Item 1B.
Unresolved Staff Comments
On June 21, 2016, we received a letter from the staff of the U.S. Securities and Exchange Commission (“SEC”) in which it requested we voluntarily provide to it documents and correspondence with environmental regulators concerning certain former operations. See 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 and general liability. Unless specifically noted, any possible range of loss associated with the legal proceedings described below is not reasonably estimable at this time. 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 (“EPD”), Georgia Department of Natural Resources, in which ARK appealed the issuance by 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 EPD would violate Georgia’s narrative water quality standard, a rule promulgated by the Georgia 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 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 EPD for consideration and issuance of a permit that comports with this ruling. The Company strongly disagrees with the decision and has appealed it, as has EPD. The appeal is being heard in the Superior Court of Wayne County, Georgia and we expect a ruling on our appeal in the first half of 2017. Until final resolution of this litigation, the Jesup plant will continue to operate under its existing waste water permit.
SEC Inquiry
On June 21, 2016, the Company received a letter from the staff of the U.S. Securities and Exchange Commission (“SEC”) in which it requested the Company voluntarily provide to it documents and correspondence with environmental regulators concerning certain former operations of the Company. These documents were requested following the Company’s response to comments from SEC staff regarding certain environmental reserves taken by the Company in the fourth quarter of 2014 and the disclosures made by the Company in connection therewith. The Company is cooperating with the SEC in its request. No enforcement action has been brought by the SEC to date and it is unknown whether any such action will be brought in the future. The Company believes its reserves and disclosures were appropriate and in compliance with applicable accounting rules and law.
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 Prices of our Common Stock; Dividends
The table below reflects, for the quarters indicated, the dividends declared per share of common stock and the range of market prices of our common stock as reported in the consolidated transaction reporting system of the New York Stock Exchange, the only exchange on which our stock is listed, under the trading symbol RYAM.
a) High and low market prices are based on daily close values.
On February 24, 2017, our board of directors declared a first quarter cash dividend of seven cents per share of common stock. The common stock dividend is payable March 31, 2017, to stockholders of record on March 17, 2017. There were approximately 43,260,052 shares of stock outstanding and 5,135 record holders, respectively, on February 16, 2017. On January 17, 2017 our board of directors declared a cash dividend of $2.00 per share of our Preferred Stock. The dividend was paid on February 15, 2017 to holders of record of our Preferred Stock as of February 1, 2017.
The declaration and payment of future dividends on our common stock will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, and other factors our board of directors deems relevant. Certain of our debt facilities may also restrict the declaration and payment of dividends, depending upon our then current compliance with certain covenants. In addition, the terms of our Preferred Stock provide that, unless full cumulative dividends have been paid or set aside for payment on all outstanding Preferred Stock for all prior dividend periods, no dividends may be declared or paid on our common stock. Dividends on our Preferred Stock are payable on a cumulative basis if and when they are declared by our board of directors. If declared, dividends will be paid at an annual rate of 8.00% of the liquidation preference of $100 per share. Dividend payment dates are February 15, May 15, August 15 and November 15 of each year, commencing on November 15, 2016 and ending on August 15, 2019. Dividends may be paid in cash or, subject to certain limitations, in shares of common stock or any combination of cash and shares of common stock. See Note 10 - Stockholders' Equity (Deficit) for more information about our Preferred Stock.
Issuer Purchases of Equity Securities
The following table provides information regarding our purchases of Rayonier Advanced Materials common stock during the quarter ended December 31, 2016:
(a)
Repurchased to satisfy the minimum tax withholding requirements related to the vesting of restricted stock under the Rayonier Advanced Materials Incentive Stock Plan.
Securities Authorized for Issuance under Equity Compensation Plans
See Part III, Item 12 of this report for information relating to our equity compensation plans.
Stock Performance Graph
The following graph compares the performance of Rayonier Advanced Material’s common stock (assuming reinvestment of dividends) with a broad-based market index, Standard & Poor’s (“S&P”) Small Cap 600, and an industry-specific index, the S&P 500 Materials Index. The initial date on the graph, June 27, 2014, reflects the date the Company separated from its former parent Rayonier.
The table and related information shall not be deemed to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
The data in the following table was used to create the above graph:
Item 6.
Item 6.
Selected Financial Data
The following financial data should be read in conjunction with our Consolidated Financial Statements. Prior to 2014, the following selected financial data consists of Rayonier’s performance fibers business for the years presented. For 2014, the balance sheet represents the financial position of the Company as of December 31, 2014 and the statement of income and statement of cash flows are presented as if the performance fibers business had been combined with the Company for the year ended December 31, 2014.
(a)
In conjunction with the Separation, 42,176,565 shares of our common stock were distributed to Rayonier shareholders on June 27, 2014. For comparative purposes, this amount has been assumed to be outstanding as of the beginning of each period prior to the Separation in the calculation of Basic Earnings Per Share. For the year ended December 31, 2016, basic and diluted earnings per share include the impact of dividends on the Company’s Preferred Stock. See Note 10 - Stockholders' Equity (Deficit) for additional information.
(b)
For comparability purposes, prior year balances have been restated in connection with the adoption of the Financial Accounting Standards Board’s Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. See Note 1 - Basis of Presentation and New Accounting Pronouncements for more information.
(c)
EBITDA, pro forma EBITDA and adjusted free cash flows are non-GAAP measures. See “Note about Non-GAAP Financial Measures” on page one 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
General
We are the leading global producer of cellulose specialties, a natural polymer, used as a raw material to manufacture a broad range of consumer-oriented products such as cigarette filters, liquid crystal displays, impact-resistant plastics, thickeners for food products, pharmaceuticals, cosmetics, high-tenacity rayon yarn for tires and industrial hoses, food casings, paints and lacquers. The manufacture and sale of cellulose specialties products are the primary driver of the Company’s profitability. Pricing for our cellulose specialties products is typically set annually in the fourth quarter for the following year based on discussions with customers and the terms of contractual arrangements.
We also produce commodity products, primarily commodity viscose and absorbent materials. Commodity viscose is a raw material for the manufacture of viscose staple fibers which are used in woven applications such as textiles for clothing and other fabrics, and in non-woven applications such as baby wipes, cosmetic and personal wipes, industrial wipes and mattress ticking. Absorbent materials, typically referred to as fluff fibers, are used as an absorbent medium in products such as disposable baby diapers, feminine hygiene products, incontinence pads, convalescent bed pads, industrial towels and wipes and non-woven fabrics. Pricing for commodity products is typically referenced to published indexes or based on publicly available spot market prices.
Our production facilities in Jesup, Georgia and Fernandina Beach, Florida, have a combined annual cellulose specialties production capacity of approximately 485,000 metric tons of cellulose specialties. Additionally, we have dedicated approximately 245,000 metric tons to commodity products.
Our products are sold throughout the world to companies for use in various industrial applications and to produce a wide variety of products. Approximately 60 percent of our sales are to export customers, primarily in Asia and Europe. Our top ten customers represent approximately 75 percent of our sales.
Cost of sales includes the cost of wood, chemicals, energy, depreciation, manufacturing overhead and transportation used to manufacture and deliver our products. Significant components and percentages of per metric ton cost are as follows:
•
Wood costs represent approximately 28 percent of the per metric ton cost of sales. We consume approximately 1.6 million short green tons of hardwood chips and 2.5 million short green tons of softwood chips per year. Weather conditions and demand in the wood products and pulp and paper markets can affect the cost of wood.
•
Chemical costs represent approximately 13 percent of the per metric ton cost of sales. Chemicals, including caustic soda (sodium hydroxide), sulfuric acid, sodium chlorate and various specialty chemicals are purchased under negotiated supply agreements with third parties.
•
Energy costs represent approximately 5 percent of the per metric ton costs of sales. The great majority of our energy is produced through the burning of lignin and other residual biomass in recovery and power boilers located at our plants. The plants also require fuel oil, natural gas and electricity to supplement their energy requirements.
Wood, chemicals and energy are subject to significant changes in price and availability. We continually pursue reductions in usage and costs of key raw materials, supplies and services and do not foresee any material constraints in the near term from pricing or availability. We currently have limited ability to pass cost increases on to our customers.
Rayonier Advanced Materials Four Pillars of Strategic Growth
In 2016, we launched a four-pronged approach aimed at transforming our business and growing EBITDA to drive long-term success for our stockholders. Our plan centers on strategic focus on the following four pillars:
•
Cost Transformation achieved through sustainable cost improvements and fostering a culture of continuous improvement;
•
New Products through which we are committed to expanding our business by developing value-added products derived from co-products, advanced materials from renewables, cellulose processing technology and next generation cellulose fibers. We have made significant progress in developing and applying proprietary technologies to new products in many of the end-market segments we serve, many of which have been introduced to customers and are currently in lab and manufacturing trials. We have also introduced products based on newly developed technology which has led to new commercial sales;
•
Market Optimization which focuses on maximizing our existing products and market mix by considering our customers’ needs, our manufacturing capabilities and transportation efficiency opportunities to drive higher value for our customers and our Company. We are committed to working with new and existing customers to find ways to grow value together; and
•
Acquisitions focused in areas that leverage our core competencies in markets and technologies that are attractive and complementary to our existing business. We expect these investments to broaden our capability set and expose us to a broader array of growth opportunities. In doing so, we hope to create greater diversity and growth potential in our revenue and earnings streams.
LignoTech Florida
In December 2016, we announced the settlement of all conditions precedent related to the our venture with Borregaard ASA (“Borregaard”) to manufacture, market and sell natural lignin-based products from our Fernandina Beach, Florida facility. We received final approvals from our boards of directors and secured the necessary permits to begin construction of the new lignin facility at our Fernandina Beach plant. The venture, LignoTech Florida (LTF), will serve the growing global demand for natural lignin-based products.
