UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 24, 2022July 1, 2023
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to
| For the transition period from to |
Commission File Number 001-36285
RAYONIER ADVANCED MATERIALS INC.
Incorporated in the State of Delaware
I.R.S. Employer Identification No.: 46-4559529
Principal Executive Office:
1301 RIVERPLACE BOULEVARD, SUITE 2300
JACKSONVILLE, FL 32207
(Principal Executive Office)
Telephone Number: (904) 357-4600
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | | Trading Symbol(s)Symbol | | Name of each exchange on which registered |
Common Stock,stock, par value $0.01 par valueper share | | RYAM | | New York Stock Exchange |
Securities to be registered pursuant to Section 12(g) of the Act: None |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | o | | Accelerated filer | x |
Non-accelerated filer | o | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The registrant had 63,971,16665,343,418 shares of common stock $.01 par value per share, outstanding as of October 31, 2022.August 7, 2023.
Table of Contents
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Part I. Financial Information | |
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Part II. Other Information | |
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Glossary
The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
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2022 Form 10-K | RYAM Annual Report on Form 10-K for the year ended December 31, 2022 |
2024 Notes | $550 million original aggregate principal amount of 5.50 percent senior unsecured notes due 2024, issued May 2014 |
2026 Notes | $500 million original aggregate principal amount of 7.625 percent senior secured notes due 2026, issued December 2020 |
2027 Term Loan | $250 million original aggregate principal amount of variable rate term loan maturing July 2027, entered into July 2023 |
ABL Credit Facility | 5-year senior secured asset-based revolving credit facility due December 2025 |
AETR | Annual effective tax rate |
AOCI | Accumulated other comprehensive income (loss) |
CAD | Canadian dollar |
CEWS | Canada Emergency Wage Subsidy |
CNC | Carboxylated cellulose nanocrystals |
DTA | Deferred tax asset |
EBITDA | Earnings before interest, taxes, depreciation and amortization |
Exchange Act | Securities Exchange Act of 1934, as amended |
Financial Statements | Consolidated financial statements included in Part I Item 1 of this Quarterly Report on Form 10-Q |
GAAP | United States generally accepted accounting principles |
GreenFirst | GreenFirst Forest Products, Inc. |
IESO | Independent Electricity System Operator |
LTF | LignoTech Florida LLC |
MACD | Market Assessment and Compliance Division |
MOS | Minutes of Settlement |
MT | Metric ton |
Purchase Right | Board-declared dividend of one preferred share purchase right for each outstanding share of RYAM common stock |
ROU | Right-of-use |
RYAM, the Company, our, we, us | Rayonier Advanced Materials Inc. and its consolidated subsidiaries |
SEC | United States Securities and Exchange Commission |
SG&A | Selling, general and administrative expense |
SOFR | Secured Overnight Financing Rate |
TSA | Transition Services Agreement |
TSR | Total shareholder return |
U.S. | United States of America |
USD | United States of America dollar |
USDOC | United States Department of Commerce |
Part I. Financial Information
Item 1. Financial Statements
Rayonier Advanced Materials Inc.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
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| Three Months Ended | | Nine Months Ended |
| September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Net Sales | $ | 466,346 | | | $ | 374,014 | | | $ | 1,217,282 | | | $ | 1,033,712 | |
Cost of Sales | (419,804) | | | (354,678) | | | (1,138,118) | | | (971,672) | |
Gross Margin | 46,542 | | | 19,336 | | | 79,164 | | | 62,040 | |
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Selling, general and administrative expenses | (19,905) | | | (17,473) | | | (68,041) | | | (51,548) | |
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Foreign exchange gains | 3,025 | | | 3,315 | | | 4,480 | | | 582 | |
Other operating expense, net | (1,133) | | | (2,352) | | | (5,764) | | | (7,345) | |
Operating Income | 28,529 | | | 2,826 | | | 9,839 | | | 3,729 | |
Interest expense | (16,433) | | | (17,185) | | | (49,318) | | | (49,003) | |
Interest income and other, net | 4,071 | | | 2,113 | | | 6,241 | | | 379 | |
Other components of pension and OPEB, excluding service costs | 1,009 | | | 803 | | | 1,910 | | | 1,545 | |
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Gain (loss) on GreenFirst equity securities | — | | | (7,955) | | | 5,197 | | | (7,955) | |
Gain on debt extinguishment | 46 | | | 2,326 | | | 519 | | | 2,326 | |
Income (Loss) from Continuing Operations Before Income Taxes | 17,222 | | | (17,072) | | | (25,612) | | | (48,979) | |
Income tax (expense) benefit (Note 16) | 1,824 | | | 4,101 | | | (3,230) | | | 28,665 | |
Equity in loss of equity method investment | (691) | | | (423) | | | (2,127) | | | (994) | |
Income (Loss) from Continuing Operations | 18,355 | | | (13,394) | | | (30,969) | | | (21,308) | |
Income from discontinued operations, net of taxes (Note 2) | 11,252 | | | 8,636 | | | 12,458 | | | 111,751 | |
Net Income (Loss) | $ | 29,607 | | | $ | (4,758) | | | $ | (18,511) | | | $ | 90,443 | |
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Basic Earnings Per Common Share (Note 13) | | | | | | | |
Income (loss) from continuing operations | $ | 0.29 | | | $ | (0.21) | | | $ | (0.48) | | | $ | (0.33) | |
Income from discontinued operations | 0.18 | | | 0.14 | | | 0.20 | | | 1.76 | |
Net income (loss) per common share-basic | $ | 0.47 | | | $ | (0.07) | | | $ | (0.28) | | | $ | 1.43 | |
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Diluted Earnings Per Common Share (Note 13) | | | | | | | |
Income (loss) from continuing operations | $ | 0.28 | | | $ | (0.21) | | | $ | (0.48) | | | $ | (0.33) | |
Income from discontinued operations | 0.17 | | | 0.14 | | | 0.20 | | | 1.76 | |
Net income (loss) per common share-diluted | $ | 0.45 | | | $ | (0.07) | | | $ | (0.28) | | | $ | 1.43 | |
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| Three Months Ended | | Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Net sales | $ | 385,413 | | | $ | 399,220 | | | $ | 852,174 | | | $ | 750,936 | |
Cost of sales | (370,785) | | | (372,525) | | | (800,106) | | | (718,314) | |
Gross margin | 14,628 | | | 26,695 | | | 52,068 | | | 32,622 | |
Selling, general and administrative expense | (17,996) | | | (28,029) | | | (37,491) | | | (48,137) | |
Foreign exchange gain (loss) | (1,461) | | | 1,950 | | | (2,134) | | | 1,454 | |
Other operating expense, net | (1,627) | | | (3,513) | | | (2,305) | | | (4,629) | |
Operating income (loss) | (6,456) | | | (2,897) | | | 10,138 | | | (18,690) | |
Interest expense | (15,438) | | | (16,687) | | | (30,934) | | | (32,885) | |
Other components of pension and OPEB, excluding service costs (Note 14) | 399 | | | (109) | | | (1,335) | | | 901 | |
Gain (loss) on GreenFirst equity securities (Note 2) | — | | | (3,703) | | | — | | | 5,197 | |
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Other income, net | 3,307 | | | 3,155 | | | 3,613 | | | 2,642 | |
Loss from continuing operations before income taxes | (18,188) | | | (20,241) | | | (18,518) | | | (42,835) | |
Income tax (expense) benefit (Note 15) | 3,249 | | | (3,656) | | | 5,835 | | | (5,052) | |
Equity in loss of equity method investment | (683) | | | (1,046) | | | (1,332) | | | (1,436) | |
Loss from continuing operations | (15,622) | | | (24,943) | | | (14,015) | | | (49,323) | |
Income (loss) from discontinued operations, net of taxes (Note 2) | (1,128) | | | 1,676 | | | (1,128) | | | 1,205 | |
Net loss | $ | (16,750) | | | $ | (23,267) | | | $ | (15,143) | | | $ | (48,118) | |
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Basic and Diluted earnings per common share (Note 12) | | | | | | | |
Loss from continuing operations | $ | (0.24) | | | $ | (0.39) | | | $ | (0.22) | | | $ | (0.77) | |
Income (loss) from discontinued operations | (0.02) | | | 0.03 | | | (0.02) | | | 0.02 | |
Net loss per common share | $ | (0.26) | | | $ | (0.36) | | | $ | (0.24) | | | $ | (0.75) | |
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See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Consolidated Statements of Comprehensive Income (Loss)Loss
