rate. Future pension expense will be impacted by many factors including actual investment performance, changes in discount rates, timing of contributions and other employee related matters. See Note 18 - Employee Benefit Plans of our consolidated financial statements for more information.
In October 2019, we purchased annuity contracts from a third-party insurance company who has assumed responsibility for future pension benefits for certain participants in our Canadian defined benefit plans. As required under Accounting Standards Codification (“ASC”) 715 Compensation-Retirement Benefits, we recognized a loss of $9 million in the fourth quarter of 2019 on the settlement and de-recognition of the projected benefit obligation.
In 2019, we made mandatory contributions and benefit payments to plan participants of approximately $12 million. We expect to make mandatory and discretionary benefit payments to plan participants of approximately $11 million. Future mandatory contribution requirements will vary depending on actual investment performance, changes in valuation assumptions, interest rates and legal requirements to maintain a certain funding status.
The sensitivity of pension expense and projected benefit obligation related to our pension plans to changes in economic assumptions is highlighted below:
Realizability of both recorded and unrecorded tax assets and tax liabilities
We have recorded certain deferred tax assets we believe will be realized in future periods. The recognition of these tax assets is based on our analysis of both positive and negative evidence about the future realization of the tax benefit of each existing deductible temporary difference or carryforward. Future realization is based on the existence of sufficient taxable income of the appropriate character, within the appropriate taxing jurisdiction (for example country, state or province), and within the carryback and carryforward periods available under the applicable tax laws. The strongest form of positive evidence is the evaluation of adjusted historical earnings and future earnings projections within the applicable carryforward periods. This evidence supports the realizability of most recorded deferred tax assets. Tax assets are reviewed periodically for realizability. This review requires management to make assumptions and estimates about future profitability affecting the realization of these tax assets. If the review indicates the realizability may be less than likely, a valuation allowance is recorded.
Our income tax returns are subject to examination by U.S. federal and state taxing authorities as well as foreign jurisdictions, including Canada and France. In evaluating the tax benefits associated with various tax filing positions, we record a tax benefit for an uncertain tax position if it is more-likely-than-not to be realized upon ultimate settlement of the issue. We record a liability for an uncertain tax position that does not meet this criterion. The liabilities for unrecognized tax benefits are adjusted in the period in which it is determined the issue is settled with the taxing authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new facts or information become available. See Note 20 - Income Taxes of our consolidated financial statements for more information.
Results of Operations
Summary of our results of operations for the three years ended December 31:
Results of Operations, Year Ended December 31, 2019 versus December 31, 2018
Net sales by segment were as follows:
Net sales decreased $182 million or 9 percent, in 2019 compared to 2018. The decrease was primarily driven by lower cellulose specialties, lumber, high-yield pulp and newsprint sales. For further assessment of changes in net sales, see the discussion of operating results by segment.
Operating income by segment was as follows:
Operating income for 2019 decreased $231 million when compared to the prior year. The decrease was primarily driven by lower sales prices and higher costs. For further assessment of changes of operating income, see the discussion of Operating Results by Segment.
Non-operating Expenses
Interest expense for 2019 increased $4 million driven by higher debt levels throughout most of 2019, increased interest margin from the amendment to our credit facilities, increased amortization of deferred loan costs from the $100 million pay-down of Senior Secured Credit Facilities as a result of the Matane Mill sale, partially offset by lower LIBOR rates. For additional information, see Note 10 - Debt and Finance Leases.
Interest income and other, net, decreased in 2019 as a result of the reduced impact of foreign exchange on the re-measurement of certain debt instruments as a result of our hedging programs.
Other components of net periodic benefit (expense) changed by $13 million to $5 million of expense in 2019 as a result of lower expected long term returns on pension assets and the $9 million pension settlement loss recorded during the fourth quarter of 2019. See Note 18 - Employee Benefit Plans.
We recognized a $20 million gain on bargain purchase during 2018 primarily from tax-related adjustments and the sale of the resins business as a result of finalizing the purchase price allocation of the Acquisition. See Note 4 - Tembec Acquisition.
Income Taxes
The full year 2019 effective tax rate from continuing operations was a benefit of 20 percent compared to an expense of 21 percent for the same period in 2018. The effective tax rate benefit differs from the federal statutory rate of 21 percent primarily due to nondeductible interest expense in the U.S., tax credits, excess tax deductions on vested stock compensation, U.S. Global Intangible Low-Taxed Income, and different statutory tax rates of foreign operations. See Note 20 - Income Taxes of our consolidated financial statements for additional information.
Discontinued Operations
Income from discontinued operations increased $67 million and reflects the $84 million gain from the sale of the Matane Mill in 2019. Excluding the gain, income from discontinued operations declined $17 million during 2019 principally driven from lower sales prices and professional fees to sell the operations. See Note 3 - Discontinued Operations of our consolidated financial statements for additional information.
Operating Results by Segment
High Purity Cellulose
Changes in High Purity Cellulose net sales are as follows:
Total net sales decreased $65 million, or 5 percent, in 2019. Cellulose specialties sales prices declined in 2019 by 2 percent primarily due to duties on products sold in China, in line with expectations. Cellulose specialties sales volumes declined by 6 percent due to weakness in the acetate, automotive and construction markets as a result of global trade issues and was partially offset by the timing of shipments which favorably impacted revenue recognition. Commodity product sales prices decreased 10 percent primarily due to weaker markets a result of global trade issues; however, the decline was more than offset by a 27 percent increase in sales volumes due to lower demand for cellulose specialties, improved commodity product production and contractual changes to the sales terms and conditions with certain customers. Other sales declined as a result of the sale of the resin business in September 2018.
Changes in High Purity Cellulose operating income are as follows:
Operating income decreased $106 million in 2019. The decrease was driven by lower cellulose specialties sales prices and volumes and a decline in other sales, partially offset by higher commodity sales volumes. Costs increased by $31 million as overall higher sales volumes, as well as higher wood and maintenance costs were only partially offset by lower chemical prices, primarily caustic and the sale of the resin business. The sale of the resin business negatively impacted operating income $5 million during 2019. Included in SG&A and other costs is our share of the loss of the lignin joint venture of $5 million and $4 million incurred during 2019 and 2018, respectively.
Forest Products
Changes in Forest Products net sales are as follows:
Total net sales declined $57 million, or 16 percent, in 2019. Lumber sales prices declined 21 percent due to weak demand while lumber sales volumes increased by 2 percent as a result of efforts to reduce inventory levels were partially offset by market downtime taken at the production facilities.
Changes in Forest Products operating income are as follows:
Operating income decreased $56 million in 2019. The decline was driven by lower lumber sales prices partially offset by higher lumber sales volumes. Lower costs were driven by lower wood costs and the reversal of the net realizable inventory reserve of $6 million partially offset by higher depreciation, transportation and energy costs. SG&A and other costs improved due to lower softwood lumber duties as a result of lower lumber sales prices. The years ended December 31, 2019 and 2018 included $23 million and $26 million in softwood lumber duties, respectively.
Paperboard
Changes in Paperboard net sales are as follows:
Total net sales declined $3 million, or 2 percent in 2019. Paperboard sales prices declined 2 percent due to increased competition. Paperboard sales volumes increased 4 percent primarily due to efforts to reduce inventories.
Changes in Paperboard operating income are as follows:
Operating income was flat in 2019. Paperboard prices declined by 2 percent, partially offset by higher paperboard sales volumes. Costs decreased due to lower pulp raw material prices partially offset by higher transportation and warehousing costs.
Pulp & Newsprint
Changes in Pulp & Newsprint net sales are as follows:
Total net sales declined $67 million, or 24 percent, in 2019. Average pulp sales prices declined 25 percent due to weak demand as a result of global trade issues. Pulp sales volumes decreased 3 percent due to market downtime and production reliability issues at the Temiscaming mill. Newsprint sales prices and volumes declined 11 percent and 13 percent, respectively. The decrease in prices are primarily due to the effects of the removal of duties on newsprint imported into the U.S. and the continued decline in demand. The newsprint volume decline was primarily as a result of reliability issues at the Kapuskasing mill.
Changes in Pulp & Newsprint operating income are as follows:
Operating income for Pulp & Newsprint decreased $70 million during 2019. This was driven by lower pulp sales prices and volumes as well as decreases in newsprint sales prices and volumes. Costs increased due to the lower newsprint production levels, higher maintenance and transportation costs.
Corporate
The operating loss for Corporate remained flat at $65 million in 2019, when compared to 2018, due to lower incentive compensation expense, higher insurance recoveries and the absence of severance expense that is reflected in 2018, offset by higher legal and administrative costs incurred from the loan amendment that was finalized during the fourth quarter of 2019, and unfavorable currency changes. In addition, 2019 had higher environmental expenses from changes to the Port Angeles remediation project and higher cost assumptions for financial assurance on the environmental projects as a result of the increase in our perceived credit risk.
Results of Operations, Year Ended December 31, 2018 versus December 31, 2017
Net sales increased $1,017 million, or 108 percent, in 2018 compared to 2017. The increase was primarily due to the inclusion of Tembec’s operations for the full year in 2018, compared to approximately a month and a half during 2017. For further assessment of changes in net sales, see the discussion of operation results by segment.
Operating income by segment was as follows:
Operating income for 2018 increased $89 million, or 151 percent, over the prior year period. The increase was primarily due to the inclusion of Tembec’s operations for the full year in 2018, compared to approximately a month and a half during 2017. For further assessment of changes of operating income, see the discussion of Operating Results by Segment discussion below.
Non-operating Expenses
Interest expense for 2018 increased $16 million over the same prior year period. The increase was due to realizing a full year of interest expense from the debt acquired to finance the Tembec acquisition in addition to slightly higher LIBOR rates on our variable-rate debt. For additional information, see Note 10 - Debt and Finance Leases. of our consolidated financial statements for additional information.
Interest income and other, net, increased during the year ended December 31, 2018 due to the foreign exchange gain on the re-measurement of certain debt instruments.
Other components of net periodic benefit costs improved due to the impact of the Tembec benefit plans for the full year in 2018. See Note 18 - Employee Benefit Plans of our consolidated financial statements for additional information.
We recognized a $20 million gain on bargain purchase during 2018 primarily from tax-related adjustments from finalizing the purchase price allocation of Tembec acquisition and the gain on sale of the resins business. See Note 4 -Tembec Acquisition. of our consolidated financial statements for additional information.
Income Taxes
Our effective tax rate for the years ended December 31, 2018 and 2017 was 21 percent and 6 percent, respectively. The increase in 2018 is due primarily to higher taxable income and the $317 million of nontaxable bargain purchase gain recorded in 2017. See Note 20 - Income Taxes of our consolidated financial statements for more information.
Discontinued Operations
Income from discontinued operations increased $27 million during 2018 primarily due to the Acquisition. See Note 3 - Discontinued Operations of our consolidated financial statements for additional information.
Operating Results by Segment
High Purity Cellulose
Changes in High Purity Cellulose net sales are as follows:
Excluding the Acquisition, cellulose specialties sales prices declined in 2018 approximately 4 percent due to lower contracted pricing, as expected. Cellulose specialties and commodity product sales volume, excluding the impact of the Acquisition, increased primarily due to the timing of revenue recognition.
