|
|
|
Item 1.
|
Financial Statements
|
Rayonier Advanced Materials Inc.
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Unaudited)
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Net Sales
|
$
|
416,129
|
|
|
$
|
501,298
|
|
|
$
|
1,307,422
|
|
|
$
|
1,475,649
|
|
Cost of Sales
|
(399,510
|
)
|
|
(419,001
|
)
|
|
(1,265,217
|
)
|
|
(1,236,761
|
)
|
Gross Margin
|
16,619
|
|
|
82,297
|
|
|
42,205
|
|
|
238,888
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
(23,416
|
)
|
|
(30,596
|
)
|
|
(72,026
|
)
|
|
(77,669
|
)
|
Duties
|
(4,542
|
)
|
|
(816
|
)
|
|
(16,062
|
)
|
|
(20,680
|
)
|
Other operating income (expense), net
|
2,775
|
|
|
(7,945
|
)
|
|
(5,600
|
)
|
|
(9,507
|
)
|
Operating Income (Loss)
|
(8,564
|
)
|
|
42,940
|
|
|
(51,483
|
)
|
|
131,032
|
|
Interest expense
|
(14,580
|
)
|
|
(13,831
|
)
|
|
(42,598
|
)
|
|
(41,839
|
)
|
Interest income and other, net
|
3,439
|
|
|
(394
|
)
|
|
3,341
|
|
|
5,013
|
|
Other components of pension and OPEB, excluding service costs
|
846
|
|
|
2,066
|
|
|
3,313
|
|
|
6,270
|
|
Adjustment to gain on bargain purchase
|
—
|
|
|
6,175
|
|
|
—
|
|
|
20,836
|
|
Income (Loss) From Continuing Operations Before Income Taxes
|
(18,859
|
)
|
|
36,956
|
|
|
(87,427
|
)
|
|
121,312
|
|
Income tax (expense) benefit (Note 16)
|
4,506
|
|
|
(6,989
|
)
|
|
25,813
|
|
|
(28,960
|
)
|
Income (Loss) from Continuing Operations
|
(14,353
|
)
|
|
29,967
|
|
|
(61,614
|
)
|
|
92,352
|
|
Income (loss) from discontinued operations, net of taxes (Note 2)
|
137
|
|
|
7,969
|
|
|
10,431
|
|
|
23,429
|
|
Net Income (Loss) Attributable to the Company
|
(14,216
|
)
|
|
37,936
|
|
|
(51,183
|
)
|
|
115,781
|
|
Mandatory convertible stock dividends
|
(1,777
|
)
|
|
(3,441
|
)
|
|
(8,582
|
)
|
|
(10,284
|
)
|
Net Income (Loss) Available to Common Stockholders
|
$
|
(15,993
|
)
|
|
$
|
34,495
|
|
|
$
|
(59,765
|
)
|
|
$
|
105,497
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Common Share (Note 13)
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(0.29
|
)
|
|
$
|
0.52
|
|
|
$
|
(1.36
|
)
|
|
$
|
1.61
|
|
Income from discontinued operations
|
—
|
|
|
0.16
|
|
|
0.20
|
|
|
0.46
|
|
Net income per common share-basic
|
$
|
(0.29
|
)
|
|
$
|
0.68
|
|
|
$
|
(1.16
|
)
|
|
$
|
2.07
|
|
Diluted Earnings Per Common Share (Note 13)
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(0.29
|
)
|
|
$
|
0.47
|
|
|
$
|
(1.36
|
)
|
|
$
|
1.45
|
|
Income from discontinued operations
|
—
|
|
|
0.13
|
|
|
0.20
|
|
|
0.37
|
|
Net income per common share-diluted
|
$
|
(0.29
|
)
|
|
$
|
0.60
|
|
|
$
|
(1.16
|
)
|
|
$
|
1.82
|
|
See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Net Income (Loss)
|
$
|
(14,216
|
)
|
|
$
|
37,936
|
|
|
$
|
(51,183
|
)
|
|
$
|
115,781
|
|
Other Comprehensive Income (Loss),
net of tax (Note 11):
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(11,210
|
)
|
|
(2,014
|
)
|
|
(12,905
|
)
|
|
(10,265
|
)
|
Unrealized gain (loss) on derivative instruments
|
(3,283
|
)
|
|
6,126
|
|
|
7,982
|
|
|
(936
|
)
|
Net gain from pension and postretirement plans
|
2,365
|
|
|
2,398
|
|
|
6,122
|
|
|
7,193
|
|
Total other comprehensive income
|
(12,128
|
)
|
|
6,510
|
|
|
1,199
|
|
|
(4,008
|
)
|
Comprehensive Income (Loss)
|
$
|
(26,344
|
)
|
|
$
|
44,446
|
|
|
$
|
(49,984
|
)
|
|
$
|
111,773
|
|
See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
December 31, 2018
|
Assets
|
Current Assets
|
|
|
|
Cash and cash equivalents
|
$
|
62,762
|
|
|
$
|
108,966
|
|
Accounts receivable, net (Note 3)
|
162,107
|
|
|
199,284
|
|
Inventory (Note 4)
|
291,425
|
|
|
304,028
|
|
Prepaid and other current assets
|
71,828
|
|
|
61,314
|
|
Assets of discontinued operations-held for sale (Note 2)
|
84,298
|
|
|
42,500
|
|
Total current assets
|
672,420
|
|
|
716,092
|
|
|
|
|
|
Property, Plant and Equipment (net of accumulated depreciation of $1,470,506 at September 28, 2019 and $1,385,837 at December 31, 2018)
|
1,327,052
|
|
|
1,363,557
|
|
Deferred Tax Assets
|
393,224
|
|
|
375,471
|
|
Intangible Assets, net
|
47,203
|
|
|
52,460
|
|
Other Assets
|
156,795
|
|
|
120,299
|
|
Assets of discontinued operations-held for sale (Note 2)
|
—
|
|
|
51,207
|
|
Total Assets
|
$
|
2,596,694
|
|
|
$
|
2,679,086
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
Current Liabilities
|
|
|
|
Accounts payable
|
$
|
144,677
|
|
|
$
|
181,705
|
|
Accrued and other current liabilities (Note 6)
|
116,718
|
|
|
146,155
|
|
Current maturities of long-term debt (Note 7)
|
21,357
|
|
|
15,012
|
|
Current environmental liabilities (Note 8)
|
11,445
|
|
|
11,310
|
|
Liabilities of discontinued operations-held for sale (Note 2)
|
18,774
|
|
|
16,236
|
|
Total current liabilities
|
312,971
|
|
|
370,418
|
|
|
|
|
|
Long-Term Debt (Note 7)
|
1,212,432
|
|
|
1,173,157
|
|
Long-Term Environmental Liabilities (Note 8)
|
148,054
|
|
|
149,344
|
|
Pension and Other Postretirement Benefits
|
231,388
|
|
|
233,658
|
|
Deferred Tax Liabilities
|
23,842
|
|
|
28,016
|
|
Other Long-Term Liabilities
|
28,999
|
|
|
12,074
|
|
Liabilities of discontinued operations-held for sale (Note 2)
|
—
|
|
|
5,548
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
Preferred stock, 0 and 10,000,000 shares authorized at $0.00 and $0.01 par value, 0 and 1,725,000 issued and outstanding as of September 28, 2019 and December 31, 2018, respectively, aggregate liquidation preference $0 and $172,500
|
—
|
|
|
17
|
|
Common stock, 140,000,000 shares authorized at $0.01 par value, 63,210,811 and 49,291,130 issued and outstanding, as of September 28, 2019 and December 31, 2018, respectively
|
632
|
|
|
493
|
|
Additional paid-in capital
|
399,234
|
|
|
399,490
|
|
Retained earnings
|
393,640
|
|
|
462,568
|
|
Accumulated other comprehensive income (loss) (Note 11)
|
(154,498
|
)
|
|
(155,697
|
)
|
Total Stockholders’ Equity
|
639,008
|
|
|
706,871
|
|
Total Liabilities and Stockholders’ Equity
|
$
|
2,596,694
|
|
|
$
|
2,679,086
|
|
See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 28, 2019
|
|
September 29, 2018
|
Operating Activities
|
|
|
|
Net income (loss)
|
$
|
(51,183
|
)
|
|
$
|
115,781
|
|
Loss (income) from discontinued operations
|
(10,431
|
)
|
|
(23,429
|
)
|
Adjustments to reconcile income (loss) from continuing operations to cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
111,695
|
|
|
105,703
|
|
Stock-based incentive compensation expense
|
5,696
|
|
|
10,146
|
|
Amortization of capitalized debt costs, discount and premium
|
429
|
|
|
942
|
|
Deferred income tax
|
(22,847
|
)
|
|
30,748
|
|
Gain on bargain purchase
|
—
|
|
|
(19,458
|
)
|
Net periodic benefit cost of pension and postretirement plans
|
5,412
|
|
|
4,313
|
|
Loss (gain) from foreign currency
|
4,180
|
|
|
(6,341
|
)
|
Other
|
(31
|
)
|
|
5,318
|
|
Changes in operating assets and liabilities:
|
|
|
|
Receivables
|
35,232
|
|
|
(9,921
|
)
|
Inventories
|
11,308
|
|
|
(34,189
|
)
|
Accounts payable
|
(35,217
|
)
|
|
(4,887
|
)
|
Accrued liabilities
|
(8,612
|
)
|
|
5,582
|
|
All other operating activities
|
(32,459
|
)
|
|
(25,730
|
)
|
Contributions to pension and other postretirement benefit plans
|
(6,004
|
)
|
|
(8,000
|
)
|
Expenditures for environmental liabilities
|
(2,547
|
)
|
|
(5,549
|
)
|
Cash provided by operating activities-continuing operations
|
4,621
|
|
|
141,029
|
|
Cash provided by operating activities-discontinued operations
|
19,437
|
|
|
19,333
|
|
Cash Provided by Operating Activities
|
24,058
|
|
|
160,362
|
|
|
|
|
|
Investing Activities
|
|
|
|
Proceeds from sale of resin operations
|
—
|
|
|
16,143
|
|
Capital expenditures
|
(80,806
|
)
|
|
(90,094
|
)
|
Cash used for investing activities-continuing operations
|
(80,806
|
)
|
|
(73,951
|
)
|
Cash used for investing activities-discontinued operations
|
(2,606
|
)
|
|
(2,492
|
)
|
Cash Used for Investing Activities
|
(83,412
|
)
|
|
(76,443
|
)
|
|
|
|
|
Financing Activities
|
|
|
|
Revolving credit facility and other borrowings
|
88,627
|
|
|
—
|
|
Repayments of revolving credit facility
|
(36,000
|
)
|
|
—
|
|
Repayment of debt
|
(9,929
|
)
|
|
(34,141
|
)
|
Dividends paid on common stock
|
(8,569
|
)
|
|
(11,030
|
)
|
Dividends paid on preferred stock
|
(10,350
|
)
|
|
(10,350
|
)
|
Proceeds from the issuance of common stock
|
—
|
|
|
452
|
|
Common stock repurchased
|
(5,830
|
)
|
|
(17,784
|
)
|
Cash provided by (used for) financing activities-continuing operations
|
17,949
|
|
|
(72,853
|
)
|
Cash provided by (used for) financing activities-discontinued operations
|
—
|
|
|
—
|
|
Cash Provided by (Used for) Financing Activities
|
17,949
|
|
|
(72,853
|
)
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
|
Change in cash and cash equivalents
|
(41,405
|
)
|
|
11,066
|
|
Net effect of foreign exchange on cash and cash equivalents
|
(4,799
|
)
|
|
(1,325
|
)
|
Balance, beginning of year
|
108,966
|
|
|
96,235
|
|
Balance, end of period
|
$
|
62,762
|
|
|
$
|
105,976
|
|
See Notes to Consolidated Financial Statements.
RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless otherwise stated)
1.Basis of Presentation and New Accounting Pronouncements
Basis of Presentation
The unaudited consolidated financial statements and notes thereto of Rayonier Advanced Materials Inc. (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these financial statements and notes reflect all adjustments (all of which are normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. These statements and notes should be read in conjunction with the financial statements and supplementary data included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 1, 2019.
The Company has reclassified certain prior year amounts to conform to the current year’s presentation for discontinued operations to reflect the sale of its Matane high-yield pulp operations. Unless otherwise stated, information in these notes to consolidated financial statements relates to continuing operations. Certain of our operations have been presented as discontinued operations. The Company presents businesses that represent components as discontinued operations when they meet the criteria for held for sale or are sold, and their disposal represents a strategic shift that has, or will have, a major effect on our operations and financial results. See Note 2 —Discontinued Operations for additional information.
Liquidity
Cash flows from operations, primarily driven by operating results, have historically been the Company’s primary source of liquidity and capital resources. As a result of the significant decreases in the market prices for commodity products, primarily viscose, fluff, high-yield pulp, lumber, paperboard and newsprint, over the last nine months, the financial results of the Company have declined requiring it to amend the financial covenants under its Senior Secured Credit Facilities. On September 30, 2019, the Company entered into an amendment of its Senior Secured Credit Facilities reducing the restrictions of its first lien secured net leverage ratio and the interest coverage ratio tests through the year ended December 31, 2021. Under the amended agreement, the Company is in compliance with the financial covenants as of September 28, 2019 and, as such, management believes that there is no longer substantial doubt of the Company’s ability to continue as a going concern. See Note 7 — Debt and Finance Leases for additional information.
Recently Adopted Accounting Pronouncements
Leases
The Company adopted Accounting Standards Update 2016-02, Leases, as amended, as of January 1, 2019. The standard requires the recognition of right of use (“ROU”) assets and lease liabilities to be reported on the balance sheet but did not change the manner in which expenses are recorded in the income statement. The Company has adopted the lease guidance using the cumulative effect adjustment approach, which requires prospective application at the adoption date and elected certain practical expedients permitted under the transition guidance. The practical expedients allow for the carry forward of the historical lease classification of existing leases and eliminates the need to reassess any lease classification of expired leases and initial direct costs. The Company also elected the short-term lease practical expedient. The Company does not record ROU assets or lease liabilities for short-term leases. In addition, the Company utilized the portfolio approach to group leases with similar characteristics and did not use hindsight to determine the lease term. For leases that include other costs, such as maintenance and other services, in addition to lease cost, the Company is separating lease and non-lease components when determining the ROU assets and lease liabilities.