Lignin, a natural component of wood, is a co-product of our sulphite cellulose specialties manufacturing process and is currently used for energy at our Fernandina plant. LTF will process the lignin into higher-value products that provide environmentally-friendly alternatives to fossil fuel based products used globally in construction, agriculture and other industrial applications. LTF will allow us to lower our overall cost position at our Fernandina Beach plant while providing an opportunity to generate revenue in new and attractive growth markets.
We will own 45 percent and Borregaard will own 55 percent. Borregaard will provide its market leading technical knowledge and global sales distribution network, while we will supply raw materials, site services and other support.
The LTF plant is expected to be completed in two phases over five years and require an aggregate capital investment of approximately $135 million to yield an annual capacity of 150,000 metric tons. In addition to contributions from the LTF partners, we expect to fund a portion of the total investment through financing at the project level. Construction for the project began in December 2016. LTF operations are slated to begin mid-2018.
Preferred Stock Offering
On August 4, 2016, we completed a registered public offering of 1,725,000 shares of 8.00% Series A Mandatory Convertible Preferred Stock (the “Preferred Stock”), at a public offering price of $100.00 per share. Net proceeds from the offering were approximately $167 million. We intend to use the funds generated from our Preferred Stock equity issuance to grow and diversify our business through our four pillars of strategic growth. See Note 10 - Stockholders' Equity (Deficit) for more information on our Preferred Stock.
Outlook
Cellulose specialties markets are mixed as demand for acetate products remains suppressed. Ethers and other cellulose specialties markets are improving, providing opportunities for volume growth. Overall, cellulose specialties markets continue to be impacted by foreign competitors benefiting from weak global currencies relative to the U. S. dollar. Given these market conditions, we have expanded our presence in non-acetate products, although at lower prices than acetate. We expect 2017 cellulose specialties prices to decline three to four percent reflecting a shift in our cellulose specialties mix as well as previously disclosed lower acetate prices. Cellulose specialties sales volumes are expected to be relatively flat compared to 2016. We expect $25 to $30 million of cost improvements to partially offset declines in revenue, resulting in forecasted net income of $41 to $48 million and EBITDA of $190 to $200 million. Cash flows from operations and adjusted free cash flows are expected to be $140 to $150 million and $80 to $90 million. We anticipate capital expenditures of approximately $60 million, including our investment in the LignoTech Florida project.
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.
EBITDA guidance for 2017 of $190 to $200 million represents expected 2017 net income of $41 to $48 million excluding estimated income tax expense, interest expense, net, and depreciation and amortization of $27 to $30 million, $37 million and $85 million, respectively.
Adjusted Free Cash Flows Guidance for 2017 of $80 to $90 million represents expected 2017 operating cash flows of $140 to $150 million excluding capital expenditures of $60 million.
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 management believes are reasonable. Actual results may differ from these estimates.
Principles of Consolidation
Prior to the Separation, our results of operations, financial position and cash flows consisted of Rayonier’s performance fibers business. Our financial statements are presented as if the performance fibers business had been combined with the Company for all periods presented. All intercompany transactions are eliminated.
The statements of income for periods prior to the Separation include allocations of certain costs from Rayonier related to the operations of the performance fibers business. The statements of income also include expense allocations for certain corporate functions historically performed by Rayonier and not allocated to its operating segments. Management believes the methodologies employed for the allocation of costs were reasonable in relation to the historical reporting of Rayonier, but may not necessarily be indicative of costs had the Company operated on a stand-alone basis during the periods prior to the Separation, nor what the costs may be in the future.
Revenue Recognition
Rayonier Advanced Materials generally recognizes sales when the following criteria are met: (i) persuasive evidence of an agreement exists, (ii) delivery has occurred, (iii) the price to the buyer is fixed and determinable and (iv) collectibility is reasonably assured. Generally, title passes upon delivery to the agreed upon location. Based on the time required to reach each location, customer orders are generally received in one period with the corresponding revenue recognized in a subsequent period. As such, there could be substantial variation in orders received and revenue recognized from period to period. Payments from customers made in advance of the recognition of revenue are included in accrued customer incentives and prepayments.
Property, Plant & Equipment
Depreciation expense is computed using the units-of-production method for our plant and equipment and the straight-line method on 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. On average, the units-of-production and straight-line methodologies accounted for approximately 94 percent and 6 percent of depreciation expense, respectively. 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. Management believes these depreciation methods are the most appropriate, versus other generally accepted accounting methods, as they most closely match revenues with expenses.
Gains and losses on the retirement of assets are included in operating income. Long-lived assets are reviewed annually for impairment or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets that are held and used is measured by net undiscounted cash flows expected to be generated by the asset. Property, plant and equipment are grouped for purposes of evaluating recoverability at the combined plant level, the lowest level for which independent cash flows are identifiable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Environmental liabilities associated with disposed operations
At December 31, 2016, we had $153 million of accrued liabilities for environmental costs relating to disposed operations. Numerous cost assumptions are used in estimating these obligations. Factors affecting these estimates include changes in the nature or extent of contamination, changes in the content or volume of the material discharged or treated in connection with one or more impacted sites, requirements to perform additional or different assessment or remediation, changes in technology that may lead to additional or different environmental remediation strategies, approaches and work-plans, discovery of additional or
unanticipated contaminated soil, groundwater or sediment on or off-site, changes in remedy selection, changes in law or interpretation of existing law and the outcome of negotiations with governmental agencies or non-governmental parties. We periodically review our environmental liabilities and also engage third-party consultants to assess our ongoing remediation of contaminated sites. Quarterly, we review our environmental liabilities related to assessment activities and remediation costs and adjust them as necessary. Liabilities for financial assurance, monitoring and maintenance activities and other activities are assessed annually. A significant change in any of these estimates could have a material effect on the results of our operations. See Note 14 - Liabilities for Disposed Operations for additional information.
Determining the adequacy of pension and other postretirement benefit assets and liabilities
Certain employees participate in the Company’s defined benefit pension and postretirement health and life insurance plan. The defined benefit pension plan is closed to new participants. Numerous estimates and assumptions are required 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. 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 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 annualized rate of return from 1994 (the date of Rayonier’s spin-off from ITT Corporation) through 2016. At the end of 2016, we reviewed this assumption for reasonableness and determined the 2016 long-term rate of return assumption should be 8.50 percent. Beginning in 2017, we will reduce the expected long-term rate of return on plan assets to 7.75 percent. In 2017, we will also change the method we use to determine the service and interest cost components of net periodic benefit cost. Historically, we have determined the cost 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. We believe 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. We will account for this change prospectively as a change in accounting estimate.
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 discount rate decreased from 4.03% at December 31, 2015 to 3.88% at December 31, 2016.
Our pension plans were underfunded by $139 million at December 31, 2016. The funded status is essentially flat as compared to 2015 as actual investment performance and higher voluntary contributions to the pension plan in the current year were offset by a decrease in the discount rate. We did not have any mandatory pension contributions in 2016, 2015 or 2014. In July of 2016, we made a $10 million voluntary contribution to the pension plan. No discretionary contributions to our qualified pension plan were made in 2015 or 2014. Future contribution requirements will vary depending on actual investment performance, changes in valuation assumptions, interest rates and requirements under the Pension Protection Act. No contributions are expected to be made in 2017.
In 2017, we expect pension expense to be approximately the same as 2016. Future pension expense will be impacted by many factors including actual investment performance, changes in discount rates, timing of contributions and other employee related matters. See Note 16 - Employee Benefit Plans for additional information.
The sensitivity of pension expense and projected benefit obligation related to our two qualified 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 realization of tax assets is based on our historical profitability and unlimited carryforward periods on a majority of our deferred tax assets. These assets are reviewed periodically in order to assess their 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. 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 13 - Income Taxes for additional information.
New Accounting Standards
See Note 1 - Basis of Presentation and New Accounting Pronouncements for a discussion of recently issued accounting pronouncements that may affect our financial results and disclosures in future periods.
Summary of our results of operations for the three years ended December 31:
Results of Operations, Year Ended December 31, 2016 versus December 31, 2015
Total net sales were $72 million lower, or approximately 8 percent, in 2016, primarily due to a 7 percent decline in cellulose specialties prices which reflects the anticipated declines from the prior year. Additionally, cellulose specialties sales volumes decreased approximately 11 thousand tons, or 2 percent as a result of weak market conditions. This decrease was slightly less than expected due to the timing of revenue recognition in the fourth quarter of 2016.
(a)
Computed based on contribution margin.
In 2016, operating income and margin percentage increased $18 million and 3.1 percentage points versus prior year. Lower cellulose specialties prices and sales volumes were partially offset by lower costs driven by the Company’s cost improvements. Selling, general and administrative (“SG&A”) and other expenses decreased $40 million primarily as a result of the Jesup asset impairment recognized in the second quarter of 2015. Additionally, lower professional fees, stock compensation expense and pension expense in 2016 compared to 2015 contributed to the decrease in SG&A and other.
We incurred $35 million of interest expense in 2016 compared with $37 million of interest expense in 2015. The decrease in interest expense reflects the repurchase of Senior Notes in the first quarter of 2016, partially offset by higher LIBOR rates on floating rate debt. See Note 6 - Debt for additional information.