Changes in operating income are as follows:
Operating income decreased $8 million or 7 percent in 2018 as the Acquisition and increased sales volumes were more than offset by lower sales prices and higher costs. Costs increased $11 million in 2018 due to higher, one-time energy costs caused by the unusually cold weather in the southeastern U.S. in January, higher wood and chemical costs, and lower production. These costs were partially offset by lower depreciation, lower costs to achieve Cost Transformation savings and the impact of the inventory write-up to fair market value of $6 million. Additionally, 2017 was negatively impacted by $5 million of higher costs for the idling of our production facilities in the southeast U.S. from Hurricane Irma. Selling, general and administrative and other costs increased due to the Acquisition and our share of the loss related to the start-up the lignin joint-venture of $4 million.
Forest Products
Changes in Forest Products net sales are as follows:
Net sales increased during 2018 primarily due to the Acquisition. In addition, prices declined due to lower demand in the latter part of the year offset by slightly higher volumes.
Changes in Forest Products operating income are as follows:
Operating income for Forest Products increased $25 million during 2018 primarily due to the Acquisition’s impact on gross margin of $55 million. Excluding the impact of the Acquisition on gross margin, prices declined as a result of demand weakness in the lumber market, partially offset by slightly higher sales volumes. Costs were lower as the absence of the 2017 inventory write-up to fair value of $5 million was partially offset by higher costs from the market-related downtime and the write-down of inventories to current net realizable value as a result of lower sales prices in December 2018. The change in SG&A and other is a result of the increase of duties paid for lumber sold into the United States of approximately $26 million in 2018 and higher costs as a result of the Acquisition.
Paperboard
Changes in Paperboard net sales are as follows:
Net sales for Paperboard increased during 2018 primarily due to the Acquisition.
Changes in Paperboard operating income are as follows:
Operating income for Paperboard increased $5 million in 2018 primarily due to the Acquisition. SG&A costs were higher in 2018 due to intangible asset amortization also resulting from the Acquisition.
Pulp & Newsprint
Changes in Pulp & Newsprint net sales are as follows:
Net sales for Pulp & Newsprint increased during 2018 due primarily to the Acquisition.
Changes in Pulp & Newsprint operating income are as follows:
Operating income for Pulp & Newsprint increased $70 million in 2018 primarily due to the Acquisition. Excluding the impact of the Acquisition, prices increased primarily as a result of duties on newsprint imported into the U.S. and pulp price increases as a result of higher demand for virgin fiber as a result of reduced recycled fiber imports in China. These increases were partially offset by lower sales volumes as the markets weakened in December 2018. Costs were lower as the absence of the 2017 inventory write-up to fair value of $6 million was partially offset by higher costs from lower production. The change in SG&A and other is primarily a result of the Acquisition.
Corporate
The operating loss for Corporate increased $3 million from 2017. Excluding the $34 million in one-time acquisition related costs in 2017, the loss increased $37 million in 2018 primarily as a result of the inclusion of the Acquisition for the full year.
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 a result of significant decreases in the market prices for commodity products, primarily viscose, fluff, high-yield pulp, lumber, paperboard and newsprint, during the year ended December 31, 2019, our operating results declined significantly, requiring us to amend our Senior Secured Credit Facilities. On September 30, 2019 we entered into an amendment of our Senior Secured Credit Facilities (the “Amendment”) reducing the restrictions of our first lien secured net leverage ratio and the interest coverage ratio tests through the year ended December 31, 2021. In addition, the Amendment increased the interest rate margin by a maximum of 1.25 percent, subject to the operation of a pricing grid which also provides for reduced rate margins when our leverage ratios improve; required additional collateral for the lenders; and required availability be maintained on the revolving credit facility to reflect the seasonality of the business. The lenders under the Credit Facilities have a first priority security interest in substantially all present and future material U.S. and Canadian assets, excluding the assets of certain non-guarantor subsidiaries. The non-guarantor subsidiaries had assets of $1,781 million, revenue of $218 million, covenant EBITDA of $5 million and liabilities of $1,309 million as of and for the year ended December 31, 2019. See Note 10 - Debt and Finance Leases of our consolidated financial statements for additional information.
Under the amended Senior Secured Credit Facilities, we are in compliance with the financial and other customary covenants as of December 31, 2019. We continue to believe our future cash flows from operations and availability under our revolving credit facility, as well as our ability to access the capital markets, if necessary or desirable, will be adequate to fund our operations and anticipated long-term funding requirements, including capital expenditures, defined benefit plan contributions, and repayment of debt maturities.
During 2019, our Board of Directors declared, and we paid, cash dividends on our Preferred Stock of approximately $10 million. Additionally, our Board of Directors declared, and we paid, quarterly cash dividends on our common stock of $0.07 per share, for the first two quarters ended June 28, 2019, for a total of $9 million. On September 6, 2019, our Board of Directors suspended our quarterly common stock dividend to use the cash flow to pay down debt and fund capital investments as well as working capital needs. 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 revised debt facilities restrict the declaration and payment of future dividends.
On January 29, 2018, the Board of Directors authorized a $100 million common stock share buyback. For the year ended December 31, 2019, we did not repurchase any common shares under this buyback program. We do not expect to utilize any further authorization in the near future. During 2018, we repurchased and retired 2,570,449 shares of common stock under this buyback program at an average price of $15.44 per share, excluding commissions, for an aggregate purchase price of approximately $40 million.
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 revolving credit facility have been reduced by standby letters of credit of approximately $33 million, $33 million and $34 million at December 31, 2019, 2018 and 2017, respectively. See Note 22 - Commitments and Contingencies of our consolidated financial statements for additional information. Additionally. we are required to maintain between $80 million and $90 million of availability on our revolving credit facility, therefore we show this as a reduction to availability.
(c)
See Note 10 - Debt and Finance Leases of our consolidated financial statements for more information.
Cash Flows (in millions of dollars)
The following table summarizes our cash flows from operating, investing and financing activities for each of the three years ended December 31:
Cash Provided by Operating Activities
Cash provided by operating activities of continuing operations during 2019 decreased $205 million compared to the prior year period, due to a decline in our operating results mostly from lower prices across all segments, partially offset by a decrease in environmental spending in 2019. Included in cash provided by operating activities for the year ended December 31, 2019 and 2018 is $20 million and $25 million, of cash provided by discontinued operations, respectively.
Cash provided by operating activities of continuing operations in 2018 increased $96 million when compared to the prior year primarily due to increased net income from an entire year of the Tembec acquisition, excluding the impact of the gain on bargain purchase due to the Acquisition, and from the timing of accounts payable payments. The increases were partially offset by higher inventories and accounts receivable. Included in cash provided by operating activities for the year ended December 31, 2018 and 2017 was cash provided by discontinued operations of $25 million and $3 million, respectively.
Cash Provided by (Used for) Investing Activities
Cash provided by investing activities of $53 million during 2019 included proceeds of $158 million that were received from the sale of the Matane mill that was sold in November 2019. Proceeds of $16 million were received in 2018 for the sale of the resins business. Capital expenditures decreased $26 million during the year ended December 31, 2019 when compared to the same prior year period. Included in cash provided by investing activities during each of the years ended December 31, 2019 and 2018 was capital expenditures for discontinued operations of $3 million.
Cash used for investing activities of continuing operations during 2018 decreased $165 million when compared to the prior year as a result of the absence of the proceeds used to fund the Tembec Acquisition, partly offset by an increase in capital spending. The year ended December 31, 2017 included $8 million from a gain on derivative instrument. Included in cash used for investing activities for the years ended December 31, 2018 was $3 million of capital spending from discontinued operations.
Cash Provided by (Used for) Financing Activities
Cash used for financing activities increased $22 million primarily due to a $64 million increase in our net long-term debt payments during 2019 when compared to the year ended December 31, 2018. Common stock dividends paid decreased by $6 million due to the suspension of the quarterly $0.07 dividend starting in the third quarter of 2019. In addition the preferred stock dividend was also lower during the year ended December 31, 2019 by $3 million as the preferred stock automatically converted to common stock in August 2019. During 2019, the Company incurred $4 million of debt issuance costs from the amendment of to our Senior Secured Credit Facilities. Common shares repurchased decreased by $36 million during 2019 when compared to the same prior year period due to the absence of the share repurchases under the buyback program.
Cash used for financing activities during 2018 increased $32 million when compared to the prior year primarily due to $40 million of common stock that was repurchased under the Company's share repurchase authorization of up to $100 million, which was declared by the Board of Directors on January 29, 2018. In addition, approximately $3 million was used to pay employee minimum tax withholding requirements in lieu of receiving common shares from incentive stock plans. These increases were partially offset by lower debt repayments in 2018 when compared to the debt repayments, net of new borrowings, during 2017. In addition, debt issuance costs of $7 million were incurred in 2017. See Note 10 - Debt and Finance Leases and Note 14 - Stockholders' Equity for additional information. Dividends were approximately $2 million higher in 2018 due to the inclusion of the 8.4 million shares issued in connection with the November 2017 Tembec acquisition.
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. We consider 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. We use EBITDA and adjusted EBITDA as performance measures and adjusted free cash flows as a liquidity measure. See “Note about Non-GAAP Financial Measures” on page 2 for limitations associated with non-GAAP measures.
EBITDA is defined by SEC rules as earnings from continuing operations before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined by the Company as EBITDA before the pension settlement loss, insurance recoveries, loan amendment costs, non-recurring expenses related to the Company’s review of its commodity asset portfolio, severance expense, gain on bargain purchase, acquisition related costs, inventory write-up to fair value, gain on derivative instrument, gain on debt extinguishment, non-cash impairment, and one-time separation and legal costs. EBITDA and adjusted EBITDA are not necessarily indicative of results that may be generated in future periods.
Below is a reconciliation of Income (Loss) from Continuing Operations to EBITDA and Adjusted EBITDA for the five years ended December 31 (in millions of dollars):
(a) Non-recurring expenses are related to the Company’s review of its commodity asset portfolio.
EBITDA and Adjusted EBITDA for 2019 decreased from 2018 primarily due to lower earnings from operations as a result of lower sales prices on all our products. EBITDA and Adjusted EBITDA for 2018 increased from the 2017 period primarily due to higher earnings from operations as a result of the Acquisition. For additional information regarding operating results see Results of Operations section of Item 7 - Management Discussion and Analysis.
Adjusted free cash flows is defined as cash provided by operating activities of continuing operations adjusted for capital expenditures excluding strategic capital expenditures. Adjusted free cash flows, as defined by the Company, is a non-GAAP measure of cash generated during a period which is available for debt reduction, strategic capital expenditures and acquisitions and repurchase of the Company’s common stock. Adjusted free cash flows is not necessarily indicative of the adjusted free cash flows that may be generated in future periods.
Below is a reconciliation of cash flows from operations to adjusted free cash flows for the five years ended December 31 (in millions of dollars):
(a)
Capital expenditures exclude strategic capital expenditures which we deem discretionary. Strategic capital for the years ended December 31, 2019, 2018, 2017 and 2016 were $27 million, $37 million, $11 million and $4 million, respectively. There were no strategic capital expenditures for the year ended December 31, 2015.