Adoption of the new standard resulted in the recording of a ROU lease assets and lease liability of $10 million and $11 million, respectively, and the reversal of deferred rent liability balances. See Note 5 — Leases for additional information.
Subsequent Events
Events and transactions subsequent to the balance sheet date have been evaluated for potential recognition and disclosure through November 7, 2019, the date these financial statements were available to be issued. The following subsequent events warranting disclosure were identified:
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
In October 2019, the Company entered into an agreement to settle certain pension liabilities. The settlement is estimated to result in a non-cash loss of approximately $15 to $20 million in the fourth quarter.
On November 4, 2019, the Company completed the sale of its Matane plant and received net proceeds of approximately $150 million, subject to working capital adjustments. Approximately $100 million of the proceeds will be used to pay down the Company’s debt as required by its September 30, 2019 amendment to its Senior Secured Credit Facilities.
2.Discontinued Operations
On August 1, 2019, the Company announced it entered into an agreement to sell its Matane, Quebec pulp mill to Sappi Limited, a global diversified wood fiber company, for a gross purchase price of approximately $175 million. The mill produces approximately 270,000 metric tons of high-yield pulp and sells the product globally for use in manufacturing paperboard, packaging, and printing and writing paper. The Matane mill was acquired by the Company as part of its acquisition of Tembec Inc. in November 2017 and was previously reported as part of the Company’s Pulp segment.
As of September 28, 2019, the assets and liabilities are classified as current in the Company’s consolidated balance sheet as the transaction is expected to close within one year.
The following table presents the major classes of assets and liabilities of discontinued operations that are classified as held for sale:
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
December 31, 2018
|
Accounts receivable, net
|
$
|
15,355
|
|
|
$
|
23,093
|
|
Inventory
|
15,770
|
|
|
17,349
|
|
Prepaid and other current assets
|
811
|
|
|
2,058
|
|
Total current assets
|
31,936
|
|
|
42,500
|
|
Property, plant and equipment, net
|
18,437
|
|
|
17,482
|
|
Deferred tax assets
|
31,486
|
|
|
31,486
|
|
Other assets
|
2,439
|
|
|
2,239
|
|
Total assets
|
$
|
84,298
|
|
|
$
|
93,707
|
|
|
|
|
|
Accounts payable
|
$
|
6,415
|
|
|
$
|
11,035
|
|
Accrued and other current liabilities
|
5,946
|
|
|
3,786
|
|
Other current liabilities
|
752
|
|
|
1,415
|
|
Total current liabilities
|
13,113
|
|
|
16,236
|
|
Other long-term liabilities
|
5,661
|
|
|
5,548
|
|
Total liabilities
|
$
|
18,774
|
|
|
$
|
21,784
|
|
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
Income (loss) from discontinued operations is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Revenues
|
$
|
34,781
|
|
|
$
|
43,041
|
|
|
$
|
114,085
|
|
|
$
|
132,401
|
|
Cost of sales
|
(31,271
|
)
|
|
(29,425
|
)
|
|
(93,567
|
)
|
|
(93,546
|
)
|
Gross margin
|
3,510
|
|
|
13,616
|
|
|
20,518
|
|
|
38,855
|
|
Selling, general and administrative expenses and other
|
(2,001
|
)
|
|
(406
|
)
|
|
(2,855
|
)
|
|
(1,258
|
)
|
Operating income (loss)
|
1,509
|
|
|
13,210
|
|
|
17,663
|
|
|
37,597
|
|
Interest expense (a)
|
(1,160
|
)
|
|
(1,142
|
)
|
|
(3,516
|
)
|
|
(3,298
|
)
|
Other non-operating income
|
87
|
|
|
93
|
|
|
262
|
|
|
284
|
|
Income (Loss) Before Income Taxes
|
436
|
|
|
12,161
|
|
|
14,409
|
|
|
34,583
|
|
Income tax benefit (expense)
|
(299
|
)
|
|
(4,192
|
)
|
|
(3,978
|
)
|
|
(11,154
|
)
|
Net Income (loss)
|
$
|
137
|
|
|
$
|
7,969
|
|
|
$
|
10,431
|
|
|
$
|
23,429
|
|
|
|
(a)
|
The Company is required to pay $100 million of debt from proceeds received from the sale of Matane. Interest expense has been allocated to discontinued operations using the weighted-average interest rates in effect for each period presented based on the proportionate amounts required to be repaid.
|
Other discontinued operations information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Depreciation and amortization
|
$
|
230
|
|
|
$
|
630
|
|
|
$
|
1,590
|
|
|
$
|
1,818
|
|
Capital expenditures
|
$
|
1,531
|
|
|
$
|
712
|
|
|
$
|
2,606
|
|
|
$
|
2,492
|
|
3.Accounts Receivable, Net
The Company’s accounts receivable included the following:
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
December 31, 2018
|
Accounts receivable, trade
|
$
|
124,958
|
|
|
$
|
146,056
|
|
Accounts receivable, other (a)
|
37,796
|
|
|
53,787
|
|
Allowance for doubtful accounts
|
(647
|
)
|
|
(559
|
)
|
Total accounts receivable, net
|
$
|
162,107
|
|
|
$
|
199,284
|
|
|
|
(a)
|
Accounts receivable, other consists primarily of value added/consumption taxes, grants receivable and accrued billings due from government agencies.
|
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
4.Inventory
The Company’s inventory included the following:
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
December 31, 2018
|
Finished goods
|
$
|
184,771
|
|
|
$
|
203,350
|
|
Work-in-progress
|
19,837
|
|
|
21,478
|
|
Raw materials
|
77,057
|
|
|
68,656
|
|
Manufacturing and maintenance supplies
|
9,760
|
|
|
10,544
|
|
Total inventory
|
$
|
291,425
|
|
|
$
|
304,028
|
|
5. Leases
The Company accounts for leases in accordance with ASC Topic 842, Leases, which was adopted on January 1, 2019. See Note 1 — Basis of Presentation and New Accounting Pronouncements, for additional information on the adoption. The Company’s operating and finance leases are primarily for corporate offices, warehouse space, rail cars and equipment. As of September 28, 2019, the Company’s leases have remaining lease terms of 1 year to 9 years with standard renewal and termination options available at the Company’s discretion. Certain equipment leases have purchase options at the end of the term of the lease, which are not included in the ROU assets as it is not reasonably certain that the Company will exercise such options. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company uses its incremental borrowing rate in determining the present value of lease payments unless the lease provides an implicit or explicit interest rate. The weighted average discount rate used in determining the operating lease ROU assets and liabilities as of September 28, 2019 was 6.0 percent. The weighted average discount rate used in determining the finance lease ROU assets and liabilities as of September 28, 2019 was 7.0 percent.
The Company’s operating and finance lease cost is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 28, 2019
|
|
September 28, 2019
|
Operating Leases
|
|
|
|
|
Operating lease expense
|
|
$
|
1,715
|
|
|
$
|
4,322
|
|
Finance Leases
|
|
|
|
|
Amortization of ROU assets
|
|
77
|
|
|
228
|
|
Interest
|
|
52
|
|
|
159
|
|
Total
|
|
$
|
1,844
|
|
|
$
|
4,709
|
|
As of September 28, 2019, the weighted average remaining lease term is 4.6 years and 7.2 years for operating leases and financing leases, respectively. Cash provided by operating activities includes approximately $4 million from operating lease payments made during the nine months ended September 28, 2019. Finance lease cash flows were immaterial during the nine months ended September 28, 2019.
The Company’s finance leases are included as debt and the maturities for the remainder of 2019 and the next four years and thereafter are included in Note 7 — Debt and Finance Leases. The Company’s balance sheet includes the following operating lease assets and liabilities:
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
September 28, 2019
|
Right-of-use assets
|
Other assets
|
|
$
|
22,516
|
|
Lease liabilities, current
|
Accrued and other current liabilities
|
|
$
|
5,276
|
|
Lease liabilities, non-current
|
Other non-current liabilities
|
|
$
|
17,935
|
|
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
As of September 28, 2019, operating lease maturities for the remainder of 2019 through 2023 and thereafter are as follows:
|
|
|
|
|
|
September 28, 2019
|
Remainder of 2019
|
$
|
1,664
|
|
2020
|
6,323
|
|
2021
|
5,639
|
|
2022
|
5,414
|
|
2023
|
4,605
|
|
Thereafter
|
3,056
|
|
Total minimum lease payments
|
$
|
26,701
|
|
Less: imputed interest
|
(3,490
|
)
|
Present value of future minimum lease payments
|
$
|
23,211
|
|
6.Accrued and Other Current Liabilities
The Company’s accrued and other current liabilities included the following:
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
December 31, 2018
|
Accrued customer incentives and prepayments
|
$
|
34,556
|
|
|
$
|
41,734
|
|
Accrued payroll and benefits
|
24,461
|
|
|
29,567
|
|
Accrued interest
|
9,775
|
|
|
3,170
|
|
Derivative instruments
|
2,930
|
|
|
16,767
|
|
Accrued property and other taxes
|
14,814
|
|
|
10,663
|
|
Other current liabilities
|
30,182
|
|
|
44,254
|
|
Total accrued and other current liabilities
|
$
|
116,718
|
|
|
$
|
146,155
|
|
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
7.Debt and Finance Leases
The Company’s debt and finance leases included the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
December 31, 2018
|
U.S. Revolver of $100 million maturing in November 2022, $41 available, bearing interest at LIBOR plus 2.25%, interest of 4.30% at September 28, 2019
|
|
$
|
50,000
|
|
|
$
|
—
|
|
Multi-currency Revolver of $150 million maturing in November 2022, $126 available, bearing interest at LIBOR plus 2.00% at September 28, 2019
|
|
—
|
|
|
—
|
|
Term A-1 Loan Facility borrowings maturing through November 2022 bearing interest at LIBOR plus 2.25%, interest rate of 4.30% at September 28, 2019
|
|
160,000
|
|
|
160,000
|
|
Term A-2 Loan Facility borrowings maturing through November 2024 bearing interest at LIBOR plus 2.50% (after consideration of 0.60% patronage benefit), interest rate of 4.55% at September 28, 2019
|
|
438,875
|
|
|
438,875
|
|
Senior Notes due 2024 at a fixed interest rate of 5.50%
|
|
495,647
|
|
|
495,647
|
|
Canadian dollar, fixed interest rate term loans with rates ranging from 5.50% to 6.86% and maturity dates ranging from March 2020 through April 2028, secured by certain assets of the Temiscaming plant
|
|
85,501
|
|
|
91,304
|
|
Other loans
|
|
4,891
|
|
|
3,777
|
|
Finance lease obligation
|
|
2,896
|
|
|
3,124
|
|
Total debt principal payments due
|
|
1,237,810
|
|
|
1,192,727
|
|
Less: Debt premium, original issue discount and issuance costs, net
|
|
(4,021
|
)
|
|
(4,558
|
)
|
Total debt
|
|
1,233,789
|
|
|
1,188,169
|
|
Less: Current maturities of long-term debt
|
|
(21,357
|
)
|
|
(15,012
|
)
|
Long-term debt
|
|
$
|
1,212,432
|
|
|
$
|
1,173,157
|
|
As of September 28, 2019, debt and finance lease payments due during the remainder of 2019 and the next four years and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
Finance Lease Payments
|
|
|
Debt Principal Payments
|
Remaining 2019
|
$
|
129
|
|
|
|
$
|
3,342
|
|
2020
|
515
|
|
|
|
23,124
|
|
2021
|
515
|
|
|
|
12,568
|
|
2022
|
515
|
|
|
|
239,779
|
|
2023
|
515
|
|
|
|
10,674
|
|
Thereafter
|
1,502
|
|
|
|
945,427
|
|
Total principal payments
|
$
|
3,691
|
|
|
|
$
|
1,234,914
|
|
Less: Imputed interest
|
(795
|
)
|
|
|
|
Present value minimum finance lease payments
|
$
|
2,896
|
|
|
|
|
On September 30, 2019, the Company entered into an amendment (the “Amendment”) of its Senior Secured Credit Agreement under which, the lenders have agreed to make the Total Net Senior First Lien Secured Leverage Ratio and Interest Coverage Ratio tests less restrictive through the year ended December 31, 2021. The Amendment also increases the interest rate margin by a maximum of 1.25 percent, subject to the operation of a pricing grid which conversely provides for reduced rate margins when the Company’s leverage ratios improve. In addition, the Amendment has additional collateral requirements on certain Company assets as well as the maintenance of available amounts on its revolving credit facility to reflect the seasonality of the business.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
8.Environmental Liabilities
An analysis of liabilities for the nine months ended September 28, 2019 is as follows:
|
|
|
|
|
Balance, December 31, 2018
|
$
|
160,654
|
|
Increase in liabilities
|
928
|
|
Payments
|
(2,547
|
)
|
Foreign currency adjustments
|
464
|
|
Balance, September 28, 2019
|
159,499
|
|
Less: Current portion
|
(11,445
|
)
|
Long-term environmental liabilities
|
$
|
148,054
|
|
In addition to the estimated liabilities, the Company is subject to the risk of reasonably possible additional liabilities in excess of the established reserves due to potential changes in circumstances and future events, including, without limitation, changes to current laws and regulations; changes in governmental agency personnel, direction, philosophy and/or enforcement policies; developments in remediation technologies; increases in the cost of remediation, operation, maintenance and monitoring of its environmental liability sites; changes in the volume, nature or extent of contamination to be remediated or monitoring to be undertaken; the outcome of negotiations with governmental agencies and non-governmental parties; and changes in accounting rules or interpretations. Based on information available as of September 28, 2019, the Company estimates this exposure could range up to approximately $69 million, although no assurances can be given that this amount will not be exceeded given the factors described above. These potential additional costs are attributable to several sites and other applicable liabilities. Further, this estimate excludes reasonably possible liabilities which are not currently estimable primarily due to the factors discussed above.
Subject to the previous paragraph, the Company believes established liabilities are sufficient for probable costs expected to be incurred over the next 20 years with respect to its environmental liabilities. However, no assurances are given they will be sufficient for the reasons described above, and additional liabilities could have a material adverse effect on the Company’s financial position, results of operations and cash flows.
9.Derivative Instruments
The Company’s earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates. The Company allows for the use of derivative financial instruments to manage interest rate and foreign currency exchange rate exposure but does not allow derivatives to be used for speculative purposes.