(Unaudited)
(in thousands)
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| Three Months Ended | | Nine Months Ended |
| September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Net Income (Loss) | $ | 29,607 | | | $ | (4,758) | | | $ | (18,511) | | | $ | 90,443 | |
Other Comprehensive Income (Loss), net of tax (Note 11): | | | | | | | |
Foreign currency translation adjustments | (14,697) | | | (4,336) | | | (30,561) | | | (10,558) | |
Unrealized gain (loss) on derivative instruments | 67 | | | 86 | | | 224 | | | (2,767) | |
Net gain from pension and postretirement plans | 1,948 | | | 6,177 | | | 5,844 | | | 12,842 | |
Total other comprehensive income (loss) | (12,682) | | | 1,927 | | | (24,493) | | | (483) | |
Comprehensive Income (Loss) | $ | 16,925 | | | $ | (2,831) | | | $ | (43,004) | | | $ | 89,960 | |
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| Three Months Ended | | Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Net loss | $ | (16,750) | | | $ | (23,267) | | | $ | (15,143) | | | $ | (48,118) | |
Other comprehensive income (loss), net of tax (Note 10) | | | | | | | |
Foreign currency translation adjustment | (109) | | | (9,582) | | | 4,103 | | | (15,864) | |
Unrealized gain on derivative instruments | 48 | | | 77 | | | 103 | | | 157 | |
Net gain (loss) on employee benefit plans | (2,240) | | | 1,948 | | | (2,367) | | | 3,896 | |
Total other comprehensive income (loss) | (2,301) | | | (7,557) | | | 1,839 | | | (11,811) | |
Comprehensive loss | $ | (19,051) | | | $ | (30,824) | | | $ | (13,304) | | | $ | (59,929) | |
See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and par value amounts)
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| September 24, 2022 | | December 31, 2021 |
Assets |
Current Assets | | | |
Cash and cash equivalents | $ | 131,673 | | | $ | 253,307 | |
Accounts receivable, net (Note 3) | 217,358 | | | 181,604 | |
Inventory (Note 4) | 269,526 | | | 230,691 | |
Income tax receivable | 1,051 | | | 21,411 | |
Investment in GreenFirst equity securities (Note 10) | — | | | 38,510 | |
Prepaid and other current assets | 68,652 | | | 50,597 | |
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Total current assets | 688,260 | | | 776,120 | |
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Property, Plant and Equipment (net of accumulated depreciation of $1,703,459 and $1,642,442 as of September 24, 2022 and December 31, 2021, respectively) | 1,132,128 | | | 1,146,162 | |
Deferred Tax Assets | 327,807 | | | 335,119 | |
Intangible Assets, net | 26,175 | | | 31,432 | |
Other Assets | 162,051 | | | 156,191 | |
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Total Assets | $ | 2,336,421 | | | $ | 2,445,024 | |
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Liabilities and Stockholders’ Equity |
Current Liabilities | | | |
Accounts payable | $ | 154,140 | | | $ | 169,456 | |
Accrued and other current liabilities (Note 6) | 153,566 | | | 136,124 | |
Debt due within one year (Note 7) | 21,554 | | | 37,680 | |
Current environmental liabilities (Note 8) | 11,273 | | | 11,303 | |
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Total current liabilities | 340,533 | | | 354,563 | |
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Long-Term Debt (Note 7) | 851,006 | | | 891,031 | |
Long-Term Environmental Liabilities (Note 8) | 159,027 | | | 159,919 | |
Pension and Other Postretirement Benefits | 159,149 | | | 170,317 | |
Deferred Tax Liabilities | 16,782 | | | 20,485 | |
Other Liabilities | 30,201 | | | 34,366 | |
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Commitments and Contingencies (Note 18) | | | |
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Stockholders’ Equity | | | |
Common stock: 140,000,000 shares authorized at $0.01 par value, 63,971,166 and 63,738,409 issued and outstanding as of September 24, 2022 and December 31, 2021, respectively | 639 | | | 637 | |
Additional paid-in capital | 417,216 | | | 408,834 | |
Retained earnings | 470,831 | | | 489,342 | |
Accumulated other comprehensive loss (Note 11) | (108,963) | | | (84,470) | |
Total Stockholders’ Equity | 779,723 | | | 814,343 | |
Total Liabilities and Stockholders’ Equity | $ | 2,336,421 | | | $ | 2,445,024 | |
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| July 1, 2023 | | December 31, 2022 |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 156,860 | | | $ | 151,803 | |
Accounts receivable, net (Note 3) | 177,465 | | | 211,526 | |
Inventory (Note 4) | 219,313 | | | 265,334 | |
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Prepaid and other current assets | 85,976 | | | 60,867 | |
Total current assets | 639,614 | | | 689,530 | |
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Property, plant and equipment (net of accumulated depreciation of $1,769,179 and $1,721,898, respectively) | 1,151,720 | | | 1,151,268 | |
Deferred tax assets | 327,015 | | | 322,164 | |
Intangible assets, net | 20,918 | | | 24,423 | |
Other assets | 166,735 | | | 160,143 | |
Total assets | $ | 2,306,002 | | | $ | 2,347,528 | |
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Liabilities and Stockholders’ Equity | | | |
Current liabilities | | | |
Accounts payable | $ | 179,497 | | | $ | 163,962 | |
Accrued and other current liabilities (Note 6) | 138,573 | | | 164,369 | |
Debt due within one year (Note 7) | 81,525 | | | 14,617 | |
Current environmental liabilities (Note 8) | 10,754 | | | 10,732 | |
Total current liabilities | 410,349 | | | 353,680 | |
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Long-term debt (Note 7) | 752,804 | | | 838,508 | |
Non-current environmental liabilities (Note 8) | 159,103 | | | 159,949 | |
Pension and other postretirement benefits (Note 14) | 121,015 | | | 119,571 | |
Deferred tax liabilities | 18,663 | | | 17,021 | |
Other liabilities | 30,051 | | | 29,486 | |
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Commitments and contingencies (Note 17) | | | |
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Stockholders’ Equity | | | |
Common stock: 140,000,000 shares authorized at $0.01 par value, 65,343,418 and 64,020,761 issued and outstanding, respectively | 654 | | | 640 | |
Additional paid-in capital | 416,042 | | | 418,048 | |
Retained earnings | 459,280 | | | 474,423 | |
Accumulated other comprehensive loss (Note 10) | (61,959) | | | (63,798) | |
Total stockholders’ equity | 814,017 | | | 829,313 | |
Total liabilities and stockholders’ equity | $ | 2,306,002 | | | $ | 2,347,528 | |
See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Consolidated Statements of Cash FlowsStockholders’ Equity
(Unaudited)
(in thousands)thousands, except share data)
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| Nine Months Ended | |
| September 24, 2022 | | September 25, 2021 | |
Operating Activities | | | | |
Net income (loss) | $ | (18,511) | | | $ | 90,443 | | |
Income from discontinued operations | (12,458) | | | (111,751) | | |
Adjustments to reconcile income (loss) from continuing operations to cash provided by operating activities: | | | | |
Depreciation and amortization | 96,294 | | | 101,284 | | |
Stock-based incentive compensation expense | 8,687 | | | 1,620 | | |
Deferred income tax expense (benefit) | 372 | | | (29,569) | | |
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Gain on debt extinguishment | (519) | | | (2,326) | | |
(Gain) loss on GreenFirst equity securities | (5,197) | | | 7,955 | | |
Net periodic benefit cost of pension and other postretirement plans | 4,489 | | | 7,338 | | |
Loss on disposal of property, plant and equipment | 2,917 | | | 801 | | |
Unrealized gain on derivative instruments | — | | | (3,787) | | |
Unrealized gain from foreign currency | (6,853) | | | (1,304) | | |
Other | 5,908 | | | 5,814 | | |
Changes in operating assets and liabilities: | | | | |
Receivables | (41,599) | | | (36,264) | | |
Inventories | (41,504) | | | (33,560) | | |
Accounts payable | (2,393) | | | (2,903) | | |
Accrued liabilities | 23,620 | | | 25,858 | | |
Other | (338) | | | 30,263 | | |
Contributions to pension and other postretirement plans | (5,467) | | | (5,243) | | |
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Cash Provided by Operating Activities-Continuing Operations | 7,448 | | | 44,669 | | |
Cash Provided by Operating Activities-Discontinued Operations | — | | | 162,230 | | |
Cash Provided by Operating Activities | 7,448 | | | 206,899 | | |
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Investing Activities | | | | |