Adjusted free cash flows in 2019 decreased from 2018 primarily due lower cash from operating activities driven by lower earnings as a result of lower sales prices on all our products. This was partially offset by our actions to decrease capital expenditures to preserve cash flow.
Adjusted free cash flows in 2018 increased from 2017 primarily from higher cash provided by operating activities, partly offset by increased capital expenditure requirements from the Acquisition.
Off Balance Sheet Arrangements
We utilize off-balance sheet arrangements to provide credit support for certain suppliers and vendors in case of their default on critical obligations, collateral for certain of our self-insurance programs and guarantees for the completion of our remediation of environmental liabilities. These arrangements consist of standby letters of credit and surety bonds. As part of our ongoing operations, we also periodically issue guarantees to third parties. Off-balance sheet arrangements are not considered a source of liquidity or capital resources and do not expose us to material risks or material unfavorable financial impacts. See Note 22 - Commitments and Contingencies of our consolidated financial statements for more information.
Contractual Financial Obligations
Information regarding the letters of credit, surety bonds and other guarantees as of December 31, 2019 is hereby incorporated by reference to Note 22 - Commitments and Contingencies of our consolidated financial statements.
The following table aggregates our contractual financial obligations as of December 31, 2019 and anticipated cash spending by period:
(a)
Projected interest payments for variable-rate debt were calculated based on outstanding principal amounts and interest rates as of December 31, 2019. See Note 10 - Debt and Finance Leases for additional information.
(b)
Purchase obligations primarily consist of payments expected to be made on natural gas, steam energy and wood chip purchase contracts. Purchase obligations exclude arrangements the Company can cancel without penalty.
(c)
Amounts include estimated postretirement benefit payments and do not include pension funding obligations. See Note 18 - Employee Benefit Plans, for additional information on our pension and postretirement benefit plans.
(d)
See Note 5 -Leases for additional information.
Environmental Regulation
We are subject to stringent environmental laws and regulations concerning air emissions, wastewater discharges, waste handling and disposal, and assessment and remediation of environmental contamination, which impact both our current ongoing operations and about 20 former operating facilities or third party-owned sites classified as disposed operations. These include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state laws and regulations impacting U.S. facilities, as well as requirements relating to ancillary matters such as financial assurance of our legal obligations for facility closure and post-closure care. Similar laws and legal requirements also impact current and former operating sites in Canada and France, respectively. Management closely monitors our environmental responsibilities and believes we are in material compliance with current requirements. In addition to ongoing compliance with laws and regulations, our facilities operate in accordance with various permits, which are issued by state and federal environmental agencies. Many of these permits impose operating conditions on us which require significant expenditures to ensure compliance. Upon renewal and renegotiation of these permits, the issuing agencies often seek to impose new or additional conditions in response to new environmental laws and regulations, or more stringent interpretations
of existing laws and regulations. In addition, under many federal environmental laws, private citizens and organizations, such as environmental advocacy groups, have the right to legally challenge permitting and other decisions made by regulatory agencies.
Our operations are subject to constantly changing environmental requirements, and interpretations of existing requirements, which are often impacted by new policy initiatives, new and amended legislation and regulation, negotiations involving state and federal governmental agencies and various other stakeholders, as well as, at times, litigation. For additional information, see Item 1A - Risk Factors for a discussion of the potential impact of environmental risks on our business, and Item 3 - Legal Proceedings, for a discussion of any environmental-related litigation.
Our future spending requirements in the area of environmental compliance could change significantly based on the passage of new environmental laws and regulations.
Environmental Liabilities
For information and details relating to our estimated environmental liabilities, see Item 1A - Risk Factors and Note 11 - Environmental Liabilities of our consolidated financial statements for more information.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Market and Other Economic Risks
We are exposed to various market risks, primarily changes in interest rates, currency and commodity prices. Our objective is to minimize the economic impact of these market risks. We use derivatives in accordance with policies and procedures approved by the Audit Committee of our Board of Directors. Derivatives are managed by a senior executive committee whose responsibilities include initiating, managing and monitoring resulting exposures. See Note 12 - Derivative Instruments for additional information.
We manage our foreign currency exposures by balancing certain assets and liabilities denominated in foreign currencies and through the use of foreign currency forward contracts. The principal objective of such contracts is to minimize the potential volatility and financial impact of changes in foreign currency exchange rates. The counterparties to these contractual agreements are major financial institutions with which we generally have other financial relationships. We are exposed to credit losses in the event of nonperformance by these counterparties. However, given their size and financial strength, we do not anticipate nonperformance by the counterparties. We do not utilize financial instruments for trading or other speculative purposes.
The prices, sales volumes and margins of the commodity products of our High Purity Cellulose segment and all the products of the Forest Products, Pulp and Newsprint segments have historically been cyclically affected by economic and market shifts, fluctuations in capacity, and changes in foreign currency exchange rates. In general, these products are commodities that are widely available from other producers; because these products have few distinguishing qualities from producer to producer, competition is based primarily on price, which is determined by supply relative to demand. The overall levels of demand for the products we manufacture, and consequently our sales and profitability, reflect fluctuations in end user demand. Our cellulose specialties product prices are impacted by market supply and demand, raw material and processing costs, changes in global currencies and other factors. They are not directly correlated to commodity paper pulp prices. In addition, a majority of our cellulose specialties products are under multi-year contracts that expire between 2021 and 2023.
As of December 31, 2019, we had $499 million of variable rate debt which is subject to interest rate risk. At this borrowing level, a hypothetical one-percentage point increase/decrease in interest rates would result in a corresponding increase/decrease of approximately $5 million in interest payments and expense over a 12-month period. Our primary interest rate exposure on variable rate debt results from changes in LIBOR. We have entered into interest rate swap agreements to reduce the volatility of financing costs, achieve a desired proportion of fixed-rate versus floating-rate debt and to hedge the variability in cash flows attributable to interest rate risks caused by changes in the LIBOR benchmark.
The fair market value of our long-term fixed interest rate debt is also subject to interest rate risk. However, we intend to hold most of our debt until maturity. The estimated fair value of our fixed-rate debt at December 31, 2019 was $465 million compared to the $586 million principal amount. We use quoted market prices to estimate the fair value of our fixed-rate debt. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise.
We may periodically enter into commodity forward contracts to fix some of our energy costs that are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. Such forward contracts partially mitigate the risk of changes to our gross margins resulting from an increase or decrease in these costs. Forward contracts which are derivative instruments are reported in the consolidated balance sheets at their fair values, unless they qualify for the normal purchase normal sale ("NPNS") exception and such exception has been elected. If the NPNS exception is elected, the fair values of such contracts are not recognized on the balance sheet.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Our consolidated financial statements and related financial statement schedule, together with the report of independent registered accounting firm, appear at pages through of this Annual Report on Form 10-K for the year ended December 31, 2019.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Rayonier Advanced Materials management is responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed with the objective of ensuring that information required to be disclosed in reports filed under the Exchange Act, such as this annual report on Form 10-K, is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Because of the inherent limitations in all control systems, no control evaluation can provide absolute assurance all control exceptions and instances of fraud have been prevented or detected on a timely basis. Even systems determined to be effective can provide only reasonable assurance their objectives are achieved.
Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K, our management, including the Chief Executive Officer and Chief Financial Officer, concluded the design and operation of the disclosure controls and procedures were effective as of December 31, 2019.
Internal Control over Financial Reporting
With regard to our internal control over financial reporting as defined in paragraph (f) of Rule 13a-15(f), see Management’s Report on Internal Control over Financial Reporting on page, followed by the Reports of Independent Registered Public Accounting Firm on page, included in Item 8 - Financial Statements and Supplementary Data of this annual report on Form 10-K.
For the year ended December 31, 2019, based upon the evaluation required by paragraph (d) of Rule 13a-15, there were no changes in our internal control over financial reporting that would materially affect or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B.
Item 9B.
Other Information
None.
Part III
Certain information required by Part III is incorporated by reference from the Company’s definitive Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for the Company’s 2020 Annual Meeting of Stockholders (the “Proxy Statement”). We will make the Proxy Statement available on our website at www.rayonieram.com as soon as it is filed with the SEC.
Item 10.
Item 10.
Information about our Directors, Executive Officers and Corporate Governance
The information required by this Item with respect to directors, executive officers and corporate governance is incorporated by reference from the sections entitled “Commitment to Best Practices in Corporate Governance,” and “Election of Directors,” and the subsections entitled “Executive Compensation Tables and Related Information-Executive Officers and Delinquent Section 16(a) Reports” and “Ratification of the Appointment of Independent Registered Public Accounting Firm-Audit Committee Financial Experts” in the Proxy Statement. The information required by this Item with respect to disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act is incorporated by reference to the section entitled “Delinquent Section 16(a) Reports” in the Proxy Statement.
Our Standard of Ethics and Code of Corporate Conduct, which is applicable to our principal executive officer and financial and accounting officers, is available on our website, www.rayonieram.com. Any amendments to or waivers of the Standard of Ethics and Code of Corporate Conduct will also be disclosed on our website.
The information called for by Item 11
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information called for by Item 12 is incorporated herein by reference from the subsections entitled “Executive Compensation Tables and Related Information-Stock Ownership of Directors and Executive Officers, Security Ownership of Certain Beneficial Owners and Equity Compensation Plan Information” in the Proxy Statement.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information called for by Item 13 is incorporated herein by reference from the section entitled “Election of Directors,” and the subsections entitled “Commitment to Best Practices in Corporate Governance-Corporate Governance Principles, Director Independence and Related Person Transactions” in the Proxy Statement.
Item 14.
Item 14.
Principal Accounting Fees and Services
The information called for by Item 14 is incorporated herein by reference from the subsection entitled “Ratification of the Appointment of Independent Registered Public Accounting Firm-Information Regarding Independent Registered Public Accounting Firm” in the Proxy Statement.
Part IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
(a) 1. Consolidated Financial Statements.
For a list of the consolidated financial information included herein, see page.
2. Financial Statement Schedules.
All other schedules have been omitted as the required information is not applicable or the information is presented in the Consolidated Financial Statements or notes thereto under Item 8 herein. The following consolidated financial statement schedule is included in Item 8:
Schedule II-Valuation and Qualifying Accounts
3. List of Exhibits.
(b) Exhibits.
See Item 15(a)(3).
(c) Financial Statement Schedule.
See Item 15(a)(2).
* The exhibits to the Arrangement Agreement have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish copies of any such schedules and exhibits to the U.S. Securities and Exchange Commission upon request.
** Management contract or compensatory plan.
***Certain confidential portions of this exhibit were omitted by means of marking such portions with asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Rayonier Advanced Materials Inc.