Our effective tax rate for 2016 was 34.9 percent, compared with 33.3 percent for 2015. The increase from the prior year period reflects the impact of the domestic manufacturing tax deduction being limited in the current year. The Company anticipates it will have no taxable income for 2016 as a result of higher tax depreciation and a tax accounting method change related to the deductibility of certain repair expenditures. As the manufacturing deduction is limited by taxable income, there is no benefit recognized in the current year. See Note 13 - Income Taxes for additional information.
Results of Operations, Year Ended December 31, 2015 versus December 31, 2014
Total net sales were $17 million lower, or approximately 2 percent, in 2015, primarily due to lower cellulose specialties prices. Additionally, cellulose specialties volumes declined approximately 12 thousand tons, or 2 percent, as we worked with our customers during the fourth quarter to assist them in balancing their inventories to address lower demand as a result of acetate supply chain de-stocking. Partially offsetting the decline were higher commodity sales volumes, driven by improved operational run rates and reduced inventory levels.
(a)
Computed based on contribution margin.
For 2015, operating income and margin percentage increased $57 million and 6.2 percentage points versus prior year. Lower cellulose specialties prices and volumes were partially offset by higher commodity products sales volumes and lower costs as a result of the Company’s cost improvement initiatives and lower raw material and other input prices. Selling, general and administrative (“SG&A”) and other expenses decreased $78 million as the $28 million impairment charge related to the Jesup plant repositioning was more than offset by lower environmental liability adjustments of $81 million, lower impairment charges for disposed operations of $7 million and lower one-time separation and legal costs of $26 million. SG&A and other expenses for 2015 were also negatively impacted by increased costs of being an independent public company. See Note 12 - Other Operating Expense, Net for additional information about the 2014 environmental liability adjustments and impairment charges.
We incurred $37 million of interest expense in 2015 compared with $22 million of interest expense in 2014. The increase in interest expense reflects a full year of outstanding debt in 2015 as compared to six months in the prior year. See Note 6 - Debt for additional information.
Our effective tax rate for 2015 was 33.3 percent, compared with 21.8 percent for 2014. The prior year period reflects a higher relative benefit from the domestic manufacturing deduction as a result of large, one-time environmental liability adjustments, which are not currently deductible for tax purposes and therefore lowered pre-tax income without reducing the domestic manufacturing deduction benefit in that period.
The 2015 effective tax rate was below the federal rate of 35 percent, primarily due to the benefit of the domestic manufacturing tax deduction and state tax credits, partially offset by an adjustment to the state deferred tax rate. See Note 13 - Income Taxes for additional information.
Liquidity and Capital Resources
Cash flows from operations have historically been our primary source of liquidity and capital resources. We believe our cash flows and availability under our revolving credit facility, as well as our ability to access the capital markets, if necessary or desirable, will be adequate to fund our operations and anticipated long-term funding requirements, including capital expenditures, dividend payments, defined benefit plan contributions and repayment of debt maturities.
The debt agreements contain various customary covenants. At December 31, 2016, we were in compliance with all covenants. Our debt’s non-guarantors had no assets, revenues, covenant EBITDA or liabilities. See Note 6 - Debt for additional information.
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)
Availability under the revolving credit facility is reduced by standby letters of credit of approximately $21 million, $14 million and $28 million at December 31, 2016, 2015 and 2014, respectively. See Note 18 - Guarantees for additional information.
(c)
See Note 6 - Debt for additional 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 in 2016 increased $30 million as lower cellulose specialties sales prices and volumes were offset by the impact of our Cost Transformation and improvements in working capital driven primarily by lower receivables and inventory balances. Current year working capital improvements were partially offset by a $10 million dollar voluntary contribution to the Company’s pension plan.
Cash provided by operating activities in 2015 increased $14 million due to higher commodity sales volumes, the impact of our cost savings initiatives and decreases in working capital driven primarily by lower inventory balances. Inventory balances as of December 31, 2014 were higher than normal as a result of good production results in the fourth quarter. These higher balances were reduced during 2015.
Cash Used for Investing Activities
Cash used for investing activities in 2016 increased $10 million primarily due to the timing of capital asset purchases. Cash used for investing activities in 2015 decreased $13 million primarily due to the purchase of timber deeds in 2014.
Cash Provided by (Used for) Financing Activities
Cash provided by financing activities in 2016 increased $169 million primarily due to the issuance of the Preferred Stock partially offset by Preferred Stock dividend payments and higher debt repayments in 2016 including the Company’s first quarter 2016 repurchase of senior notes.
Cash used for financing activities in 2015 increased $58 million due to the higher repayments of debt, net of the issuance of debt, debt issuance costs and net payments to Rayonier and higher dividend payments. See Note 1 - Basis of Presentation and New Accounting Pronouncements, Note 6 - Debt and Note 10 - Stockholders' Equity (Deficit) for additional information.
Performance and Liquidity Indicators
The discussion below is presented to enhance the reader’s understanding of our operating performance, liquidity, ability to generate cash and satisfy rating agency and creditor requirements. This information includes the following measures of financial results: EBITDA, pro forma EBITDA and adjusted free cash flows. These measures are not defined by U.S. Generally Accepted Accounting Principles (“GAAP”) and the discussion of EBITDA and adjusted free cash flows is not intended to conflict with or change any of the GAAP disclosures described above. Management considers these measures, in addition to operating income, to be important to estimate the enterprise and stockholder values of the Company, and for making strategic and operating decisions. In addition, analysts, investors and creditors use these measures when analyzing our operating performance, financial condition and cash generating ability. Management uses EBITDA and pro forma EBITDA as performance measures and adjusted free cash flows as a liquidity measure. See “Note about Non-GAAP Financial Measures” on page one for limitations associated with non-GAAP measures.
EBITDA is defined by SEC rule as earnings before interest, taxes, depreciation and amortization. Pro forma EBITDA is defined by the Company as EBITDA before non-cash impairment, one-time separation and legal costs, insurance recovery, environmental liability adjustments and gain on debt extinguishment. EBITDA and pro forma EBITDA are not necessarily indicative of results that may be generated in future periods.
Below is a reconciliation of Net Income to EBITDA and pro forma EBITDA for the five years ended December 31 (in millions of dollars):
EBITDA for 2016 increased compared to the corresponding 2015 period as lower cellulose specialty sales prices and volumes were more than offset by lower non-cash charges and lower production and SG&A costs driven by the Cost Transformation.
Pro forma EBITDA for the current year decreased from 2015 due to lower cellulose specialties sales prices and volumes partially offset by cost improvements from the Company’s Cost Transformation.
Adjusted free cash flows is defined as cash provided by operating activities adjusted for capital expenditures excluding strategic capital expenditures and subsequent tax benefits to exchange the Alternative Fuel Mixture Credit (“AFMC”) for the Cellulosic Biofuel Producer Credit (“CBPC”). Adjusted free cash flows, as defined by the Company, is a non-GAAP measure of cash generated during a period which is available for dividend distribution, debt reduction, strategic capital expenditures and acquisitions and repurchase of the Company’s common stock. Adjusted free cash flows is not necessarily indicative of the adjusted free cash flows that may be generated in future periods.
Below is a reconciliation of cash flows from operations to adjusted free cash flows for the five years ended December 31 (in millions of dollars):
(a)
Capital expenditures exclude strategic capital expenditures which are deemed discretionary by management. Strategic capital for the year ended December 31, 2016 was $4 million for LignoTech Florida. There was no strategic capital for the year ended December 31, 2015. Strategic capital totaled $13 million for the purchase of timber deeds and $2 million for the purchase of land for the year ended December 31, 2014. Strategic capital totaled $141 million and $201 million for the Cellulose Specialties Expansion project for the years ended December 31, 2013 and 2012, respectively.
Adjusted free cash flows increased over the prior year as lower cellulose specialties sales prices and volumes were offset by the impact of our Cost Transformation and improvements in working capital driven primarily by lower receivables and inventory balances.
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 self-insurance programs we maintain 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 18 - Guarantees for further discussion.
Contractual Financial Obligations
See Note 18 - Guarantees for details on the letters of credit and surety bonds as of December 31, 2016.
The following table aggregates our contractual financial obligations as of December 31, 2016 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, 2016. See Note 6 - Debt for additional information.
(b)
Purchase obligations primarily consist of payments expected to be made on natural gas, steam energy and wood chips purchase contracts.
(c)
Purchase orders represent non-cancellable purchase agreements entered into in the normal course of business with various suppliers that specify a fixed or minimum quantity that we must purchase.
(d)
Operating leases primarily consist of the office lease for our corporate headquarters and machinery and equipment.
Environmental Regulation
We are subject to stringent environmental laws and regulations concerning air emissions, wastewater discharges, waste handling and disposal, and assessment and remediation of environmental contamination, which impact both our current ongoing operations and 17 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, as well as requirements relating to ancillary matters such as financial assurance of the Company’s legal obligations for facility closure and post-closure care. Management closely monitors our environmental responsibilities and believes we are in compliance with current material requirements. In addition to ongoing compliance with laws and regulations, our facilities operate in accordance with various permits, which are issued by state and federal environmental agencies. Many of these permits impose operating conditions on us which require significant expenditures to ensure compliance. Upon renewal and renegotiation of these permits, the issuing agencies often seek to impose new or additional conditions in response to new environmental laws and regulations, or more stringent interpretations of existing laws and regulations. In addition, under many federal environmental laws, private citizens and organizations, such as environmental advocacy groups, have the right to legally challenge permitting and other decisions made by regulatory agencies.
Our operations are subject to constantly changing environmental requirements, and interpretations of existing requirements, which are often impacted by new policy initiatives, new and amended legislation and regulation, negotiations involving state and federal governmental agencies and various other stakeholders, as well as, at times, litigation. For additional information, see Item 1A - Risk Factors for a discussion of the potential impact of environmental risks on our business, and Item 3 - Legal Proceedings, for a discussion of any environmental-related litigation.