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Capital expenditures, net | (114,159) | | | (61,029) | | |
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Investment in equity method investment | — | | | (4,142) | | |
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Cash Used in Investing Activities-Continuing Operations | (114,159) | | | (65,171) | | |
Cash Provided by Investing Activities-Discontinued Operations | 44,428 | | | 182,690 | | |
Cash Provided by (Used in) Investing Activities | (69,731) | | | 117,519 | | |
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Financing Activities | | | | |
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Other borrowings | 5,721 | | | — | | |
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Repayment of long-term debt | (51,128) | | | (131,171) | | |
Short-term financing, net | (4,990) | | | (4,492) | | |
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Common stock repurchased | (303) | | | (1,422) | | |
Debt issue costs | — | | | (636) | | |
Other | (282) | | | — | | |
Cash Used in Financing Activities | (50,982) | | | (137,721) | | |
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Change in cash and cash equivalents | (113,265) | | | 186,697 | | |
Net effect of foreign exchange on cash and cash equivalents | (8,369) | | | (1,194) | | |
Balance, beginning of period | 253,307 | | | 93,653 | | |
Balance, end of period | $ | 131,673 | | | $ | 279,156 | | |
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| Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity |
| Shares | | Par Value | | |
Three months ended July 1, 2023 | | | | | | | | | | | |
Balance at April 1, 2023 | 65,106,348 | | | $ | 651 | | | $ | 414,406 | | | $ | 476,030 | | | $ | (59,658) | | | $ | 831,429 | |
Net loss | — | | | — | | | — | | | (16,750) | | | — | | | (16,750) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (2,301) | | | (2,301) | |
Issuance of common stock under incentive stock plans | 266,321 | | | 3 | | | (3) | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | 1,893 | | | — | | | — | | | 1,893 | |
Repurchase of common stock(a) | (29,251) | | | — | | | (254) | | | — | | | — | | | (254) | |
Balance at July 1, 2023 | 65,343,418 | | | $ | 654 | | | $ | 416,042 | | | $ | 459,280 | | | $ | (61,959) | | | $ | 814,017 | |
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Three months ended June 25, 2022 | | | | | | | | | | | |
Balance at March 26, 2022 | 63,849,150 | | | $ | 638 | | | $ | 410,788 | | | $ | 464,491 | | | $ | (88,724) | | | $ | 787,193 | |
Net loss | — | | | — | | | — | | | (23,267) | | | — | | | (23,267) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (7,557) | | | (7,557) | |
Issuance of common stock under incentive stock plans | 122,016 | | | 1 | | | (1) | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | 4,470 | | | — | | | — | | | 4,470 | |
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Balance at June 25, 2022 | 63,971,166 | | | $ | 639 | | | $ | 415,257 | | | $ | 441,224 | | | $ | (96,281) | | | $ | 760,839 | |
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Six months ended July 1, 2023 | | | | | | | | | | | |
Balance at December 31, 2022 | 64,020,761 | | | $ | 640 | | | $ | 418,048 | | | $ | 474,423 | | | $ | (63,798) | | | $ | 829,313 | |
Net loss | | | — | | | — | | | (15,143) | | | — | | | (15,143) | |
Other comprehensive income, net of tax | | | — | | | — | | | — | | | 1,839 | | | 1,839 | |
Issuance of common stock under incentive stock plans | 1,966,815 | | | 20 | | | (20) | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | 3,371 | | | — | | | — | | | 3,371 | |
Repurchase of common stock(a) | (644,158) | | | (6) | | | (5,357) | | | — | | | — | | | (5,363) | |
Balance at July 1, 2023 | 65,343,418 | | | $ | 654 | | | $ | 416,042 | | | $ | 459,280 | | | $ | (61,959) | | | $ | 814,017 | |
| | | | | | | | | | | |
Six months ended June 25, 2022 | | | | | | | | | | | |
Balance at December 31, 2021 | 63,738,409 | | | $ | 637 | | | $ | 408,834 | | | $ | 489,342 | | | $ | (84,470) | | | $ | 814,343 | |
Net loss | — | | | — | | | — | | | (48,118) | | | — | | | (48,118) | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (11,811) | | | (11,811) | |
Issuance of common stock under incentive stock plans | 294,936 | | | 3 | | | (3) | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | 6,728 | | | — | | | — | | | 6,728 | |
Repurchase of common stock(a) | (62,179) | | | (1) | | | (302) | | | — | | | — | | | (303) | |
Balance at June 25, 2022 | 63,971,166 | | | $ | 639 | | | $ | 415,257 | | | $ | 441,224 | | | $ | (96,281) | | | $ | 760,839 | |
——————————————
(a) Repurchased to satisfy tax withholding requirements related to the issuance of stock under the Company’s incentive stock plans.
See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
| | | | | | | | | | | | |
| Six Months Ended | |
| July 1, 2023 | | June 25, 2022 | |
Operating activities | | | | |
Net loss | $ | (15,143) | | | $ | (48,118) | | |
Adjustments to reconcile net loss to cash provided by (used in) operating activities: | | | | |
(Income) loss from discontinued operations | 1,128 | | | (1,205) | | |
Depreciation and amortization | 67,689 | | | 61,144 | | |
Stock-based compensation expense | 3,371 | | | 6,728 | | |
| | | | |
Deferred income tax expense (benefit) | (2,312) | | | 1,536 | | |
| | | | |
Gain on GreenFirst equity securities | — | | | (5,197) | | |
| | | | |
Net periodic benefit cost of pension and other postretirement plans | 2,045 | | | 2,972 | | |
Unrealized (gain) loss on foreign currency | 1,669 | | | (2,729) | | |
(Gain) loss on disposal of property, plant and equipment | (1,376) | | | 2,756 | | |
| | | | |
Other | 2,927 | | | 3,645 | | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | 36,139 | | | (31,100) | | |
| | | | |
Inventories | 46,680 | | | (13,156) | | |
Accounts payable | 3,181 | | | 12,248 | | |
Accrued liabilities | (27,981) | | | 14,478 | | |
Other | (27,440) | | | (36,625) | | |
Contributions to pension and other postretirement plans | (6,717) | | | (3,659) | | |
| | | | |
| | | | |
| | | | |
Cash provided by (used in) operating activities | 83,860 | | | (36,282) | | |
| | | | |
Investing activities | | | | |
Capital expenditures, net | (54,154) | | | (86,589) | | |
Investment in equity method investment | (169) | | | — | | |
Cash used in investing activities-continuing operations | (54,323) | | | (86,589) | | |
Cash provided by investing activities-discontinued operations | — | | | 43,288 | | |
Cash used in investing activities | (54,323) | | | (43,301) | | |
| | | | |
Financing activities | | | | |
| | | | |
Borrowing of long-term debt | 1,509 | | | 5,569 | | |
Repayment of long-term debt | (20,305) | | | (25,215) | | |
Short-term financing, net | (1,479) | | | (1,720) | | |
| | | | |
Repurchase of common stock | (5,363) | | | (304) | | |
| | | | |
Cash used in financing activities | (25,638) | | | (21,670) | | |
| | | | |
Net increase (decrease) in cash and cash equivalents | 3,899 | | | (101,253) | | |
Net effect of foreign exchange on cash and cash equivalents | 1,158 | | | (4,306) | | |
Balance, beginning of period | 151,803 | | | 253,307 | | |
Balance, end of period | $ | 156,860 | | | $ | 147,748 | | |
| | | | |
Supplemental cash flow information: | | | | |
Interest paid | $ | (28,404) | | | $ | (29,430) | | |
Income taxes paid, net | (7,090) | | | (6,331) | | |
Capital assets purchased on account | 41,846 | | | 29,518 | | |
See Notes to Consolidated Financial Statements.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands unless otherwise stated)
1. Basis of Presentation and New Accounting Pronouncements
Basis of Presentation
The unaudited Consolidated Financial Statementsconsolidated financial statements and notes thereto of Rayonier Advanced Materials Inc. (the “Company”)the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”)GAAP for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”).SEC. In the opinion of management, these Consolidated Financial Statementsconsolidated financial statements and notes reflect all adjustments, (all of which areincluding all normal recurring adjustments)adjustments, necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. These statements and notes should be read in conjunction with the Consolidated Financial Statementsconsolidated financial statements and supplementary data included in the Company’s Annual Report on2022 Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 1, 2022 (the “2021 Form 10-K”).10-K.