(Registrant)
By:
/s/ MARCUS J. MOELTNER
Marcus J. Moeltner
Chief Financial Officer and
Senior Vice President, Finance
(Duly Authorized Officer and Principal Financial Officer)
Date: March 2, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ PAUL G. BOYNTON
Chairman of the Board, President and Chief Executive Officer
March 2, 2020
Paul G. Boynton
(Principal Executive Officer)
/s/ MARCUS J. MOELTNER
Chief Financial Officer and Senior Vice President, Finance
March 2, 2020
Marcus J. Moeltner
(Principal Financial Officer)
/s/ JOHN P. CARR
Chief Accounting Officer and Vice President, Controller
March 2, 2020
John P. Carr
(Principal Accounting Officer)
*
Lead Director
C. David Brown, II
*
Director
Charles E. Adair
*
Director
DeLyle W. Bloomquist
*
Director
Julie A. Dill
*
Director
Mark E. Gaumond
*
Director
James F. Kirsch
*
Director
Thomas I. Morgan
*
Director
Lisa M. Palumbo
*By:
/s/ MARCUS J. MOELTNER
Marcus J. Moeltner
(Attorney-In-Fact)
March 2, 2020
Page
Management’s Report on Internal Control over Financial Reporting
F- 2
Reports of Independent Registered Public Accounting Firm
F- 3
Consolidated Statements of Income and Comprehensive Income for the Three Years Ended December 31, 2019
F- 5
Consolidated Balance Sheets as of December 31, 2019 and 2018
F- 6
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2019
F- 7
Notes to Consolidated Financial Statements
F- 8
Index to Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
F- 47
All other financial statement schedules have been omitted because they are not applicable, the required matter is not present, or the required information has been otherwise supplied in the financial statements or the notes thereto.
F- 1
Management’s Report on Internal Control over Financial Reporting
The management of Rayonier Advanced Materials Inc. and its subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our system of internal controls over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of the inherent limitations of internal control over financial reporting, misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Rayonier Advanced Materials Inc.’s management, under the supervision of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making this assessment, we used the framework included in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on our evaluation under the criteria set forth in Internal Control - Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2019.
Grant Thornton LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2019. The report on the Company’s internal control over financial reporting as of December 31, 2019, is on page.
F- 2
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Rayonier Advanced Materials Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Rayonier Advanced Materials Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 2, 2020 expressed an unqualified opinion.
Change in accounting principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2016.
Jacksonville, FL
March 2, 2020
F- 3
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Rayonier Advanced Materials Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Rayonier Advanced Materials Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated March 2, 2020 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Jacksonville, Florida
March 2, 2020
F- 4
Rayonier Advanced Materials Inc.
Consolidated Statements of Income and Comprehensive Income
For the Years Ended December 31,
(Dollars in thousands, except per share amounts)
See Notes to Consolidated Financial Statements.
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Rayonier Advanced Materials Inc.
Consolidated Balance Sheets
As of December 31,
(Dollars in thousands, except common share amounts)
See Notes to Consolidated Financial Statements.
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Rayonier Advanced Materials Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, (Dollars in thousands)
See Notes to Consolidated Financial Statements.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands unless otherwise stated)
1.Nature of Operations and Basis of Presentation
Nature of Operations
Rayonier Advanced Materials Inc. (“the Company”) is a leading manufacturer of high purity cellulose products, lumber, pulp and paper products. The Company operates in the following business segments:
High Purity Cellulose
The Company, through its four production facilities located in the United States (“U.S.”), Canada and France, manufactures and markets high purity cellulose, which is sold as either cellulose specialties or commodity products. Cellulose specialties are primarily used in dissolving chemical applications that require a highly purified form of cellulose. Commodity products are used for commodity viscose and absorbent materials applications. Commodity viscose is a raw material required for the manufacture of viscose staple fibers which are used in woven and non-woven applications. Absorbent materials, typically referred to as fluff fibers, are used as an absorbent medium in consumer products. Sales of resins, chemicals, and energy, a majority of which are by-products of the manufacturing process, are included in the high purity cellulose segment.
Forest Products
The Company, through its seven sawmills in Canada, manufactures and markets high-quality, construction-grade lumber in North America. The lumber, primarily spruce, pine, or fir, is used in the construction of residential and multi-family homes, light industrial and commercial facilities, and the home repair and remodel markets. The wood chips, manufactured as a by-product of the lumber manufacturing process, are used in the Company’s Canadian High Purity Cellulose, Pulp and Paper plants.
Paperboard
The Company, through its production facility in Canada, manufactures and markets paperboard products. Paperboard is used for packaging, printing documents, brochures, promotional materials, paperback book or catalog covers, file folders, tags and tickets.
Pulp & Newsprint
The Company, through its production facilities in Canada, manufactures and markets high-yield pulp and newsprint. High-yield is used by paper manufacturers to produce paperboard, packaging, printer and writing papers and a variety of other paper products. Newsprint is a paper grade used to print newspapers, advertising materials and other publications.
Basis of Presentation
Principles of Consolidation
The consolidated financial statements include the accounts and operations of the Company and its wholly owned, majority owned and controlled subsidiaries. The Company applies the equity method of accounting for investments in which it has an ownership interest from 20 percent to 50 percent or exercises significant influence over the related investee’s operations. All significant intercompany accounts and transactions are eliminated in consolidation.
Discontinued Operations
As a result of the sale its Matane, Quebec, Canada high-yield pulp mill, the Company has reclassified certain prior year amounts to conform to the current year’s presentation for 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 our operations and financial results. See Note 3 - Discontinued Operations for additional information.
Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
Fiscal Year
The Company’s fiscal year end is the last day of the calendar year. For interim reporting periods, the Company uses the last Saturday of the fiscal quarter.
Subsequent Events
Events and transactions subsequent to the balance sheet date have been evaluated for potential recognition and disclosure through March 2, 2020, the date these financial statements were available to be issued. There were no subsequent events warranting disclosure.
2.Summary of Significant Accounting Policies and New Accounting Pronouncements
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and to disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. There are risks inherent in using estimates and therefore, actual results could differ from those estimates.
Translation of Foreign Currency
Assets and liabilities of consolidated subsidiaries whose functional currency is other than the U.S. dollar are translated into U.S. dollars using currency exchange rates at the balance sheet date. Revenues and expenses are translated using the average currency exchange rates during the period. Foreign currency translation gains and losses are reported as a component of Accumulated Other Comprehensive Income (Loss) (“AOCI”). Gains and losses resulting from foreign currency transactions are included in operating results as incurred.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and other investments that are highly liquid with original maturities of three months or less when purchased.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at invoiced amounts and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company's allowance is established based on historical patterns of accounts receivable collections and general economic conditions. Outstanding accounts receivable balances are reviewed quarterly or more frequently when circumstances indicate a review is warranted, for example if there is a significant change in the aging of the Company’s receivables or a customer’s financial condition. Write-offs are recorded at the time a customer receivable is deemed uncollectible and collection efforts have been exhausted.
Inventory
Finished goods, work-in-process and raw materials inventories are valued at the lower of cost, as determined on the first-in, first-out basis, or market. Manufacturing and maintenance supplies are valued at average cost. Inventory costs include material, labor and manufacturing overhead. The need for a provision for estimated losses from obsolete, excess or slow-moving inventories is reviewed periodically.
Property, Plant, Equipment and Depreciation
Property, plant and equipment additions are recorded at cost, including applicable freight, interest, construction and installation costs. The Forest Products segment production related plant and equipment are depreciated using the straight-line method over 3 to 20 years. High Purity Cellulose, Paperboard and Pulp & Newsprint production related plant and equipment are depreciated using the units-of-production method. The total units of production used to calculate depreciation expense is determined by factoring annual production days, based on normal production conditions, by the economic useful life of the asset involved. Production related assets under finance leases are depreciated using the straight-line method over the related lease term. The Company depreciates its non-production assets, including office, lab and transportation equipment, using the straight-line depreciation method over 3 to 25 years. Buildings and land improvements are depreciated using the straight-line method over 15
F- 9
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
to 35 years and 5 to 30 years, respectively. Depreciation expense reflected in cost of sales in the Consolidated Statements of Income was $137 million, $135 million and $93 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Gains and losses on the retirement of assets are included in operating income. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets that are held and used is measured by net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying value exceeds the fair value of the assets, which is based on a discounted cash flows model. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
Maintenance Costs
The Company performs scheduled inspections, repairs and maintenance of plant machinery and equipment at the Company’s High Purity, Paperboard and Pulp & Newsprint manufacturing facilities during a full plant shutdown. Costs associated with these planned outage periods are referred to as shutdown costs and are incurred to ensure the long-term reliability and safety of the manufacturing operations. Shutdown costs are accounted for using the deferral method, under which expenditures related to shutdown are capitalized in other assets when incurred and amortized to production costs on a straight-line basis over the period benefited, or the period of time until the next scheduled shutdown which can generally range from one year to eighteen months. Shutdown costs are classified as working capital in operating activities in the consolidated statements of cash flows. As of December 31, 2019 and 2018 the Company had $19 million and $12 million, respectively, in shut down costs capitalized in other current assets.
Intangible Assets
The Company has definite-life intangible assets which it acquired through a business combination. The definite-life intangible assets consist of customer lists and trade-names and are amortized over their estimated useful lives generally for periods ranging from 8 to 15 years. The Company evaluates the recovery of its definite-life intangible assets by comparing the net carrying value of the asset group to the undiscounted net cash flows expected to be generated from the use and eventual disposition of that asset group when events or changes in circumstances indicate that its carrying amount may not be recoverable. If the carrying amount of the asset group is not recoverable, the fair value of the asset group is measured, and, if the carrying amount exceeds the fair value, an impairment loss is recognized.
The Company’s definite-lived intangible assets are summarized as follows (in thousands):
Total amortization expense related to definite-lived assets was $7 million, $7 million and $1 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, amortization expense for the years ended December 31, 2020 through 2024 is expected to be $7 million per year and $10 million for all remaining years thereafter.
F- 10
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
Equity Method Investment
The Company holds a 45 percent interest in LignoTech Florida LLC (“LTF”), a joint venture accounted for under the equity method of accounting. Borregaard, a public company in Norway traded on the Oslo Exchange, owns the remaining 55 percent interest. LTF purchases sulfite liquor from the Company’s Fernandina Beach, Florida plant and converts it to purified lignins and ligno-sulfonates which are used in concrete, textile dyes, pesticides, batteries and other products.
The Company recorded $6 million and $2 million of lignin sales to the LTF joint venture during the years ended December 31, 2019 and 2018, respectively. The Company records its share of net earnings and losses on the investment within “Other operating expense, net” in the Consolidated Statements of Income and Comprehensive Income. See Note 19 - Other Operating Expense, Net
The Company is liable for certain financing agreements related to the entity. See Note 22 - Commitments and Contingencies for further discussion.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy that prioritizes the inputs used to measure fair value was established as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flows methodologies and similar techniques that use significant unobservable inputs.
Derivative Instruments
Derivatives are recognized on the consolidated balance sheets at fair value and are classified according to their asset or liability position and the expected timing of settlement. Changes in the fair values of derivatives are recorded in net earnings or other comprehensive income based on whether the instrument is designated and effective as a hedge transaction and, if so, the type of hedge transaction. Gains or losses on derivative instruments reported in AOCI are reclassified to earnings in the period the hedged item affects earnings. If the underlying hedged transaction ceases to exist, any associated amounts reported in AOCI are reclassified to earnings at that time. Any ineffectiveness is recognized in earnings in the current period.
