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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-36285
RAYONIER ADVANCED MATERIALS INC.
Incorporated in the State of Delaware
I.R.S. Employer Identification No.: 46-4559529
Principal Executive Office:
1301 RIVERPLACE BOULEVARD, SUITE 2300
JACKSONVILLE, FL 32207
Telephone Number: (904) 357-4600
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol | | Name of exchange on which registered |
Common stock, par value $0.01 per share | | RYAM | | New York Stock Exchange |
Securities to be registered pursuant to Section 12(g) of the Act: None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | o | | Accelerated filer | x |
Non-accelerated filer | o | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The registrant had 65,343,418 shares of common stock outstanding as of November 6, 2023.
Table of Contents
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Part I. Financial Information | |
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Part II. Other Information | |
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Glossary
The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
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2022 Form 10-K | RYAM Annual Report on Form 10-K for the year ended December 31, 2022 |
2024 Notes | $550 million original aggregate principal amount of 5.50 percent senior unsecured notes due 2024, issued May 2014 |
2026 Notes | $500 million original aggregate principal amount of 7.625 percent senior secured notes due 2026, issued December 2020 |
2027 Term Loan | $250 million original aggregate principal amount of variable rate term loan maturing July 2027, entered into July 2023 |
2G | Second generation |
ABL Credit Facility | 5-year senior secured asset-based revolving credit facility due December 2025 |
AOCI | Accumulated other comprehensive income (loss) |
CAD | Canadian dollar |
CEWS | Canada Emergency Wage Subsidy |
DTA | Deferred tax asset |
EBITDA | Earnings before interest, taxes, depreciation and amortization |
Exchange Act | Securities Exchange Act of 1934, as amended |
Financial Statements | Consolidated financial statements included in Part I Item 1 of this Quarterly Report on Form 10-Q |
GAAP | United States generally accepted accounting principles |
GreenFirst | GreenFirst Forest Products, Inc. |
LTF | LignoTech Florida LLC |
MT | Metric ton |
OPEB | Other post-employment benefits |
Purchase Right | Board-declared dividend of one preferred share purchase right for each outstanding share of RYAM common stock |
ROU | Right-of-use |
RYAM, the Company, our, we, us | Rayonier Advanced Materials Inc. and its consolidated subsidiaries |
SEC | United States Securities and Exchange Commission |
SG&A | Selling, general and administrative expense |
SOFR | Secured Overnight Financing Rate |
TSR | Total shareholder return |
U.S. | United States of America |
USD | United States of America dollar |
USDOC | United States Department of Commerce |
Part I. Financial Information
Item 1. Financial Statements
Rayonier Advanced Materials Inc.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
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| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
Net sales | $ | 368,670 | | | $ | 466,346 | | | $ | 1,220,844 | | | $ | 1,217,282 | |
Cost of sales | (359,938) | | | (419,804) | | | (1,160,044) | | | (1,138,118) | |
Gross margin | 8,732 | | | 46,542 | | | 60,800 | | | 79,164 | |
Selling, general and administrative expense | (21,162) | | | (19,905) | | | (58,653) | | | (68,041) | |
Foreign exchange gain (loss) | 624 | | | 3,025 | | | (1,510) | | | 4,480 | |
Other operating expense, net | (2,634) | | | (1,133) | | | (4,939) | | | (5,764) | |
Operating income (loss) | (14,440) | | | 28,529 | | | (4,302) | | | 9,839 | |
Interest expense | (21,015) | | | (16,433) | | | (51,949) | | | (49,318) | |
Other components of pension and OPEB, excluding service costs (Note 14) | 501 | | | 1,009 | | | (834) | | | 1,910 | |
Gain on GreenFirst equity securities (Note 2) | — | | | — | | | — | | | 5,197 | |
| | | | | | | |
Other income, net | 3,281 | | | 4,117 | | | 6,894 | | | 6,760 | |
Income (loss) from continuing operations before income taxes | (31,673) | | | 17,222 | | | (50,191) | | | (25,612) | |
Income tax (expense) benefit (Note 15) | 5,392 | | | 1,824 | | | 11,227 | | | (3,230) | |
Equity in loss of equity method investment | (259) | | | (691) | | | (1,591) | | | (2,127) | |
Income (loss) from continuing operations | (26,540) | | | 18,355 | | | (40,555) | | | (30,969) | |
Income from discontinued operations, net of taxes (Note 2) | 1,440 | | | 11,252 | | | 312 | | | 12,458 | |
Net income (loss) | $ | (25,100) | | | $ | 29,607 | | | $ | (40,243) | | | $ | (18,511) | |
| | | | | | | |
Basic earnings per common share (Note 12) | | | | | | | |
Income (loss) from continuing operations | $ | (0.41) | | | $ | 0.29 | | | $ | (0.62) | | | $ | (0.48) | |
Income from discontinued operations | 0.02 | | | 0.18 | | | — | | | 0.20 | |
Net income (loss) per common share-basic | $ | (0.39) | | | $ | 0.47 | | | $ | (0.62) | | | $ | (0.28) | |
| | | | | | | |
Diluted earnings per common share (Note 12) | | | | | | | |
Income (loss) from continuing operations | $ | (0.41) | | | $ | 0.28 | | | $ | (0.62) | | | $ | (0.48) | |
Income from discontinued operations | 0.02 | | | 0.17 | | | — | | | 0.20 | |
Net income (loss) per common share-diluted | $ | (0.39) | | | $ | 0.45 | | | $ | (0.62) | | | $ | (0.28) | |
See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