As a result of the sale of its lumber and newsprint assets in August 2021, to GreenFirst Forest Products, Inc. (“GreenFirst”), the Company presents the results for those operations and any associated impacts as discontinued operations. Unless otherwise stated, information in these notes to Consolidated Financial Statementsconsolidated financial statements relates to continuing operations. The Company presents businesses that represent components as discontinued operations when they meet the criteria for held for sale or are sold, and their disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results. See Note 2 —2—Discontinued Operations for further information.information on the sale.
Recent Accounting Developments
There have been no newly issuednew or recently adopted accounting pronouncements impacting the Company’s unaudited consolidated interim financial statements.
Subsequent Events
In October 2022,Duties on Canadian Softwood Lumber Sold to the U.S.
On July 26, 2023, the USDOC completed its fourth administrative review of duties applied to Canadian softwood lumber exports to the U.S. during 2021 and reduced rates applicable to the Company repaidto a Canadian dollar (“CAD”) fixed interest ratecombined 8.0 percent. In connection with this development, in the third quarter the Company will record a pre-tax gain of approximately $2 million in “income (loss) from discontinued operations, net of taxes” and increase the long-term receivable related to the USDOC administrative reviews to approximately $40 million.
Term Loan
On July 20, 2023, the Company secured term loan financing of $250 million in aggregate principal amount and received net proceeds of $243 million after original issue discount, which will be used, together with cash on hand, to redeem the remaining $318 million in aggregate principal balance of the 2024 Notes and pay fees and expenses related to the transaction. The Company will record a loss on debt extinguishment of approximately $1 million in the third quarter related to the redemption.
The 2027 Term Loan matures in July 2027, bears interest at a rate per annum equal to three-month Term SOFR (or, if greater, 3.00 percent) plus 8.00 percent and requires quarterly principal payments of 0.50 percent of the initial principal amount commencing in the fourth quarter of CAD $12 million (U.S. dollar (“USD”) $9 million).2023. The Company may voluntarily make prepayments at any time, subject to customary breakage costs and, if within the first three anniversaries of closing, an additional make-whole premium.
The agreement governing the 2027 Term Loan contains various customary covenants that limit the ability of the Company and its restricted subsidiaries, as defined by the term loan agreement and in particular the Company’s French subsidiaries, to take certain specified actions, subject to certain exceptions, including: incurring debt or liens, making investments, entering into mergers, consolidations, and acquisitions, paying dividends and making other restricted payments. Additionally, the 2027 Term Loan contains customary affirmative covenants and customary events of default (subject, in certain cases, to customary grace or cure periods), including, without limitation, late payment, breach of covenant, bankruptcy, judgment and defaults under certain other indebtedness and changes in control.
2. Discontinued Operations
In August 2021, the Company completed the sale of its lumber and newsprint facilities and certain related assets located in Ontario and Québec Canada to GreenFirst for cash of $232 million, which included 28.7 million shares of GreenFirst common stock andwith a credit note issued todeemed fair value of $42 million. In the Company by GreenFirst insecond quarter of 2022, the amount of CAD $8 million (approximately USD $5 million after present value discount). The Company sold the GreenFirst common shares for $43 million in the second quarter of 2022.million. Prior to the sale of shares, the GreenFirst common shares were accounted for at fair value, with changes in fair value recorded in the consolidated statements of operations. See Note 10 — Fair Value Measurements for further information. The shares sale agreement contains a purchase price protection clause whereby the Company is entitled to participate in further share price appreciation under certain circumstances over the next 18 months.
The cash consideration received at closing was preliminary and remains subject to final purchase price and other sale-related adjustments. During the first quarter of 2022, the Company trued up certain sale-related items with GreenFirst for a total net cash outflow of $3 million, as expected and previously disclosed. No adjustments have been made in 2022 to the gain on sale recorded during the year endeduntil December 31, 2021. Pursuant to the terms of the asset purchase agreement, GreenFirst and the Company continue efforts to finalize the closing inventory valuation adjustment.
In connection with the sale, the parties entered into a Transition Services Agreement (“TSA”) whereby the Company would provide certain transitional services to GreenFirst, including information technology, accounting, treasury and other services, following the closing of the transaction. The transitional services have been completed and the TSA was terminated during the second quarter of 2022.2023.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
(in thousands unless otherwise stated)
DuringAs part of the third quartersale of 2022, the U.S. Departmentlumber assets, the Company retained all rights and obligations to softwood duties generated or incurred through the closing date of Commerce (the “USDOC”) completed its third administrative review of duties applied to Canadianthe sale. In total, the Company paid $112 million in softwood lumber exportsduties from 2017 through August 2021, and expects to receive all or the U.S. during 2020vast majority of these duties upon final resolution of the dispute between the USDOC and reduced rates applicable toCanada. As of July 1, 2023, the Company tohad a combined 8.6 percent. In connection with this development, the Company recorded a $16$38 million gain, pre-tax, in the results of discontinued operations within selling, general and administrative expenses and other, and increased the long-term receivable related to the USDOC administrative reviews completed to $38 million. See Note 18 — Commitmentsdate.
During the three and Contingencies for further information relatingsix months ended July 1, 2023, the Company incurred $2 million related to this dispute.the settlement of a claim pursuant to the representations and warranties in the asset purchase agreement.
Income (loss) from discontinued operations iswas comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Net sales (a) | $ | — | | | $ | 83,994 | | | $ | — | | | $ | 442,833 | |
Cost of sales | — | | | (68,224) | | | 155 | | | (237,912) | |
Gross margin | — | | | 15,770 | | | 155 | | | 204,921 | |
Selling, general and administrative expenses and other | 15,313 | | | (7,571) | | | 16,808 | | | (26,465) | |
Operating income | 15,313 | | | 8,199 | | | 16,963 | | | 178,456 | |
Interest expense (b) | (4) | | | (1,973) | | | (13) | | | (7,290) | |
Other non-operating income | — | | | 254 | | | — | | | 967 | |
Income from discontinued operations before income taxes | 15,309 | | | 6,480 | | | 16,950 | | | 172,133 | |
Income tax expense | (4,057) | | | (4,239) | | | (4,492) | | | (66,777) | |
Income from discontinued operations, net of taxes | 11,252 | | | 2,241 | | | 12,458 | | | 105,356 | |
Gain on sale of discontinued operations, pre-tax | — | | | 9,217 | | | — | | | 9,217 | |
Income tax expense on gain | — | | | (2,822) | | | — | | | (2,822) | |
Gain on sale of discontinued operations, net of tax | — | | | 6,395 | | | — | | | 6,395 | |
Income from discontinued operations | $ | 11,252 | | | $ | 8,636 | | | $ | 12,458 | | | $ | 111,751 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
| | | | | | | |
Cost of sales | $ | — | | | $ | 326 | | | $ | — | | | $ | 153 | |
Gross margin | — | | | 326 | | | — | | | 153 | |
Selling, general and administrative and other operating income (expense) | (1,533) | | | 1,953 | | | (1,533) | | | 1,495 | |
Operating income (loss) | (1,533) | | | 2,279 | | | (1,533) | | | 1,648 | |
| | | | | | | |
Other non-operating expense | — | | | (4) | | | — | | | (9) | |
Income (loss) from discontinued operations before income taxes | (1,533) | | | 2,275 | | | (1,533) | | | 1,639 | |
Income tax (expense) benefit | 405 | | | (599) | | | 405 | | | (434) | |
Income (loss) from discontinued operations, net of taxes | $ | (1,128) | | | $ | 1,676 | | | $ | (1,128) | | | $ | 1,205 | |
3. Accounts Receivable, Net
Accounts receivable, net included the following:
| | | | | | | | | | | |
| July 1, 2023 | | December 31, 2022 |
Accounts receivable, trade | $ | 145,045 | | | $ | 171,144 | |
Accounts receivable, other(a) | 32,927 | | | 41,446 | |
Allowance for credit loss | (507) | | | (1,064) | |
Accounts receivable, net | $ | 177,465 | | | $ | 211,526 | |
——————————————
(a) There were no intercompany sales for the three and nine months ended September 24, 2022 and $8 million and $31 million for the three and nine months ended September 25, 2021, respectively.