Revenue Recognition and Measurement
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which was adopted on January 1, 2018, using the modified retrospective basis. The core principle of ASC 606 is that a company should recognize revenue when it transfers control of goods or services to customers for an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services.
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of the Company’s contracts have a single performance obligation to transfer products. Accordingly, it recognizes revenue when control has been transferred to the customer. Generally, control passes upon delivery to a location in accordance with terms and conditions of the sale. Changes in customer contract terms and conditions, as well as the timing of orders and shipments, may have an impact on the timing of revenue recognition.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring its products and is generally based upon contractual arrangements with customers or published indices. The Company sells its products both directly to customers and through distributors and agents typically under agreements with payment terms less than 90 days.
The Company elected to account for shipping and handling as activities to fulfill the promise to transfer the goods. As such, shipping and handling costs incurred are recorded in cost of sales. In addition, the Company has excluded from net sales any value-add, sales and other taxes which we collect concurrent with its revenue-producing activities.
F- 11
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
The nature of the Company’s contracts may give rise to variable consideration, which may be constrained, including sales volume-based rebates to customers. The Company estimates the level of sales volumes based on anticipated purchases at the beginning of the period and records a rebate accrual for each purchase toward the requisite rebate volume. These estimated rebates are included in the transaction price as a reduction to net sales.
We have certain contracts which contain performance obligations which are not significant in the context of the contract with the customer and have elected not to assess whether these promised goods or services are performance obligations.
Contract liabilities primarily relate to prepayments received from our customers before revenue is recognized and sales volume rebates payable to customers. These amounts are included in accrued customer incentives and prepayments in the consolidated balance sheets (see Note 9 - Accrued and Other Current Liabilities). The Company does not have any material contract assets as of December 31, 2019.
These methodologies are consistent with the manner in which we have historically accounted for the recognition of revenue.
Environmental Costs
The Company has established liabilities to assess, remediate, maintain and monitor sites related to disposed operations from which no current or future benefit is discernible. These obligations are established based on projected spending over the next 20 years and require significant estimates to determine the proper amount at any point in time. The projected period, from 2020 through 2040, reflects the time during which potential future costs are both estimable and probable. As new information becomes available, these cost estimates are updated and the recorded liabilities are adjusted appropriately. Environmental liabilities are accounted for on an undiscounted basis and are reflected in current and non-current liabilities for disposed operations in the consolidated balance sheets.
Employee Benefit Plans
The determination of expense and funding requirements for the Company’s defined benefit pension and postretirement health care and life insurance plans are largely based on a number of actuarial assumptions. The key assumptions include discount rate, return on assets, salary increases, health care cost trends, mortality rates, longevity and service lives of employees.
The components of periodic pension and post retirement costs, other than service costs, are presented separately outside of operating income in “Other components of net periodic benefit costs” on the consolidated statement of income. The service cost component of net periodic benefit cost is presented in cost of sales and selling, general and administrative expense, which correlates with the related employee compensation costs arising from services rendered during the period. Only the service cost component of the net periodic benefit cost is eligible for capitalization in assets.
Changes in the funded status of the Company’s plans are recorded through comprehensive income in the year in which the changes occur. Actuarial gains and losses, which occur when actual experience differs from actuarial assumptions, are reflected in stockholders’ equity, net of taxes. If actuarial gains and losses exceed ten percent of the greater of plan assets or plan liabilities, the Company will amortize them over the average future service period of employees.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, operating loss carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are measured pursuant to tax laws using rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The Company records a valuation allowance to reduce the carrying amounts of deferred tax assets if it is more likely than not such deferred tax assets will not be realized. Interest expense and penalties, if applicable, related to unrecognized tax benefits are recorded in income tax expense.
The Company’s income tax returns are subject to audit by U.S. federal and state taxing authorities as well as foreign jurisdictions, including Canada and France. In evaluating the tax benefits associated with various tax filing positions, the Company records a tax benefit for an uncertain tax position if it is more-likely-than-not to be realized upon ultimate settlement of the issue. The Company records a liability for an uncertain tax position that does not meet this criterion. The Company adjusts its liabilities for unrecognized tax benefits in the period in which it is determined the issue is settled with the taxing authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new facts or information becomes available.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
New Accounting Pronouncements
Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses on Financial Instruments (Topic 326). The updated guidance is to be applied on a modified retrospective approach and is effective for years, and interim periods within those fiscal years, beginning after December 15, 2019. The update provides guidance on the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The amendment replaces the current incurred loss impairment approach with a methodology to reflect expected credit losses and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. Early adoption is permitted for fiscal years beginning after December 15, 2018, and interim periods therein. The Company anticipates the adoption of this new standard will not have a material impact, if any, to the Consolidated Financial Statements.
Recently Adopted Accounting Pronouncements
Leases
The Company adopted ASU 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 assets and lease liability of $10 million and $11 million, respectively, and the reversal of deferred rent liability balances as of January 1, 2019. See Note 5 - Leases for additional information.
Pension
In August 2018, the FASB issued ASU No. 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans, which amended the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The update is effective for fiscal years ending after December 15, 2020, early adoption is permitted. The amendment removes disclosures that are no longer considered cost beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant. Entities are required to apply the amendment retrospectively for all periods presented. The Company elected to early adopt the new guidance in 2019. The adoption did not have a material impact on the Company’s consolidated financial statements. See Note 18 -Employee Benefit Plans, for additional information.
Fair Value
On August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement. This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. This new standard requires changes to the disclosure requirements for fair value measurements for certain Level 3 items and specifies that some of the changes must be applied prospectively, while others should be applied retrospectively. The Company adopted this ASU during the fourth quarter of 2019. The Company does not have any Level 3 items, as such, the adoption of this new standard did not have an impact on its financial statement disclosures. See Note 13 -Fair Value Measurements, for additional information.
3.Discontinued Operations
In November 2019, the Company sold its Matane, Quebec pulp mill to Sappi Limited, a global diversified wood fiber company, for a gross purchase price of approximately $175 million. The mill produces approximately 270,000 metric tons of high-yield
F- 13
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
pulp and sells the product globally for use in manufacturing paperboard, packaging, and printing and writing paper. The Matane mill was acquired by the Company as part of its acquisition of Tembec Inc. (“Tembec”) in November 2017 and was previously reported as part of the Company’s Pulp segment.
The following table presents the major classes of assets and liabilities of discontinued operations that are classified as held for sale as of December 31, 2018:
Income (loss) from discontinued operations is comprised of the following:
(a)
The Company was required to repay $100 million of debt from proceeds received from the sale of Matane. As such, interest expense has been allocated to discontinued operations using the weighted-average interest rates in effect for each period presented based on the proportionate amounts required to be repaid.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
Other discontinued operations information is as follows:
4.Tembec Acquisition
On November 17, 2017, the Company acquired all of the outstanding common shares of Tembec for an aggregate purchase price of approximately $317 million Canadian dollars cash and 8.4 million shares of the Company’s common stock, par value $0.01 per share (the “Acquisition”). The aggregate purchase price was allocated to the major categories of assets and liabilities acquired based upon their estimated fair values as of December 31, 2017, which were based, in part, upon outside preliminary appraisals for certain assets. As a result of the preliminary allocation, a gain on bargain purchase was recognized of $317 million, primarily as a result of the elimination of Tembec’s valuation allowance associated with certain deferred tax assets. The Company finalized the valuation and completed the purchase consideration allocation within the measurement period and recognized an additional gain on bargain purchase of $20 million during 2018.
Tembec’s operating results contributed net revenue of $139 million and no operating income for the period from the acquisition date of November 17, 2017 to December 31, 2017. The Company recognized $34 million of acquisition related expenses in operating expense during 2017.
The following presents the unaudited pro forma consolidated financial information of the Company as if the acquisition of Tembec was completed on January 1, 2017. The unaudited pro forma financial information includes adjustments for the pro forma year ended December 31, 2017 for (i) depreciation on acquired property, plant and equipment of $15 million; (ii) amortization of intangible assets recorded at the date of the transactions of $7 million; (iii) the elimination of acquisition related costs of $49 million and the fair value write-up of inventory of $23 million; (iv) the elimination of interest expense related to Tembec debt that was paid off, net of interest expense associated with financing the acquisition of $38 million; (v) the elimination of the gain on bargain purchase and (vi) total weighted average shares outstanding related to the acquisition. This information is presented for informational purposes only and does not purport to be indicative of the results of future operations or the results that would have occurred had the transaction taken place on January 1, 2017.
5. Leases
The Company’s operating and finance leases are primarily for corporate offices, warehouse space, rail cars and equipment. As of December 31, 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 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 December 31, 2019 was 6.0 percent. The weighted average discount rate used in determining the finance lease ROU assets and liabilities as of December 31, 2019 was 7.0 percent.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
The Company’s operating and finance lease cost is as follows:
As of December 31, 2019, the weighted average remaining lease term is 4.3 years and 6.9 years for operating leases and financing leases, respectively. Cash provided by operating activities includes approximately $6 million from operating lease payments made during the year ended December 31, 2019.
As of December 31, 2019, assets acquired under finance leases of $3 million are reflected in Property, Plant and Equipment, net. The Company’s finance leases liabilities are included as debt and the maturities for the next five four years and thereafter are included in Note 10 - Debt and Finance Leases.
The Company’s balance sheet includes the following operating lease assets and liabilities:
As of December 31, 2019, operating lease maturities for 2020 through 2024 and thereafter are as follows:
6.Accounts Receivable
The Company’s accounts receivable included the following for the years ended December 31:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(a)
Accounts receivable, other consists primarily of value added/consumption taxes, government grants receivable and accrued billings due from government agencies.
7.Inventory
The Company’s inventory included the following for the years ended December 31:
8.Property, Plant and Equipment
The Company’s property, plant and equipment included the following as of December 31,:
9.Accrued and Other Current Liabilities
The Company’s accrued and other current liabilities included the following as of December 31,:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
10.Debt and Finance Leases
The Company’s debt and finance leases include the following for the years ended December 31,:
Debt and finance lease payments due during the next five years and thereafter are as follows:
5.50% Senior Notes due 2024
On May 22, 2014, the Company issued $550 million in aggregate principal amount of 5.50 percent senior notes due 2024 (the “Senior Notes”). The Senior Notes were issued and sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the U.S. Securities Act of 1933, as amended (the “Securities Act”) and non-U.S. persons pursuant to Regulation S under the Securities Act.
During the fourth quarter of 2018, the Company repurchased in the open market $11 million of the Senior Notes and retired them for $10 million plus accrued and unpaid interest. In connection with the retirement of these Senior Notes, the Company recorded a gain in other income of approximately $1 million, which includes the write-off of unamortized debt issuance costs. There were no open market purchases of these notes during the year ended December 31, 2019.