Ongoing Operations
During 2016, 2015 and 2014, we spent the following for capital projects related to environmental compliance for ongoing operations:
(a)
Represents spending required as a result of a regulation originally promulgated in 2012 (and later re-promulgated after litigation), which imposes more stringent emissions limits on certain air pollutants from industrial boilers. This project was completed in 2016.
(b)
Represents spending related to a 2008 Jesup plant consent order, as later amended, in which we agreed to implement certain capital improvements relating to the plant’s wastewater treatment.
(c)
Includes spending for improvements to our manufacturing process and pollution control systems to comply with the requirements of new or renewed air emission and waste water discharge permits, and other required improvements for our plants.
The Company’s future spending requirements in the area of environmental compliance could change significantly based on the passage of new environmental laws and regulations.
Disposed Operations
For information and details relating to our disposed operations and estimated liabilities relating thereto, see Item 1A - Risk Factors and Note 14 - Liabilities for Disposed Operations.
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 and commodity prices. Our objective is to minimize the economic impact of these market risks. We may use derivatives in accordance with policies and procedures approved by the Audit Committee of our Board of Directors. Any such derivatives would be managed by a senior executive committee whose responsibilities include initiating, managing and monitoring resulting exposures. We do not enter into financial instruments for trading or speculative purposes. At December 31, 2016, we had no derivatives outstanding.
Cyclical pricing of commodity market paper pulp is one of the factors which influences prices in the absorbent materials and commodity viscose product lines. 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 correlated to commodity paper pulp prices. In addition, a majority of our cellulose specialties products are under long-term volume contracts that expire between 2017 and 2019. The pricing provisions of these contracts are typically set in the fourth quarter in the year prior to the shipment.
As of December 31, 2016, we had $271 million of long-term 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 $3 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.
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, 2016 was $475 million compared to the $506 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. A hypothetical one-percentage point increase/decrease in prevailing interest rates at December 31, 2016 would result in a corresponding decrease/increase in the fair value of our fixed-rate debt of approximately $28 million.
We may periodically enter into commodity forward contracts to fix some of our fuel oil and natural gas costs. Such forward contracts partially mitigate the risk of a change in margins resulting from an increase or decrease in these energy costs. At December 31, 2016, we had no fuel oil or natural gas forward contracts outstanding.
Item 8.
Item 8.
Financial Statements and Supplementary Data
See Index to Financial Statements on page ii.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
As previously disclosed in the Company's Current Report on Form 8-K filed on March 14, 2016, our Audit Committee approved the engagement of Grant Thornton LLP as our independent registered public accounting firm effective March 12, 2016. There were no disagreements or reportable events related to the change in accountants requiring disclosure under Item 304(b) of Regulation S-K.
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, 2016.
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 pages and, included in Item 8 - Financial Statements and Supplementary Data of this annual report on Form 10-K.
In the quarter ended December 31, 2016, 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 2017 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.
Directors, Executive Officers and Corporate Governance
The information required by this Item with respect to directors, executive officers and corporate governance is incorporated by reference from the sections entitled “Election of Directors,” “Corporate Governance,” “Executive Officers” and “Report of the Audit Committee” in the Proxy Statement. The information required by this Item with respect to disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Our Standard of Ethics and Code of Corporate Conduct, which is applicable to our principal executive officer and financial and accounting officers, is available on our website, www.rayonieram.com. Any amendments to or waivers of the Standard of Ethics and Code of Corporate Conduct will also be disclosed on our website.
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 sections entitled “Share Ownership of Certain Beneficial Owners,” “Share Ownership of Directors and Executive Officers” 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 and subsections entitled “Election of Directors,” “Corporate Governance - Director Independence” and “Corporate Governance - 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 “Report of the Audit Committee - Information Regarding Independent Registered Public Accounting Firm” in the Proxy Statement.
Part IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules
(a) Documents filed as a part of this report:
(1)
See Index to Financial Statements on page ii for a list of the financial statements filed as part of this report.
(2)
See Schedule II - Valuation and Qualifying Accounts. All other financial statement schedules have been omitted because they are not applicable, the required matter is not present or the required information has otherwise been supplied in the financial statements or the notes thereto.
(3)
See Exhibit Index for a list of the exhibits filed or incorporated herein as part of this report. Exhibits that are incorporated by reference to documents filed previously by the Company under the Securities Exchange Act of 1934, as amended, are filed with the SEC under File No. 1-6780.
(b) Exhibits:
See Item 15 (a)(3).
(c) Financial Statement Schedules:
See Item 15 (a)(2).
None.
Management’s Report on Internal Control over Financial Reporting
To Our Stockholders:
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, 2016. 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, 2016.
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, 2016. The report on the Company’s internal control over financial reporting as of December 31, 2016, is on page.
RAYONIER ADVANCED MATERIALS INC.
By:
/s/ PAUL G. BOYNTON
Paul G. Boynton
Chairman, President and Chief Executive Officer
February 24, 2017
By:
/s/ FRANK A. RUPERTO
Frank A. Ruperto
Chief Financial Officer and Senior Vice President, Finance and Strategy
(Duly Authorized Officer and Principal Financial Officer)
February 24, 2017
F- 1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Rayonier Advanced Materials Inc.
We have audited the accompanying consolidated balance sheets of Rayonier Advanced Materials Inc. and subsidiaries (the “Company”) as of December 31, 2016, and the related consolidated statements of income and comprehensive income, and cash flows for the year ended December 31, 2016. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rayonier Advanced Materials Inc. and subsidiaries as of December 31, 2016, and the results of its operations and its cash flows for the year ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, 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 February 24, 2017 expressed an unqualified opinion thereon.
/s/ GRANT THORNTON LLP
Jacksonville, Florida
February 24, 2017
F- 2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Rayonier Advanced Materials Inc.
We have audited the internal control over financial reporting of Rayonier Advanced Materials Inc. and subsidiaries (the “Company”) as of December 31, 2016, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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.
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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, 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), the consolidated financial statements of the Company as of and for the year ended December 31, 2016, and our report dated February 24, 2017 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Jacksonville, Florida
February 24, 2017
F- 3
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Rayonier Advanced Materials Inc.
We have audited the accompanying consolidated balance sheet of Rayonier Advanced Materials Inc. (“the Company”) as of December 31, 2015, and the related consolidated statements of income and comprehensive income, and cash flows for each of the two years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2015, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Certified Public Accountants
Jacksonville, Florida
February 26, 2016
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.
F- 5
Rayonier Advanced Materials Inc.
Consolidated Balance Sheets
As of December 31,
(Dollars in thousands)
See Notes to Consolidated Financial Statements.
F- 6
Rayonier Advanced Materials Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31,
(Dollars in thousands)
See Notes to Consolidated Financial Statements.
F- 7
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in thousands unless otherwise stated)
1. Basis of Presentation and New Accounting Pronouncements
Basis of Presentation
On June 27, 2014, Rayonier Advanced Materials Inc. (“Rayonier Advanced Materials” or the “Company”) separated (the “Separation”) from its former parent, Rayonier Inc. (“Rayonier”) through the distribution to its stockholders of 42,176,565 shares of common stock (the “Distribution”). The Company’s Consolidated Statements of Income, Comprehensive Income and Cash Flows for the year ended December 31, 2014 consist of the consolidated results of Rayonier Advanced Materials for the six months ended December 31, 2014 and the combined results of Rayonier’s performance fibers business for the six months ended June 27, 2014. The Company’s Consolidated Balance Sheets as of December 31, 2016 and 2015 consist of the consolidated balances of Rayonier Advanced Materials.
The statements of income for periods prior to the Separation include allocations of certain costs from Rayonier related to the operations of the Company. These corporate administrative costs were charged to the Company based on employee headcount and payroll costs. The combined statements of income, for periods prior to the Separation, also include expense allocations for certain corporate functions historically performed by Rayonier and not allocated to its operating segments. These allocations were based on revenues and specific identification of time and/or activities associated with the Company. Management believes the methodologies employed for the allocation of costs were reasonable in relation to the historical reporting of Rayonier, but may not necessarily be indicative of costs had the Company operated on a stand-alone basis during the periods prior to the Separation, nor what the costs may be in the future.
The Company’s Consolidated Statements of Income, Comprehensive Income and Cash Flows for the year ended December 31, 2016 and 2015, consist entirely of the consolidated results of Rayonier Advanced Materials.
Nature of Business Operations
The Company is a leading manufacturer of high-value cellulose specialties products and commodity products with production facilities in Jesup, Georgia and Fernandina Beach, Florida. These products are sold throughout the world to companies for use in various industrial applications and to produce a wide variety of products, including cigarette filters, foods, pharmaceuticals, textiles and electronics.
The Company’s primary products consist of the following:
Cellulose specialties
Cellulose specialties are natural polymers, used as raw materials to manufacture a broad range of consumer-oriented products such as cigarette filters, liquid crystal displays, impact-resistant plastics, thickeners for food products, pharmaceuticals, cosmetics, high-tenacity rayon yarn for tires and industrial hoses, food casings, paints and lacquers. Cellulose specialties are primarily used in dissolving chemical applications that require a highly purified form of cellulose. The Company concentrates on producing the purest, most technologically-demanding forms of cellulose specialties products, such as cellulose acetate and high-purity cellulose ethers, and is a leading supplier of these products. A majority of the Company’s cellulose specialties products are under long-term volume contracts that expire between 2017 and 2019. Pricing under these contracts is typically set in the fourth quarter in the year prior to the shipment.