All derivative instruments are recognized on the consolidated balance sheets at their fair value and are either designated as a hedge of a forecasted transaction or undesignated. Changes in the fair value of a derivative designated as a hedge are recorded in other comprehensive income until earnings are affected by the hedged transaction and are then reported in current earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings.
Interest Rate Risk
The Company’s primary debt obligations utilize variable-rate LIBOR, exposing the Company to variability in interest payments due to changes in interest rates. The Company entered into interest rate swap agreements to reduce the volatility of financing costs, achieve a desired proportion of fixed-rate versus floating-rate debt and to hedge the variability in cash flows attributable to interest rate risks caused by changes in the LIBOR benchmark.
The Company designated the swaps as cash flow hedges and is assessing their effectiveness using the hypothetical derivative method in conjunction with regression. Effective gains and losses, deferred to accumulated other comprehensive income (loss) (“AOCI”), are reclassified into earnings over the life of the associated hedge.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
Foreign Currency Exchange Rate Risk
Foreign currency fluctuations affect investments in foreign subsidiaries and foreign currency cash flows related to third party purchases, product shipments, and foreign-denominated debt. The Company is also exposed to the translation of foreign currency earnings to the U.S. dollar. Management uses foreign currency forward contracts to selectively hedge its foreign currency cash flow exposure and manage risk associated with changes in currency exchange rates. The Company’s principal foreign currency exposure is to the Canadian dollar, and to a lesser extent, the euro.
The notional amounts of outstanding derivative instruments as of September 28, 2019 and December 31, 2018 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
December 31, 2018
|
Interest rate swaps (a)
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
Foreign exchange forward contracts (b)
|
|
$
|
359,648
|
|
|
$
|
388,930
|
|
Foreign exchange forward contracts (c)
|
|
$
|
95,051
|
|
|
$
|
125,979
|
|
(a) Maturity date of December 2020
(b) Various maturity dates through September 2020
(c) Various maturity dates in 2020, 2022 and 2028
The fair values of derivative instruments included in the consolidated balance sheet as of September 28, 2019 and December 31, 2018 are provided in the below table. See Note 10 — Fair Value Measurements for additional information related to the Company’s derivatives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
September 28, 2019
|
|
December 31, 2018
|
Assets
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other current assets
|
|
$
|
—
|
|
|
$
|
1,194
|
|
Interest rate swaps
|
|
Other assets
|
|
—
|
|
|
937
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
914
|
|
|
—
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current assets
|
|
35
|
|
|
7
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other current liabilities
|
|
(557
|
)
|
|
—
|
|
Interest rate swaps
|
|
Other non-current liabilities
|
|
(277
|
)
|
|
—
|
|
Foreign exchange forward contracts
|
|
Other current liabilities
|
|
(2,373
|
)
|
|
(16,408
|
)
|
Foreign exchange forward contracts
|
|
Other non-current liabilities
|
|
(2,044
|
)
|
|
(3,105
|
)
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
Other current liabilities
|
|
—
|
|
|
(360
|
)
|
Total derivatives
|
|
|
|
$
|
(4,302
|
)
|
|
$
|
(17,735
|
)
|
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
The effects of derivatives designated as hedging instruments, the related changes in AOCI and the gains and losses in income are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 28, 2019
|
|
|
Derivatives Designated as Hedging Instruments
|
|
Gain (Loss) Recognized in OCI on Derivative
|
|
Gain (Loss) Reclassified from AOCI into Income
|
|
Location on Statement of Income
|
Interest rate swaps
|
|
$
|
(64
|
)
|
|
$
|
172
|
|
|
Interest expense
|
Foreign exchange forward contracts
|
|
$
|
(5,940
|
)
|
|
$
|
(76
|
)
|
|
Other operating expense, net
|
Foreign exchange forward contracts
|
|
$
|
1,256
|
|
|
$
|
(1,256
|
)
|
|
Cost of sales
|
Foreign exchange forward contracts
|
|
$
|
(2,000
|
)
|
|
$
|
(1,290
|
)
|
|
Interest income and other, net
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 29, 2018
|
|
|
|
|
Gain (Loss) Recognized in OCI on Derivative
|
|
Gain (Loss) Reclassified from AOCI into Income
|
|
Location on Statement of Income
|
Interest rate swaps
|
|
$
|
530
|
|
|
$
|
74
|
|
|
Interest expense
|
Foreign exchange forward contracts
|
|
$
|
5,002
|
|
|
$
|
60
|
|
|
Other operating expense, net
|
Foreign exchange forward contracts
|
|
$
|
1,399
|
|
|
$
|
(1,399
|
)
|
|
Cost of sales
|
Foreign exchange forward contracts
|
|
$
|
1,570
|
|
|
$
|
1,529
|
|
|
Interest income and other, net
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 28, 2019
|
|
|
Derivatives Designated as Hedging Instruments
|
|
Gain (Loss) Recognized in OCI on Derivative
|
|
Gain (Loss) Reclassified from AOCI into Income
|
|
Location on Statement of Income
|
Interest rate swaps
|
|
$
|
(2,237
|
)
|
|
$
|
728
|
|
|
Interest expense
|
Foreign exchange forward contracts
|
|
$
|
(1,903
|
)
|
|
$
|
600
|
|
|
Other operating expense, net
|
Foreign exchange forward contracts
|
|
$
|
8,822
|
|
|
$
|
(8,822
|
)
|
|
Cost of sales
|
Foreign exchange forward contracts
|
|
$
|
1,031
|
|
|
$
|
2,077
|
|
|
Interest income and other, net
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 29, 2018
|
|
|
Derivatives Designated as Hedging Instruments
|
|
Gain (Loss) Recognized in OCI on Derivative
|
|
Gain (Loss) Reclassified from AOCI into Income
|
|
Location on Statement of Income
|
Interest rate swaps
|
|
$
|
3,095
|
|
|
$
|
(112
|
)
|
|
Interest expense
|
Foreign exchange forward contracts
|
|
$
|
(5,406
|
)
|
|
$
|
1,188
|
|
|
Other operating expense, net
|
Foreign exchange forward contracts
|
|
$
|
1,466
|
|
|
$
|
(1,466
|
)
|
|
Cost of sales
|
Foreign exchange forward contracts
|
|
$
|
181
|
|
|
$
|
973
|
|
|
Interest income and other, net
|
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
The effects of derivative instruments not designated as hedging instruments on the statement of income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
Derivatives Not Designated as Hedging Instruments
|
|
Location of Gain (Loss) Recognized in Income on Derivative
|
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Foreign exchange forward contracts
|
|
Other operating income (expense), net
|
|
$
|
(137
|
)
|
|
$
|
(250
|
)
|
|
$
|
193
|
|
|
$
|
(3,791
|
)
|
The after-tax amounts of unrealized gains (losses) in AOCI related to hedge derivatives are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
December 31, 2018
|
Interest rate cash flow hedges
|
|
$
|
(650
|
)
|
|
$
|
1,663
|
|
Foreign exchange cash flow hedges
|
|
$
|
(2,990
|
)
|
|
$
|
(13,285
|
)
|
The amount of future reclassifications from AOCI will fluctuate with movements in the underlying markets.
10.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 September 28, 2019 and December 31, 2018, using market information and what management believes to be appropriate valuation methodologies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
December 31, 2018
|
|
Carrying
Amount
|
|
Fair Value
|
|
Carrying
Amount
|
|
Fair Value
|
Assets:
|
|
Level 1
|
|
Level 2
|
|
|
Level 1
|
|
Level 2
|
Cash and cash equivalents
|
$
|
62,762
|
|
|
$
|
62,762
|
|
|
$
|
—
|
|
|
$
|
108,966
|
|
|
$
|
108,966
|
|
|
$
|
—
|
|
Interest rate swaps (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
2,131
|
|
|
—
|
|
|
2,131
|
|
Foreign currency forward contracts (a)
|
949
|
|
|
—
|
|
|
949
|
|
|
7
|
|
|
—
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities (b):
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (a)
|
834
|
|
|
—
|
|
|
834
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency forward contracts (a)
|
4,417
|
|
|
—
|
|
|
4,417
|
|
|
19,873
|
|
|
—
|
|
|
19,873
|
|
Fixed-rate long-term debt
|
580,068
|
|
|
—
|
|
|
448,325
|
|
|
585,824
|
|
|
—
|
|
|
541,267
|
|
Variable-rate long-term debt
|
650,824
|
|
|
—
|
|
|
653,766
|
|
|
599,221
|
|
|
—
|
|
|
602,652
|
|
(a) These items represent derivative instruments.
(b) Liabilities exclude finance lease obligation.
The Company uses the following methods and assumptions in estimating the fair value of its financial instruments:
Cash and cash equivalents — The carrying amount is equal to fair market value.
Derivative instruments — The fair value is calculated based on standard valuation models using quoted prices and market observable data of similar instruments. The interest rate derivatives are based on the LIBOR swap rate, which is observable at commonly quoted intervals for the full term of the swap and therefore is considered Level 2. The foreign currency derivatives are contracts to buy foreign currency at a fixed rate on a specified future date. The foreign exchange rate is observable for the full term of the swap and is therefore considered Level 2. See Note 9 — Derivative Instruments for additional information related to the derivative instruments.
Debt — The fair value of fixed rate debt is based upon quoted market prices for debt with similar terms and maturities. The variable rate debt adjusts with changes in the market rate, therefore the carrying value approximates fair value.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
11.Accumulated Other Comprehensive Income (Loss)
The components of AOCI are as follows:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 28, 2019
|
|
September 29, 2018
|
Unrecognized components of employee benefit plans, net of tax:
|
|
|
|
|
Balance, beginning of year
|
$
|
(135,590
|
)
|
|
$
|
(81,638
|
)
|
Reclassifications to earnings: (a)
|
|
|
|
Amortization of losses
|
7,829
|
|
|
8,907
|
|
Amortization of prior service costs
|
311
|
|
|
429
|
|
Amortization of negative plan amendment
|
—
|
|
|
(115
|
)
|
Income tax on reclassifications
|
(1,804
|
)
|
|
(2,028
|
)
|
Foreign currency adjustments, net of tax of $75
|
(214
|
)
|
|
—
|
|
Net comprehensive gain (loss) on employee benefit plans, net of tax
|
6,122
|
|
|
7,193
|
|
Balance, end of quarter
|
(129,468
|
)
|
|
(74,445
|
)
|
|
|
|
|
Unrealized gain (loss) on derivative instruments, net of tax:
|
|
|
|
Balance, beginning of year
|
(11,622
|
)
|
|
619
|
|
Other comprehensive income before reclassifications
|
5,713
|
|
|
(664
|
)
|
Income tax on other comprehensive income
|
(1,446
|
)
|
|
281
|
|
Reclassifications to earnings: (b)
|
|
|
|
Interest rate contracts
|
(728
|
)
|
|
112
|
|
Foreign exchange contracts
|
6,145
|
|
|
(695
|
)
|
Income tax on reclassifications
|
(1,702
|
)
|
|
30
|
|
Net comprehensive gain (loss) on derivative instruments, net of tax
|
7,982
|
|
|
(936
|
)
|
Balance, end of quarter
|
(3,640
|
)
|
|
(317
|
)
|
|
|
|
|
Foreign currency translation adjustments:
|
|
|
|
Balance, beginning of year
|
(8,485
|
)
|
|
4,868
|
|
Foreign currency translation adjustment, net of tax of $0 and $0
|
(12,905
|
)
|
|
(10,265
|
)
|
Balance, end of quarter
|
(21,390
|
)
|
|
(5,397
|
)
|
|
|
|
|
Accumulated other comprehensive income (loss), end of quarter
|
$
|
(154,498
|
)
|
|
$
|
(80,159
|
)
|
|
|
(a)
|
The AOCI components for defined benefit pension and post-retirement plans are included in the computation of net periodic benefit cost. See Note 15— Employee Benefit Plans for additional information.
|
|
|
(b)
|
Reclassifications of interest rate contracts are recorded in interest expense. Reclassifications of foreign currency exchange contracts are recorded in cost of sales, other operating income or non-operating income as appropriate. See Note 9 —Derivative Instruments for additional information.