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Notes to Consolidated Financial Statements (Continued)
The indenture governing the Senior Notes contains various customary covenants that limit the ability of the Company and its restricted subsidiaries, as defined by the Senior Notes, to take certain specified actions, subject to certain exceptions, including: creating liens; incurring indebtedness; making investments and acquisitions; engaging in mergers and other fundamental changes; making dispositions; making restricted payments, including dividends and distributions; and consummating transactions with affiliates. Additionally, the Senior Notes contain customary affirmative covenants and customary events of default (subject, in certain cases, to customary grace or cure periods), including, without limitation, payment defaults, breach of covenant defaults, bankruptcy defaults, judgment defaults, defaults under certain other indebtedness and changes in control. At December 31, 2019, the Company was in compliance with all covenants under the Senior Notes.
Senior Secured Credit Facility
The Company’s senior secured credit facilities (collectively the “Credit Facility”) consists of a $230 million senior secured term loan (the “Term A-1 Loan Facility”), a $450 million senior secured year term loan (the “Term A-2 Loan Facility” and together with the Term A-1 Facility, the “Term Loan Facilities”), a $100 million revolving credit facility (the “U.S. Revolver”) and a multi-currency revolving credit facility in a U.S. Dollar equivalent amount of $150 million (the “Multi-currency Revolver” and together with the U.S. Revolver, the “Revolving Credit Facility”). The lenders under the Credit Facilities have a first priority security interest in substantially all the Company’s current and future U.S. and Canadian material assets.
In September 2019, the Company entered into an amendment (the “Amendment”) of the Credit Facility under which, among other changes, the lenders have agreed to relax the total net senior first lien secured leverage ratio and interest coverage ratio tests through 2021. The Amendment also increases the interest rate margin on borrowings to be paid to lenders by a maximum of 1.25 percent, subject to operation of a pricing grid which provides for reduced interest rate margins with improved leverage ratios; provides additional collateral for the lenders; and requires the Company to maintain availability under its revolving credit facility in specified amounts that vary to reflect the seasonality of the business. The Amendment reduced the availability of the multi-currency revolver borrowings to $126 million and the U.S. revolver borrowings to $84 million. The Amendment was accounted for as a debt modification and, as such, lender fees of $4 million were capitalized and will be amortized over the remaining term of the Credit Facility and third-party fees of $4 million were expensed as incurred.
The loans under the Credit Facility, as amended, bear interest at either (a) a base rate plus an applicable margin ranging between 2 percent and 3 percent or (b) an adjusted LIBOR rate plus an applicable margin ranging between 3 percent and 4 percent. The applicable margin for borrowings under the Credit Facility is based on a consolidated total net leverage-based pricing grid.
As of December 31, 2019, the Company had $87 million of available borrowings under the Revolving Credit Facility after taking into account $33 million used to secure outstanding letters of credit. The Amendment also requires the Company to maintain between $80 million and $90 million of availability on our revolving credit facility, which is also reflected as a reduction in the available borrowings.
The Credit Facility, as amended, contains a number of covenants that limit the ability of the Company and its restricted subsidiaries, as defined by the Credit Facility, to take certain specified actions, subject to certain exceptions, including: creating liens; incurring indebtedness; making investments and acquisitions; engaging in mergers and other fundamental changes; making dispositions; making restricted payments, including dividends and distributions; and consummating transactions with affiliates. As of December 31, 2019, the Company will be required to maintain a less restrictive consolidated first lien secured net leverage ratio of no greater than 5.60 to 1.00 and an interest coverage ratio of no less than 1.65 to 1.00. These covenant ratios gradually become more restrictive through December 31, 2021 to a first lien secured net leverage ratio of no greater than 3.00 to 1.00 and an interest coverage ratio of no less than 3.00 to 1.00 for the quarterly period ended March 31, 2022. Additionally, the Credit Facility contains customary affirmative covenants for credit facilities of this kind and customary events of default (subject, in certain cases, to customary grace or cure periods), including, without limitation, non-payment of interest or principal, breaches of covenants, bankruptcy filing, judgment defaults, defaults under certain other indebtedness and changes in control. As of December 31, 2019, the Company was in compliance with all covenants under the Credit Facility.
z11. Environmental Liabilities
The Company’s environmental liabilities relate to sawmills, pulp, paper and wood treating plants which have ceased operations other than environmental investigation and remediation activities. The Company owns or has liability for approximately twenty sites that are subject to various federal, state or provincial statutes, including but not limited to, the Resource Conservation and Recovery Act (“RCRA”), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”)
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Notes to Consolidated Financial Statements (Continued)
and the Environmental Protection Act in the United States, and similar laws in Canada and France, related to the investigation and remediation of environmentally-impacted sites.
The Company estimates its environmental liabilities based on its current interpretation of environmental laws and regulations when it is probable a liability has been incurred and the amount of such liability is estimable. The Company calculates estimates based on a number of factors, including the application and interpretation of current environmental laws, regulations and other requirements; reports and advice of internal and third-party environmental specialists; and management’s knowledge and experience with these and similar types of environmental matters. These estimates include potential costs for investigation, assessment, remediation, ongoing operation and maintenance (where applicable), and post-remediation monitoring of the sites, as well as the cost of legally-required financial assurance relating to the Company’s obligations on an undiscounted basis, generally for a period of 20 years. These environmental liabilities do not include potential third-party recoveries to which the Company may be entitled unless they are probable and estimable.
The following table provides detail for specific sites where current estimates exceed 10 percent of the total liabilities for disposed operations at December 31, 2019, 2018, or 2017. An analysis of the activity of the liabilities for disposed operations for the years ended December 31, 2019 and 2018 is as follows:
(a)
Included in the Increase (Decrease) to Liabilities during the year ended December 31, 2019 and 2018 is a $1 million increase and a $1 million decrease of the liability, respectively, due to foreign currency gains and losses.
A brief description of the above identified sites is as follows:
Port Angeles, Washington - The Company operated a pulp mill at this site from 1930 until 1997. The site and the adjacent marine areas (a portion of Port Angeles harbor) have been in various stages of the assessment process under the Washington Model Toxics Control Act (“MTCA”) since 2000, and several voluntary interim soil clean-up actions have been performed during this time. In addition, the Company may be liable under CERCLA for “natural resource damages” caused by releases from the site. As a result of an agreed order with the Washington State Department of Ecology (“Ecology”), the remainder of the MTCA regulatory process will be completed on a set timetable, subject to approval of all reports and studies by Ecology. Upon completion of all work required under the agreed order and negotiation of an approved remedy, additional remedial measures for the site and off-site areas may be necessary and, as a result, current cost estimates and the corresponding liability could change. During 2019 and 2018, the estimated liability increased by $10 million and $1 million, respectively, due to changes in the Company’s remediation cost estimates, partly offset by payments made during the year.
Augusta, Georgia - The Company operated a wood treatment plant at this site from 1928 to 1988. This site operates under a 10-year hazardous waste permit renewed and issued pursuant to RCRA in 2015. Ongoing remediation activities currently consist primarily of groundwater recovery and treatment. Current cost estimates and the corresponding liability could vary if recovery or discharge volumes change or if changes to current remediation activities are required in the future. During 2019 and 2018, the Company recorded an $1 million increase and a $1 million decrease in the liability, respectively, due to payments and to the change in the estimated costs related to the site’s operation and maintenance.
Baldwin, Florida - The Company operated a wood treatment plant at this site from 1954 to 1987. This site operates under a 10-year hazardous waste permit renewed and issued pursuant to RCRA in 2017. Ongoing remediation activities currently consist primarily of groundwater recovery and treatment. Additional remedial activities may be necessary in the future and, therefore,
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
current cost estimates and the corresponding liability could change. During 2018, the Company decreased the estimated liability by approximately $5 million due to payments and a decrease in the estimated costs related to the site’s remediation plan. During 2019, the reserve remained flat as payments during the year were essentially offset by an increase in the remediation cost estimates.
In addition to the estimated liabilities, the Company is subject to the risk of reasonably possible additional liabilities in excess of the established liabilities due to potential changes in circumstances and future events, including, without limitation, changes to current laws and regulations; changes in governmental agency personnel, direction, philosophy or enforcement policies; developments in remediation technologies; increases in the cost of remediation, operation, maintenance and monitoring of its disposed operations sites and providing financial assurance relating thereto; changes in the volume, nature or extent of contamination to be remediated or monitoring to be undertaken; the outcome of negotiations with governmental agencies or non-governmental parties; and changes in accounting rules or interpretations. Based on information available as of December 31, 2019, the Company estimates this exposure could range up to approximately $80 million, although no assurances can be given that this amount will not be exceeded given the factors described above. These potential additional costs are attributable to several of the above sites and other applicable liabilities. This estimate excludes liabilities which would otherwise be considered reasonably possible but for the fact that they are not currently estimable primarily due to the factors discussed above.
Subject to the previous paragraph, the Company believes its estimates of liabilities are sufficient for probable costs expected to be incurred over the next 20 years with respect to its disposed operations. However, no assurances are given these estimates of liabilities will be sufficient for the reasons described above, and additional liabilities could have a material adverse effect on the Company’s financial position, results of operations and cash flows.
12.Derivative Instruments
The Company’s earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates. The Company allows for the use of derivative financial instruments to manage interest rate and foreign currency exchange rate exposure but does not allow derivatives to be used for speculative purposes.
All derivative instruments are recognized on the consolidated balance sheets at their fair value and are either (1) designated as a hedge of a forecasted transaction or (2) undesignated. Changes in the fair value of a derivative designated as a hedge are recorded in other comprehensive income until earnings are affected by the hedged transaction and are then reported in current earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings.
Interest Rate Risk
The Company’s primary debt obligations utilize variable-rate LIBOR, exposing the Company to variability in interest payments due to changes in interest rates. The Company entered into interest rate swap agreements to reduce the volatility of financing costs, achieve a desired proportion of fixed-rate versus floating-rate debt and to hedge the variability in cash flows attributable to interest rate risks caused by changes in the LIBOR benchmark.
The Company designated the swaps as cash flow hedges and assesses their effectiveness using the hypothetical derivative method in conjunction with regression. Effective gains and losses deferred to AOCI are reclassified into earnings over the life of the associated hedge. Ineffective gains and losses are classified to earnings immediately. There was no hedge ineffectiveness during 2019 or 2018.
Foreign Currency Exchange Rate Risk
Foreign currency fluctuations affect investments in foreign subsidiaries and foreign currency cash flows related to third party purchases, product shipments, and foreign-denominated debt. The Company is also exposed to the translation of foreign currency earnings to the U.S. dollar. Management may use foreign currency forward contracts to selectively hedge its foreign currency cash flows exposure and manage risk associated with changes in currency exchange rates. The Company’s principal foreign currency exposure is to the Canadian dollar, and to a lesser extent, the euro.
The notional amounts and maturity dates of outstanding derivative instruments as of December 31, 2019 and 2018 are presented below.