Commodity products
Commodity products are used for viscose and absorbent materials applications. Commodity viscose is a raw material required for the manufacture of viscose staple fibers which are used in woven applications such as textiles for clothing and other fabrics, and in non-woven applications such as baby wipes, cosmetic and personal wipes, industrial wipes and mattress ticking. Absorbent materials, typically referred to as fluff fibers, are used as an absorbent medium in products such as disposable baby diapers, feminine hygiene products, incontinence pads, convalescent bed pads, industrial towels and wipes and non-woven fabrics. Pricing for commodity products is typically referenced to published indexes or based on publicly available spot market prices.
Principles of Consolidation
The consolidated financial statements include Rayonier Advanced Materials, as well as the Company’s wholly owned
F- 8
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
subsidiaries. All intercompany balances and transactions are eliminated.
Reclassifications
Certain 2015 and 2014 amounts have been reclassified to conform with the current year presentation.
Fiscal Year
The Company’s fiscal year end is the last day of the calendar year. For interim reporting periods, the Company uses the last Saturday of the fiscal quarter.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 estimating, and therefore, actual results could differ from those estimates.
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.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at invoiced amount 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. Production related plant and equipment are depreciated using the units-of-production method. The total units of production used to calculate depreciation expense is determined by factoring annual production days, based on normal production conditions, by the economic useful life of the asset involved. Production related assets under capital leases are depreciated using the straight-line method over the related lease term. The Company depreciates its non-production assets, including office, lab and transportation equipment, using the straight-line depreciation method over 3 to 25 years. Buildings and land improvements are depreciated using the straight-line method over 15 to 35 years and 5 to 30 years, respectively. Depreciation expense reflected in cost of sales in the Consolidated Statements of Income was $84.8 million, $87.5 million and $84.6 million for the years ended December 31, 2016, 2015 and 2014, 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.
F- 9
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
The Company performs scheduled inspections, repairs and maintenance of plant machinery and equipment at the Company’s manufacturing plants during a full plant shutdown. The Company’s Jesup, Georgia plant has an annual shutdown while the Company’s Fernandina Beach, Florida plant is on an 18-month shutdown cycle. Costs associated with these planned outage periods are referred to as shutdown costs. Shutdown costs are costs incurred to ensure the long-term reliability and safety of operations.
Shut down 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 shut down.
Shut down costs are classified as working capital in operating activities in the consolidated statements of cash flows. As of December 31, 2016 and 2015 the Company had $15.8 million and $11.8 million in shut down costs capitalized in other current assets and $1.1 million and $0 in shut down costs capitalized in other assets, respectively.
Capitalized Interest
Interest from external borrowings is capitalized on major projects with an expected construction period of one year or longer. The interest costs are added to the cost of the underlying basis of the property, plant and equipment and amortized over the useful life of the assets. During 2016, 2015 and 2014, interest capitalized to property, plant and equipment was $0.8 million, $1.3 million and $0.1 million, respectively.
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.
Revenue Recognition
The Company generally recognizes sales when persuasive evidence of an agreement exists, delivery of products has occurred, the sales price to the buyer is fixed and determinable and collectibility is reasonably assured. Generally, title passes upon delivery to the agreed upon location. Based on the time required to reach each location, customer orders are generally received in one period with the corresponding revenue recognized in a subsequent period. As such, there could be substantial variation in orders received and revenue recognized from period to period. Customer incentives are recorded as a reduction of gross sales within the same period that revenue from the sale is recognized. Payments from customers made in advance of the recognition of revenue are included in accrued customer incentives and prepayments.
Shipping and Handling Costs
Shipping and handling costs, such as freight to the customers’ destinations, are included in cost of goods sold in the Consolidated Statements of Income.
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 2017 through 2036, 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
F- 10
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
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 plan, unfunded excess pension plan 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.
Periodic pension and other postretirement expense is included in “Cost of sales” and “Selling, general and administrative expenses” in the Consolidated Statements of Income. At December 31, 2016 and 2015, the pension plans were in a net liability position. The estimated amount to be paid in the next 12 months is recorded in “Accrued payroll and benefits” on the Consolidated Balance Sheets, with the remainder recorded as a long-term liability in “Pension and other postretirement benefits.” 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 (deficit) (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
For the period prior to the Separation, the Company was a subsidiary of Rayonier and, for purposes of U.S. federal and state income taxes, was not directly subject to income taxes but was included in the income tax return of Rayonier. In the accompanying Consolidated Financial Statements for period prior to the Separation, the Company’s provision for income taxes has been determined on a separate return basis.
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.
The Company’s income tax returns are subject to audit by U.S. federal and state taxing authorities. 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.
Recently Adopted Accounting Pronouncements
In May 2015, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). The update exempts investments measured using the net asset value (NAV) practical expedient in ASC 820, Fair Value Measurement, from categorization within the fair value hierarchy. It became effective for fiscal years beginning after December 15, 2015. The Company adopted as of January 1, 2016 and retrospectively applied the guidance. The adoption did not have a material impact on the Company’s financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. It became effective for fiscal years beginning after December 15, 2015. The Company adopted as of March 26, 2016. The effect of this accounting change on prior periods was a reclassification of debt issuance costs as of December 31, 2015 of $9.6 million and $0.3 million to “Long-term debt” from “Other assets” and “Prepaid and other current assets,” respectively.
F- 11
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
New Accounting Pronouncements
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation. The update simplifies several areas of accounting for share based payments. The guidance also includes the acceptable or required transition methods for each of the various amendments included in the new standard. It is effective for fiscal years beginning after December 15, 2016. The Company expects to record approximately $2.2 million in tax expense during the first quarter of 2018 as a result of the adoption of ASU 2016-09.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The update requires entities to recognize assets and liabilities arising from finance and operating leases and to classify those finance and operating lease payments in the financing or operating sections, respectively, of the statement of cash flows. It is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of this standard on its consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. The update requires inventory to be measured at the lower of cost and net realizable value. It is effective for fiscal years beginning after December 15, 2016. The update is not expected to have a material impact on the Company’s financial statements as current inventory valuation practices already approximate the lower of cost or net realizable value.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as amended and/or clarified by ASU Nos. 2016-08, 2016-10, 2016-12, and 2016-20, a comprehensive new revenue recognition standard. This standard will supersede virtually all current revenue recognition guidance. The core principle is that a company will recognize revenue when it transfers goods or services to customers for an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. The new revenue standard (and subsequent amendments) will be effective for the Company’s first quarter 2018 Form 10-Q filing.
In preparation for the 2018 adoption date, management is in the process of evaluating the standard’s overall impact on the Company’s revenue recognition process and the resulting adoption impact. Under ASC 606, revenue is recognized as control is transferred to the customer either at a point in time or over time. The assessment of whether control transfers over time or at a point in time is critical to determining when to recognize revenue.
Management is evaluating whether its contracts satisfy the criteria for revenue recognition over time for customized goods. If the Company determines the over time criteria is satisfied, revenue recognition will be accelerated for cellulose specialties and commodity products contracts. If management determines the over time criteria for revenue recognition is not met, the Company will recognize revenue at a point in time. If a point in time revenue recognition determination is made, the Company expects revenue recognition to remain substantially consistent with current practice.
The Company expects to adopt the standard on a modified retrospective basis and is currently in the process of assessing changes required to its business processes, systems and controls to support revenue recognition and related financial statement disclosures under the new standard.
Subsequent Events
Events and transactions subsequent to the balance sheet date have been evaluated for potential recognition and disclosure through February 24, 2017, the date these financial statements were available to be issued. Two subsequent events warranting disclosure were identified.
On January 17, 2017, our board of directors declared a first quarter 2017 cash dividend of $2.00 per share of our mandatory convertible preferred stock. The dividend was paid on February 15, 2017 to mandatory convertible preferred stockholders of record as of February 1, 2017.
On February 24, 2017, the Company declared a first quarter 2017 cash dividend of $0.07 per share of common stock. The dividend is payable on March 31, 2017 to stockholders of record on March 17, 2017.
F- 12
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
2. Related Party Transactions
As discussed in Note 1 - Basis of Presentation and New Accounting Pronouncements, for periods prior to the Separation, the Consolidated Statements of Income include expense allocations for certain corporate functions historically performed by Rayonier and not allocated to its operating segments, including general corporate expenses related to executive oversight, accounting, treasury, tax, legal, human resources and information technology. Net charges from Rayonier for these services, reflected in selling, general and administrative expenses in the Consolidated Statements of Income was $8.0 million for the year ended December 31, 2014. There were no comparable charges for the years ended December 31, 2016 and 2015.
For periods prior to the Separation, the Consolidated Statements of Income also include allocations of certain costs from Rayonier related to the operations of the Company including: medical costs for active salaried and retired employees, workers’ compensation, general liability and property insurance, salaried payroll costs, equity based compensation and a pro-rata share of direct corporate administration expense for accounting, human resource services and information system maintenance. Net charges from Rayonier for these costs, reflected in the Consolidated Statements of Income was $27.3 million for the year ended December 31, 2014. There were no comparable charges for the years ended December 31, 2016 and 2015.
3. Segment and Geographical Information
The Company operates as a single segment business with two major product lines: cellulose specialties and commodity products. All sales originate from production facilities in the United States, including the Jesup, Georgia plant, the Fernandina Beach, Florida plant and the five chip facilities. Almost all of the Company’s assets are located in the United States. Assets related to its three foreign representative offices, located in London, Tokyo and Shanghai, are not significant.