Net income (loss) | $ | (25,100) | | | $ | 29,607 | | | $ | (40,243) | | | $ | (18,511) | |
Other comprehensive loss, net of tax (Note 10) | | | | | | | |
Foreign currency translation adjustment | (5,212) | | | (14,697) | | | (1,109) | | | (30,561) | |
Unrealized gain on derivative instruments | 47 | | | 67 | | | 150 | | | 224 | |
Net gain (loss) on employee benefit plans | (65) | | | 1,948 | | | (2,432) | | | 5,844 | |
Total other comprehensive loss | (5,230) | | | (12,682) | | | (3,391) | | | (24,493) | |
Comprehensive income (loss) | $ | (30,330) | | | $ | 16,925 | | | $ | (43,634) | | | $ | (43,004) | |
See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and par value amounts)
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 27,127 | | | $ | 151,803 | |
Accounts receivable, net (Note 3) | 175,814 | | | 211,526 | |
Inventory (Note 4) | 242,691 | | | 265,334 | |
| | | |
Prepaid and other current assets | 72,696 | | | 60,867 | |
Total current assets | 518,328 | | | 689,530 | |
| | | |
Property, plant and equipment (net of accumulated depreciation of $1,792,607 and $1,721,898, respectively) | 1,132,469 | | | 1,151,268 | |
Deferred tax assets | 329,084 | | | 322,164 | |
Intangible assets, net | 19,166 | | | 24,423 | |
Other assets | 176,619 | | | 160,143 | |
Total assets | $ | 2,175,666 | | | $ | 2,347,528 | |
| | | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities | | | |
Accounts payable | $ | 171,333 | | | $ | 163,962 | |
Accrued and other current liabilities (Note 6) | 133,716 | | | 164,369 | |
Debt due within one year (Note 7) | 18,621 | | | 14,617 | |
Current environmental liabilities (Note 8) | 10,740 | | | 10,732 | |
Total current liabilities | 334,410 | | | 353,680 | |
| | | |
Long-term debt (Note 7) | 730,453 | | | 838,508 | |
Non-current environmental liabilities (Note 8) | 158,854 | | | 159,949 | |
Pension and other postretirement benefits (Note 14) | 119,737 | | | 119,571 | |
Deferred tax liabilities | 14,972 | | | 17,021 | |
Other liabilities | 31,563 | | | 29,486 | |
| | | |
Commitments and contingencies (Note 17) | | | |
| | | |
Stockholders’ Equity | | | |
Common stock: 140,000,000 shares authorized at $0.01 par value, 65,343,418 and 64,020,761 issued and outstanding, respectively | 654 | | | 640 | |
Additional paid-in capital | 418,032 | | | 418,048 | |
Retained earnings | 434,180 | | | 474,423 | |
Accumulated other comprehensive loss (Note 10) | (67,189) | | | (63,798) | |
Total stockholders’ equity | 785,677 | | | 829,313 | |
Total liabilities and stockholders’ equity | $ | 2,175,666 | | | $ | 2,347,528 | |
See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity |
| Shares | | Par Value | | |
Three months ended September 30, 2023 | | | | | | | | | | | |
Balance at July 1, 2023 | 65,343,418 | | | $ | 654 | | | $ | 416,042 | | | $ | 459,280 | | | $ | (61,959) | | | $ | 814,017 | |
Net loss | — | | | — | | | — | | | (25,100) | | | — | | | (25,100) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (5,230) | | | (5,230) | |
| | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 1,990 | | | — | | | — | | | 1,990 | |
| | | | | | | | | | | |
Balance at September 30, 2023 | 65,343,418 | | | $ | 654 | | | $ | 418,032 | | | $ | 434,180 | | | $ | (67,189) | | | $ | 785,677 | |
| | | | | | | | | | | |
Three months ended September 24, 2022 | | | | | | | | | | | |
Balance at June 25, 2022 | 63,971,166 | | | $ | 639 | | | $ | 415,257 | | | $ | 441,224 | | | $ | (96,281) | | | $ | 760,839 | |
Net income | — | | | — | | | — | | | 29,607 | | | — | | | 29,607 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (12,682) | | | (12,682) | |
| | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 1,959 | | | — | | | — | | | 1,959 | |
| | | | | | | | | | | |
Balance at September 24, 2022 | 63,971,166 | | | $ | 639 | | | $ | 417,216 | | | $ | 470,831 | | | $ | (108,963) | | | $ | 779,723 | |
| | | | | | | | | | | |
Nine months ended September 30, 2023 | | | | | | | | | | | |
Balance at December 31, 2022 | 64,020,761 | | | $ | 640 | | | $ | 418,048 | | | $ | 474,423 | | | $ | (63,798) | | | $ | 829,313 | |
Net loss | | | — | | | — | | | (40,243) | | | — | | | (40,243) | |
Other comprehensive loss, net of tax | | | — | | | — | | | — | | | (3,391) | | | (3,391) | |
Issuance of common stock under incentive stock plans | 1,966,815 | | | 20 | | | (20) | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | 5,361 | | | — | | | — | | | 5,361 | |
Repurchase of common stock(a) | (644,158) | | | (6) | | | (5,357) | | | — | | | — | | | (5,363) | |
Balance at September 30, 2023 | 65,343,418 | | | $ | 654 | | | $ | 418,032 | | | $ | 434,180 | | | $ | (67,189) | | | $ | 785,677 | |
| | | | | | | | | | | |
Nine months ended September 24, 2022 | | | | | | | | | | | |
Balance at December 31, 2021 | 63,738,409 | | | $ | 637 | | | $ | 408,834 | | | $ | 489,342 | | | $ | (84,470) | | | $ | 814,343 | |
Net loss | — | | | — | | | — | | | (18,511) | | | — | | | (18,511) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (24,493) | | | (24,493) | |
Issuance of common stock under incentive stock plans | 294,936 | | | 3 | | | (3) | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | 8,687 | | | — | | | — | | | 8,687 | |
Repurchase of common stock(a) | (62,179) | | | (1) | | | (302) | | | — | | | — | | | (303) | |
Balance at September 24, 2022 | 63,971,166 | | | $ | 639 | | | $ | 417,216 | | | $ | 470,831 | | | $ | (108,963) | | | $ | 779,723 | |
(a)Repurchased to satisfy tax withholding requirements related to the issuance of stock under the Company’s incentive stock plans.