|
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
12.Stockholders' Equity
An analysis of stockholders’ equity is shown below (share amounts not in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Preferred Stock
|
|
Additional Paid in Capital
|
|
Retained
Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Total Stockholders’
Equity
|
|
Shares
|
|
Par Value
|
|
Shares
|
|
Par Value
|
|
|
For the nine months ended September 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
49,291,130
|
|
|
$
|
493
|
|
|
1,725,000
|
|
|
$
|
17
|
|
|
$
|
399,490
|
|
|
$
|
462,568
|
|
|
$
|
(155,697
|
)
|
|
$
|
706,871
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(51,183
|
)
|
|
—
|
|
|
(51,183
|
)
|
Other comprehensive income (loss), net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,199
|
|
|
1,199
|
|
Preferred stock converted to common stock
|
13,361,678
|
|
|
133
|
|
|
(1,725,000
|
)
|
|
(17
|
)
|
|
(116
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of common stock under incentive stock plans
|
980,968
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,696
|
|
|
—
|
|
|
—
|
|
|
5,696
|
|
Repurchase of common stock
|
(422,965
|
)
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
(5,826
|
)
|
|
—
|
|
|
—
|
|
|
(5,830
|
)
|
Common stock dividends
($0.14 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,395
|
)
|
|
—
|
|
|
(7,395
|
)
|
Preferred stock dividends
($6.00 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,350
|
)
|
|
—
|
|
|
(10,350
|
)
|
Balance, September 28, 2019
|
63,210,811
|
|
|
$
|
632
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
399,234
|
|
|
$
|
393,640
|
|
|
$
|
(154,498
|
)
|
|
$
|
639,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 29, 2019
|
49,848,087
|
|
|
$
|
498
|
|
|
1,725,000
|
|
|
$
|
17
|
|
|
$
|
397,115
|
|
|
$
|
411,306
|
|
|
$
|
(142,370
|
)
|
|
$
|
666,566
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,216
|
)
|
|
—
|
|
|
(14,216
|
)
|
Other comprehensive income (loss), net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,128
|
)
|
|
(12,128
|
)
|
Preferred stock converted to common stock
|
13,361,678
|
|
|
133
|
|
|
(1,725,000
|
)
|
|
(17
|
)
|
|
(116
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of common stock under incentive stock plans
|
953
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,240
|
|
|
—
|
|
|
—
|
|
|
2,240
|
|
Repurchase of common shares
|
93
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
Common stock dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Preferred stock dividends
($2.00 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,450
|
)
|
|
—
|
|
|
(3,450
|
)
|
Balance, September 28, 2019
|
63,210,811
|
|
|
$
|
632
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
399,234
|
|
|
$
|
393,640
|
|
|
$
|
(154,498
|
)
|
|
$
|
639,008
|
|
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Preferred Stock
|
|
Additional Paid in Capital
|
|
Retained
Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Total Stockholders’
Equity
|
|
Shares
|
|
Par Value
|
|
Shares
|
|
Par Value
|
|
|
For the nine months ended September 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
51,717,142
|
|
|
$
|
517
|
|
|
1,725,000
|
|
|
$
|
17
|
|
|
$
|
392,353
|
|
|
$
|
377,020
|
|
|
$
|
(76,151
|
)
|
|
$
|
693,756
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
115,781
|
|
|
—
|
|
|
115,781
|
|
Other comprehensive income (loss), net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,008
|
)
|
|
(4,008
|
)
|
Issuance of common stock under incentive stock plans
|
302,976
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
449
|
|
|
—
|
|
|
—
|
|
|
452
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,146
|
|
|
—
|
|
|
—
|
|
|
10,146
|
|
Repurchase of common stock
|
(959,163
|
)
|
|
(9
|
)
|
|
—
|
|
|
—
|
|
|
(4,089
|
)
|
|
(13,686
|
)
|
|
—
|
|
|
(17,784
|
)
|
Common stock dividends
($0.21 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,137
|
)
|
|
—
|
|
|
(11,137
|
)
|
Preferred stock dividends
($6.00 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,350
|
)
|
|
—
|
|
|
(10,350
|
)
|
Balance, September 29, 2018
|
51,060,955
|
|
|
$
|
511
|
|
|
1,725,000
|
|
|
$
|
17
|
|
|
$
|
398,859
|
|
|
$
|
457,628
|
|
|
$
|
(80,159
|
)
|
|
$
|
776,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018
|
51,217,595
|
|
|
$
|
512
|
|
|
1,725,000
|
|
|
$
|
17
|
|
|
$
|
395,326
|
|
|
$
|
429,753
|
|
|
$
|
(86,669
|
)
|
|
$
|
738,939
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
37,936
|
|
|
—
|
|
|
37,936
|
|
Other comprehensive income (loss), net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,510
|
|
|
6,510
|
|
Issuance of common stock under incentive stock plans
|
414
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
109
|
|
|
—
|
|
|
—
|
|
|
109
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,647
|
|
|
—
|
|
|
—
|
|
|
3,647
|
|
Repurchase of common shares
|
(157,054
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(223
|
)
|
|
(3,031
|
)
|
|
—
|
|
|
(3,255
|
)
|
Common stock dividends
($0.07 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,580
|
)
|
|
—
|
|
|
(3,580
|
)
|
Preferred stock dividends
($2.00 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,450
|
)
|
|
—
|
|
|
(3,450
|
)
|
Balance, September 29, 2018
|
51,060,955
|
|
|
$
|
511
|
|
|
1,725,000
|
|
|
$
|
17
|
|
|
$
|
398,859
|
|
|
$
|
457,628
|
|
|
$
|
(80,159
|
)
|
|
$
|
776,856
|
|
Series A Mandatory Convertible Preferred Stock
On August 4, 2016, the Company completed a registered public offering of 1,725,000 shares of the Company’s 8.00% Series A Mandatory Convertible Preferred Stock (the “Preferred Stock”), at a public offering price of $100.00 per share. Net proceeds were $167 million after deducting underwriting discounts, commissions and expenses.
Each share of the Preferred Stock automatically converted into shares of common stock on August 15, 2019. The number of shares of common stock issuable at conversion was determined based on the volume-weighted average price of the Company’s common stock over a 20 trading day period immediately prior to the mandatory conversion date (“Applicable Market Value”). The Applicable Market Value for our common stock was less than $12.91, resulting in a conversion rate per share of 7.7459. On August 15, 2019, the Company issued approximately 13.4 million shares of common stock at conversion.
Dividends on the Preferred Stock were payable on a cumulative basis when declared by our Board of Directors. Preferred Stock dividends were paid at an annual rate of 8.00% of the liquidation preference of $100 per share. The final dividend was paid in cash on August 15, 2019.
Common Stock Buyback
On January 29, 2018, the Board of Directors authorized a share buyback program pursuant to which the Company may, from time to time, purchase shares of its common stock with an aggregate purchase price of up to $100 million. During the nine months ended September 28, 2019, the Company did not repurchase any common shares under this buyback program. During the nine months ended September 29, 2018, the Company repurchased and retired 802,040 shares of common stock at an average price of
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
$18.32 totaling approximately $15 million. As of September 28, 2019, there was approximately $60 million of share repurchase authorization remaining under the program. The Company does not expect to utilize any further authorization in the near future.
13.Earnings Per Share of Common Stock
The following table provides details of the calculations of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Income (loss) from continuing operations
|
$
|
(14,353
|
)
|
|
$
|
29,967
|
|
|
$
|
(61,614
|
)
|
|
$
|
92,352
|
|
Preferred Stock dividends
|
(1,777
|
)
|
|
(3,441
|
)
|
|
(8,582
|
)
|
|
(10,284
|
)
|
Income (loss) from continuing operations attributable to common stockholders
|
(16,130
|
)
|
|
26,526
|
|
|
(70,196
|
)
|
|
82,068
|
|
Income (loss) from discontinued operations
|
137
|
|
|
7,969
|
|
|
10,431
|
|
|
23,429
|
|
Net income (loss) available for common stockholders
|
$
|
(15,993
|
)
|
|
$
|
34,495
|
|
|
$
|
(59,765
|
)
|
|
$
|
105,497
|
|
|
|
|
|
|
|
|
|
Shares used for determining basic earnings per share of common stock
|
56,089,839
|
|
|
50,603,498
|
|
|
51,576,123
|
|
|
51,005,206
|
|
Dilutive effect of:
|
|
|
|
|
|
|
|
Stock options
|
—
|
|
|
3,620
|
|
|
—
|
|
|
4,127
|
|
Performance and restricted stock
|
—
|
|
|
1,266,588
|
|
|
—
|
|
|
1,297,024
|
|
Preferred stock
|
—
|
|
|
11,371,718
|
|
|
—
|
|
|
11,371,718
|
|
Shares used for determining diluted earnings per share of common stock
|
56,089,839
|
|
|
63,245,424
|
|
|
51,576,123
|
|
|
63,678,075
|
|
|
|
|
|
|
|
|
|
Basic per share amounts
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(0.29
|
)
|
|
$
|
0.52
|
|
|
$
|
(1.36
|
)
|
|
$
|
1.61
|
|
Income (loss) from discontinued operations
|
—
|
|
|
0.16
|
|
|
0.20
|
|
|
0.46
|
|
Net income (loss)
|
$
|
(0.29
|
)
|
|
$
|
0.68
|
|
|
$
|
(1.16
|
)
|
|
$
|
2.07
|
|
Diluted per share amounts
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(0.29
|
)
|
|
$
|
0.47
|
|
|
$
|
(1.36
|
)
|
|
$
|
1.45
|
|
Income (loss) from discontinued operations
|
—
|
|
|
0.13
|
|
|
0.20
|
|
|
0.37
|
|
Net income (loss)
|
$
|
(0.29
|
)
|
|
$
|
0.60
|
|
|
$
|
(1.16
|
)
|
|
$
|
1.82
|
|
Anti-dilutive instruments excluded from the computation of diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Stock options
|
225,934
|
|
|
263,184
|
|
|
225,934
|
|
|
263,184
|
|
Performance and restricted stock
|
688,029
|
|
|
11,687
|
|
|
502,888
|
|
|
398,576
|
|
Total anti-dilutive instruments
|
913,963
|
|
|
274,871
|
|
|
728,822
|
|
|
661,760
|
|
14.Incentive Stock Plans
The Company’s total stock-based compensation cost for the nine months ended September 28, 2019 and September 29, 2018 was $6 million and $10 million, respectively.
The Company made new grants of restricted stock units and performance-based stock units to certain employees during the first nine months of 2019. The 2019 restricted stock unit awards vest over three years. The 2019 performance-based stock unit
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
awards are measured against an internal return on invested capital target. Depending on performance against the target, the awards will pay out in common stock amounts between 0 and 200 percent of the performance-based stock units awarded. The total number of common stock awards granted will be adjusted up or down 25 percent, for certain participants, based on stock price performance relative to a peer group over the term of the plan, which could result in a final common stock issuance of 0 to 250 percent of the performance-based stock units awarded.
In March 2019, the performance-based share units granted in 2016 were settled at an average of 246 percent of the performance-based stock units awarded, resulting in the issuance of 923,211 shares of common stock.
The following table summarizes the activity on the Company’s incentive stock awards for the nine months ended September 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Restricted Stock and Stock Units
|
|
Performance-Based Stock Units
|
|
Options
|
|
Weighted Average Exercise Price
|
|
Awards
|
|
Weighted Average Grant Date Fair Value
|
|
Awards
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at January 1, 2019
|
286,613
|
|
|
$
|
34.23
|
|
|
917,098
|
|
|
$
|
13.71
|
|
|
1,325,894
|
|
|
$
|
14.69
|
|
Granted
|
—
|
|
|
—
|
|
|
395,777
|
|
|
11.99
|
|
|
400,921
|
|
|
14.98
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(9,533
|
)
|
|
15.22
|
|
|
(7,501
|
)
|
|
16.92
|
|
Exercised or settled
|
—
|
|
|
—
|
|
|
(458,748
|
)
|
|
10.64
|
|
|
(520,167
|
)
|
|
7.80
|
|
Expired or cancelled
|
(60,679
|
)
|
|
26.82
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding at September 28, 2019
|
225,934
|
|
|
$
|
36.22
|
|
|
844,594
|
|
|
$
|
14.56
|
|
|
1,199,147
|
|
|
$
|
17.76
|
|
15.Employee Benefit Plans
The Company has defined benefit pension and other postretirement plans covering certain union and non-union employees, primarily in the U.S., Canada and France. The defined benefit pension plans are closed to new participants. Employee defined benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
The components of net periodic benefit costs from defined benefit plans that have been recorded are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
Postretirement
|
|
Three Months Ended
|
|
Three Months Ended
|
Components of Net Periodic Benefit Cost
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Service cost
|
$
|
2,411
|
|
|
$
|
2,845
|
|
|
$
|
456
|
|
|
$
|
521
|
|
Interest cost
|
9,199
|
|
|
7,907
|
|
|
352
|
|
|
217
|
|
Expected return on plan assets
|
(13,110
|
)
|
|
(13,302
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
142
|
|
|
143
|
|
|
(38
|
)
|
|
—
|
|
Amortization of losses
|
2,590
|
|
|
2,912
|
|
|
20
|
|
|
57
|
|
Amortization of negative plan amendment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total net periodic benefit cost
|
$
|
1,232
|
|
|
$
|
505
|
|
|
$
|
790
|
|
|
$
|
795
|
|
|
|
|
|
|
|
|
|
|
Pension
|
Postretirement
|
|
Nine Months Ended
|
|
Nine Months Ended
|
Components of Net Periodic Benefit Cost
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Service cost
|
$
|
7,339
|
|
|
$
|
8,605
|
|
|
$
|
1,387
|
|
|
$
|
1,978
|
|
Interest cost
|
27,949
|
|
|
23,885
|
|
|
1,072
|
|
|
675
|
|
Expected return on plan assets
|
(40,475
|
)
|
|
(40,166
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
426
|
|
|
429
|
|
|
(115
|
)
|
|
—
|
|
Amortization of losses
|
7,768
|
|
|
8,735
|
|
|
61
|
|
|
172
|
|
Amortization of negative plan amendment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total net periodic benefit cost
|
$
|
3,007
|
|
|
$
|
1,488
|
|
|
$
|
2,405
|
|
|
$
|
2,825
|
|
Service cost is included in cost of sales and selling, general and administrative expenses in the statements of income, as appropriate. Interest cost, expected return on plan assets, amortization of prior service cost, amortization of losses and amortization of negative plan amendment are included in Other components of pension and OPEB on the consolidated statement of income.
16.Income Taxes
The Company’s effective tax rate for the three and nine months ended September 28, 2019 was a benefit of 24 percent and 30 percent, respectively, compared to an expense of 19 percent and 24 percent for the three and nine months ended September 29, 2018, respectively.
The current quarter and year-to-date September 28, 2019 effective rate differs from the federal statutory rate of 21 percent primarily due to different statutory rates on foreign operations. The effective tax rate benefit for the nine months ended September 28, 2019 is also impacted by excess tax deduction on vested stock compensation and tax credits recognized in the first and second quarters.
There have been no material changes to the balance of unrecognized tax benefits reported at December 31, 2018.
17.Segment Information
The Company has currently divided its operations into five reportable segments: High Purity Cellulose, Forest Products, Pulp, Paper and Corporate. The Corporate operations consist primarily of senior management, accounting, information systems, human resources, treasury, tax and legal administrative functions that provide support services to the operating business units. The Company does not currently allocate the cost of maintaining these support functions to its operating units.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
The Company evaluates the performance of its segments based on operating income. Intersegment sales consist primarily of wood chips sales from Forest Products to High Purity Cellulose, Pulp and Paper segments and high-yield pulp sales from Pulp to Paper. Intersegment sales prices are at rates that approximate market.