Sales by the two major product lines was comprised of the following for the three years ended December 31:
Geographical distribution of the Company’s sales was comprised of the following for the three years ended December 31:
(a)
All sales to foreign countries are denominated in U.S. dollars.
F- 13
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
The Company had sales to three significant customers which represented over 10 percent of total sales for the three years ended December 31:
4. Inventory
As of December 31, 2016 and 2015, the Company’s inventory included the following:
5. Property, Plant and Equipment
As of December 31, 2016 and 2015, the Company’s property, plant and equipment included the following:
F- 14
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
6. Debt
As of December 31, 2016 and 2015, the Company’s debt consisted of the following:
During the first quarter of 2016, the Company repurchased in the open market $43.6 million of its Senior Notes due 2024 and retired them for $34.1 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 $8.8 million, which includes the write-off of $0.7 million of unamortized debt issuance costs in the first quarter of 2016. During the year ended December 31, 2016, the Company also made $25.5 million and $11.5 million in principal debt repayments on the Term A-1 and Term A-2 Loan Facilities, respectively.
Debt and capital 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 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.
On or after June 1, 2019, the Company may redeem the Senior Notes, in whole or in part, at the redemption prices specified in the indenture governing the Senior Notes plus accrued and unpaid interest to, but excluding, the redemption date. Prior to June 1, 2017, the Company may redeem up to 40 percent percent of the Senior Notes using proceeds from certain equity offerings in accordance with the terms of the indenture. Prior to June 1, 2019, the Company may redeem some or all of the Senior Notes at
F- 15
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
a redemption price of 100 percent of the principal amount, plus accrued and unpaid interest, to, but excluding, the redemption date, plus a “make-whole” premium.
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, 2016, the Company was in compliance with all covenants.
Senior Secured Credit Facilities
On June 26, 2014, the Company entered into senior secured credit facilities comprised of a $110 million senior secured term loan facility (the “Term A-1 Loan Facility”), a $290 million senior secured term loan facility (the “Term A-2 Loan Facility” and together with the Term A-1 Facility, the “Term Loan Facilities”), and a $250 million senior secured revolving credit facility (which includes letter of credit and swingline loan subfacilities) (the “Revolving Credit Facility” and together with the Term Loan Facilities, the “Credit Facilities”). The Credit Facilities have a first priority security interest in substantially all present and future material assets, excluding the Fernandina Beach plant’s real property.
The loans under the Credit Facilities will bear interest at either (a) a base rate or (b) an adjusted LIBOR rate, in each case, plus an applicable margin (the “Applicable Margin”), in the case of base rate loans, ranging between 0.25 percent and 1.00 percent, and in the case of adjusted LIBOR rate loans, ranging between 1.25 percent and 2.00 percent. The Applicable Margin for borrowings under the Credit Facilities is based on a consolidated total net leverage-based pricing grid.
The Revolving Credit Facility matures in June 2019. As of December 31, 2016, the Company had no outstanding balance on the Revolving Credit Facility. At December 31, 2016, the Company had $229 million of available borrowings under the Revolving Credit Facility, net of $21 million to secure its outstanding letters of credit.
The Credit Facilities contain a number of covenants that limit the ability of the Company and its restricted subsidiaries, as defined by the Credit Facilities, to take certain specified actions, subject to certain exceptions, including: creating liens; incurring indebtedness; making investments and acquisitions; engaging in mergers and other fundamental changes; making dispositions; making restricted payments, including dividends and distributions; and consummating transactions with affiliates. Under the Credit Facilities, the Company will be required to maintain a consolidated first lien secured net leverage ratio of no greater than 3.00 to 1.00 and an interest coverage ratio of no less than 3.00 to 1.00. Additionally, the Credit Facilities contain customary affirmative covenants for credit facilities of this kind and customary events of default (subject, in certain cases, to customary grace or cure periods), including, without limitation, payment defaults, breach of covenant defaults, bankruptcy defaults, judgment defaults, defaults under certain other indebtedness and changes in control. At December 31, 2016, the Company was in compliance with all covenants.
F- 16
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
7. 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, 2016 and 2015, using market information and what management believes to be appropriate valuation methodologies:
(a) Table excludes the Company’s capital lease obligation.
The Company uses the following methods and assumptions in estimating the fair value of its financial instruments:
Cash and cash equivalents - The carrying amount is equal to fair market value.
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.
8. Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Loss (“AOCI”) was comprised of the following for the three years ended December 31:
(a)
These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 16 - Employee Benefit Plans for additional information.
(b)
Prior to the Separation, certain of the Company’s employees participated in employee benefit plans sponsored by Rayonier. The Company did not record an asset, liability or accumulated other comprehensive loss to recognize the funded status of the Rayonier plans on the Consolidated Balance Sheet until the Separation. See Note 10 - Stockholders' Equity (Deficit) for additional information.
F- 17
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
9. LignoTech Florida
In December 2016, the Company announced the fulfillment of all conditions precedent related to the LignoTech Florida (“LTF”) venture with Borregaard ASA (“Borregaard”) to manufacture, market and sell lignin-based products from the Company’s Fernandina Beach facility. The Company owns 45 percent of LTF and Borregaard owns 55 percent. The Company will account for its investment in LTF as an equity method investment. As of December 31, 2016, there was no impact on the Company’s financial statements from its LTF investment. The LTF plant is expected to be completed in two phases over five years and require an aggregate capital investment of approximately $135 million to yield an annual capacity of 150,000 metric tons. Construction for the project began in December 2016. LTF operations are expected to begin mid-2018.
F- 18
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
10. Stockholders' Equity (Deficit)
An analysis of stockholders’ (deficit) equity for each of the three years ended December 31 is shown below (share amounts not in thousands):
F- 19
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
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 $166.6 million after deducting underwriting discounts, commissions and expenses.
Each share of the Preferred Stock will automatically convert into shares of common stock, subject to anti-dilution and other adjustments, on the mandatory conversion date, which is expected to be August 15, 2019. The number of shares of common stock issuable on conversion will be determined based on the volume-weighted average price of the Company’s common stock over a 20 trading day period immediately prior to the mandatory conversion date (“Applicable Market Value”). If the Applicable Market Value for our common stock is greater than $15.17 or less than $12.91, the conversion rate per share of Preferred Stock will be 6.5923 or 7.7459, respectively. If the Applicable Market Value is between $15.17 and $12.91, the conversion rate per share of Preferred Stock will be between 6.5923 and 7.7459. Subject to certain restrictions, at any time prior to August 15, 2019, holders of the Preferred Stock may elect to convert all or a portion of their shares into common stock at the minimum conversion rate of 6.5923 shares of common stock per share of Preferred Stock, subject to adjustment.
Preferred Stock holders have no voting rights unless dividends on the Preferred Stock have not been declared and paid for six or more dividend periods. In those circumstances holders will be entitled to vote for the election of a total of two additional members of the Company’s board of directors.
Dividends on the Preferred Stock are payable on a cumulative basis if and when they are declared by our board of directors. If declared, dividends will be paid at an annual rate of 8.00% of the liquidation preference of $100 per share. Dividend payment dates are February 15, May 15, August 15 and November 15 of each year, commencing on November 15, 2016 and ending on August 15, 2019. Dividends may be paid in cash or, subject to certain limitations, in shares of common stock or any combination of cash and shares of common stock. The terms of the Preferred Stock provide that, unless full cumulative dividends have been paid or set aside for payment on all outstanding Preferred Stock for all prior dividend periods, no dividends may be declared or paid on common stock.
Net Parent Company Investment
The following provides a reconciliation of the amounts presented as “Net transfers to Rayonier” in the above table and the amounts presented as “Net payments to Rayonier” on the Consolidated Statements of Cash Flows for the year ended December 31, 2014. There were no net payments to/from Rayonier for the years ended December 31, 2016 and 2015.
(a)
Included in the costs allocated to the Company from Rayonier are expense allocations for certain corporate functions historically performed by Rayonier and not allocated to its operating segments. See Note 2 - Related Party Transactions.
(b)
As a result of the Separation, certain assets and liabilities were transferred to the Company that were not included in the historical financial statements for periods prior to the Separation. These non-cash capital contributions included:
•
$73.9 million of disposed operations liabilities (See Note 14 - Liabilities for Disposed Operations for additional information)
F- 20
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
•
$73.8 million of employee benefit plan liabilities (See Note 16 - Employee Benefit Plans for additional information)
•
$67.4 million of deferred tax assets (primarily associated with the liabilities above)
•
$3.6 million of other liabilities, net
11. Earnings Per Share of Common Stock
In conjunction with the Separation, 42,176,565 shares of the Company’s common stock were distributed to Rayonier shareholders. For comparative purposes, and to provide a more meaningful calculation of weighted-average shares outstanding, the Company assumed this amount to be outstanding as of the beginning of each period prior to the Separation presented in the calculation of weighted-average shares. Prior to the Separation, there were no dilutive shares since the Company had no outstanding equity awards.
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.
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:
F- 21
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
12. Other Operating Expense, Net
Other operating expense, net was comprised of the following for the three years ended December 31:
(a)
The increase in environmental liabilities for disposed operations in 2016, 2015 and 2014 of $5.3 million, $6.9 million and $70.1 million, respectively, reflects an increase to the estimates for the assessment, remediation and long-term monitoring and maintenance of the Company’s disposed operations sites over the next 20 years. See Note 14 - Liabilities for Disposed Operations for additional information.