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Notes to Consolidated Financial Statements (Continued)
(a) Maturity date of December 2020
(b) Various maturity dates through September 2020
(c) Various maturity dates in 2020, 2022 and 2028
The fair values of derivative instruments included in the consolidated balance sheet as of December 31, 2019 and 2018 are provided in the below table. See Note 13 - Fair Value Measurements for additional information related to the Company’s derivatives.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
The effects of derivative instruments designated as cash flow hedges, the related changes in AOCI and the gains and losses in income for the years ended December 31, 2019 and 2018 were as follows:
The effects of derivative instruments not designated as hedging instruments on the statement of income for the years ended December 31, 2019 and 2018 were as follows:
The after-tax amounts of unrealized gains in AOCI related to hedge derivatives at December 31, 2019 and 2018 are presented below:
The amount of future reclassifications from AOCI will fluctuate with movements in the underlying markets.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
13.Fair Value Measurements
The following table presents the carrying amount, estimated fair values and categorization under the fair value hierarchy for financial instruments held by the Company at December 31, 2019 and 2018, using market information and what management believes to be appropriate valuation methodologies discussed in further detail below:
(a) These items represent derivative instruments.
(b) Liabilities excludes finance lease obligation.
(c) The Company did not have Level 3 assets or liabilities at December 31, 2019 and 2018.
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 12 - 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.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
14.Stockholders' Equity
An analysis of stockholders’ equity is shown below (share amounts not in thousands):
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 automatically converted into shares of common stock on August 15, 2019. The number of shares of common stock issuable at conversion was determined based on the volume-weighted average price of the Company’s
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Notes to Consolidated Financial Statements (Continued)
common stock over a 20-trading day period immediately prior to the mandatory conversion date (“Applicable Market Value”). The Applicable Market Value for our common stock was less than $12.91, resulting in a conversion rate per share of 7.7459. On August 15, 2019, the Company issued approximately 13.4 million shares of common stock at conversion.
Dividends on the Preferred Stock were payable on a cumulative basis when declared by our Board of Directors. Preferred Stock dividends were paid at an annual rate of 8.00% of the liquidation preference of $100 per share. The final dividend was paid on August 15, 2019.
Common Stock Buyback
On January 29, 2018, the Board of Directors authorized a share buyback program pursuant to which the Company may, from time to time, purchase shares of its common stock with an aggregate purchase price of up to $100 million. During 2018, the Company repurchased and retired 2,570,449 shares of common stock under this buyback program at an average price of $15.44 per share, excluding commissions, for an aggregate purchase price of approximately $40 million. No shares were repurchased during the year ended December 31, 2019.
15.Accumulated Other Comprehensive Income (Loss)
AOCI was comprised of the following for the three years ended December 31:
(a)
The AOCI components for defined benefit pension and post-retirement plans are included in the computation of net periodic pension cost. See Note 18 - Employee 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. Additional details about the reclassifications related to derivative instruments is included in Note 12 -Derivative Instruments. There were no reclassifications to earnings for derivative instruments during the year ended December 31, 2017.
(c)
Represents a reclassification to retained earnings from the adoption of ASU No. 2018-02.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(d)
In October 2019, the Company purchased annuity contracts from a third-party insurance company who has assumed responsibility for future pension benefits for certain participants in our Canadian defined benefit plans. As a result, we recognized a loss on the settlement and de-recognition of the projected benefit obligation. See Note 18 - Employee Benefit Plans.
16.Earnings per Share of Common Stock
Basic earnings per share (“EPS”) is calculated by dividing net income available for common stockholders by the weighted-average number of shares of common stock outstanding during the year. Diluted EPS is calculated by dividing net income by the weighted-average number of shares of common stock outstanding adjusted to include the potentially dilutive effect of outstanding stock options, performance shares, restricted shares and Preferred Stock.
In connection with the acquisition of Tembec in November 2017, the Company issued 8.4 million shares of common stock as part of the consideration to Tembec shareholders. These shares were included in the calculation of weighted-average shares outstanding at December 31, 2017. Refer to Note 4- Tembec Acquisition for more information.
The following table provides details of the calculations of basic and diluted EPS for the three years ended December 31:
Anti-dilutive instruments excluded from the computation of diluted earnings per share for the three years ended December 31, are as follows:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
17.Incentive Stock Plans
As of December 31, 2019, the Company had two stock-based incentive plans. The Rayonier Advanced Materials Inc. Incentive Stock Plan (the “Prior Plan”) provided for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, performance shares, restricted stock, and restricted stock units, subject to certain limitations. The Company no longer issues shares under the Prior Plan. The Rayonier Advanced Materials Inc. 2017 Incentive Stock Plan (the “2017 Plan”) provides for up to 4.8 million shares to be granted for stock options, non-qualified stock options, stock appreciation rights, performance shares, restricted stock, and restricted stock units. Under the 2017 Plan, shares available for issuance may be increased by any shares of common stock subject to awards under the Prior Plan that, in whole or in part, are forfeited, terminated or expire unexercised, settled in cash in lieu of stock, or released from a reserve for failure to meet the maximum payout under a program. At December 31, 2019, approximately 3.0 million shares were available for future grants under the 2017 Plan.
During the year ended December 31, 2019, the Company made new grants of restricted stock units and performance-based stock units to certain employees. The 2019 restricted stock unit awards vest over three years. The 2019 performance-based stock unit awards are measured against an internal return on an invested capital target and metrics aligned with a weighted average cost of capital. Depending on performance against the targets, the awards will pay out in common stock amounts between 0 and 200 percent of the performance-based stock units awarded. The total number of common stock awards awarded 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 Company recognizes stock-based compensation expense on a straight-line basis over the service period of the award. The Company’s total stock-based compensation cost, including allocated amounts, for the years ended December 31, 2019, 2018 and 2017 was $7 million, $13 million and $9 million, respectively. These amounts may not reflect the cost of current or future equity awards.
The Company’s employee stock option compensation program generally provides accelerated vesting (i.e., a waiver of the remaining period of service required to earn an award) for awards held by employees at the time of their retirement. Stock-based compensation expense for stock option awards is recognized over the shorter of: (1) the service period (i.e., the stated period of time required to earn the award); or (2) the period beginning at the start of the service period and ending when an employee first becomes eligible for retirement.
Fair Value Calculations by Award
All restricted stock and performance share awards are presented for Rayonier Advanced Materials stock only. Option awards include Rayonier Advanced Materials awards held by employees of its former parent Rayonier Inc.
Non-Qualified Employee Stock Option Awards
Stock options are granted with an exercise price equal to the market value of the underlying stock on the grant date. They generally vest ratably over three years and have a maximum term of 10 years and two days from the grant date.
The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model. The Company has elected to value each grant in total and recognize the expense for stock options on a straight-line basis over three years. During the years ended December 31, 2019, 2018 and 2017, no options were granted.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
A summary of the Company’s stock option activity is presented below for the year ended December 31, 2019:
A summary of additional information pertaining to stock options granted to employees is presented below:
Restricted Stock and Stock Unit Awards
Restricted stock and stock units granted in connection with the Company’s performance share plan generally vests upon completion of periods ranging from 1 year to four years. The fair value of each share granted is equal to the share price of the underlying stock on the date of grant. As of December 31, 2019, there was $5 million of unrecognized compensation cost related to the Company’s outstanding restricted stock. This cost is expected to be recognized over a weighted average period of 1.5 years.
The following table summarizes the activity of restricted stock and stock units granted to employees for the three years ended December 31:
A summary of the Company’s restricted stock and stock units activity is presented below for the year ended December 31, 2019:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
Performance-Based Stock Unit Awards
The Company’s performance-based stock unit awards generally vest upon completion of a three-year period. The number of shares, if any, that are ultimately awarded is contingent upon the Company’s performance against an internal performance metric or a combination of an internal metric and a market condition.
The performance-based stock unit awards which are measured against a market condition or incorporate market conditions are valued using a Monte Carlo simulation model. The model generates the fair value of the market-based award or market-based portion of the award at the grant date. The related expense is then amortized over the award’s vesting period.
As of December 31, 2019, there was $2 million of unrecognized compensation cost related to the Company’s performance-based stock unit awards. This cost is expected to be recognized over a weighted average period of 1.01 years.
The following table summarizes the activity of the Company’s performance-based stock units awarded to its employees for the three years ended December 31:
A summary of the Company’s performance-based stock unit award activity is presented below for the year ended December 31, 2019:
The expected volatility is based on representative price returns using the stock price of several peer companies. The risk-free rate was based on the 3-year U.S. treasury rate on the date of the award. The following chart provides a tabular overview of the weighted average assumptions used in calculating the fair value of the awards granted for the three years ended December 31:
18. Employee Benefit Plans
Defined Benefit Plans
The Company has defined benefit pension and other postretirement plans covering certain union and non-union employees, primarily in the U.S., Canada and France. In connection with the Acquisition, we assumed the obligations of various defined benefit pension and other postretirement plans that were maintained by Tembec which cover certain employees, primarily in Canada and France. The defined benefit pension plans are closed to new participants.
In October 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 approximately $9 million in pension settlement losses which
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
were recognized in “Other components of net periodic benefit costs” in our Consolidated Statement of Income and Comprehensive Income for the year ended December 31, 2019.
Defined benefit pension and other postretirement plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change.
The following tables set forth the changes in the projected benefit obligation and plan assets and reconciles the funded status and the amounts recognized in the Consolidated Balance Sheets for the defined benefit pension and postretirement plans for the two years ended December 31:
The projected benefit obligation decreased during the year ended December 31, 2019 due to the settlement of certain Canadian pension plan obligations, as discussed above, partially offset by an actuarial loss resulting from a decrease in the discount rate assumed.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
Net gains (losses) recognized in other comprehensive income for the three years ended December 31 are as follows:
Net gains or losses and prior service costs or credits reclassified from other comprehensive income and recognized as a component of pension and postretirement expense for the three years ended December 31 are as follows:
(a) In October 2019, the Company purchased annuity contracts from a third-party insurance company who has assumed responsibility for future pension benefits for certain participants in our Canadian defined benefit plans. As required under ASC 715 Compensation-Retirement Benefits, we recognized a loss in the fourth quarter of 2019 on the settlement and de-recognition of the projected benefit obligation.
Net losses, prior service costs or credits and plan amendments that have not yet been included in pension and postretirement expense for the two years ended December 31 which have been recognized as a component of AOCI are as follows:
For defined benefit pension plans with accumulated benefit obligations in excess of plan assets, the following table sets forth the projected and accumulated benefit obligations and the fair value of plan assets for the years ended December 31:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
The following tables set forth the components of net pension and postretirement benefit cost that have been recognized during the three years ended December 31:
(a)
Service cost is included in cost of sales or selling, general and administrative expenses in the statements of income, as appropriate. Interest cost, expected return on plan assets, amortization of prior service cost, amortization of losses and amortization of negative plan amendment are included in non-operating income on the consolidated statement of income.
In 2017, the Company changed its method used to determine the service and interest cost components of net periodic benefit cost. Previously, the cost was determined using a single weighted-average discount rate derived from the yield curve. Under the new method, known as the spot rate approach, individual spot rates along the yield curve that correspond with the timing of each benefit payment will be used. The Company believes this change will provide a more precise measurement of service and interest costs by improving the correlation between projected cash outflows and corresponding spot rates on the yield curve. This change does not affect the measurement of plan obligations but generally results in lower pension expense in periods where the yield curve is upward sloping. The Company accounted for this change prospectively as a change in accounting estimate.