Net sales, disaggregated by product-line, was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
High Purity Cellulose
|
|
|
|
|
|
|
|
Cellulose Specialties
|
$
|
180,718
|
|
|
$
|
217,538
|
|
|
$
|
563,604
|
|
|
$
|
625,864
|
|
Commodity Products
|
67,348
|
|
|
56,448
|
|
|
197,492
|
|
|
153,220
|
|
Other sales (a)
|
19,675
|
|
|
34,001
|
|
|
61,445
|
|
|
96,535
|
|
Total High Purity Cellulose
|
267,741
|
|
|
307,987
|
|
|
822,541
|
|
|
875,619
|
|
Forest Products
|
|
|
|
|
|
|
|
Lumber
|
49,195
|
|
|
68,713
|
|
|
170,855
|
|
|
228,686
|
|
Other sales (b)
|
16,265
|
|
|
17,242
|
|
|
50,982
|
|
|
53,551
|
|
Total Forest Products
|
65,460
|
|
|
85,955
|
|
|
221,837
|
|
|
282,237
|
|
Pulp
|
|
|
|
|
|
|
|
High-yield pulp
|
26,159
|
|
|
46,399
|
|
|
94,746
|
|
|
133,093
|
|
Paper
|
|
|
|
|
|
|
|
Paperboard
|
53,818
|
|
|
50,675
|
|
|
151,161
|
|
|
149,100
|
|
Newsprint
|
19,948
|
|
|
27,698
|
|
|
66,613
|
|
|
88,958
|
|
Total Paper
|
73,766
|
|
|
78,373
|
|
|
217,774
|
|
|
238,058
|
|
Eliminations
|
(16,997
|
)
|
|
(17,416
|
)
|
|
(49,476
|
)
|
|
(53,358
|
)
|
Total net sales
|
$
|
416,129
|
|
|
$
|
501,298
|
|
|
$
|
1,307,422
|
|
|
$
|
1,475,649
|
|
(a) Other sales include sales of electricity, resins, lignin and other by-products to third-parties
|
(b) Other sales include sales of logs, wood chips and other by-products to other segments and third-parties
|
Operating income (loss) by segment was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
High Purity Cellulose
|
$
|
6,745
|
|
|
$
|
33,922
|
|
|
$
|
10,665
|
|
|
$
|
83,288
|
|
Forest Products
|
(5,076
|
)
|
|
7,986
|
|
|
(26,664
|
)
|
|
35,158
|
|
Pulp
|
(2,061
|
)
|
|
12,825
|
|
|
2,700
|
|
|
37,373
|
|
Paper
|
165
|
|
|
13,648
|
|
|
1,136
|
|
|
23,465
|
|
Corporate
|
(8,337
|
)
|
|
(25,441
|
)
|
|
(39,320
|
)
|
|
(48,252
|
)
|
Total operating income (loss)
|
$
|
(8,564
|
)
|
|
$
|
42,940
|
|
|
$
|
(51,483
|
)
|
|
$
|
131,032
|
|
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
Identifiable assets by segment were as follows:
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
December 31, 2018
|
High Purity Cellulose
|
$
|
1,585,594
|
|
|
$
|
1,643,092
|
|
Forest Products
|
169,365
|
|
|
166,801
|
|
Pulp
|
33,284
|
|
|
41,087
|
|
Paper
|
223,302
|
|
|
240,427
|
|
Corporate
|
500,851
|
|
|
493,972
|
|
Assets Held for Sale
|
84,298
|
|
|
93,707
|
|
Total identifiable assets
|
$
|
2,596,694
|
|
|
$
|
2,679,086
|
|
18.Commitments and Contingencies
Commitments
The following table includes the material changes to the contractual financial obligations presented in Note 20 — Commitments and Contingencies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC. The changes in the future minimum payments under these purchase obligations are presented as of September 28, 2019. The amounts primarily consist of commitments for the purchase of natural gas, steam energy and electricity contracts. The payment amounts are estimates and may vary based on changes in actual price and volumes terms.
Subsequent to the sale of the Company’s Matane operations that closed on November 4, 2019, we are no longer required to pay approximately $117 million of the contractual financial obligations that were presented in Note 20 — Commitments and Contingencies in the Annual Report on Form 10-K for the year ended December 31, 2018.
|
|
|
|
|
|
Purchase Obligations
|
Remainder of 2019
|
$
|
2,818
|
|
2020
|
17,342
|
|
2021
|
11,399
|
|
2022
|
7,606
|
|
2023
|
2,524
|
|
Thereafter
|
5,225
|
|
Total
|
$
|
46,914
|
|
Contingencies
The Company is engaged in various legal and regulatory actions and proceedings, and has been named as a defendant in various lawsuits and claims arising in the ordinary course of its business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, the Company has in certain cases retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance and general liability. These other lawsuits and claims, either individually or in aggregate, are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
As of September 28, 2019, all of the Company’s collective bargaining agreements covering its unionized employees are current.
Guarantees and Other
The Company provides financial guarantees as required by creditors, insurance programs and various governmental agencies. As of September 28, 2019, the Company had net exposure of $36 million from various standby letters of credit, primarily for financial assurance relating to environmental remediation, credit support for natural gas and electricity purchases, and guarantees related to foreign retirement plan obligations. These standby letters of credit represent a contingent liability. The Company would
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
only be liable upon its default on the related payment obligations. The letters of credit have various expiration dates and will be renewed as required.
The Company had surety bonds of $86 million as of September 28, 2019, primarily to comply with financial assurance requirements relating to environmental remediation and post closure care, to provide collateral for the Company’s workers’ compensation program, and to guarantee taxes and duties for products shipped internationally. These surety bonds expire at various dates and are expected to be renewed annually as required.
LignoTech Florida, a venture in which the Company owns 45 percent and its venture partner Borregaard ASA owns 55 percent, entered into a construction contract to build its lignin manufacturing facility and financing agreements to fund the construction of the facility, which was completed in the second quarter of 2018. The Company is a guarantor under both the construction and financing agreements. In the event of default, the Company expects it would only be liable for its proportional share as a result of an agreement with its venture partner. The remaining guarantee related to LignoTech Florida at September 28, 2019 was $33 million.
The Company has not recorded any liabilities for these financial guarantees in its consolidated balance sheets, either because the Company has recorded the underlying liability associated with the guarantee or the guarantee is dependent on the Company’s own performance and, therefore, is not subject to the measurement requirements or because the Company has calculated the estimated fair value of the guarantee and determined it to be immaterial based upon the current facts and circumstances that would trigger a payment obligation.
It is not possible to determine the maximum potential amount of the liability under these potential obligations due to the unique set of facts and circumstances likely to be involved with each provision.
19.Supplemental Disclosures of Cash Flows Information
Supplemental disclosures of cash flows information were comprised of the following for the nine months ended:
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
September 29, 2018
|
Cash paid (received) during the period:
|
|
|
|
Interest
|
$
|
37,126
|
|
|
$
|
35,000
|
|
Income taxes
|
$
|
1,858
|
|
|
$
|
12,834
|
|
Non-cash investing and financing activities:
|
|
|
|
Capital assets purchased on account
|
$
|
15,732
|
|
|
$
|
8,221
|
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
When we refer to “we,” “us,” “our” or “the Company,” we mean Rayonier Advanced Materials Inc. and its consolidated subsidiaries. References herein to “Notes to Financial Statements” refer to the Notes to the Consolidated Financial Statements of Rayonier Advanced Materials Inc. included in Item 1 of this Quarterly Report on Form 10-Q (the “Report.”)
The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors which may affect future results. Our MD&A should be read in conjunction with our 2018 Annual Report on Form 10-K and information contained in our subsequent Forms 10-Q, 8-K and other reports to the U.S. Securities and Exchange Commission (the “SEC”).
On August 1, 2019, the Company announced it entered into an agreement to sell its Matane, Quebec pulp mill and related assets to Sappi Limited, a global diversified wood fiber company, for a purchase price of $175 million. The sale closed on November 4, 2019. The Company received approximately $150 million, net of fees, expenses, working capital and other adjustments related to the sale. The mill annually produces approximately 270,000 metric tons of high-yield pulp and sells the product globally for use in manufacturing paperboard, packaging, and printing and writing paper. As a result of the sale, we have reclassified prior year amounts to conform to the current year’s presentation for discontinued operations. See Note 2 —Discontinued Operations for additional information.
Note About Forward-Looking Statements
Certain statements in this Report regarding anticipated financial, business, legal or other outcomes including business and market conditions, outlook and other similar statements relating to the Company’s future events, developments, or financial or operational performance or results, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as “may,” “will,” “should,” “expect,” “estimate,” “believe,” “intend,” “forecast,” “anticipate” “guidance” and other similar language. However, the absence of these or similar words or expressions does not mean a statement is not forward-looking. While we believe these forward-looking statements are reasonable when made, forward-looking statements are not guarantees of future performance or events and undue reliance should not be placed on these statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance these expectations will be attained and it is possible actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. The following risk factors and those contained in Item 1A — Risk Factors, among others, could cause actual results or events to differ materially from the Company’s historical experience and those expressed in forward-looking statements made in this document.
Amounts contained in this Report may not always add due to rounding.
Our operations are subject to a number of risks and uncertainties including, but not limited to, those listed below. When considering an investment in our securities, you should carefully read and consider these risks, together with all other information in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC and our other filings and submissions to the SEC, which provide much more information and detail on the risks described below. If any of the events described in the following risk factors actually occur, our business, financial condition or operating results, as well as the market price of our securities, could be materially adversely affected. These risks and events include, without limitation:
|
|
•
|
The businesses we operate are highly competitive and many of them are cyclical, which may result in fluctuations in pricing and volume that can adversely impact our business, financial condition and results of operations.
|
|
|
•
|
Our ten largest customers represent approximately 35 percent of our 2018 sales, and the loss of all or a substantial portion of our revenue from these large customers could have a material adverse effect on our business.
|
|
|
•
|
A material disruption at one of our major manufacturing facilities could prevent us from meeting customer demand, reduce our sales and profitability, increase our cost of production and capital needs, or otherwise adversely affect our business, financial condition and results of operation.
|
|
|
•
|
Changes in raw material and energy availability and prices could affect our business, financial condition and results of operations.
|
|
|
•
|
The availability of, and prices for, wood fiber could materially impact our business, results of operations and financial condition.
|
|
|
•
|
We are subject to risks associated with doing business outside of the United States.
|
|
|
•
|
Our operations require substantial capital.
|
|
|
•
|
Currency fluctuations may have a negative impact on our business, financial condition and results of operations.
|
|
|
•
|
Restrictions on trade through tariffs, countervailing and anti-dumping duties, quotas and other trade barriers, in the United States and internationally, especially with respect to China, Canada and as a result of “Brexit”, could adversely affect our ability to access certain markets and otherwise impact our results of operations.
|
|
|
•
|
We depend on third parties for transportation services and increases in costs and the availability of transportation could adversely affect our business.
|
|
|
•
|
Our business is subject to extensive environmental laws, regulations and permits that may restrict or adversely affect our financial results and how we conduct business.
|
|
|
•
|
The potential impacts of climate change and climate-related initiatives, remain uncertain at this time.
|
|
|
•
|
Our failure to maintain satisfactory labor relations could have a material adverse effect on our business.
|
|
|
•
|
We are dependent upon attracting and retaining key personnel, the loss of whom could adversely affect our business.
|
|
|
•
|
Failure to develop new products or discover new applications for our existing products, or our inability to protect the intellectual property underlying such new products or applications, could have a negative impact on our business.
|
|
|
•
|
The risk of loss of the Company’s intellectual property and sensitive business information, or disruption of its manufacturing operations, in each case due to cyberattacks or cybersecurity breaches, could adversely impact the Company.
|
|
|
•
|
We may need to make significant additional cash contributions to our retirement benefit plans if investment returns on pension assets are lower than expected or interest rates decline, and/or due to changes to regulatory, accounting and actuarial requirements.
|
|
|
•
|
We have significant debt obligations that could adversely affect our business and our ability to meet our obligations.
|
|
|
•
|
The phase-out of the London Inter Bank Office Rate (“LIBOR”) as an interest rate benchmark could result in an increase to our borrowing costs.
|
|
|
•
|
Challenges in the commercial and credit environments may materially adversely affect our future access to capital.
|
|
|
•
|
We may need additional financing in the future to meet our capital needs or to make acquisitions, and such financing may not be available on favorable terms, if at all, and may be dilutive to existing stockholders.
|
|
|
•
|
The inability to effectively integrate the Tembec Inc. (“Tembec”) acquisition and meet our financial objectives therefrom, and any future acquisitions we may make, may affect our results.
|
|
|
•
|
While the Company has entered into an amendment (the “Amendment”) to its Senior Secured Credit Facilities (as amended by the Amendment, the “Credit Agreement”) to address the risk of potential non-compliance with certain covenants at the end of the third quarter of 2019, there can be no assurances that the Company will continue in full compliance with the amended covenants provided in the Credit Amendment through December 31, 2021, which is the date covenant relief granted under the Amendment expires.
|
Forward-looking statements are only as of the date they are made, and the Company undertakes no duty to update its forward-looking statements except as required by law. You are advised, however, to review any further disclosures we have made or may make in our filings and other submissions to the SEC, including those on Forms 10-Q, 10-K, 8-K and other reports.
Note About Non-GAAP Financial Measures
A “non-GAAP financial measure” is generally defined as a numerical measure of a company’s historical or future performance that excludes or includes amounts, or is subject to adjustments, so as to be different from the most directly comparable measure calculated and presented in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). This Report contains certain non-GAAP financial measures, including Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), adjusted EBITDA, and adjusted free cash flows. These non-GAAP measures are reconciled to each of their respective most directly comparable GAAP financial measures in Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We believe these non-GAAP measures provide useful information to our Board of Directors, management and investors regarding certain trends relating to our financial condition and results of operations. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses, purposes of determining management incentive compensation and budgeting, forecasting and planning purposes.
We do not consider non-GAAP measures an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is they may exclude significant expense and income items that are required by GAAP to be recognized in our consolidated financial statements. In addition, they reflect the exercise of management’s judgment about which expense and income items are excluded or included in determining these non-GAAP financial measures. In order to compensate for these limitations, reconciliations of the non-GAAP financial measures we use to their most directly comparable GAAP measures are provided. Non-GAAP financial measures should not be relied upon, in whole or part, in evaluating the financial condition, results of operations or future prospects of the Company.
Business
Rayonier Advanced Materials Inc. is a global leader of cellulose-based technologies, including high purity cellulose specialties, a natural polymer commonly found in cell phone and computer screens, filters and pharmaceuticals. In 2017, we acquired Tembec which was engaged in the manufacture of cellulose specialties, commodity products, forest products pulp and paper (the “Acquisition”). The Acquisition created a combined company with leading positions in acetate and ethers high purity cellulose end-use markets, as well as, a more diversified earnings stream given the addition of the forest products, pulp and paper businesses. We now operate in the following business segments: High Purity Cellulose, Forest Products, Pulp and Paper.
On August 1, 2019, the Company announced it entered into an agreement to sell its Matane, Quebec pulp mill and related assets to Sappi Limited, a global diversified wood fiber company, for a purchase price of approximately $175 million and net proceeds of approximately $150 million, net of fees, expenses and other adjustments. The mill produces approximately 270,000 metric tons of high-yield pulp and sells the product globally for use in manufacturing paperboard, packaging, and printing and writing paper. The sale closed on November 4, 2019.