(b) The Company allocated interest expense to discontinued operations based on the total portion of debt not attributable to other operations repaid as a result of the transaction.
Other discontinued operations information includes the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Depreciation and amortization | $ | — | | | $ | — | | | $ | — | | | $ | 3,172 | |
Capital expenditures | $ | — | | | $ | 2,119 | | | $ | — | | | $ | 7,933 | |
3. Accounts Receivable, Net
The Company’s accounts receivables included the following:
| | | | | | | | | | | |
| September 24, 2022 | | December 31, 2021 |
Accounts receivable, trade | $ | 180,492 | | | $ | 131,371 | |
Accounts receivable, other (a) | 38,158 | | | 51,007 | |
| | | |
Allowance for expected credit losses | (1,292) | | | (774) | |
Accounts receivable, net | $ | 217,358 | | | $ | 181,604 | |
——————————————
(a)Consists primarily of value added/value-added/consumption taxes, grants receivable and accrued billings due from government agencies.
4. Inventory
Inventory included the following:
| | | | | | | | | | | |
| July 1, 2023 | | December 31, 2022 |
Finished goods | $ | 156,469 | | | $ | 198,931 | |
Work-in-progress | 5,023 | | | 5,230 | |
Raw materials | 50,637 | | | 52,967 | |
Manufacturing and maintenance supplies | 7,184 | | | 8,206 | |
Inventory | $ | 219,313 | | | $ | 265,334 | |
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
4. Inventory(in thousands unless otherwise stated)
The Company’s inventory included the following:
| | | | | | | | | | | |
| September 24, 2022 | | December 31, 2021 |
Finished goods | $ | 202,576 | | | $ | 175,832 | |
Work-in-progress | 6,903 | | | 6,533 | |
Raw materials | 53,527 | | | 41,974 | |
Manufacturing and maintenance supplies | 6,520 | | | 6,352 | |
Inventory | $ | 269,526 | | | $ | 230,691 | |
5. Leases
The Company’s operating and finance leases are primarily for corporate offices, warehouse space, rail cars and equipment. As of September 24, 2022,July 1, 2023, the Company’s leases hadhave remaining lease terms of 1less than one year to 14.113.3 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 right of use (“ROU”)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
Financial and other information related to the operating lease ROU assets and liabilities as of September 24, 2022 and December 31, 2021 was 8.7 percent and 7.6 percent, respectively. The weighted average discount rate used in determining the finance lease ROU assets and liabilities as of September 24, 2022 and December 31, 2021 was 7.0 percent.
The Company’s operating and finance lease cost is as follows:leases follow:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Operating Leases | | | | | | | |
Operating lease expense | $ | 1,973 | | | $ | 1,416 | | | $ | 5,821 | | | $ | 4,254 | |
Finance Leases | | | | | | | |
Amortization of ROU assets | 95 | | | 89 | | | 281 | | | 262 | |
Interest | 34 | | | 40 | | | 106 | | | 125 | |
Total | $ | 2,102 | | | $ | 1,545 | | | $ | 6,208 | | | $ | 4,641 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Operating lease cost | $ | 1,791 | | | $ | 1,917 | | | $ | 3,485 | | | $ | 3,848 | |
| | | | | | | |
Finance lease cost | | | | | | | |
Amortization of ROU assets | 100 | | | 94 | | | 199 | | | 185 | |
Interest | 29 | | | 35 | | | 59 | | | 72 | |
Total lease cost | $ | 1,920 | | | $ | 2,046 | | | $ | 3,743 | | | $ | 4,105 | |
As of September 24, 2022, the weighted average remaining lease term was 5.7 years and 4.1 years for operating leases and financing leases, respectively. As of December 31, 2021, the weighted average remaining lease term was 5.3 years and 4.9 years for operating leases and finance leases, respectively. Cash provided by operating activities includes approximately $2 million and $5 million from operating lease payments made during the nine months ended September 24, 2022 and September 25, 2021, respectively. | | | | | | | | | | | | | | | | | |
| Balance Sheet Classification | | July 1, 2023 | | December 31, 2022 |
Operating leases | | | | | |
ROU assets | Other assets | | $ | 16,207 | | | $ | 15,623 | |
Lease liabilities, current | Accrued and other current liabilities | | 4,465 | | | 4,741 | |
Lease liabilities, non-current | Other liabilities | | 12,573 | | | 11,399 | |
| | | | | |
Finance leases | | | | | |
ROU assets | Property, plant and equipment, net | | 1,263 | | | 1,448 | |
Lease liabilities | Long-term debt | | 1,561 | | | 1,760 | |
| | | | | | | | | | | |
| Six Months Ended |
| July 1, 2023 | | June 25, 2022 |
Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities | $ | 1,701 | | | $ | 1,879 | |
Operating lease ROU assets obtained in exchange for lease liabilities | 1,946 | | | 59 | |
Finance lease cash flows were immaterial during each of the ninethree and six months ended September 24, 2022July 1, 2023 and SeptemberJune 25, 2021.2022.
As of both September 24, 2022 and December 31, 2021, assets acquired under finance leases of $2 million are reflected in “property, plant and equipment, net” in the consolidated balance sheets. The Company’s finance leases are included in “long-term debt” and their maturities are disclosed in Note 7 — Debt and Finance Leases.
The Company’s consolidated balance sheets include the following operating lease assets and liabilities:
| | | | | | | | | | | | | | | | | |
| Balance Sheet Classification | | September 24, 2022 | | December 31, 2021 |
ROU assets | Other assets | | $ | 17,068 | | | $ | 18,316 | |
Lease liabilities, current | Accrued and other current liabilities | | $ | 5,024 | | | $ | 6,050 | |
Lease liabilities, non-current | Other liabilities | | $ | 12,423 | | | $ | 12,551 | |
| | | | | |
| | | | | | | | | | | | | | | |
| July 1, 2023 | | December 31, 2022 | | | | |
Operating leases | | | | | | | |
Weighted average remaining lease term (in years) | 5.8 | | 5.8 | | | | |
Weighted average discount rate | 8.7 | % | | 8.9 | % | | | | |
| | | | | | | |
Finance leases | | | | | | | |
Weighted average remaining lease term (in years) | 3.3 | | 3.8 | | | | |
Weighted average discount rate | 7.0 | % | | 7.0 | % | | | | |
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
Operating lease maturities as of September 24, 2022 were as follows:(in thousands unless otherwise stated)
| | | | | |
Remainder of 2022 | $ | 1,773 | |
2023 | 5,880 | |
2024 | 3,676 | |
2025 | 2,784 | |
2026 | 2,106 | |
Thereafter | 7,180 | |
Total minimum lease payments | 23,399 | |
Less: imputed interest | (5,952) | |
Present value of future minimum lease payments | $ | 17,447 | |
6. Accrued and Other Current Liabilities
The Company’s accruedAccrued and other current liabilities included the following:
| | | September 24, 2022 | | December 31, 2021 | | July 1, 2023 | | December 31, 2022 |
Accrued customer incentives | Accrued customer incentives | $ | 29,546 | | | $ | 26,726 | | Accrued customer incentives | $ | 26,063 | | | $ | 28,702 | |
Accrued payroll and benefits | Accrued payroll and benefits | 18,533 | | | 13,363 | | Accrued payroll and benefits | 14,898 | | | 13,763 | |
Accrued interest | Accrued interest | 15,290 | | | 19,153 | | Accrued interest | 17,294 | | | 18,877 | |
Accrued income taxes | Accrued income taxes | 7,639 | | | 9,210 | | Accrued income taxes | 2,914 | | | 9,321 | |
Accrued property and other taxes | Accrued property and other taxes | 9,341 | | | 4,074 | | Accrued property and other taxes | 6,561 | | | 3,065 | |
Deferred revenue (a) | Deferred revenue (a) | 20,796 | | | 22,518 | | Deferred revenue(a) | 21,080 | | | 21,645 | |
Other current liabilities(b) | Other current liabilities(b) | 52,421 | | | 41,080 | | Other current liabilities(b) | 49,763 | | | 68,996 | |
Accrued and other current liabilities | Accrued and other current liabilities | $ | 153,566 | | | $ | 136,124 | | Accrued and other current liabilities | $ | 138,573 | | | $ | 164,369 | |
——————————————
(a)Includes Included at both July 1, 2023 and December 31, 2022 was CAD $25 million (approximately USD $20(USD $19 million) associated with funds received in 2021 for the Canada Emergency Wage Subsidy (“CEWS”).CEWS. All CEWS claims are subject to mandatory audit. The Company will recognize amounts from these claims in income at the time that there is sufficient evidence that it will not be required to repay such amounts.