See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| | | | | | | | | | | | |
| Nine Months Ended | |
| September 30, 2023 | | September 24, 2022 | |
Operating activities | | | | |
Net loss | $ | (40,243) | | | $ | (18,511) | | |
Adjustments to reconcile net loss to cash provided by operating activities: | | | | |
Income from discontinued operations | (312) | | | (12,458) | | |
Depreciation and amortization | 104,073 | | | 96,294 | | |
Stock-based compensation expense | 5,361 | | | 8,687 | | |
| | | | |
Deferred income tax expense (benefit) | (8,130) | | | 372 | | |
| | | | |
Gain on GreenFirst equity securities | — | | | (5,197) | | |
| | | | |
Net periodic benefit cost of pension and other postretirement plans | 3,060 | | | 4,489 | | |
Unrealized (gain) loss on foreign currency | 564 | | | (6,853) | | |
(Gain) loss on disposal of property, plant and equipment | (1,085) | | | 2,917 | | |
| | | | |
Other | 6,133 | | | 5,389 | | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | 42,865 | | | (41,599) | | |
| | | | |
Inventories | 22,301 | | | (41,504) | | |
Accounts payable | 5,545 | | | (2,393) | | |
Accrued liabilities | (31,732) | | | 23,620 | | |
Other | (17,493) | | | (338) | | |
Contributions to pension and other postretirement plans | (8,768) | | | (5,467) | | |
| | | | |
| | | | |
| | | | |
Cash provided by operating activities | 82,139 | | | 7,448 | | |
| | | | |
Investing activities | | | | |
Capital expenditures, net | (95,203) | | | (114,159) | | |
Investment in equity method investment | (415) | | | — | | |
Cash used in investing activities-continuing operations | (95,618) | | | (114,159) | | |
Cash provided by investing activities-discontinued operations | — | | | 44,428 | | |
Cash used in investing activities | (95,618) | | | (69,731) | | |
| | | | |
Financing activities | | | | |
| | | | |
Borrowings of long-term debt | 303,217 | | | 5,721 | | |
| | | | |
Repayments of long-term debt | (397,087) | | | (51,410) | | |
Short-term financing, net | (2,457) | | | (4,990) | | |
Debt issuance costs | (10,082) | | | — | | |
| | | | |
Repurchase of common stock | (5,363) | | | (303) | | |
| | | | |
Cash used in financing activities | (111,772) | | | (50,982) | | |
| | | | |
Net decrease in cash and cash equivalents | (125,251) | | | (113,265) | | |
Net effect of foreign exchange on cash and cash equivalents | 575 | | | (8,369) | | |
Balance, beginning of period | 151,803 | | | 253,307 | | |
Balance, end of period | $ | 27,127 | | | $ | 131,673 | | |
| | | | |
Supplemental cash flow information: | | | | |
Interest paid | $ | (50,306) | | | $ | (48,384) | | |
Income taxes refunded (paid), net | (7,215) | | | 16,484 | | |
Capital assets purchased on account | 31,706 | | | 16,316 | | |
See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
1. Basis of Presentation
The unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with GAAP for interim financial information and in accordance with the rules and regulations of the SEC. In the opinion of management, these consolidated financial statements and notes reflect all adjustments, including all normal recurring adjustments, necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. These statements and notes should be read in conjunction with the consolidated financial statements and supplementary data included in the Company’s 2022 Form 10-K.
As a result of the sale of its lumber and newsprint assets in August 2021, the Company presents the results for those operations and any associated impacts as discontinued operations. Unless otherwise stated, information in these notes to consolidated financial statements relates to continuing operations. See Note 2—Discontinued Operations for further information on the sale.
Recent Accounting Developments
There have been no new or recently adopted accounting pronouncements impacting the Company’s consolidated interim financial statements.
Subsequent Events
The Company recently began plans towards a realignment of its High Purity Cellulose assets to optimize production mix, including a consolidation of its commodity products production into the Temiscaming plant. The Company is currently evaluating the potential impact of this realignment on its consolidated financial statements and disclosures.
2. Discontinued Operations
In August 2021, the Company completed the sale of its lumber and newsprint facilities and certain related assets located in Canada to GreenFirst for $232 million, which included 28.7 million shares of GreenFirst common stock with a deemed fair value of $42 million. In the second quarter of 2022, the Company sold the GreenFirst common shares for $43 million. Prior to the sale of shares, the GreenFirst common shares were accounted for at fair value, with changes in fair value recorded in the consolidated statements of operations. The shares sale agreement contains a purchase price protection clause whereby the Company is entitled to participate in further share price appreciation under certain circumstances until December 2023.
As part of the sale of the lumber assets, the Company retained all rights and obligations to softwood duties generated or incurred through the closing date of the sale. In total, the Company paid $112 million in softwood lumber duties from 2017 through August 2021, and expects to receive all or the vast majority of these duties upon final resolution of the dispute between the USDOC and Canada. During the third quarter of 2023, the USDOC completed its fourth administrative review of duties applied to Canada softwood lumber exports to the U.S. during 2021 and reduced rates applicable to the Company to a combined 8.05 percent. In connection with this development, the Company recorded a pre-tax gain of $2 million in “income from discontinued operations, net of taxes” and increased the long-term receivable related to USDOC administrative reviews to $40 million. During the third quarter of 2022, the USDOC completed its third administrative review of duties applied to Canada softwood lumber exports during 2020 and reduced applicable rates to a combined 8.6 percent, for which the Company recorded a pre-tax gain of $16 million.
During the nine months ended September 30, 2023, the Company incurred a $2 million loss related to the settlement of a claim pursuant to the representations and warranties in the asset purchase agreement.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
Income from discontinued operations was comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
| | | | | | | |
Cost of sales | $ | — | | | $ | — | | | $ | — | | | $ | 155 | |
Gross margin | — | | | — | | | — | | | 155 | |
Selling, general and administrative expense and other operating income, net | 1,957 | | | 15,313 | | | 424 | | | 16,808 | |
Operating income | 1,957 | | | 15,313 | | | 424 | | | 16,963 | |
Non-operating expense | — | | | (4) | | | — | | | (13) | |
Income from discontinued operations before income taxes | 1,957 | | | 15,309 | | | 424 | | | 16,950 | |
Income tax expense | (517) | | | (4,057) | | | (112) | | | (4,492) | |
Income from discontinued operations, net of taxes | $ | 1,440 | | | $ | 11,252 | | | $ | 312 | | | $ | 12,458 | |
3. Accounts Receivable, Net
Accounts receivable, net included the following:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Accounts receivable, trade | $ | 141,998 | | | $ | 171,144 | |
Accounts receivable, other(a) | 34,501 | | | 41,446 | |
Allowance for credit loss | (685) | | | (1,064) | |
Accounts receivable, net | $ | 175,814 | | | $ | 211,526 | |
(a)Consists primarily of value-added/consumption taxes, grants receivable and accrued billings due from government agencies.
4. Inventory
Inventory included the following:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Finished goods | $ | 182,209 | | | $ | 198,931 | |
Work-in-progress | 5,816 | | | 5,230 | |
Raw materials | 47,421 | | | 52,967 | |
Manufacturing and maintenance supplies | 7,245 | | | 8,206 | |
Inventory | $ | 242,691 | | | $ | 265,334 | |
5. Leases
The Company’s operating and finance leases are primarily for corporate offices, warehouse space, rail cars and equipment. As of September 30, 2023, the Company’s leases have remaining lease terms of less than one year to 13.1 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 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.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
Financial and other information related to the Company’s operating and finance leases follow:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
Operating lease cost | $ | 1,858 | | | $ | 1,973 | | | $ | 5,464 | | | $ | 5,821 | |
| | | | | | | |
Finance lease cost | | | | | | | |
Amortization of ROU assets | 102 | | | 95 | | | 301 | | | 281 | |
Interest | 26 | | | 34 | | | 85 | | | 106 | |
Total lease cost | $ | 1,986 | | | $ | 2,102 | | | $ | 5,850 | | | $ | 6,208 | |
| | | | | | | | | | | | | | | | | |
| Balance Sheet Classification | | September 30, 2023 | | December 31, 2022 |
Operating leases | | | | | |
ROU assets | Other assets | | $ | 17,600 | | | $ | 15,623 | |
Lease liabilities, current | Accrued and other current liabilities | | 4,235 | | | 4,741 | |
Lease liabilities, non-current | Other liabilities | | 14,220 | | | 11,399 | |
| | | | | |
Finance leases | | | | | |
ROU assets | Property, plant and equipment, net | | 1,171 | | | 1,448 | |
Lease liabilities | Long-term debt | | 1,459 | | | 1,760 | |
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities | $ | 5,182 | | | $ | 1,770 | |
Operating lease ROU assets obtained in exchange for lease liabilities | 5,650 | | | 2,975 | |
Finance lease cash flows were immaterial during each of the three and nine months ended September 30, 2023 and September 24, 2022.
| | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | | | |
Operating leases | | | | | | | |
Weighted average remaining lease term (in years) | 5.7 | | 5.8 | | | | |
Weighted average discount rate | 8.4 | % | | 8.9 | % | | | | |
| | | | | | | |
Finance leases | | | | | | | |
Weighted average remaining lease term (in years) | 3.1 | | 3.8 | | | | |
Weighted average discount rate | 7.0 | % | | 7.0 | % | | | | |
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
6. Accrued and Other Current Liabilities
Accrued and other current liabilities included the following:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
Accrued customer incentives | $ | 22,815 | | | $ | 28,702 | |
Accrued payroll and benefits | 14,974 | | | 13,763 | |
Accrued interest | 14,012 | | | 18,877 | |
Accrued income taxes | 2,854 | | | 9,321 | |
Accrued property and other taxes | 8,111 | | | 3,065 | |
Deferred revenue(a) | 20,459 | | | 21,645 | |
Other current liabilities(b) | 50,491 | | | 68,996 | |
Accrued and other current liabilities | $ | 133,716 | | | $ | 164,369 | |
(a)Included at both September 30, 2023 and December 31, 2022 was CAD $25 million (USD $19 million) associated with funds received in 2021 for CEWS. All CEWS claims are subject to mandatory audit. The Company will recognize amounts from these claims in income at the time there is sufficient evidence that it will not be required to repay such amounts.
(b)Included at September 30, 2023 and December 31, 2022 was $17 million and $30 million, respectively, of energy-related payables associated with Tartas facility operations.
7. Debt and Finance Leases
Debt and finance leases included the following:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
ABL Credit Facility due 2025: $112 million available, bearing interest of 7.42% (5.42% adjusted SOFR plus 2.00% margin) at September 30, 2023 | $ | — | | | $ | — | |
Term Loan due 2027: bearing interest of 13.33% (5.33% three-month Term SOFR plus 8.00% margin) at September 30, 2023 | 250,000 | | | — | |
7.625% Senior Secured Notes due 2026 | 464,640 | | | 475,000 | |
5.50% Senior Unsecured Notes due 2024 | — | | | 322,675 | |
5.50% CAD-based term loan due 2028 | 31,776 | | | 36,585 | |
Other loans(a) | 20,507 | | | 19,598 | |
Short-term factoring facility-France | 1,292 | | | 3,773 | |
Finance lease obligations | 1,459 | | | 1,760 | |
Total principal payments due | 769,674 | | | 859,391 | |
Less: unamortized debt premium, discount and issuance costs | (20,600) | | | (6,266) | |
Total debt | 749,074 | | | 853,125 | |
Less: debt due within one year | (18,621) | | | (14,617) | |
Long-term debt | $ | 730,453 | | | $ | 838,508 | |
(a)Consist of loans for energy and bioethanol projects in France.
Term Loan
In July 2023, the Company secured term loan financing of $250 million in aggregate principal amount and received net proceeds of $243 million after original issue discount. In addition, the Company incurred issuance costs of $10 million, which, together with the original issue discount, were recorded in “long-term debt” in the consolidated balance sheets and will be amortized to “interest expense” in the consolidated statements of operations over the term of the loan. The net proceeds, together with cash on hand, were used to redeem the 2024 Notes and pay transaction costs.
The 2027 Term Loan matures in July 2027, bears interest at an annual rate equal to three-month Term SOFR (or, if greater, 3.00 percent) plus 8.00 percent and requires quarterly principal payments of $1.25 million. The Company may voluntarily make prepayments at any time, subject to customary breakage costs and, if within the first three anniversaries of closing, an additional make-whole premium.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
The agreement governing the 2027 Term Loan contains various customary covenants that limit the ability of the Company and its restricted subsidiaries, as defined by the term loan agreement and in particular the Company’s French subsidiaries, to take certain specified actions, subject to stated exceptions, including: incurring debt or liens, making investments, entering into mergers, consolidations, and acquisitions, paying dividends and making other restricted payments. The Company will be required to maintain a consolidated secured net leverage ratio, based on covenant EBITDA, of no greater than 4.50 to 1.00. Additionally, the 2027 Term Loan contains customary affirmative covenants and customary events of default (subject, in certain cases, to customary grace or cure periods), including, without limitation, late payment, breach of covenant, bankruptcy, judgment and defaults under certain other indebtedness and changes in control.
Senior Notes
2026 Notes
In April 2023, the Company repurchased $10 million of its 2026 Notes through open-market transactions and retired the notes for cash of $9 million. A gain on extinguishment of $1 million for the repurchase was recorded to “other income, net” in the consolidated statements of operations.
2024 Notes
In August 2023, the Company redeemed the $318 million principal balance and accrued interest of $4 million of the 2024 Notes. A loss on extinguishment of $1 million related to the redemption was recorded to “other income, net” in the consolidated statements of operations.
Prior to the full redemption of its 2024 Notes, in March 2023, the Company repurchased $5 million of the 2024 Notes through open-market transactions and retired the notes for cash of $5 million. An immaterial gain on extinguishment for the repurchase was recorded to “other income, net” in the consolidated statements of operations.