As a result of the sale, we have reclassified prior year amounts to conform to the current year’s presentation for discontinued operations. Unless otherwise stated, information in management’s discussion and analysis relates to continuing operations. We present businesses that represent components as discontinued operations when they meet the criteria for held for sale or are sold, and their disposal represents a strategic shift that has, or will have, a major effect on our operations and financial results. See Note 2 —Discontinued Operations for additional information.
Our plan is to grow EBITDA, reduce debt and drive long-term value for our stockholders. The plan focuses on the following:
|
|
•
|
Go-to-Market Strategy - designed to improve cellulose specialties price and margin and align assets to market needs and sales mix to drive long term High Purity Cellulose segment EBITDA growth
|
|
|
•
|
Improve our competitive positioning through the following Four Strategic Pillars
|
•Cost Transformation - driving sustainable cost reductions by fostering a culture of continuous improvement.
|
|
•
|
New Products - expanding our business by developing next generation cellulose fibers and other value-added products utilizing our cellulose processing technology, expertise and co-products. We have made significant progress in developing and applying proprietary technologies to new products in many of the end-market segments we serve.
|
|
|
•
|
Market Optimization - maximizing the profitability of our existing products and assets by optimizing the intersection of our customers’ needs, our manufacturing capabilities and transportation costs to drive higher value for our customers and our Company.
|
|
|
•
|
Investments - delivering a capital allocation strategy that maximizes our risk adjusted returns. We intend to de-lever our balance sheet through EBITDA growth and repayment of indebtedness with a target net leverage ratio of 2.5 times EBITDA.
|
Outlook
High Purity Cellulose
For full year 2019, we continue to expect cellulose specialties prices to be lower by approximately 1 to 2 percent, as previously guided, excluding the impact on sales prices of any Chinese duties we incur. Cellulose specialties volumes are expected to be down approximately 6 percent versus 2018 due to demand weakness in acetate, automotive and construction markets, as customers aggressively manage inventory levels. Commodity product (primarily viscose and fluff pulp) sales prices are expected to be significantly lower in the fourth quarter due to weakness in the broad paper pulp markets as global trade issues persist. For the full year, we anticipate High Purity Cellulose EBITDA of approximately $140 million.
Forest Products
U.S. housing starts and remodeling activity are the key drivers for lumber demand and have remained relatively flat in 2019; Low interest rates provide positive market environment. Announced production curtailments should positively impact future pricing once inventories have been reduced. Duties on lumber sales from Canada into the U.S. will continue to impact financial results. To date, we have paid approximately $53 million of lumber duties.
Pulp
High-yield pulp prices continued to weaken in the third quarter due to lower demand for paper pulp products. However, we believe Chinese high-yield pulp markets have stabilized resulting in modest increases in regional pricing from September levels. European market prices continue to decline as they come into closer alignment with the Chinese pricing. The weaker demand has held inventory levels relatively high and continue to pressure global pulp prices.
Paper
North American paperboard prices will remain under pressure primarily due to increased competition. In newsprint, demand continues to decline as industry production capacity remains stable, resulting in continued pricing pressure.
Capital Allocation and Investment
Due to market conditions and increased leverage, we are reducing capital spending across all segments. We currently expect capital spending to be $120 million for the full year 2019, down $10 million from our original $130 million estimate, and continue to evaluate further actions.
On September 6, 2019, we announced our Board of Directors determined to suspend the quarterly common stock dividend to improve cash flow.
On November 4, 2019, we sold our Matane facility for $175 million. We received approximately $150 million, net of fees, expenses, working capital and other adjustments related to the sale. Proceeds from the sale will be used to repay $100 million of debt with the remainder for general corporate purposes, including enhancing liquidity.
Amendment
On September 30, 2019, we amended our Senior Secured Credit Agreement. The amendment relaxes financial covenants through 2021. We believe we now have the runway to manage the business through these challenging economic conditions enabling us to emerge financially stronger and able to realize the earnings potential of the business.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates.
For a full description of our critical accounting policies, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K. For recent accounting pronouncements see Item 1 of Part I, Financial Statements — Note 1 —Basis of Presentation and New Accounting Pronouncements.
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Information
|
Three Months Ended
|
|
%
|
|
Nine Months Ended
|
|
%
|
(in millions, except percentages)
|
September 28, 2019
|
|
September 29, 2018
|
|
Change
|
|
September 28, 2019
|
|
September 29, 2018
|
|
Change
|
Net Sales
|
$
|
416
|
|
|
$
|
501
|
|
|
(17)%
|
|
$
|
1,307
|
|
|
$
|
1,476
|
|
|
(11)%
|
Cost of Sales
|
(399
|
)
|
|
(419
|
)
|
|
|
|
(1,265
|
)
|
|
(1,237
|
)
|
|
|
Gross Margin
|
17
|
|
|
82
|
|
|
(79)%
|
|
42
|
|
|
239
|
|
|
(82)%
|
Selling, general and administrative expenses
|
(23
|
)
|
|
(30
|
)
|
|
|
|
(72
|
)
|
|
(78
|
)
|
|
|
Duties
|
(5
|
)
|
|
(1
|
)
|
|
|
|
(16
|
)
|
|
(21
|
)
|
|
|
Other operating income (expense), net
|
3
|
|
|
(8
|
)
|
|
|
|
(5
|
)
|
|
(9
|
)
|
|
|
Operating Income (Loss)
|
(8
|
)
|
|
43
|
|
|
(119)%
|
|
(51
|
)
|
|
131
|
|
|
(139)%
|
Interest expense
|
(15
|
)
|
|
(14
|
)
|
|
|
|
(43
|
)
|
|
(42
|
)
|
|
|
Interest income and other, net
|
3
|
|
|
—
|
|
|
|
|
3
|
|
|
5
|
|
|
|
Adjustment to gain on bargain purchase
|
—
|
|
|
6
|
|
|
|
|
—
|
|
|
21
|
|
|
|
Net periodic pension and OPEB income (expense), excluding service costs
|
1
|
|
|
2
|
|
|
|
|
3
|
|
|
6
|
|
|
|
Income (Loss) From Continuing Operations Before Income Taxes
|
(19
|
)
|
|
37
|
|
|
(151)%
|
|
(88
|
)
|
|
122
|
|
|
(172)%
|
Income tax benefit (expense)
|
5
|
|
|
(7
|
)
|
|
|
|
26
|
|
|
(29
|
)
|
|
|
Income (Loss) from Continuing Operations
|
$
|
(14
|
)
|
|
$
|
30
|
|
|
(147)%
|
|
$
|
(62
|
)
|
|
$
|
93
|
|
|
(167)%
|
Income (loss) from discontinued operations, net of taxes
|
—
|
|
|
8
|
|
|
|
|
10
|
|
|
23
|
|
|
|
Net Income (Loss)
|
$
|
(14
|
)
|
|
$
|
38
|
|
|
|
|
$
|
(52
|
)
|
|
$
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin %
|
4
|
%
|
|
16
|
%
|
|
|
|
3
|
%
|
|
16
|
%
|
|
|
Operating Margin %
|
(2
|
)%
|
|
9
|
%
|
|
|
|
(4
|
)%
|
|
9
|
%
|
|
|
Effective Tax Rate %
|
24
|
%
|
|
19
|
%
|
|
|
|
30
|
%
|
|
24
|
%
|
|
|
Net sales by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
Net sales (in millions)
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
High Purity Cellulose
|
$
|
268
|
|
|
$
|
308
|
|
|
$
|
822
|
|
|
$
|
876
|
|
Forest Products
|
65
|
|
|
86
|
|
|
222
|
|
|
282
|
|
Pulp
|
26
|
|
|
46
|
|
|
95
|
|
|
133
|
|
Paper
|
74
|
|
|
78
|
|
|
218
|
|
|
238
|
|
Eliminations
|
(17
|
)
|
|
(17
|
)
|
|
(50
|
)
|
|
(53
|
)
|
Total net sales
|
$
|
416
|
|
|
$
|
501
|
|
|
$
|
1,307
|
|
|
$
|
1,476
|
|
Net sales decreased $85 million and $169 million, during the three and nine months ended September 28, 2019, down approximately 17 percent and 11 percent, respectively, when compared to the same prior year periods. The decrease was primarily driven by lower cellulose specialties, lumber, high-yield pulp and newsprint sales prices. For further discussion, see Operating Results by Segment.
Operating income (loss) by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
Operating income (loss) (in millions)
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
High Purity Cellulose
|
$
|
7
|
|
|
$
|
34
|
|
|
$
|
11
|
|
|
$
|
83
|
|
Forest Products
|
(5
|
)
|
|
8
|
|
|
(27
|
)
|
|
35
|
|
Pulp
|
(2
|
)
|
|
13
|
|
|
3
|
|
|
37
|
|
Paper
|
—
|
|
|
13
|
|
|
1
|
|
|
24
|
|
Corporate
|
(8
|
)
|
|
(25
|
)
|
|
(39
|
)
|
|
(48
|
)
|
Total operating income (loss)
|
$
|
(8
|
)
|
|
$
|
43
|
|
|
$
|
(51
|
)
|
|
$
|
131
|
|
Operating results for the three and nine month periods ended September 28, 2019 decreased $51 million and $182 million compared to the same 2018 period. These declines where primarily driven by lower sales prices and higher costs. For further discussion, see Operating Results by Segment.
Non-operating Expenses
Interest expense increased slightly from $14 million and $42 million to $15 million and $43 million for the third quarter and year to date periods September 29, 2018 and September 28, 2019, respectively. Overall debt levels were higher during the periods ended September 28, 2019 and our increased interest margin more than offset the lower LIBOR rate, resulting in slightly higher rates on variable debt. See Note 7 — Debt and Finance Leases.
Income Tax Benefit (Expense)
The Company’s effective tax rate for the three and nine months ended September 28, 2019 was a benefit of 24 percent and 30 percent, respectively, compared to an expense of 19 percent and 24 percent for the three and nine months ended September 29, 2018, respectively.
The effective tax rate for the three months ended September 28, 2019 differs from the federal statutory rate of 21 percent primarily due to different statutory rates on foreign operations. The effective tax rate benefit for the nine months ended September 28, 2019 is also impacted by excess tax deduction on vested stock compensation and tax credits recognized in the first and second quarters. See Note 16 — Income Taxes for additional information.
Discontinued Operations
The Company has presented the operating results for its Matane operations as discontinued operations for the three and nine months ended September 28, 2019 and September 29, 2018. The decline in discontinued operations is principally driven from lower sales prices during the three and nine months ended September 28, 2019 when compared to the same prior year periods. Included in discontinued operations is allocated interest expense for debt that is required to be repaid upon completion of the sale. The three and nine months ended September 28, 2019 also include legal and administrative costs to sell the operation.
Operating Results by Segment
High Purity Cellulose
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in millions)
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Net Sales
|
$
|
268
|
|
|
$
|
308
|
|
|
$
|
822
|
|
|
$
|
876
|
|
Operating income (loss)
|
$
|
7
|
|
|
$
|
34
|
|
|
$
|
11
|
|
|
$
|
83
|
|
Average Sales Prices ($ per metric ton):
|
|
|
|
|
|
|
|
Cellulose Specialties
|
$
|
1,317
|
|
|
$
|
1,333
|
|
|
$
|
1,303
|
|
|
$
|
1,344
|
|
Commodity Products
|
$
|
768
|
|
|
$
|
807
|
|
|
$
|
803
|
|
|
$
|
813
|
|
Sales Volumes (thousands of metric tons):
|
|
|
|
|
|
|
|
Cellulose Specialties
|
137
|
|
|
163
|
|
|
432
|
|
|
466
|
|
Commodity Products
|
88
|
|
|
70
|
|
|
246
|
|
|
188
|
|
Changes in High Purity Cellulose net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Changes Attributable to:
|
|
|
Net Sales
(in millions)
|
September 29, 2018
|
Price
|
|
Volume/Mix/Other
|
|
September 28, 2019
|
Cellulose Specialties
|
$
|
218
|
|
|
$
|
(2
|
)
|
|
$
|
(35
|
)
|
|
$
|
181
|
|
Commodity Products
|
56
|
|
|
(5
|
)
|
|
16
|
|
|
67
|
|
Other sales (a)
|
34
|
|
|
—
|
|
|
(14
|
)
|
|
20
|
|
Total Net Sales
|
$
|
308
|
|
|
$
|
(7
|
)
|
|
$
|
(33
|
)
|
|
$
|
268
|
|
(a) Other sales consist of electricity, resins, lignin and other by-products to third-parties.
|
Total net sales for the three months ended September 28, 2019 declined $40 million, or 13 percent, to $268 million. This decline was driven by a 1 percent decline in cellulose specialties sales prices due to duties on products sold in China and a 16 percent decline in cellulose specialties sales volumes, due to weaknesses in the acetate and automotive markets. Commodity product sales prices declined 5 percent due to weaker markets. This decline was more than offset by a 26 percent increase in commodity sales volumes due to lower demand for cellulose specialties and improved commodity production. Other sales declined by $14 million as a result of the sale of the resin business in September 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Changes Attributable to:
|
|
|
Net Sales
(in millions)
|
September 29, 2018
|
Price
|
|
Volume/Mix/Other
|
|
September 28, 2019
|
Cellulose Specialties
|
$
|
626
|
|
|
$
|
(18
|
)
|
|
$
|
(44
|
)
|
|
$
|
564
|
|
Commodity Products
|
153
|
|
|
(5
|
)
|
|
49
|
|
|
197
|
|
Other sales (a)
|
97
|
|
|
—
|
|
|
(36
|
)
|
|
61
|
|
Total Net Sales
|
$
|
876
|
|
|
$
|
(23
|
)
|
|
$
|
(31
|
)
|
|
$
|
822
|
|
(a) Other sales consist of electricity, resins, lignin and other by-products to third-parties
|
|
|
|
|
|
|
|
|
Total net sales for the nine months ended September 28, 2019 declined $54 million, or 6 percent, to $822 million. Cellulose specialties sales prices were down by approximately 3 percent in 2019 due to duties on products sold in China and higher average prices in the 2018 comparable year-to-date period due to 2017 higher priced shipments which were recognized as sales in 2018. Cellulose specialties volumes decreased 7 percent during the nine months ended September 28, 2019 due to weaknesses in the acetate and automotive markets. Commodity product sales volumes increased by approximately 31 percent primarily due to lower demand for cellulose specialties and improved production. Other sales declined by $36 million principally as a result of the sale of the resin business in September 2018.