(b) Included at July 1, 2023 and December 31, 2022 was $17 million and $30 million, respectively, of energy-related payables associated with Tartas facility operations.
7. Debt and Finance Leases
The Company’s debtDebt and finance leases included the following:
| | | | | | | | | | | |
| September 24, 2022 | | December 31, 2021 |
ABL Credit Facility due 2025: $128 million available, bearing interest of 5.33% (3.08% LIBOR plus 2.25%) at September 24, 2022 | $ | — | | | $ | — | |
Senior Secured Notes due 2026 at a fixed interest rate of 7.625% | 475,000 | | | 475,000 | |
Senior Notes due 2024 at a fixed interest rate of 5.5% | 334,185 | | | 369,185 | |
Canadian dollar, fixed interest rate term loans with rates ranging from 5.50% to 6.86% and maturity dates ranging from October 2022 through April 2028, secured by certain assets of the Temiscaming mill | 47,218 | | | 65,451 | |
Other loans (a) | 19,048 | | | 18,280 | |
Short-term factoring facility-France | 2,127 | | | 7,118 | |
Finance lease obligation | 1,857 | | | 2,138 | |
Total debt principal payments due | 879,435 | | | 937,172 | |
Less: Debt premium, original issue discount and issuance costs, net | (6,875) | | | (8,461) | |
Total debt | 872,560 | | | 928,711 | |
Less: Debt due within one year | (21,554) | | | (37,680) | |
Long-term debt | $ | 851,006 | | | $ | 891,031 | |
| | | | | | | | | | | |
| July 1, 2023 | | December 31, 2022 |
ABL Credit Facility due 2025: $109 million available, bearing interest of 7.42% (5.17% adjusted SOFR plus 2.25% margin) at July 1, 2023 | $ | — | | | $ | — | |
7.625% Senior Secured Notes due 2026 | 464,640 | | | 475,000 | |
5.50% Senior Unsecured Notes due 2024 | 317,675 | | | 322,675 | |
5.50% CAD-based term loan due 2028 | 33,315 | | | 36,585 | |
Other loans(a) | 19,732 | | | 19,598 | |
Short-term factoring facility-France | 2,337 | | | 3,773 | |
Finance lease obligations | 1,561 | | | 1,760 | |
Total principal payments due | 839,260 | | | 859,391 | |
Less: unamortized debt premium, discount and issuance costs | (4,931) | | | (6,266) | |
Total debt | 834,329 | | | 853,125 | |
Less: debt due within one year | (81,525) | | | (14,617) | |
Long-term debt | $ | 752,804 | | | $ | 838,508 | |
——————————————
(a)Consist of loans for energy and bioethanol projects in FranceFrance..
In April 2023, the Company repurchased $10 million of its 2026 Notes through open-market transactions and retired the notes for cash of $9 million. A gain on extinguishment of $1 million for the repurchase was recorded to “other income, net” in the consolidated statements of operations.
In March 2023, the Company repurchased $5 million of its 2024 Notes through open-market transactions and retired the notes for cash of $5 million. An immaterial gain on extinguishment for the repurchase was recorded to “other income, net” in the consolidated statements of operations.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
During the third quarter of 2022, the Company repaid a Canadian dollar fixed interest rate term loan (in the amount of CAD $12 million (USD $9 million).thousands unless otherwise stated)
During the second and third quarters of 2022, the Company repurchased $20 million and $15 million, respectively, of its 5.5% unsecured senior notes due 2024 (the “Unsecured Notes”) through open-market transactions and retired the notes for cash of approximately $20 million and $15 million, respectively. A net gain of less than $1 million on the repurchases was recorded to “gain on debt extinguishment” in the consolidated statements of operations during the nine months ended September 24, 2022.
During the three and nine months ended September 25, 2021, the Company recorded a $2 million gain on extinguishment on the repurchase of $127 million of Unsecured Notes.
As of September 24, 2022,July 1, 2023, the Company’s debt principal payments, excluding finance lease obligations, were due as follows:
| | | | | |
Remainder of 2022 | $ | 14,515 | |
2023 | 9,995 | |
2024 | 344,890 | |
2025 | 10,594 | |
2026 | 485,028 | |
Thereafter | 12,556 | |
Total debt principal payments, excluding finance lease obligation | $ | 877,578 | |
| | | | | |
Remainder of 2023(a) | $ | 75,059 | |
2024(b) | 261,438 | |
2025 | 11,424 | |
2026 | 475,432 | |
2027 | 8,645 | |
Thereafter | 5,701 | |
Total debt principal payments | $ | 837,699 | |
——————————————
(a) Includes $68 million of the $318 million in aggregate principal balance of the 2024 Notes, which will be redeemed with cash on hand in the third quarter of 2023 in accordance with the 2027 Term Loan financing agreement.
(b) Includes the remaining $250 million principal balance of the 2024 Notes, which will be redeemed with the proceeds of the 2027 Term Loan in the third quarter of 2023. The 2027 Term Loan will mature in 2027. See Note 1—Basis of Presentation for further information on the refinancing of the 2024 Notes.
8. Environmental Liabilities
The Company’s environmental liabilities balance changed as follows during the ninesix months ended September 24, 2022:July 1, 2023:
| | | | | |
| |
Balance at December 31, 20212022 | $ | 171,222170,681 | |
Increase in liabilities | 2,8031,664 | |
Payments | (3,071)(2,645) | |
Foreign currency adjustments | (654)157 | |
Balance at September 24, 2022July 1, 2023 | 170,300169,857 | |
Less: Currentcurrent portion | (11,273)(10,754) | |
Long-termNon-current environmental liabilities | $ | 159,027159,103 | |
In addition to thethese 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 andor non-governmental parties; and changes in accounting rules or interpretations. Based on information available as of September 24, 2022,July 1, 2023, the Company estimates this exposure could range up to approximately $84$85 million, although no assurances can be given that this amount will not be exceeded given the factors described above. These potential additional costs are attributable to several sites and other applicable liabilities. Further, thisThis estimate excludes liabilities that would otherwise be considered reasonably possible liabilities whichbut for the fact that they are not currently estimable, primarily due to the factors discussed above.
Subject to the previous paragraph, the Company believes establishedits estimates of liabilities are sufficient for probable costs expected to be incurred over the next 20 years with respect to its environmental liabilities. However, no assurances are given theythat these estimates will be sufficient for the reasons described above and additional liabilities could have a material adverse effect on the Company’s financial position, results of operations and cash flows.
9. 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 has used derivative financial instruments to manage interest rate and foreign currency exchange rate exposure: it does not use derivatives for trading or speculative purposes.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
(in thousands unless otherwise stated)
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 (loss) 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.
In December 2020, the Company terminated all outstanding derivative instruments, which had been previously designated as hedging instruments and had various maturity dates through 2028. Accumulated gains and losses associated with these instruments were deferred as a component of accumulated other comprehensive income (loss) to be recognized in earnings as the underlying hedged transactions occur and affect earnings.
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 USD. Management may use foreign currency forward contracts to selectively hedge its foreign currency cash flows exposure and manage risk associated with changes in currency exchange rates. The Company’s principal foreign currency exposure is to the CAD, and to a lesser extent, the euro.