The following table sets forth the weighted average principal assumptions inherent in the determination of benefit obligations and net periodic benefit cost of the pension and postretirement benefit plans as of December 31:
The estimated return on plan assets is based on historical and expected long-term rates of return on broad equity and bond indices and consideration of the actual annualized rate of return. The Company, with the assistance of external consultants, utilizes this information in developing assumptions for returns, risks and correlation of asset classes, which are then used to establish the asset allocation ranges.
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Notes to Consolidated Financial Statements (Continued)
Assumed health care cost trends have a significant effect on the amounts reported for the postretirement benefit plans. The following table sets forth the assumed health care cost trend rates as of December 31:
Investment of Plan Assets
The Company’s Pension and Savings Plan Committee and the Audit Committee of the Board of Directors oversee the defined benefit pension plans’ investment program. The investment approach of each defined benefit pension plan is designed to maximize returns and provide sufficient liquidity to meet each plans obligations while maintaining acceptable risk levels. For certain defined benefit plans, investment target allocation percentages for equity securities can range up to 65 percent. In other more well-funded plans, 100 percent is allocated to fixed income securities. All plans were within their respective targeted ranges. The Company’s weighted average defined benefit pension plan asset allocation at December 31, 2019 and 2018, by asset category are as follows:
Investments within the equity categories may include large capitalization, small capitalization and emerging market securities, while the international fixed income portfolio may include emerging markets debt. Pension assets did not include a direct investment in Rayonier Advanced Materials common stock at December 31, 2019 or 2018.
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Notes to Consolidated Financial Statements (Continued)
Fair Value Measurements
The following table sets forth by level, within the fair value hierarchy (see Note 2 - Summary of Significant Accounting Policies and New Accounting Pronouncements for definition), the assets of the plans as of December 31, 2019 and 2018.
The valuation methodology used for measuring the fair value of these asset categories was as follows:
Mutual funds - Net asset value in an observable market.
Common collective trust funds - Common collective trusts are measured at NAV per share, as a practical expedient for fair value, as provided by the Plan trustee. The NAV is calculated by determining the fair value of the fund’s underlying assets, deducting its liabilities, and dividing by the units outstanding as of the valuation date. These funds are not publicly traded; however, in the majority of cases the unit price calculation is based on observable market inputs of the funds’ underlying assets.
There have been no changes in the methodology used during the years ended December 31, 2019 and 2018.
Cash Flows
Expected benefit payments for the next ten years are as follows:
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Notes to Consolidated Financial Statements (Continued)
The Company has mandatory pension contribution requirements of $5 million in 2019 and may make additional discretionary contributions.
Defined Contribution Plans
The Company provides defined contribution plans to all of its hourly and salaried employees. The Company’s contributions charged to expense for these plans were $9 million, $8 million, and $5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
19.Other Operating Expense, Net
Other operating expense, net was comprised of the following for the three years ended December 31:
(a)
Environmental liability expense reflects the adjustments to the Company’s estimates for environmental liability for the assessment, remediation and long-term monitoring and maintenance of the disposed operations sites over the next 20 years and other related costs. See Note 11 - Environmental Liabilities for additional information.
20.Income Taxes
Income Tax Benefit (Expense) from Continuing Operations
Income tax benefit (expense) from continuing operations for the three years ended December 31 are as follows:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
A reconciliation of the U.S. federal statutory income tax rate to the actual income tax rate for the three years ended December 31 is as follows:
(a)
The bargain purchase gain from the acquisition of Tembec of $20 million and $317 million during the years ended December 31, 2018 and 2017, respectively, was not taxable resulting in a decrease in the income tax rate.
(b)
Each quarter, the Company evaluates both positive and negative evidence related to the likelihood of realization of the deferred tax assets in order to determine, based on all available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. In the year ended December 31, 2019, the Company established a new valuation allowance in the amount of $16 million against deferred tax assets associated with deferred U.S deductions of interest. The realizable amount of these deferred interest deductions could be positively or negatively impacted by future U.S. tax guidance, changes in U.S. taxable earnings, or changes in U.S. interest expense.
(c)
The income tax rate for the year ended December 31, 2017 was impacted by the Tax Cuts and Jobs Act through a decrease in the federal tax rate from 35 percent to 21 percent. Income tax expense of $11 million for the re-measurement of the deferred tax assets was recorded during the year ended December 31, 2017. This expense is the result of previously recorded deferred tax deductions which will now result in a lower after-tax benefit due to the reduced rate.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
Deferred Taxes
Deferred income taxes result from recording revenues and expenses in different periods for financial reporting versus tax reporting. The nature of the temporary differences and the resulting net deferred tax liability for the two years ended December 31 were as follows:
(a)
The following relates to net operating losses, tax credits, and certain other carryforwards as of December 31, 2019:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
Unrecognized Tax Benefits
The Company recognizes the impact of a tax position if it is more likely than not to prevail, based on technical merit, in the case of an audit. As of December 31, 2019, there were several positions resulting in unrecognized tax benefits that, if recognized, would affect income tax expense. During the years presented, the Company recorded in total less than $1 million of interest expense and penalties in income tax expense. A reconciliation of the beginning and ending unrecognized tax benefits for the three years ended December 31 is as follows:
Each of our unrecognized tax benefits would impact our effective tax rate if recognized. Total interest and penalties recorded in unrecognized tax benefits is less than $1 million.
It is reasonably possible that within the next twelve months a number of tax positions could increase or decrease, due to pending tax legislation, new tax regulations, or the conclusion of statute of limitations, impacting our unrecognized tax position reserve by between a decrease of $2 million and increase of $2 million.
Tax Statutes
In the normal course of business, the Company is regularly audited by tax authorities, and is currently under audit in the U.S. and Canada. The following table provides detail of tax years that remain open to examination by significant taxing jurisdictions:
21.Segment and Geographical Information
As a result of the Matane Mill sale in November 2019, the Company now operates in the following business segments: High Purity Cellulose, Forest Products, Paperboard, Pulp & Newsprint and Corporate. All prior period amounts presented herein have been reclassified to conform to the new segment structure. See Note 3 -Discontinued Operations for additional information on the Matane Mill sale. See also Note 1 - Nature of Operations and Basis of Presentation for a description of the operating businesses. The Corporate segment consists primarily of senior management, accounting, information systems, human resources, treasury, tax and legal administrative functions that provide support services to the operating business units. The Company does not allocate the cost of maintaining these support functions to its operating units.
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 and to the Pulp & Newsprint segments. Intersegment sales prices are at rates that approximate market for the respective operating area.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
Net sales, disaggregated by product-line, was comprised of the following for the three years ended December 31:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
Operating income by segment was comprised of the following for the years ended December 31:
Identifiable assets by segment were as follows for the years ended December 31:
Long-life assets by country were as follows for the years ended December 31:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
Depreciation and amortization and capital expenditures by segment were as follows for the years ended December 31:
(a) Amounts exclude the impact of changes in capital assets purchased on account and government grants.
Geographical distribution of the Company’s sales was comprised of the following for the three years ended December 31:
The Company had no significant customers representing over 10 percent of total sales for the year ended December 31, 2019 and 2018. The Company had three significant customers in its High Purity Cellulose segment which represented over 10 percent of total sales for the year ended December 31, 2017:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
22.Commitments and Contingencies
Litigation and Contingencies
IESO Investigation of the Kapuskasing Facility. Since 2014, the Market Assessment and Compliance Division (“MACD”) branch of the Independent Electricity System Operator (“IESO”), the governmental agency responsible for operating the wholesale electricity market and directing the operation of the bulk electrical system in the province of Ontario, Canada, has been engaged in reviewing certain companies’ compliance with the published market rules that govern the operation of the wholesale electricity market in Ontario. MACD has been specifically reviewing issues relating to payments made by IESO to the Company’s facility in Kapuskasing, Ontario. The inquiry has focused primarily on payments made by IESO between 2010 and 2019 under market rules in connection with multiple planned, extended and unplanned forced outages that caused extensive downtime in respect of parts or the entire Kapuskasing facility. The Company has been cooperating in MACD’s inquiry. The Company believes it has complied in all material respects with the rules. No final breach or sanction determinations have yet been made, nor any lawsuits filed, against the Company by MACD to date in respect of this matter. The Company does not believe this matter will be material to its business or financial condition, although no assurances can be given.
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.
Commitments
The Company leases certain buildings, machinery and equipment under various operating leases. Total rental expense for operating leases amounted to $7 million, $8 million, and $6 million in 2019, 2018 and 2017, respectively. See Note 5-Leases, for additional information on future minimum lease payments.
At December 31, 2019, the future minimum payments under purchase obligations were as follows:
(a)
Purchase obligations primarily consist of payments expected to be made on natural gas, steam energy and wood chips purchase contracts. Obligations reported in the table are estimates and may vary based on changes in actual price and volumes terms.
Guarantees and Other
The Company provides financial guarantees as required by creditors, insurance programs and various governmental agencies. As of December 31, 2019, the Company had $37 million of various standby letters of credit, primarily for financial assurance relating to environmental remediation, credit support for natural gas and electricity purchases, and guarantees related to foreign retirement plan obligations. These standby letters of credit represent a contingent liability. The Company would only be liable upon its default on the related payment obligations. The letters of credit have various expiration dates and will be renewed as required.
The Company had surety bonds of $86 million as of December 31, 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.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
The Company is liable for certain financing agreements related to its LTF joint venture. The Company’s portion of the guarantee related to LTF at December 31, 2019 was $31 million.
The Company has not recorded any liabilities for these financial guarantees in its consolidated balance sheets, either because the Company has recorded the underlying liability associated with the guarantee or the guarantee is dependent on the Company’s own performance and, therefore, is not subject to the measurement requirements or because the Company has calculated the estimated fair value of the guarantee and determined it to be not material based upon the current facts and circumstances that would trigger a payment obligation.
It is not possible to determine the maximum potential amount of the liability under these potential obligations due to the unique set of facts and circumstances likely to be involved with each provision.
The Company currently employs approximately 4,000 people in the United States, Canada and France. As of December 31, 2019, approximately 74 percent of the work force is unionized. As a result, the Company is required to negotiate wages, benefits and other terms with unionized employees collectively. As of December 31, 2019, all of the Company’s collective bargaining agreements covering its unionized employees were current.
23.Supplemental Disclosures of Cash Flows Information
Supplemental disclosures of cash flows information was comprised of the following for the three years ended December 31:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
24.Quarterly Results for 2019 and 2018 (Unaudited)
(a)
Basic and diluted earnings per share for the second, third, and fourth quarters of 2018 and year ended December 31, 2018 included the impact of the repurchase and retirement of common stock as part of the Board of Directors authorized share buyback program. See Note 16 - Earnings per Share of Common Stock for additional information.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(b)
Basic and diluted earnings per share may include the impact of dividends on the Company’s Preferred Stock. As a result, quarterly EPS does not crossfoot to full-year EPS. See Note 16 - Earnings per Share of Common Stock for additional information.
(c) Fourth quarter 2019 includes the gain from the sale of the Matane mill. See Note 3 -Discontinued Operations.
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Rayonier Advanced Materials Inc.
Schedule II-Valuation and Qualifying Accounts
Years Ended December 31, 2019, 2018, and 2017
(In thousands)
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