Changes in High Purity Cellulose operating income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Gross Margin Changes Attributable to (a):
|
|
|
|
|
(in millions)
|
September 29, 2018
|
Sales Price
|
|
Sales Volume/Mix/Other
|
|
Cost
|
|
SG&A and other
|
|
September 28, 2019
|
Operating income (loss)
|
$
|
34
|
|
|
$
|
(7
|
)
|
|
$
|
(25
|
)
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
7
|
|
Operating margin %
|
11.0
|
%
|
|
(2.1
|
)%
|
|
(8.2
|
)%
|
|
1.5
|
%
|
|
0.4
|
%
|
|
2.6
|
%
|
(a) Sales Volume computed based on contribution margin.
|
Operating income decreased $27 million for the three months ended September 28, 2019 to $7 million. The decrease was driven by lower cellulose specialties sales prices and volumes, commodity product sale prices and a decline in other sales, partially offset by higher commodity sales volumes, as previously discussed. Costs decreased $4 million mostly driven by lower chemical prices, primarily caustic.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Gross Margin Changes Attributable to (a):
|
|
|
|
|
(in millions)
|
September 29, 2018
|
Sales Price
|
|
Sales Volume/Mix/Other
|
|
Cost
|
|
SG&A and other
|
|
September 28, 2019
|
Operating income (loss)
|
$
|
83
|
|
|
$
|
(23
|
)
|
|
$
|
(35
|
)
|
|
$
|
(17
|
)
|
|
$
|
3
|
|
|
$
|
11
|
|
Operating margin %
|
9.5
|
%
|
|
(2.4
|
)%
|
|
(4.0
|
)%
|
|
(2.1
|
)%
|
|
0.4
|
%
|
|
1.4
|
%
|
(a) Sales Volume computed based on contribution margin.
|
Operating income decreased $72 million for the nine months ended September 28, 2019 to $11 million. The decrease was driven by lower cellulose specialties sales prices and volumes and a decline in other sales volume, partially offset by higher commodity sales volumes, as previously discussed. Costs increased $17 million during the nine months ended September 28, 2019 compared to the prior year period as wood and maintenance costs were only partially offset by lower chemical prices, primarily caustic. SG&A and other costs include a $4 million and $3 million loss during the nine months ended September 28, 2019 and September 29, 2018, respectively, associated with the lignin joint venture that began operations in the second half of 2018. The increase in the joint venture loss in 2019 was more than offset by favorable SG&A costs and foreign exchange gains.
The three and nine month periods ended September 29, 2018 include operating income of $2 million and $5 million, respectively from the resins business which was sold in September 2018.
Forest Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in millions)
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Net Sales
|
$
|
65
|
|
|
$
|
86
|
|
|
$
|
222
|
|
|
$
|
282
|
|
Operating income (loss)
|
(5
|
)
|
|
8
|
|
|
$
|
(27
|
)
|
|
$
|
35
|
|
Average Sales Prices ($ per thousand board feet):
|
|
|
|
|
|
|
|
Lumber
|
$
|
366
|
|
|
$
|
487
|
|
|
$
|
370
|
|
|
$
|
500
|
|
Sales Volumes (millions of board feet):
|
|
|
|
|
|
|
|
Lumber
|
134
|
|
|
141
|
|
|
462
|
|
|
457
|
|
Changes in Forest Products net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
September 29, 2018
|
|
Changes Attributable to:
|
|
September 28, 2019
|
Net Sales
(in millions)
|
Price
|
|
Volume/Mix/Other
|
|
Lumber
|
$
|
69
|
|
|
$
|
(16
|
)
|
|
$
|
(4
|
)
|
|
$
|
49
|
|
Other sales (a)
|
17
|
|
|
—
|
|
|
(1
|
)
|
|
16
|
|
Total Net Sales
|
$
|
86
|
|
|
$
|
(16
|
)
|
|
$
|
(5
|
)
|
|
$
|
65
|
|
(a) Other sales consist of sales of logs, wood chips, and other by-products to other segments and third-parties
|
Total net sales for the three months ended September 28, 2019 declined $21 million, or 24 percent, to $65 million. Average lumber sales prices declined 25 percent due to weak demand while lumber sales volumes decreased approximately 5 percent also from weak market conditions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
September 29, 2018
|
|
Changes Attributable to:
|
|
September 28, 2019
|
Net Sales
(in millions)
|
Price
|
|
Volume/Mix/Other
|
|
Lumber
|
$
|
229
|
|
|
$
|
(60
|
)
|
|
$
|
2
|
|
|
$
|
171
|
|
Other sales (a)
|
53
|
|
|
—
|
|
|
(2
|
)
|
|
51
|
|
Total Net Sales
|
$
|
282
|
|
|
$
|
(60
|
)
|
|
$
|
—
|
|
|
$
|
222
|
|
(a) Other sales consist of sales of logs, wood chips, and other by-products to other segments and third-parties
|
Total net sales for the nine months ended September 28, 2019 declined $60 million, or 21 percent, to $222 million. Average lumber sales prices declined 26 percent due primarily to weak demand while lumber sales volumes increased approximately 1 percent as a result of efforts to reduce inventory levels, partially offset by market downtime taken at the production facilities.
Changes in Forest Products operating income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Gross Margin Changes Attributable to (a)
|
|
|
|
|
(in millions)
|
September 29, 2018
|
Sales Price
|
|
Sales Volume/Mix/Other
|
|
Cost
|
|
SG&A and other
|
|
September 28, 2019
|
Operating income (loss)
|
$
|
8
|
|
|
$
|
(16
|
)
|
|
$
|
(3
|
)
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
(5
|
)
|
Operating margin %
|
9.3
|
%
|
|
(22.3
|
)%
|
|
(3.9
|
)%
|
|
7.7
|
%
|
|
1.5
|
%
|
|
(7.7
|
)%
|
(a) Sales Volume computed based on contribution margin.
|
Operating income decreased $13 million for the three months ended September 28, 2019 to an operating loss of $5 million. The decline was primarily driven by lower lumber sales prices and volumes, as previously discussed. Cost declined primarily driven by a $5 million reversal of the net realizable inventory reserve as a result of price increases in the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Gross Margin Changes Attributable to (a)
|
|
|
|
|
(in millions)
|
September 29, 2018
|
Sales Price
|
|
Sales Volume/Mix/Other
|
|
Cost
|
|
SG&A and other
|
|
September 28, 2019
|
Operating income (loss)
|
$
|
35
|
|
|
$
|
(60
|
)
|
|
$
|
(1
|
)
|
|
$
|
(4
|
)
|
|
$
|
3
|
|
|
$
|
(27
|
)
|
Operating margin %
|
12.4
|
%
|
|
(23.7
|
)%
|
|
(0.5
|
)%
|
|
(1.8
|
)%
|
|
1.4
|
%
|
|
(12.2
|
)%
|
(a) Sales Volume computed based on contribution margin.
|
Operating income decreased $62 million for the nine months ended September 28, 2019 to an operating loss of $27 million. The decline was primarily driven by lower lumber sales prices partially offset by higher lumber sales volumes, as previously discussed. Higher costs were driven by increased maintenance and depreciation expense, partially offset by the impact of favorable incentive compensation and lower wood and energy costs. SG&A and other costs improved primarily due to lower softwood
lumber duties driven by lower lumber prices partially offset by higher lumber sales volumes. The nine months ended September 28, 2019 and September 29, 2018 included $16 million and $21 million in softwood lumber duties, respectively.
Pulp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in millions)
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Net Sales
|
$
|
26
|
|
|
$
|
46
|
|
|
$
|
95
|
|
|
$
|
133
|
|
Operating income
|
$
|
(2
|
)
|
|
$
|
13
|
|
|
$
|
3
|
|
|
$
|
37
|
|
Average Sales Prices ($ per metric tons) (a):
|
|
|
|
|
|
|
|
High-yield pulp
|
$
|
455
|
|
|
$
|
673
|
|
|
$
|
524
|
|
|
$
|
671
|
|
Sales Volumes (in thousands of metric tons) (a):
|
|
|
|
|
|
|
|
High-yield pulp
|
45
|
|
|
59
|
|
|
145
|
|
|
168
|
|
(a) Average sales prices and volumes for external sales only. For the three month period ended September 28, 2019 and September 29, 2018, the Pulp segment sold approximately 16,000 MT and 17,000 MT of high-yield pulp for $6 million and $7 million, respectively, to the Paper segment for the production of paperboard. For the nine months ended September 28, 2019 and September 29, 2018, 48,000 MT and 50,000 MT of high-yield pulp was sold to the Paper segment for $19 million and $20 million, respectively.
|
Changes in Pulp net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
September 29, 2018
|
|
Changes Attributable to:
|
|
September 28, 2019
|
Net Sales
(in millions)
|
Price
|
|
Volume/Mix
|
|
High-yield pulp
|
$
|
46
|
|
|
$
|
(10
|
)
|
|
$
|
(10
|
)
|
|
$
|
26
|
|
Total net sales for the three months ended September 28, 2019 declined $20 million, or 44 percent, to $26 million. Average pulp sales prices declined 32 percent due to weak demand which also contributed to a decline in pulp sales volumes of approximately 24 percent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
September 29, 2018
|
|
Changes Attributable to:
|
|
September 28, 2019
|
Net Sales
(in millions)
|
Price
|
|
Volume/Mix
|
|
High-yield pulp
|
$
|
133
|
|
|
$
|
(22
|
)
|
|
$
|
(16
|
)
|
|
$
|
95
|
|
Total net sales for the nine months ended September 28, 2019 declined $38 million, or (29) percent, to $95 million. Average pulp sales prices declined 22 percent due to weak demand while pulp sales volumes decreased approximately 14 percent as a result of lower production from market downtime and production reliability issues at the Temiscaming plant during the first quarter of 2019.
Changes in Pulp operating income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Gross Margin Changes Attributable to (a):
|
|
|
|
|
(in millions)
|
September 29, 2018
|
Sales Price
|
|
Sales Volume/Mix
|
|
Cost
|
|
SG&A and other
|
|
September 28, 2019
|
Operating income (loss)
|
$
|
13
|
|
|
$
|
(10
|
)
|
|
$
|
(5
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
Operating margin %
|
28.3
|
%
|
|
(19.9
|
)%
|
|
(16.0
|
)%
|
|
—
|
%
|
|
—
|
%
|
|
(7.6
|
)%
|
(a) Sales Volume computed based on contribution margin.
|
Operating income decreased $15 million for the three months ended September 28, 2019 to operating loss of $2 million. The decline was primarily driven by lower pulp sales prices and volumes, as previously discussed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Gross Margin Changes Attributable to (a):
|
|
|
|
|
(in millions)
|
September 29, 2018
|
Sales Price
|
|
Sales Volume/Mix
|
|
Cost
|
|
SG&A and other
|
|
September 28, 2019
|
Operating income
|
$
|
37
|
|
|
$
|
(22
|
)
|
|
$
|
(8
|
)
|
|
$
|
(5
|
)
|
|
$
|
1
|
|
|
$
|
3
|
|
Operating margin %
|
27.8
|
%
|
|
(14.3
|
)%
|
|
(6.1
|
)%
|
|
(5.3
|
)%
|
|
1.1
|
%
|
|
3.2
|
%
|
(a) Sales Volume computed based on contribution margin.
|
Operating income decreased $34 million for the nine months ended September 28, 2019 to operating income of $3 million. The decline was primarily driven by lower pulp sales prices in addition to lower pulp sales volumes, as previously discussed.
Paper
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(in millions)
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Net Sales
|
$
|
74
|
|
|
$
|
78
|
|
|
$
|
218
|
|
|
$
|
238
|
|
Operating income (loss)
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
1
|
|
|
$
|
24
|
|
Average Sales Prices ($ per metric ton):
|
|
|
|
|
|
|
|
Paperboard
|
$
|
1,097
|
|
|
$
|
1,120
|
|
|
$
|
1,105
|
|
|
$
|
1,136
|
|
Newsprint
|
$
|
532
|
|
|
$
|
633
|
|
|
$
|
542
|
|
|
$
|
590
|
|
Sales Volumes (in metric tons):
|
|
|
|
|
|
|
|
Paperboard
|
49
|
|
|
45
|
|
|
137
|
|
|
131
|
|
Newsprint
|
38
|
|
|
44
|
|
|
123
|
|
|
151
|
|
Changes in Paper net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
September 29, 2018
|
|
Changes Attributable to:
|
|
September 28, 2019
|
Net Sales
(in millions)
|
Price
|
|
Volume/Mix
|
|
Paperboard
|
$
|
51
|
|
|
$
|
(1
|
)
|
|
$
|
4
|
|
|
$
|
54
|
|
Newsprint
|
28
|
|
|
(4
|
)
|
|
(4
|
)
|
|
20
|
|
Total Net Sales
|
$
|
79
|
|
|
$
|
(5
|
)
|
|
$
|
—
|
|
|
$
|
74
|
|
Total net sales for the three months ended September 28, 2019 declined $5 million, or 6 percent, to $74 million. Paperboard sales volumes increased during the quarter ended September 28, 2019 due to efforts to reduce inventories. Newsprint sales price declined 16 percent primarily due to the affects of the removal of duties on newsprint imported into the U.S and the continued decline in demand. Newsprint sales volumes declined 14 percent primarily as a result of reliability issues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
September 29, 2018
|
|
Changes Attributable to:
|
|
September 28, 2019
|
Net Sales
(in millions)
|
Price
|
|
Volume/Mix
|
|
Paperboard
|
$
|
149
|
|
|
$
|
(4
|
)
|
|
$
|
6
|
|
|
$
|
151
|
|
Newsprint
|
89
|
|
|
(6
|
)
|
|
(16
|
)
|
|
67
|
|
Total Net Sales
|
$
|
238
|
|
|
$
|
(10
|
)
|
|
$
|
(10
|
)
|
|
$
|
218
|
|
Net sales for the nine months ended September 28, 2019 declined $20 million, or 9 percent, to $218 million. Paperboard sales prices declined 3 percent due to increased competition and weaker markets. Paperboard sales volumes increased 5 percent primarily due to efforts to reduce inventories. Newsprint sales prices declined 8 percent primarily due to the affects of the removal of duties on newsprint imported into the U.S and the continued decline in demand. Newsprint sales volumes declined 19 percent due to production reliability issues and an energy curtailment that required production downtime at the Kapuskasing plant.