There were no derivatives designated as hedging instruments during the three and nine months ended September 24, 2022. The effects of derivatives designated as hedging instruments, the related changes in AOCI and the gains and losses in income for the three and nine months ended September 25, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | |
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| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | Three Months Ended September 25, 2021 | | | | | | |
Derivatives Designated as Hedging Instruments | | Gain (Loss) Recognized in OCI | | Gain (Loss) Reclassified from AOCI into Income | | Location on Statement of Income | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Foreign exchange forward contracts | | $ | — | | | $ | (99) | | | Interest income and other, net | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | Nine Months Ended September 25, 2021 | | | | | | |
Derivatives Designated as Hedging Instruments | | Gain (Loss) Recognized in OCI | | Gain (Loss) Reclassified from AOCI into Income | | Location on Statement of Income | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Foreign exchange forward contracts | | $ | — | | | $ | 4,088 | | | Cost of sales | | | | |
Foreign exchange forward contracts | | $ | — | | | $ | (301) | | | Interest income and other, net | | | | |
The unrealized gain (loss) in AOCI related to hedge derivatives is presented below:
| | | | | | | | | | | | | | |
| | September 24, 2022 | | December 31, 2021 |
| | | | |
Foreign exchange cash flow hedges, net of tax | | $ | (623) | | | $ | (847) | |
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
10.9. Fair Value Measurements
The following table presents the carrying amount, estimated fair values and categorization under the fair value hierarchy for financial instruments held by the Company, using market information and what management believes to be appropriate valuation methodologies:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 24, 2022 | | | December 31, 2021 |
| Carrying Amount | | Fair Value (b) | | | Carrying Amount | | Fair Value (b) |
Assets: | | Level 1 | | Level 2 | | | | Level 1 | | Level 2 | | |
Cash and cash equivalents | | | | | | | | | | | | | | |
Cash | $ | 97,771 | | | $ | 97,771 | | | $ | — | | | | $ | 253,307 | | | $ | 253,307 | | | $ | — | | | |
Money market and similar funds | 33,902 | | | 33,902 | | | — | | | | — | | | — | | | — | | | |
| | | | | | | | | | | | | | |
Investment in GreenFirst equity securities | — | | | — | | | — | | | | 38,510 | | | — | | | 38,510 | | | |
| | | | | | | | | | | | | | |
Liabilities: (a) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Fixed-rate long-term debt | $ | 868,576 | | | $ | — | | | $ | 823,481 | | | | $ | 919,455 | | | $ | — | | | $ | 964,308 | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| July 1, 2023 | | | December 31, 2022 |
| Carrying Amount | | Fair Value | | | Carrying Amount | | Fair Value |
| | Level 1 | | Level 2 | | | | Level 1 | | Level 2 | | |
Assets | | | | | | | | | | | | | | |
Cash and cash equivalents | | | | | | | | | | | | | | |
Cash | $ | 86,891 | | | $ | 86,891 | | | $ | — | | | | $ | 127,288 | | | $ | 127,288 | | | $ | — | | | |
Money market and similar funds | 69,969 | | | 69,969 | | | — | | | | 24,515 | | | 24,515 | | | — | | | |
| | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | |
Fixed-rate long-term debt(a) | $ | 830,431 | | | $ | — | | | $ | 769,672 | | | | $ | 847,591 | | | $ | — | | | $ | 838,502 | | | |
——————————————
(a)Liabilities exclude Excludes finance lease obligation.
(b) The Company did not have Level 3 assets or liabilities at September 24, 2022 or December 31, 2021.obligations.
The Company uses the following methods and assumptions in estimating the fair value of its financial instruments:
Cash and cash equivalents— Cash and cash equivalents are all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase and the carrying amount is equal to fair market value. The Company had $34 million ofmeasures its investments in money market and similar funds as of September 24, 2022, measured using level 1 inputs. The Company did not invest in any such funds as of December 31, 2021.
Debt — The fair value of fixed rate debt is based upon quoted market prices for debt with similar terms and maturities. The variableVariable rate debt adjusts with changes in the market rate therefore theand so carrying value approximates fair value.
Investment in GreenFirst shares — The Company received 28.7 million shares of GreenFirst common stock in connection with the sale of the lumber and newsprint assets to GreenFirst, which the Company was required to hold for a minimum of six months following the close of the transaction. Accordingly, prior to February 28, 2022, the fair value of these shares reflected a discount for lack of marketability (“DLOM”) given the restriction on sale by the Company. The primary inputs in the fair value estimate during the minimum holding period were expected term, dividend yield, volatility and risk-free rate. All inputs to the DLOM were observable. In May 2022, the Company sold the 28.7 million common shares for $43 million.
The following were the key inputs at each measurement date:
| | | | | | | | | | | |
| December 31, 2021 | | At closing of transaction |
Expected Term | 0.16 years | | 0.5 years |
Risk-free rate | 0.10 | % | | 0.20 | % |
Dividend yield | — | | | — | |
Volatility | 73.77 | % | | 92.04 | % |
DLOM | 6.77 | % | | 14.38 | % |
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
(in thousands unless otherwise stated)
11.10. Accumulated Other Comprehensive Income (Loss)Loss
The components of AOCI include:
| | | | | | | | | | | |
| Nine Months Ended |
| September 24, 2022 | | September 25, 2021 |
Unrecognized components of employee benefit plans, net of tax: | | | |
Balance, beginning of year | $ | (76,849) | | | $ | (146,614) | |
Other comprehensive gain (loss) before reclassifications | — | | | (236) | |
Income tax on other comprehensive loss | — | | | 61 | |
Reclassifications to earnings: (a) | | | |
Pension settlement loss | — | | | 226 | |
Amortization of losses | 7,466 | | | 12,258 | |
Amortization of prior service costs | 24 | | | 413 | |
| | | |
Income tax on reclassifications | (1,646) | | | (2,853) | |
Plans included in sale of assets to GreenFirst | — | | | 4,012 | |
Income Tax on plans included in sale of assets to GreenFirst | — | | | (1,039) | |
| | | |
Net comprehensive gain on employee benefit plans, net of tax | 5,844 | | | 12,842 | |
Balance, end of period | (71,005) | | | (133,772) | |
| | | |
Unrealized gain (loss) on derivative instruments, net of tax: | | | |
Balance, beginning of year | (847) | | | 1,834 | |
| | | |
| | | |
Reclassifications to earnings: (b) | | | |
| | | |
Foreign exchange contracts | 258 | | | (3,787) | |
Income tax on reclassifications | (34) | | | 1,020 | |
Net comprehensive gain (loss) on derivative instruments, net of tax | 224 | | | (2,767) | |
Balance, end of period | (623) | | | (933) | |
| | | |
Foreign currency translation adjustments: | | | |
Balance, beginning of year | (6,774) | | | 11,145 | |
Foreign currency translation adjustment, net of tax of $0 and $0 | (30,561) | | | (10,558) | |
Balance, end of period | (37,335) | | | 587 | |
| | | |
Accumulated other comprehensive loss, end of period | $ | (108,963) | | | $ | (134,118) | |
| | | | | | | | | | | |
| Six Months Ended |
| July 1, 2023 | | June 25, 2022 |
Unrecognized components of employee benefit plans, net of tax | | | |
Balance, beginning of period | $ | (43,694) | | | $ | (76,849) | |
Other comprehensive loss before reclassifications | (3,034) | | | — | |
Income tax on other comprehensive loss | 804 | | | — | |
Reclassifications to earnings(a) | | | |
| | | |
Amortization of (gain) loss | (354) | | | 4,976 | |
Amortization of prior service cost | 172 | | | 17 | |
Income tax on reclassifications | 45 | | | (1,097) | |
Net comprehensive gain (loss) on employee benefit plans, net of tax | (2,367) | | | 3,896 | |
Balance, end of period | (46,061) | | | (72,953) | |
| | | |
Unrealized gain (loss) on derivative instruments, net of tax | | | |
Balance, beginning of period | (567) | | | (847) | |
Reclassifications to earnings - foreign currency exchange contracts(b) | 119 | | | 181 | |
Income tax on reclassifications | (16) | | | (24) | |
Net comprehensive gain on derivative instruments, net of tax | 103 | | | 157 | |
Balance, end of period | (464) | | | (690) | |
| | | |
Foreign currency translation | | | |
Balance, beginning of period | (19,537) | | | (6,774) | |
Foreign currency translation adjustment, net of tax(c) | 4,103 | | | (15,864) | |
Balance, end of period | (15,434) | | | (22,638) | |
| | | |
Accumulated other comprehensive loss, end of period | $ | (61,959) | | | $ | (96,281) | |
——————————————
(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 — 14—Employee Benefit Plans for further information.