As of September 30, 2023, the Company’s debt principal payments, excluding finance lease obligations, were due as follows:
| | | | | |
Remainder of 2023 | $ | 5,597 | |
2024 | 16,345 | |
2025 | 16,392 | |
2026 | 480,320 | |
2027 | 243,071 | |
Thereafter | 6,490 | |
Total debt principal payments | $ | 768,215 | |
8. Environmental Liabilities
The Company’s environmental liabilities balance changed as follows during the nine months ended September 30, 2023:
| | | | | |
Balance at December 31, 2022 | $ | 170,681 | |
Increase in liabilities | 2,462 | |
Payments | (3,634) | |
Foreign currency adjustments | 85 | |
Balance at September 30, 2023 | 169,594 | |
Less: current portion | (10,740) | |
Non-current environmental liabilities | $ | 158,854 | |
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
In addition to these estimated liabilities, the Company is subject to the risk of reasonably possible additional liabilities in excess of the established reserves due to potential changes in circumstances and future events, including, without limitation, changes to current laws and regulations; changes in governmental agency personnel, direction, philosophy or enforcement policies; developments in remediation technologies; increases in the cost of remediation, operation, maintenance and monitoring of its environmental liability sites; changes in the volume, nature or extent of contamination to be remediated or monitoring to be undertaken; the outcome of negotiations with governmental agencies or non-governmental parties; and changes in accounting rules or interpretations. Based on information available as of September 30, 2023, the Company estimates this exposure could range up to approximately $85 million, although no assurances can be given that this amount will not be exceeded given the factors described above. These potential additional costs are attributable to several sites and other applicable liabilities. This estimate excludes liabilities that 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 environmental liabilities. However, no assurances are given that these estimates 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.
9. Fair Value Measurements
The following table presents the carrying amount, estimated fair values and categorization under the fair value hierarchy for financial instruments held by the Company, using market information and what management believes to be appropriate valuation methodologies:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | | December 31, 2022 |
| Carrying Amount | | Fair Value | | | Carrying Amount | | Fair Value |
| | Level 1 | | Level 2 | | | | Level 1 | | Level 2 | | |
Assets | | | | | | | | | | | | | | |
Cash and cash equivalents | | | | | | | | | | | | | | |
Cash | $ | 17,484 | | | $ | 17,484 | | | $ | — | | | | $ | 127,288 | | | $ | 127,288 | | | $ | — | | | |
Money market and similar funds | 9,643 | | | 9,643 | | | — | | | | 24,515 | | | 24,515 | | | — | | | |
| | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | |
Fixed-rate long-term debt(a) | $ | 513,004 | | | $ | — | | | $ | 439,787 | | | | $ | 847,591 | | | $ | — | | | $ | 838,502 | | | |
(a)Excludes finance lease obligations.
The Company uses the following methods and assumptions in estimating the fair value of its financial instruments:
Cash and cash equivalents — Cash and cash equivalents are highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase and the carrying amount is equal to fair market value. The Company measures its investments in money market and similar funds using level 1 inputs.
Debt — The fair value of fixed rate debt is based upon quoted market prices for debt with similar terms and maturities. Variable rate debt adjusts with changes in the market rate and so carrying value approximates fair value.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
10. Accumulated Other Comprehensive Loss
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2023 | | September 24, 2022 |
Unrecognized components of employee benefit plans, net of tax | | | |
Balance, beginning of period | $ | (43,694) | | | $ | (76,849) | |
Other comprehensive loss before reclassifications | (3,034) | | | — | |
Income tax on other comprehensive loss | 804 | | | — | |
Reclassifications to earnings(a) | | | |
| | | |
Amortization of (gain) loss | (531) | | | 7,466 | |
Amortization of prior service cost | 259 | | | 24 | |
Income tax on reclassifications | 70 | | | (1,646) | |
Net comprehensive gain (loss) on employee benefit plans, net of tax | (2,432) | | | 5,844 | |
Balance, end of period | (46,126) | | | (71,005) | |
| | | |
Unrealized gain (loss) on derivative instruments, net of tax | | | |
Balance, beginning of period | (567) | | | (847) | |
Reclassifications to earnings - foreign currency exchange contracts(b) | 173 | | | 258 | |
Income tax on reclassifications | (23) | | | (34) | |
Net comprehensive gain on derivative instruments, net of tax | 150 | | | 224 | |
Balance, end of period | (417) | | | (623) | |
| | | |
Foreign currency translation | | | |
Balance, beginning of period | (19,537) | | | (6,774) | |
Foreign currency translation adjustment, net of tax(c) | (1,109) | | | (30,561) | |
Balance, end of period | (20,646) | | | (37,335) | |
| | | |
Accumulated other comprehensive loss, end of period | $ | (67,189) | | | $ | (108,963) | |
(a)The AOCI components for defined benefit pension and post-retirement plans are included in the computation of net periodic benefit cost. See Note 14—Employee Benefit Plans for further information.
(b)Reclassifications of foreign currency exchange contracts are recorded in “cost of sales,” “other operating expense, net” or “other income, net,” as appropriate.
(c)Foreign currency translation is net of tax effects of $0 for all periods presented, as the French operations are taxed on the foreign functional currency, not the translated reporting currency.
11. Stockholders’ Equity
Stockholder Rights Plan
In March 2022, the Company adopted a stockholder rights plan whereby a significant penalty is imposed upon any person or group which acquires beneficial ownership of 10% or more of the Company’s common stock without the approval of the Board of Directors. On the same date, the Board of Directors declared a dividend of one preferred share Purchase Right for each outstanding share of common stock of the Company, par value $0.01 per share, which was paid to Company stockholders of record as of March 31, 2022. On March 20, 2023, the Purchase Rights expired.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
12. Earnings Per Common Share
The following table provides the inputs to the calculations of basic and diluted earnings per common share (share amounts not in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
Income (loss) from continuing operations | $ | (26,540) | | | $ | 18,355 | | | $ | (40,555) | | | $ | (30,969) | |
Income from discontinued operations | 1,440 | | | 11,252 | | | 312 | | | 12,458 | |
Net income (loss) available for common stockholders | $ | (25,100) | | | $ | 29,607 | | | $ | (40,243) | | | $ | (18,511) | |
| | | | | | | |
Shares used for determining basic earnings per share of common stock | 65,343,418 | | | 63,971,166 | | | 65,024,654 | | | 63,882,920 | |
Dilutive effect of: | | | | | | | |
| | | | | | | |
Performance and restricted stock | — | | | 1,548,941 | | | — | | | — | |
Shares used for determining diluted earnings per share of common stock | 65,343,418 | | | 65,520,107 | | | 65,024,654 | | | 63,882,920 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Anti-dilutive instruments excluded from the computation of diluted earnings per share included (not in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
Stock options | 46,798 | | | 78,660 | | | 46,798 | | | 78,660 | |
Performance and restricted stock | 3,302,332 | | | 1,517,135 | | | 3,302,332 | | | 3,726,090 | |
Total anti-dilutive instruments | 3,349,130 | | | 1,595,795 | | | 3,349,130 | | | 3,804,750 | |
13. Incentive Stock Plans
Stock-based compensation expense was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
Stock-based compensation expense | $ | 1,990 | | | $ | 1,959 | | | $ | 5,361 | | | $ | 8,687 | |
The Company made new grants of restricted stock units, performance-based stock units and performance-based cash awards during the first and second quarters of 2023. The 2023 restricted stock unit awards cliff vest after three years. The 2023 performance-based awards cliff vest after three years and are based equally on TSR relative to peers and three-year cumulative adjusted EBITDA. Participants can earn between 0 and 200 percent of the target award. Performance below the threshold for the TSR would result in zero payout for the TSR metric. The performance-based cash award is measured using the same objectives as the performance-based stock unit award but is paid and accounted for separately. Performance-based cash awards are classified as a liability and remeasured to fair value at the end of each reporting period until settlement.