(b)
The Company is subject to certain legal requirements relating to the provision of annual financial assurance regarding environmental remediation and post closure care at certain disposed sites. To comply with these requirements, the Company purchased surety bonds from an insurer, with the Company’s repayment obligations (if the bonds are drawn upon) secured by the issuance of a letter of credit by the Company’s revolving credit facility lender. As a result of the Separation and the Company’s obligations to procure financial assurance annually for the foreseeable future, the Company recorded a corresponding increase to liabilities for disposed operations. See Note 14 - Liabilities for Disposed Operations and Note 18 - Guarantees for additional information.
(c)
In light of the persistent imbalance of supply and demand in the cellulose specialties markets, on July 30, 2015, the Company announced a strategic asset repositioning at its Jesup, Georgia plant to better align its production assets to current market conditions, improve efficiency and restore commodity production throughput to approach historical levels. This repositioning resulted in the abandonment of certain long-lived assets, primarily at the Jesup plant. As a result, the abandoned assets were written down to salvage value and a $28.5 million pre-tax, non-cash impairment charge was recorded during the second quarter of 2015. The abandonment led management to conduct an impairment analysis on all long-lived assets being held and used on a combined plant level. Based on the impairment analysis performed, management concluded the assets were recoverable.
In 2014, the Company determined certain pieces of property associated with its disposed operations should be assessed for impairment based on recent changes to remediation plans at four of its disposed operations sites. As a result, the Company concluded the land values were impaired and reduced the carrying value of those properties by approximately $7.2 million.
13. Income Taxes
Provision for Income Taxes
The provision for income taxes for periods prior to the Separation has been computed as if the Company were a stand-alone company.
F- 22
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
The provision for income taxes consisted of the following:
A reconciliation of the U.S. federal statutory income tax rate to the actual income tax rate was as follows:
(a)
The impact of the manufacturing deduction on the effective tax rate was greater in 2014 due to expenses that reduced pre-tax income but were not currently deductible for income tax purposes. The Company anticipates it will have no taxable income for 2016 as a result of higher tax depreciation and a tax accounting method change related to the deductibility of certain repair expenditures. As the manufacturing deduction is limited by taxable income, there is no benefit recognized in the current year.
F- 23
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
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 tax credit carryforwards and net operating losses as of December 31, 2016:
(b) In 2016, the Company’s tax depreciation was higher than normal due to the timing of certain assets’ place-in-service dates and tax accounting method change for repair expenditures disclosed above.
Unrecognized Tax Benefits
In accordance with generally accepted accounting principles, the Company recognizes the impact of a tax position if a position is “more likely than not” to prevail. As of December 31, 2016, there were no unrecognized tax benefits that, if recognized, would affect the effective tax rate. The Company records interest (and penalties, if applicable) related to unrecognized tax benefits in non-operating expenses. During the years ended December 31, 2016, 2015 and 2014, the Company did not record any interest or penalties. A reconciliation of the beginning and ending unrecognized tax benefits for the years ended December 31 is as follows:
F- 24
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
During 2014, the Company received a resolution from the Internal Revenue Service regarding Rayonier’s amended 2009 tax return. As a result, the Company reversed the $4.8 million uncertain tax liability recorded in 2013 related to an increased domestic production deduction on the Rayonier amended 2009 tax return due to the inclusion of the Cellulosic Biofuel Producer Credit income.
Tax Statutes
The following table provides detail of tax years that remain open to examination by significant taxing jurisdictions:
Tax Matters Agreement
In connection with the Separation, the Company entered into a tax matters agreement with Rayonier. The agreement governs the parties’ respective rights, responsibilities and obligations with respect to taxes for any period (or portion thereof) ending on or before or straddling the Separation. Generally, Rayonier Advanced Materials is liable for all pre-separation U.S. federal income taxes, state taxes and non-income taxes attributable to Rayonier’s performance fibers business.
14. Liabilities for Disposed Operations
Under the terms of the Separation, the Company assumed certain environmental liabilities not included in the Company’s historical combined financial statements, which were previously managed by Rayonier. These environmental liabilities relate to previously disposed operations, which include Rayonier’s Port Angeles, Washington dissolving pulp mill that was closed in 1997 and other sites in Washington; Rayonier’s wholly owned subsidiary, Southern Wood Piedmont Company (“SWP”), which ceased operations other than environmental investigation and remediation activities in 1989; and other miscellaneous assets held for disposition. SWP owns or has liability for ten inactive former wood treating sites that are subject to the Resource Conservation and Recovery Act (“RCRA”), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) and/or other similar federal or state statutes relating to the investigation and remediation of environmentally-impacted sites.
The Company records accruals for 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, on an undiscounted basis, generally for a period of 20 years, as well as the costs of legally-required financial assurance relating to the Company’s obligations. These environmental liabilities do not include potential third-party recoveries to which the Company may be entitled unless they are probable and estimable.
F- 25
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
The following table provides detail, by site, for specific sites where current estimates exceed 10 percent of the total liabilities for disposed operations at December 31, 2016 and 2015. An analysis of the activity for the years ended December 31, 2016 and 2015 is as follows:
A brief description of each of these sites is as follows:
Augusta, Georgia - SWP operated a wood treatment plant at this site from 1928 to 1988. 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. As a result of spending, the Company increased its estimated liability by $1.2 million and $1.9 million in December 31, 2016 and 2015, respectively, to maintain a 20 year projection of costs in the liability. Total spending related to the site as of December 31, 2016 was $72.5 million. Liabilities are recorded to cover obligations for the estimated remaining remedial, monitoring activities and financial assurance costs through 2036.
Spartanburg, South Carolina - SWP operated a wood treatment plant at this site from 1925 to 1989. Remediation activities consist primarily of groundwater recovery and treatment. In 2012, SWP entered into a consent decree with the South Carolina Department of Health and Environmental Control (“DHEC”) which governs future investigatory and assessment activities at the site and for potential off-site contamination. Depending on the results of this investigation and assessment, additional remedial actions may be required in the future and, therefore, current cost estimates and the corresponding liability could change. In 2016, the Company decreased its estimated liability by $4.9 million primarily due to expected lower estimated costs for addressing certain off-site areas based on the results of a study performed by the Company and approved by DHEC. In 2015, the Company decreased its estimated liability by $0.6 million primarily due to expected lower costs for operating, monitoring and maintenance activities. Total spending related to the site as of December 31, 2016 was $43.5 million. Liabilities are recorded to cover obligations for the estimated remaining assessment, remediation and monitoring activities and financial assurance costs through 2036.
Baldwin, Florida - SWP operated a wood treatment plant at this site from 1954 to 1987. This site operates under a 10-year hazardous waste permit issued pursuant to the RCRA. The site’s most recent permit is currently in the renewal process. The current remediation activities primarily consist of groundwater recovery and treatment. Additionally, the investigation and assessment of other potential areas of concern, on and off-site, are ongoing. Additional remedial activities may be necessary in the future and, therefore, current cost estimates and the corresponding liability could change. In 2016, the Company increased its estimated liability by $2.8 million primarily due to additional expected remediation costs and to maintain its liability at the 20 year projected level as a result of current year spending. In 2015, the Company increased its estimated liability by $3.3 million primarily due to additional projected financial assurance costs and to maintain its liability at the 20 year projected level as a result of current year spending. Total spending as of December 31, 2016 was $26.7 million. Liabilities are recorded to cover obligations for the estimated remaining assessment, remedial, monitoring activities and financial assurance costs through 2036.
Port Angeles, Washington - Rayonier operated a dissolving pulp mill at this site from 1930 until 1997. The plant 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
F- 26
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
releases from the site. As a result of an agreed order with the Washington State Department of Ecology (“Ecology”), the remainder of the MTCA regulatory process will be completed on a set timetable, subject to approval of all reports and studies by Ecology. Upon completion of all work required under the agreed order and negotiation of an approved remedy, additional remedial measures for the site and off-site areas may be necessary and, as a result, current cost estimates and the corresponding liability could change. In 2016 and 2015, the Company increased the estimated liability by $0.7 million and $0.5 million, respectively, to maintain its liability at the 20 year projected level as a result of current year spending. Total spending related to the site as of December 31, 2016 was $46.9 million. Liabilities are recorded to cover obligations for the estimable assessment, remediation, monitoring obligations and financial assurance costs through 2036.
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, 2016, the Company estimates this exposure could range up to approximately $66 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 established liabilities are sufficient for probable costs expected to be incurred over the next 20 years with respect to its disposed operations. However, no assurances are given they will be sufficient for the reasons described above, and additional liabilities could have a material adverse effect on the Company’s financial position, results of operations and cash flows.
15. Incentive Stock Plans
The Rayonier Advanced Materials Incentive Stock Plan (“the Stock Plan”) provides for up to 5.2 million shares of stock to be granted for incentive stock options, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and restricted stock units, subject to certain limitations. At December 31, 2016, approximately 1.8 million shares were available for future grants under the Stock Plan.
In connection with the separation from Rayonier, incentive stock options, performance shares and restricted stock awards issued to employees and directors under the Rayonier Incentive Stock Plan prior to the Distribution were adjusted or converted, as applicable, into new awards using formulas generally designed to preserve the value of the awards immediately prior to the Distribution.
The Employee Matters Agreement between Rayonier and the Company, which was executed in connection with the Distribution and filed with the Form 10, describes how the Rayonier stock awards were treated. Refer to the respective sections below for a summary of how each type of award was converted through the Distribution.
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, 2016, 2015 and 2014 was $7.2 million, $10.0 million and $8.7 million, respectively. These amounts may not reflect the cost of current or future equity awards. Amounts for periods prior to the Separation may not reflect results the Company would have experienced, or expect to experience, as an independent, publicly traded company.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
Total stock-based compensation expense was allocated for the years ended December 31 as follows:
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 Rayonier employees.