Changes in Paper operating income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Gross Margin Changes Attributable to (a):
|
|
|
|
|
(in millions)
|
September 29, 2018
|
Sales Price
|
|
Sales Volume/Mix
|
|
Cost
|
|
SG&A and other
|
|
September 28, 2019
|
Operating income (loss)
|
$
|
13
|
|
|
$
|
(5
|
)
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
(5
|
)
|
|
$
|
—
|
|
Operating margin %
|
16.5
|
%
|
|
(5.6
|
)%
|
|
(1.4
|
)%
|
|
(2.7
|
)%
|
|
(6.8
|
)%
|
|
—
|
%
|
(a) Sales Volume computed based on contribution margin.
|
Operating income decreased $13 million for the three months ended September 28, 2019 to $0 million. The decline was primarily driven by lower newsprint sales prices and volumes, partially offset by higher paperboard volumes, as previously discussed. Costs increased during the third quarter of 2019 due to lower newsprint production levels, partially offset by lower pulp prices for the production of paperboard. SG&A costs increased as the 2018 three month period was favorably impacted by the reversal of $5 million of duties on newsprint exported to the U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Gross Margin Changes Attributable to (a):
|
|
|
|
|
(in millions)
|
September 29, 2018
|
Sales Price
|
|
Sales Volume/Mix
|
|
Cost
|
|
SG&A and other
|
|
September 28, 2019
|
Operating income
|
$
|
24
|
|
|
$
|
(10
|
)
|
|
$
|
(8
|
)
|
|
$
|
(3
|
)
|
|
$
|
(2
|
)
|
|
$
|
1
|
|
Operating margin %
|
10.1
|
%
|
|
(3.9
|
)%
|
|
(3.4
|
)%
|
|
(1.4
|
)%
|
|
(0.9
|
)%
|
|
0.5
|
%
|
(a) Sales Volume computed based on contribution margin.
|
Operating income decreased by $23 million for the nine month period ended September 28, 2019 to $1 million. The decline was primarily driven by lower paperboard prices and newsprint sales prices and volumes, partially offset by higher paperboard sales volumes, as previously discussed. Costs increased due to lower newsprint production levels, higher maintenance and transportation costs, partially offset by lower pulp costs for the production of paperboard and lower energy costs due to electrical credits received associated with provincial energy curtailment.
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
Operating Income (Loss)
(in millions)
|
September 28, 2019
|
|
September 29, 2018
|
|
September 28, 2019
|
|
September 29, 2018
|
Operating loss
|
$
|
(8
|
)
|
|
$
|
(25
|
)
|
|
$
|
(39
|
)
|
|
$
|
(48
|
)
|
The operating loss for the three and nine months ended September 28, 2019 decreased from than the comparable 2018 periods due to lower incentive compensation expense, as a result of company performance, favorable foreign exchange impacts, an insurance recovery and the absence of severance expense that was recorded in 2018. The decreases were partially offset by higher legal and administrative costs incurred from the loan amendment that was finalized after the quarter ended.
Liquidity and Capital Resources
Cash flows from operations, primarily driven by operating results, have historically been our primary source of liquidity and capital resources. As a result of the significant decreases in the market prices for commodity products, primarily viscose, fluff, high-yield pulp, lumber, paperboard and newsprint, over the last nine months, our financial results have declined requiring us to amend the financial covenants under our Senior Secured Credit Facilities. On September 30, 2019, we entered into an Amendment of our Senior Secured Credit Facilities reducing the restrictions of the first lien secured net leverage ratio and the interest coverage ratio tests through the year ended December 31, 2021. Under the new Credit Agreement, we are in compliance with the financial covenants as of September 28, 2019 and, as such, management believes that there is no longer substantial doubt of the Company’s ability to continue as a going concern. See Note 7 — Debt and Finance Leases of our financial statements for additional information.
Our Board of Directors has declared, and we have paid, cash dividends on our preferred stock of approximately $10 million in 2019. The final cash dividend on our preferred shares of approximately $3 million was paid on August 15, 2019 and we issued approximately 13.4 million shares of common stock at conversion.
Our Board of Directors has declared, and we have paid, cash dividends of $0.07 per share on our common stock for the first and second quarters of 2019 for a total of approximately $9 million. On September 6, 2019, our Board of Directors suspended
our quarterly common stock dividend to use the cash flow to pay down debt and fund capital investments as well as working capital needs. The declaration and payment of future common stock dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and other factors the Board of Directors deems relevant. In addition, our debt facilities restrict the declaration and payment of future dividends.
On January 29, 2018, the Board of Directors authorized a $100 million common stock share buyback, which we believe provides another option to maximize long-term shareholder value as we execute on a disciplined and balanced capital allocation strategy. For the nine months ended September 28, 2019, we did not repurchase any common shares under this buyback program. We do not expect to utilize any further authorization in the near future.
Our debt agreements contain various customary covenants. At September 28, 2019, we were in compliance with all covenants. Our financial statements include assets of $1,537 million, year-to-date revenue of $730 million, covenant EBITDA for the last twelve months of $64 million and liabilities of $858 million for non-guarantors of our debt as of September 28, 2019.
A summary of liquidity and capital resources is shown below (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
September 28, 2019
|
|
December 31, 2018
|
Cash and cash equivalents (a)
|
$
|
63
|
|
|
$
|
109
|
|
Availability under the Revolving Credit Facility (b)
|
167
|
|
|
217
|
|
Total debt (c)
|
1,234
|
|
|
1,188
|
|
Stockholders’ equity
|
639
|
|
|
707
|
|
Total capitalization (total debt plus equity)
|
$
|
1,873
|
|
|
$
|
1,895
|
|
Debt to capital ratio
|
66
|
%
|
|
63
|
%
|
|
|
(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 $33 million at September 28, 2019 and December 31, 2018.
|
|
|
(c)
|
See Note 7 — Debt and Finance Leases of our financial statements for additional information.
|
During the nine months ended September 28, 2019, we did not have any required principal repayments on the Term A-1 or Term A-2 Loan Facility.
Cash Flows (in millions of dollars)
The following table summarizes our cash flows from operating, investing and financing activities for the nine months ended:
|
|
|
|
|
|
|
|
|
Cash Provided by (Used for):
|
September 28, 2019
|
|
September 29, 2018
|
Operating activities
|
$
|
24
|
|
|
$
|
160
|
|
Investing activities
|
$
|
(83
|
)
|
|
$
|
(76
|
)
|
Financing activities
|
$
|
18
|
|
|
$
|
(73
|
)
|
Cash provided by operating activities decreased $136 million during the nine months ended of September 28, 2019 to $24 million when compared to the same prior year period. Operating cash flows from continuing operations decreased primarily due to a decline in our operating results due mostly from lower prices across all segments, partially offset by a decrease in working capital requirements as lower inventories and accounts receivable were partially offset by lower accounts payable and accrued liabilities, from the timing of payments. Included in operating cash flows for the nine months ended September 28, 2019 and September 29, 2018 was cash provided by operating activities of discontinued operations of $19 million and $19 million, respectively.
Cash used for investing activities increased $7 million during the first nine months of 2019 to $83 million. Investing cash flows from continuing operations increased due to the absence of proceeds from the sale of the resin operation from September 2018, partially offset by lower capital spending. Included in cash used for investing activities in the nine months ended September 28, 2019 and September 29, 2018 was cash used for investing activities of discontinued operations of $2 million and $2 million, respectively.
Cash provided by financing activities increased $91 million primarily due to a $53 million increase in net borrowings on our revolving credit facility and $24 million lower principal payments on our term loans. Common stock dividends paid decreased from $11 million to $9 million primarily as a result of the suspension of the quarterly dividend which was effective for the third quarter of 2019. Common shares repurchased decreased $12 million primarily due to the absence of common stock repurchases of $15 million under the share buyback program. See Note 7 — Debt and Finance Leases, Note 13 — Earnings Per Share of Common Stock and Note 14 — Incentive Stock Plans to our financial statements for additional information.
Performance and Liquidity Indicators
The discussion below is presented to enhance the reader’s understanding of our operating performance, liquidity, ability to generate cash and satisfy rating agency and creditor requirements. This information includes the following measures of financial results: EBITDA 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 as a performance measure and adjusted free cash flows as a liquidity measure. See Item 2 — Note about Non-GAAP Financial Measures for limitations associated with non-GAAP measures.
EBITDA is defined by SEC rules as earnings before interest, taxes, depreciation and amortization. EBITDA is not necessarily indicative of results that may be generated in future periods.
Below is a reconciliation of Income (Loss) from Continuing Operations to EBITDA and Adjusted EBITDA by segment (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended:
|
Forest Products
|
|
Pulp
|
|
Paper
|
|
High Purity Cellulose
|
|
Corporate & Other
|
|
Total
|
September 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(5
|
)
|
|
$
|
(2
|
)
|
|
$
|
3
|
|
|
$
|
8
|
|
|
$
|
(18
|
)
|
|
$
|
(14
|
)
|
Depreciation and amortization
|
2
|
|
|
1
|
|
|
4
|
|
|
33
|
|
|
—
|
|
|
40
|
|
Interest expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
15
|
|
Income tax expense (benefit)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
(5
|
)
|
EBITDA
|
$
|
(3
|
)
|
|
$
|
(1
|
)
|
|
$
|
7
|
|
|
$
|
41
|
|
|
$
|
(8
|
)
|
|
$
|
36
|
|
Loan Amendment Costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
Insurance Recovery
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
Adjusted EBITDA
|
$
|
(3
|
)
|
|
$
|
(1
|
)
|
|
$
|
7
|
|
|
$
|
41
|
|
|
$
|
(9
|
)
|
|
$
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
8
|
|
|
$
|
13
|
|
|
$
|
16
|
|
|
$
|
40
|
|
|
$
|
(47
|
)
|
|
$
|
30
|
|
Depreciation and amortization
|
2
|
|
|
1
|
|
|
4
|
|
|
30
|
|
|
—
|
|
|
37
|
|
Interest expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14
|
|
|
14
|
|
Income tax expense (benefit)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
7
|
|
EBITDA
|
$
|
10
|
|
|
$
|
14
|
|
|
$
|
20
|
|
|
$
|
70
|
|
|
$
|
(26
|
)
|
|
$
|
88
|
|
Gain on bargain purchase
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
1
|
|
|
(6
|
)
|
Severance expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
4
|
|
Adjusted EBITDA
|
$
|
10
|
|
|
$
|
14
|
|
|
$
|
20
|
|
|
$
|
63
|
|
|
$
|
(21
|
)
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended:
|
Forest Products
|
|
Pulp
|
|
Paper
|
|
High Purity Cellulose
|
|
Corporate & Other
|
|
Total
|
September 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(27
|
)
|
|
$
|
3
|
|
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
(56
|
)
|
|
$
|
(62
|
)
|
Depreciation and amortization
|
7
|
|
|
2
|
|
|
13
|
|
|
90
|
|
|
—
|
|
|
112
|
|
Interest expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43
|
|
|
43
|
|
Income tax expense (benefit)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(26
|
)
|
|
(26
|
)
|
EBITDA
|
$
|
(20
|
)
|
|
$
|
5
|
|
|
$
|
21
|
|
|
$
|
100
|
|
|
$
|
(39
|
)
|
|
$
|
67
|
|
Insurance recovery
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
Loan amendment costs
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
Non-recurring expense (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Adjusted EBITDA
|
$
|
(20
|
)
|
|
$
|
5
|
|
|
$
|
21
|
|
|
$
|
100
|
|
|
$
|
(39
|
)
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
35
|
|
|
$
|
37
|
|
|
$
|
31
|
|
|
$
|
97
|
|
|
$
|
(107
|
)
|
|
$
|
93
|
|
Depreciation and amortization
|
5
|
|
|
2
|
|
|
13
|
|
|
86
|
|
|
—
|
|
|
106
|
|
Interest expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41
|
|
|
41
|
|
Income tax expense (benefit)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
28
|
|
|
28
|
|
EBITDA
|
$
|
40
|
|
|
$
|
39
|
|
|
$
|
44
|
|
|
$
|
183
|
|
|
$
|
(38
|
)
|
|
$
|
268
|
|
Severance expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
$
|
4
|
|
Gain on bargain purchase
|
—
|
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
(11
|
)
|
|
$
|
(21
|
)
|
Adjusted EBITDA
|
$
|
40
|
|
|
$
|
39
|
|
|
$
|
44
|
|
|
$
|
173
|
|
|
$
|
(45
|
)
|
|
$
|
251
|
|
(a) Non-recurring expenses are related to the Company’s review of its commodity asset portfolio.
EBITDA and Adjusted EBITDA for the three and nine month periods ended September 28, 2019 decreased primarily due to lower operating income, primarily from lower prices across all segments. For the full discussion of changes to operating income, see Management’s Discussion of Results of Operations.
We define adjusted free cash flows as cash provided by (used for) operating activities from continuing operations adjusted for capital expenditures excluding strategic capital. Adjusted free cash flows is a non-GAAP measure of cash generated during a period which is available for dividend distribution, debt reduction, strategic acquisitions and repurchase of our 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 respective periods (in millions of dollars):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
Cash Flows from Operations to Adjusted Free Cash Flows Reconciliation
|
September 28, 2019
|
|
September 29, 2018
|
Cash provided by operating activities of continuing operations
|
$
|
5
|
|
|
$
|
141
|
|
Capital expenditures (a)
|
(63
|
)
|
|
(58
|
)
|
Adjusted Free Cash Flows
|
$
|
(58
|
)
|
|
$
|
83
|
|
|
|
(a)
|
Capital expenditures exclude strategic capital expenditures which are deemed discretionary by management. Strategic expenditures for the first nine months of 2019 were approximately $18 million. Strategic capital expenditures for the same period of 2018 were approximately $29 million.
|
Adjusted free cash flows decreased primarily due to unfavorable earnings as well as increased capital expenditure requirements.
Contractual Financial Obligations and Off-Balance Sheet Arrangements
We have no material changes outside the ordinary course of business to the Contractual Financial Obligations table as presented in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K.
See Note 18 — Commitments and Contingencies for details on our letters of credit and surety bonds as of September 28, 2019.