In March 2023, the performance-based stock units granted in 2020 were settled with the issuance of 1,257,015 shares of common stock, including incremental shares of 370,366, based on performance results.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
The following table summarizes the 2023 activity of the Company’s incentive stock awards:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Restricted Stock Units | | Performance-Based Stock Units |
| Options | | Weighted Average Exercise Price | | Awards | | Weighted Average Grant Date Fair Value | | Awards | | Weighted Average Grant Date Fair Value |
Outstanding at December 31, 2022 | 77,767 | | | $ | 39.98 | | | 1,697,587 | | | $ | 6.21 | | | 1,956,919 | | | $ | 6.79 | |
Granted | — | | | — | | | 972,307 | | | 5.32 | | | 305,764 | | | 9.09 | |
Forfeited | — | | | — | | | (28,363) | | | 5.95 | | | (5,433) | | | 4.73 | |
Exercised or settled | — | | | — | | | (709,800) | | | 5.49 | | | (886,649) | | | 5.95 | |
Expired or cancelled | (30,969) | | | 43.32 | | | — | | | — | | | — | | | — | |
Outstanding at September 30, 2023 | 46,798 | | | $ | 37.77 | | | 1,931,731 | | | $ | 6.03 | | | 1,370,601 | | | $ | 7.83 | |
14. Employee Benefit Plans
Defined Benefit Plans
The Company has defined benefit pension and other long-term and postretirement benefit plans covering certain union and non-union employees, primarily in the U.S. and Canada. The defined benefit pension plans are closed to new participants. The liabilities for these plans are calculated using actuarial estimates and management assumptions. These estimates are based on historical information and certain assumptions about future events.
During the nine months ended September 24, 2022, the Company recorded a $1 million loss related to the final asset surplus distribution to the plan participants of certain wound-up Canadian pension plans. During the nine months ended September 30, 2023, the Company recorded a $2 million loss related to the final asset surplus distribution to the plan participants of certain other wound-up Canadian pension plans. The settlements were recognized in “other components of pension and OPEB, excluding service costs” in the Company’s consolidated statements of operations.
The following tables present the components of net periodic benefit costs of these plans:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | Postretirement |
| Three Months Ended | | Three Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
Service cost | $ | 1,223 | | | $ | 2,150 | | | $ | 293 | | | $ | 352 | |
Interest cost | 7,204 | | | 4,561 | | | 352 | | | 215 | |
Expected return on plan assets | (7,967) | | | (8,258) | | | — | | | — | |
Amortization of prior service cost (credit) | 111 | | | 38 | | | (24) | | | (31) | |
Amortization of (gain) loss | (123) | | | 2,473 | | | (54) | | | 17 | |
Pension settlement loss | — | | | (25) | | | — | | | — | |
Net periodic benefit cost | $ | 448 | | | $ | 939 | | | $ | 567 | | | $ | 553 | |
| | | | | | | |
| Pension | Postretirement |
| Nine Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
Service cost | $ | 3,664 | | | $ | 6,497 | | | $ | 879 | | | $ | 1,057 | |
Interest cost | 21,586 | | | 13,764 | | | 1,057 | | | 646 | |
Expected return on plan assets | (23,854) | | | (24,965) | | | — | | | — | |
Amortization of prior service cost (credit) | 332 | | | 116 | | | (73) | | | (92) | |
Amortization of (gain) loss | (369) | | | 7,419 | | | (162) | | | 47 | |
Pension settlement loss | 2,317 | | | 1,154 | | | — | | | — | |
Net periodic benefit cost | $ | 3,676 | | | $ | 3,985 | | | $ | 1,701 | | | $ | 1,658 | |
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
Service cost is included in “cost of sales” or “selling, general and administrative expense” in the consolidated statements of operations, as appropriate. Interest cost, expected return on plan assets, amortization of prior service cost (credit) and amortization of (gain) loss are included in “other components of pension and OPEB, excluding service costs” in the consolidated statements of operations.
15. Income Taxes
Effective Tax Rate
The Company’s effective tax rates were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
Income (loss) from continuing operations | $ | (26,540) | | | $ | 18,355 | | | $ | (40,555) | | | $ | (30,969) | |
Effective tax rate | 17.0 | % | | (10.6) | % | | 22.4 | % | | (12.6) | % |
The 2023 effective tax rates differed from the federal statutory rate of 21 percent primarily due to disallowed interest deductions in the U.S. and nondeductible executive compensation, offset by U.S. tax credits, return-to-accrual adjustments related to previously filed tax returns, changes in the valuation allowance on disallowed interest deductions and interest received on overpayments of tax from prior years. The effective tax rate for the nine-month period was also impacted by an excess tax benefit on vested stock compensation.
The effective tax rate for the three months ended September 24, 2022 differed from the federal statutory rate of 21 percent primarily due to changes in the valuation allowance on disallowed interest deductions in the U.S. and interest received on overpayments of tax from prior years, partially offset by unfavorable tax return-to-accrual adjustments. The effective tax rate for the nine months ended September 24, 2022 differed from the federal statutory rate primarily due to changes in the valuation allowance on disallowed interest deductions in the U.S. and nondeductible executive compensation, partially offset by interest received on overpayments of tax from prior years, U.S. tax credits and favorable tax return-to-accrual adjustments.
Deferred Taxes
As of both September 30, 2023 and December 31, 2022, the Company’s net DTA included $17 million of disallowed U.S. interest deductions that the Company does not believe will be realized. In strict compliance with the American Institute of Certified Public Accountants’ Technical Questions and Answers 3300.01-02, which asserts that certain material evidence regarding the realizability of disallowed U.S. interest deductions should be ignored when assessing the need for a valuation allowance, the Company has not recognized a valuation allowance on this portion of the net DTA generated from disallowed interest.
16. Segments
The Company operates in the following business segments: High Purity Cellulose, Paperboard and High-Yield Pulp. Corporate 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 allocates a portion of the cost of maintaining these support functions to its operating units.