Non-Qualified Employee Stock Options
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. All stock option awards granted prior to the Distribution were valued based on Rayonier’s share price and assumptions. For all options granted before the Separation, the expected volatility is based on historical volatility for each grant and is calculated using the historical change in the daily market price of Rayonier’s underlying stock over the expected life of the award. No options have been granted since the Separation. 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, 2016 and 2015 no options were granted. The following chart provides a tabular overview of the weighted average assumptions and related fair value calculations of options granted for the year ended December 31, 2014:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
A summary of the Company’s stock option activity is presented below for the year ended December 31, 2016:
A summary of additional information pertaining to stock options granted to employees is presented below:
Restricted Stock
As a result of the Separation, holders of Rayonier restricted stock, including Rayonier non-employee directors, retained those awards and also received one share of Company restricted stock for every three shares of Rayonier restricted stock held prior to the Separation. The adjusted awards resulted in incremental compensation expense of $2.3 million to be recognized over a two year period following the Distribution.
Restricted stock granted in connection with the Company’s performance share plan generally vests upon completion of a one to four year period. 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, 2016, there was $4.3 million of unrecognized compensation cost related to the Company’s outstanding restricted stock. This cost is expected to be recognized over a weighted average period of 1.7 years.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
The following table summarizes the activity of restricted shares granted to employees for the three years ended December 31:
A summary of the Company’s restricted stock activity is presented below for the year ended December 31, 2016:
Performance Share Awards
The Company’s performance share 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. Performance under the Company’s 2014 award is determined by comparing the Company’s total shareholder return versus selected peer group companies.
Company 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, 2016, there was $7.6 million of unrecognized compensation cost related to the Company’s performance share awards. This cost is expected to be recognized over a weighted average period of 1.6 years.
The following table summarizes the activity of the Company’s performance share units granted to its employees for the three years ended December 31:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
A summary of the Company’s performance-share activity is presented below for the year ended December 31, 2016:
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:
16. Employee Benefit Plans
Defined Benefit Plans
The Company has a qualified non-contributory defined benefit pension plan covering approximately half of its employees and an unfunded plan that provides benefits in excess of amounts allowable in the qualified plans under current tax law. Both the qualified plan and the unfunded excess plan are closed to new participants. Employee benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change.
F- 31
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
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 pension and postretirement plans for the two years ended December 31:
Net gains or losses recognized in other comprehensive income for the three years ended December 31 are as follows:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
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:
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 pension and postretirement 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 two years ended December 31:
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)
A portion of the net periodic benefit cost is recorded in cost of goods sold in the Consolidated Statements of Income.
The estimated pre-tax amounts that will be amortized from AOCI into net periodic benefit cost in 2017 are as follows:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
Beginning in 2017, the Company will change the 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 will account for this change prospectively as a change in accounting estimate.
The following table sets forth the 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 expected return on plan assets remained at 8.5 percent for the year ended December 31, 2016. The estimated return 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, and risks and correlation of asset classes, which are then used to establish the asset allocation ranges. Beginning in 2017, the Company will reduce the expected long-term rate of return on plan assets to 7.75 percent.
The following table sets forth the assumed health care cost trend rates as of December 31:
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement benefit plans. The following table shows the effect of a one percentage point change in assumed health care cost trends:
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
Investment of Plan Assets
The Company’s pension plan asset allocation at December 31, 2016 and 2015, and target allocation ranges by asset category are as follows:
The Company’s Pension and Savings Plan Committee and the Audit Committee of the Board of Directors oversee the pension plans’ investment program which is designed to maximize returns and provide sufficient liquidity to meet plan obligations while maintaining acceptable risk levels. The investment approach emphasizes diversification by allocating the plans’ assets among asset categories and selecting investment managers whose various investment methodologies will be minimally correlative with each other. 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, 2016 or 2015.
Fair Value Measurements
The following table sets forth by level, within the fair value hierarchy (see Note 1 - Basis of Presentation and New Accounting Pronouncements to the Consolidated Financial Statements for definition), the assets of the plans as of December 31, 2016 and 2015.
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.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
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, 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, 2016 and 2015.
Cash Flows
Expected benefit payments for the next ten years are as follows:
The Company has no mandatory pension contribution requirements in 2017, but may make 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 $5.0 million, $5.2 million and $3.7 million for the years ended December 31, 2016, 2015 and 2014, respectively. Rayonier Advanced Materials Hourly and Salaried Defined Contribution Plans include Rayonier Advanced Materials common stock with a fair market value of $16.4 million at December 31, 2016.
17. Contingencies
The Company is engaged in various legal and regulatory actions and proceedings, and has been named as a defendant in various lawsuits and claims arising in the ordinary course of its business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, the Company has in certain cases retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance and general liability. These other lawsuits and claims, either individually or in aggregate, are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
The Company currently employs approximately 1,200 people, nearly all of whom are in the United States. As of December 31, 2016, approximately 65 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.
The collective bargaining agreements at the Company’s Jesup, Georgia plant, which cover approximately 48 percent of the Company’s work force, will expire on June 30, 2017. The Company is currently negotiating new agreements. Based on past experience, the Company expects to be able to reach an agreement with the labor unions; however, if the Company is unable to negotiate acceptable contracts with any of these unions it could result in strikes or work stoppages which may adversely affect the Company’s financial results. The Company believes relations with its employees are satisfactory.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
18. Guarantees
The Company provides financial guarantees as required by creditors, insurance programs and various governmental agencies. As of December 31, 2016, the following financial guarantees were outstanding:
(a)
The letters of credit primarily provide credit support for surety bonds issued to comply with financial assurance requirements relating to environmental remediation of disposed sites and for credit support of natural gas purchases. The letters of credit will expire during 2017 and will be renewed as required.
(b)
Rayonier Advanced Materials purchases surety bonds primarily to comply with financial assurance requirements relating to environmental remediation and post closure care and to provide collateral for the Company’s workers’ compensation program. These surety bonds expire at various dates during 2017 and 2019. They are expected to be renewed annually as required.
(c)
LTF entered into a construction contract to build its lignin manufacturing facility. The Company is a guarantor under the contract and is jointly and severally liable for payment of costs incurred to construct the facility. In the event of default, the Company expects it would only be liable for its proportional share as a result of an agreement with its venture partner. See Note 9 - LignoTech Florida for more information.
19. Commitments
The Company leases certain buildings, machinery and equipment under various operating leases. Total rental expense for operating leases amounted to $4.5 million, $4.0 million, and $2.1 million in 2016, 2015 and 2014, respectively.
At December 31, 2016, the future minimum payments under non-cancellable operating leases and purchase obligations were as follows:
(a)
Operating leases include leases on buildings, machinery and equipment under various operating leases.
(b)
Purchase obligations primarily consist of payments expected to be made on natural gas, steam energy and wood chips purchase contracts. Obligations reported in the table are estimates and may vary based on changes in actual price and volumes terms.
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Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Dollar amounts in thousands unless otherwise stated)
20. Quarterly Results for 2016 and 2015 (Unaudited)
(a)
Basic and diluted earnings per share included the impact of dividends on the Company’s Preferred Stock for the quarter ended September 26, 2016 and the quarter and year ended December 31, 2016. As a result of the impact of the Preferred Stock in the third and fourth quarters of 2016, quarterly diluted EPS does not crossfoot to full-year diluted EPS. See Note 10 - Stockholders' Equity (Deficit) for additional information.
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Rayonier Advanced Materials Inc.
Schedule II-Valuation and Qualifying Accounts
Years Ended December 31, 2016, 2015, and 2014
(In thousands)
(a)
An allowance for sales returns was not required for the years ended December 31, 2015 and 2014.
(b)
The decrease in the self-insurance liabilities relates to an adjustment based on an annual actuarial review.
F- 39
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/ FRANK A. RUPERTO
Frank A. Ruperto
Chief Financial Officer and
Senior Vice President, Finance and Strategy
(Duly Authorized Officer and Principal Financial Officer)
Date: February 24, 2017
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.
F- 40
Signature
Title
Date
/s/ PAUL G. BOYNTON
Chairman of the Board, President and Chief Executive Officer
February 24, 2017
Paul G. Boynton
(Principal Executive Officer)
/s/ FRANK A. RUPERTO
Chief Financial Officer and Senior Vice President, Finance and Strategy
February 24, 2017
Frank A. Ruperto
(Principal Financial Officer)
/s/ JOHN P. CARR
Chief Accounting Officer and Vice President, Controller
February 24, 2017
John P. Carr
(Principal Accounting Officer)
*
Lead Director
C. David Brown, II
*
Director
Charles E. Adair
*
Director
DeLyle W. Bloomquist
*
Director
Mark E. Gaumond
*
Director
James F. Kirsch
*
Director
Lisa M. Palumbo
*
Director
Thomas I. Morgan
*
Director
Ronald Townsend
*By:
/s/ FRANK A. RUPERTO
Frank A. Ruperto
(Attorney-In-Fact)
February 24, 2017
F- 41
Exhibit Index
The following is a list of Exhibits filed as part of the Form 10-K. The documents incorporated by reference are located in the SEC’s Public Reference Room in Washington D.C. in SEC File no. 001-36285.
As permitted by the rules of the SEC, the Company has not filed certain instruments defining the rights of holders of long-term debt of the Company or consolidated subsidiaries under which the total amount of securities authorized does not exceed 10 percent of the total assets of the Company and its consolidated subsidiaries. The Company agrees to furnish to the SEC, upon request, a copy of any omitted instrument.
* Management contract or compensatory plan
** Portions of this exhibit have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934