The Company evaluates the performance of its segments based on operating income (loss). Intersegment sales consist primarily of High-Yield Pulp sales to Paperboard. Intersegment sales prices are at rates that approximate market for the respective operating area.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
Net sales, disaggregated by product line, was comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
High Purity Cellulose | | | | | | | |
Cellulose Specialties | $ | 164,654 | | | $ | 243,175 | | | $ | 570,584 | | | $ | 645,169 | |
Commodity Products | 98,834 | | | 92,638 | | | 321,548 | | | 223,151 | |
Other sales(a) | 28,528 | | | 33,080 | | | 73,447 | | | 84,059 | |
Total High Purity Cellulose | 292,016 | | | 368,893 | | | 965,579 | | | 952,379 | |
Paperboard | 57,212 | | | 65,039 | | | 164,300 | | | 182,512 | |
High-Yield Pulp | 25,393 | | | 39,564 | | | 111,397 | | | 101,992 | |
Eliminations | (5,951) | | | (7,150) | | | (20,432) | | | (19,601) | |
Net sales | $ | 368,670 | | | $ | 466,346 | | | $ | 1,220,844 | | | $ | 1,217,282 | |
(a)Include sales of bioelectricity, lignosulfonates and other by-products to third parties.
Operating income (loss) by segment was comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
High Purity Cellulose | $ | (5,547) | | | $ | 22,536 | | | $ | 6,965 | | | $ | 21,221 | |
Paperboard | 13,088 | | | 11,293 | | | 28,680 | | | 27,579 | |
High-Yield Pulp | (6,062) | | | 5,646 | | | 2,030 | | | 3,910 | |
Corporate | (15,919) | | | (10,946) | | | (41,977) | | | (42,871) | |
Operating income (loss) | $ | (14,440) | | | $ | 28,529 | | | $ | (4,302) | | | $ | 9,839 | |
Identifiable assets by segment were as follows:
| | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 | | |
High Purity Cellulose | $ | 1,544,041 | | | $ | 1,654,214 | | | |
Paperboard | 115,851 | | | 112,757 | | | |
High-Yield Pulp | 36,276 | | | 50,947 | | | |
Corporate | 479,498 | | | 529,610 | | | |
Total assets | $ | 2,175,666 | | | $ | 2,347,528 | | | |
17. Commitments and Contingencies
Commitments
The Company had no material changes to the purchase obligations presented in its 2022 Form 10-K that were outside the normal course of business during the nine months ended September 30, 2023. The Company’s purchase obligations continue to primarily consist of commitments for the purchase of natural gas, steam energy and wood chips.
The Company leases certain buildings, machinery and equipment under various operating and finance leases. See Note 5—Leases for further information.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
Litigation and Contingencies
Duties on Canadian Softwood Lumber Sold to the U.S.
The Company previously operated six softwood lumber mills in Ontario and Quebec, Canada, and exported softwood lumber into the U.S. from Canada. In connection with these exports, the Company paid approximately $112 million for softwood lumber duties between 2017 and August 28, 2021, including $1 million of ancillary fees, which were recorded as expense in the periods incurred. As part of the sale of its lumber assets, the Company retained all rights and obligations to softwood duties generated or incurred through the closing date of the sale. As of September 30, 2023, the Company had a $40 million long-term receivable associated with the USDOC’s determinations of the revised rates for the 2017, 2018, 2019, 2020 and 2021 periods. This amount does not include interest, which will be due on any amounts refunded. The Company estimates interest earned on the total amount of softwood lumber duties paid to be approximately $6 million.
Cash is not expected to return to the Company until final resolution of the softwood lumber dispute, which remains subject to legal challenges.
Other
In addition to the above, the Company is engaged in various legal and regulatory actions and proceedings and has been named as a defendant in various lawsuits and claims arising in the ordinary course of 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. These other lawsuits and claims, either individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Guarantees and Other
The Company provides financial guarantees as required by creditors, insurance programs and various governmental agencies. As of September 30, 2023, the Company had net exposure of $34 million from various standby letters of credit, primarily for financial assurance relating to environmental remediation, credit support for natural gas and electricity purchases and guarantees related to foreign retirement plan obligations. These standby letters of credit represent a contingent liability; the Company would only be liable upon its default on the related payment obligations. The standby letters of credit have various expiration dates and are expected to be renewed as required.
The Company had surety bonds of $90 million as of September 30, 2023, 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.
LTF is a venture in which the Company owns 45 percent and its partner, Borregaard ASA, owns 55 percent. The Company is a guarantor of LTF’s financing agreements and, in the event of default, expects it would only be liable for its proportional share of any repayment under the agreements. The Company’s proportion of the LTF financing agreement guarantee was $29 million at September 30, 2023.
The Company has not recorded any liabilities for these financial guarantees in its consolidated balance sheets, either because the Company has recorded the underlying liability associated with the guarantee or the guarantee is dependent on the Company’s own performance and, therefore, is not subject to the measurement requirements or because the Company has calculated the estimated fair value of the guarantee and determined it to be immaterial based upon the current facts and circumstances that would trigger a payment obligation.
It is not possible to determine the maximum potential amount of liability under these potential obligations due to the unique set of facts and circumstances likely to be involved with each provision.
As of December 31, 2022, a collective bargaining agreement covering approximately 575 unionized employees was expired. The employees continued to work under the terms of the expired contract until negotiations concluded in the second quarter of 2023 and final agreement with the union was reached. As of September 30, 2023, all of the Company’s collective bargaining agreements covering its unionized employees were current.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following analysis of our financial condition and results of operations should be read in conjunction with our Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q and with our 2022 Form 10-K and information contained in subsequent Forms 8-K and other reports filed with the SEC.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q regarding anticipated financial, business, legal or other outcomes, including business and market conditions, outlook and other similar statements relating to future events, developments or financial or operational performance or results, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as “may,” “will,” “should,” “could,” “expect,” “estimate,” “believe,” “intend,” “plan,” “forecast,” “anticipate,” “project,” “guidance” and other similar language. However, the absence of these or similar words or expressions does not mean that a statement is not forward-looking.
Forward-looking statements are not guarantees of future performance or events and undue reliance should not be placed on these statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be attained, and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. The risk factors contained in Item 1A—Risk Factors of our 2022 Form 10-K, among others, could cause actual results or events to differ materially from our historical experience and those expressed in forward-looking statements made in this report.
Forward-looking statements are only as of the date of the filing of this Quarterly Report on Form 10-Q and we undertake no duty to update its forward-looking statements except as required by law. You are advised to review any further disclosures that we have made or may make in our filings and other submissions to the SEC, including those on Forms 10-K, 10-Q, 8-K and other reports.
Business Overview
We are a global leader of specialty cellulose materials with a broad offering of high purity cellulose specialties, a natural polymer used in the production of a variety of specialty chemical products, including liquid crystal displays, filters, textiles and performance additives for pharmaceutical, food and other industrial applications. Building upon more than 95 years of experience in cellulose chemistry, we provide some of the highest quality high-purity cellulose pulp products that make up the essential building blocks for our customers’ products while providing exceptional service and value. We also produce a unique, lightweight multi-ply paperboard product and a bulky, high-yield pulp product. Our paperboard is used for production in the commercial printing, lottery ticket and high-end packaging sectors. Our high-yield pulp is used by paperboard producers, as well as in traditional printing, writing and specialty paper manufacturing.
We operate in the following business segments: High Purity Cellulose, Paperboard and High-Yield Pulp.
Recent Business Developments
•In July 2023, we secured term loan financing of $250 million in aggregate principal amount, the proceeds of which were used, together with cash on hand, to redeem the $318 million principal balance of the 2024 Notes in August 2023.
•In April 2023, we repurchased $10 million of our 2026 Notes through open-market transactions and retired the notes for cash of $9 million.
•In March 2023, we repurchased $5 million of our 2024 Notes through open-market transactions and retired the notes for cash of $5 million.
Market Assessment
In October 2023, we announced that we engaged a financial advisor to explore the potential sale of our Paperboard and High-Yield Pulp assets located at our Temiscaming site. This strategic move is aligned with our commitment to enhancing our operational and financial performance, optimizing our portfolio to align with our long-term growth strategy and providing flexibility to pay down debt and reduce leverage.
The following market assessment represents our best current estimate of our business segments’ future performance.
High Purity Cellulose
Average sales prices for cellulose specialties in 2023 are expected to be in the high single-digit percent higher than average 2022 sales prices, while sales volumes are expected to decrease from prior year due to softness in sales orders driven principally by significant customer destocking and market-driven demand declines. Market demand for commodity products remains resilient with fluff and viscose prices bottoming in the third quarter and a slight uptick expected in the fourth quarter. Commodity sales volumes are expected to continue to increase through the end of 2023. The prices for certain inputs have come off the 2022 highs but are expected to remain significantly elevated versus pre-COVID pandemic levels. We expect to take downtime at our Tartas facility at the end of 2023 due to market conditions and to improve working capital.
We recently began plans towards a realignment of our High Purity Cellulose assets to optimize production mix, including a consolidation of our commodity products production into the Temiscaming plant. We are currently evaluating the potential impact of this realignment on our consolidated financial statements and disclosures.
Paperboard
Paperboard prices are expected to rebound slightly in the fourth quarter, remaining elevated from 2022 levels, while sales volumes are expected to improve in the second half of the year as customer inventories return to more normal levels. Raw material prices are expected to increase slightly as purchased pulp prices are forecast to increase in the fourth quarter. We expect to take downtime in the coming quarter due to market conditions and to improve working capital.
High-Yield Pulp
High-yield pulp prices have declined due to soft demand and new paper pulp capacity ramping up. Prices are expected to decline overall in 2023 despite an expected uptick in the fourth quarter, in line with industry forecasts for the global paper pulp market. We expect to take downtime in the coming quarter due to market conditions and to improve working capital.
A Sustainable Future
Our portfolio is aligned with sustainability drivers in the European Green Deal for the Renewable Energy Directive II and the 2G bio-fuel that is noncompetitive to human food supply. The 2G bioethanol facility at our Tartas, France plant is near completion and is anticipated to be operational in the first quarter of 2024. The total estimated cost of the project is approximately $40 million, with $22 million to be spent in 2023. We plan to utilize $28 million of low-cost green loans to help fund the project, including $10 million already borrowed, and $4 million in grants. The project is expected to provide $8 million to $10 million of annual incremental EBITDA, depending on current exchange rates, beginning in 2025.
Results of Operations
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| Three Months Ended | | | | Nine Months Ended | | |
(in millions, except percentages) | September 30, 2023 | | September 24, 2022 | | | | September 30, 2023 | | September 24, 2022 | | |
Net sales | $ | 369 | | | $ | 466 | | | | | $ | 1,221 | | | $ | 1,217 | | | |
Cost of sales | (360) | | | (419) | | | | | (1,160) | | | (1,138) | | | |
Gross margin | 9 | | | 47 | | | | | 61 | | | 79 | | | |
Selling, general and administrative expense | (22) | | | (20) | | | | | (59) | | | (68) | | | |
Foreign exchange gain (loss) | 1 | | | 3 | | | | | (1) | | | 4 | | | |
Other operating expense, net | (2) | | | (1) | | | | | (5) | | | (5) | | | |
Operating income (loss) | (14) | | | 29 | | | | | (4) | | | 10 | | | |
Interest expense | (21) | | | (16) | | | | | (52) | | | (49) | | | |
Other components of pension and OPEB, excluding service costs | — | | | 1 | | | | | (1) | | | 2 | | | |
Gain on GreenFirst equity securities | — | | | — | | | | | — | | | 5 | | | |
| | | | | | | | | | | |
Other income, net | 4 | | | 3 | | | | | 7 | | | 6 | | | |
Income (loss) from continuing operations before income taxes | (31) | | | 17 | | | | | (50) | | | (26) | | | |
Income tax (expense) benefit | 5 | | | 2 | | | | | 11 | | | (3) | | | |
Equity in loss of equity method investment | (1) | | | (1) | | | | | (2) | | | (2) | | | |
Income (loss) from continuing operations | (27) | | | 18 | | | | | (41) | | | (31) | | | |
Income from discontinued operations, net of taxes | 2 | | | 12 | | | | | 1 | | | 12 | | | |
Net income (loss) | $ | (25) | | | $ | 30 | | | | | $ | (40) | | | $ | (19) | | | |
| | | | | | | | | | | |
Gross margin % | 2.4 | % | | 10.1 | % | | | | 5.0 | % | | 6.5 | % | | |
Operating margin % | (3.8) | % | | 6.2 | % | | | | (0.3) | % | | 0.8 | % | | |
Effective tax rate | 17.0 | % | | (10.6) | % | | | | 22.4 | % | | (12.6) | % | | |
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in millions) | September 30, 2023 | | September 24, 2022 | | September 30, 2023 | | September 24, 2022 |
High Purity Cellulose | $ | 292 | | | $ | 369 | | | $ | 966 | | | $ | 952 | |
Paperboard | 57 | | | 66 | | | 164 | | | 183 | |
High-Yield Pulp | 25 | | | 40 | | | 111 | | | 102 | |
Eliminations | (5) | | | (9) | | | (20) | | | (20) | |
Net sales | $ | 369 | | | $ | 466 | | | $ | 1,221 | | |