(b) Reclassifications of foreign currency exchange contracts are recorded in cost“cost of sales, other” “other operating expense, net” or “other income, or non-operating incomenet,” as appropriate. See Note 9 —
Derivative Instruments(c) Foreign currency translation is net of tax effects of $0 for further information.all periods presented, as the French operations are taxed on the foreign functional currency, not the translated reporting currency.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
12.11. Stockholders’ Equity
An analysis of stockholders’ equity is shown below (share amounts not in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity |
| Shares | | Par Value | | | | | | |
Nine Months Ended September 24, 2022 | | | | | | | | | | | | | | | |
Balance at December 31, 2021 | 63,738,409 | | | $ | 637 | | | | | | | $ | 408,834 | | | $ | 489,342 | | | $ | (84,470) | | | $ | 814,343 | |
Net loss | — | | | — | | | | | | | — | | | (18,511) | | | — | | | (18,511) | |
Other comprehensive loss, net of tax | — | | | — | | | | | | | — | | | — | | | (24,493) | | | (24,493) | |
Issuance of common stock under incentive stock plans | 294,936 | | | 3 | | | | | | | (3) | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | | | | | 8,687 | | | — | | | — | | | 8,687 | |
Repurchase of common shares (a) | (62,179) | | | (1) | | | | | | | (302) | | | — | | | — | | | (303) | |
Balance at September 24, 2022 | 63,971,166 | | | $ | 639 | | | | | | | $ | 417,216 | | | $ | 470,831 | | | $ | (108,963) | | | $ | 779,723 | |
| | | | | | | | | | | | | | | |
Three Months Ended September 24, 2022 | | | | | | | | | | | | | | | |
Balance at June 25, 2022 | 63,971,166 | | | $ | 639 | | | | | | | $ | 415,257 | | | $ | 441,224 | | | $ | (96,281) | | | $ | 760,839 | |
Net income | — | | | — | | | | | | | — | | | 29,607 | | | — | | | 29,607 | |
Other comprehensive income (loss), net of tax | — | | | — | | | | | | | — | | | — | | | (12,682) | | | (12,682) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | | | | | 1,959 | | | — | | | — | | | 1,959 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at September 24, 2022 | 63,971,166 | | | $ | 639 | | | | | | | $ | 417,216 | | | $ | 470,831 | | | $ | (108,963) | | | $ | 779,723 | |
| | | | | | | | | | | | | | | |
Nine Months Ended September 25, 2021 | | | | | | | | | | | | | | | |
Balance at December 31, 2020 | 63,359,839 | | | $ | 633 | | | | | | | $ | 405,161 | | | $ | 422,928 | | | $ | (133,635) | | | $ | 695,087 | |
Net income | — | | | — | | | | | | | — | | | 90,443 | | | — | | | 90,443 | |
Other comprehensive loss, net of tax | — | | | — | | | | | | | — | | | — | | | (483) | | | (483) | |
| | | | | | | | | | | | | | | |
Issuance of common stock under incentive stock plans | 509,713 | | | 5 | | | | | | | (5) | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | | | | | 1,619 | | | — | | | — | | | 1,619 | |
Repurchase of common shares (a) | (132,196) | | | (1) | | | | | | | (1,421) | | | — | | | — | | | (1,422) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at September 25, 2021 | 63,737,356 | | | $ | 637 | | | | | | | $ | 405,354 | | | $ | 513,371 | | | $ | (134,118) | | | $ | 785,244 | |
| | | | | | | | | | | | | | | |
Three Months Ended September 25, 2021 | | | | | | | | | | | | | | | |
Balance at June 26, 2021 | 63,737,356 | | | $ | 637 | | | | | | | $ | 404,120 | | | $ | 518,129 | | | $ | (136,045) | | | $ | 786,841 | |
Net loss | — | | | — | | | | | | | — | | | (4,758) | | | — | | | (4,758) | |
Other comprehensive income, net of tax | — | | | — | | | | | | | — | | | — | | | 1,927 | | | 1,927 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | | | | | 1,234 | | | — | | | — | | | 1,234 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Balance at September 25, 2021 | 63,737,356 | | | $ | 637 | | | | | | | $ | 405,354 | | | $ | 513,371 | | | $ | (134,118) | | | $ | 785,244 | |
——————————————
(a) Repurchased to satisfy the tax withholding requirements related to the issuance of stock under the Rayonier Advanced Materials Incentive Stock Plan.
Common Stock Buyback
In January 2018, the Board of Directors authorized a share buyback program pursuant to which the Company may, from time to time, purchase shares of its common stock with an aggregate purchase price of up to $100 million. During the three and nine months ended September 24, 2022 and September 25, 2021 the Company did not repurchase any common shares under this buyback program. As of September 24, 2022, 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.
ShareholderStockholder Rights Plan
In March 2022, the Company adopted a shareholderstockholder rights plan (the “Rights Agreement”) whereby a significant penalty is imposed upon any person or group which acquires beneficial ownership of 10% or more of the Company’s common stock without the approval of the Board of Directors (the “Board”). Also on thisDirectors. On the same date, the Board of Directors declared a dividend of one preferred share purchase right (a “Right”)Purchase Right for each outstanding share of common stock of the Company, par value $0.01 per share, (“Company Common Stock”), which was paid to Company stockholders of record as of the close of business on March 31, 2022.On March 20, 2023, the Purchase Rights expired.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
(in thousands unless otherwise stated)
The Rights trade with, and are inseparable from, shares of the Company Common Stock. Each Right will allow its holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock for $35.00, once the Rights become exercisable. This portion of a Preferred Share will give the stockholder approximately the same dividend, voting and liquidation rights as would one share of Company Common Stock. The Rights expire on March 20, 2023 and are exercisable 10 days after the public announcement or public disclosure that a person or group has acquired a beneficial ownership of 10% or more of the outstanding Company Common Stock (including certain derivative positions), subject to certain exceptions.
13.12. Earnings Per Common Share
The following table provides details ofthe inputs to the calculations of basic and diluted earnings per common share (share and per share amounts not in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Income (loss) from continuing operations | $ | 18,355 | | | $ | (13,394) | | | $ | (30,969) | | | $ | (21,308) | |
| | | | | | | |
| | | | | | | |
Income from discontinued operations | 11,252 | | | 8,636 | | | 12,458 | | | 111,751 | |
Net income (loss) available for common stockholders | $ | 29,607 | | | $ | (4,758) | | | $ | (18,511) | | | $ | 90,443 | |
| | | | | | | |
Shares used for determining basic earnings per share of common stock | 63,971,166 | | | 63,737,355 | | | 63,882,920 | | | 63,610,710 | |
Dilutive effect of: | | | | | | | |
Stock options | — | | | — | | | — | | | — | |
Performance and restricted stock | 1,548,941 | | | — | | | — | | | — | |
| | | | | | | |
Shares used for determining diluted earnings per share of common stock | 65,520,107 | | | 63,737,355 | | | 63,882,920 | | | 63,610,710 | |
| | | | | | | |
Basic per share amounts | | | | | | | |
Income (loss) from continuing operations | $ | 0.29 | | | $ | (0.21) | | | $ | (0.48) | | | $ | (0.33) | |
Income from discontinued operations | 0.18 | | | 0.14 | | | 0.20 | | | 1.76 | |
Net income (loss) | $ | 0.47 | | | $ | (0.07) | | | $ | (0.28) | | | $ | 1.43 | |
| | | | | | | |
Diluted per share amounts | | | | | | | |
Income (loss) from continuing operations | $ | 0.28 | | | $ | (0.21) | | | $ | (0.48) | | | $ | (0.33) | |
Income from discontinued operations | 0.17 | | | 0.14 | | | 0.20 | | | 1.76 | |
Net income (loss) | $ | 0.45 | | | $ | (0.07) | | | $ | (0.28) | | | $ | 1.43 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Loss from continuing operations | $ | (15,622) | | | $ | (24,943) | | | $ | (14,015) | | | $ | (49,323) | |
Income (loss) from discontinued operations | (1,128) | | | 1,676 | | | (1,128) | | | 1,205 | |
Net loss available for common stockholders | $ | (16,750) | | | $ | (23,267) | | | $ | (15,143) | | | $ | (48,118) | |
| | | | | | | |
Shares used for determining basic earnings per share of common stock | 65,226,344 | | | 63,898,761 | | | 64,865,272 | | | 63,837,292 | |
Dilutive effect of: | | | | | | | |
Stock options | — | | | — | | | — | | | — | |
Performance and restricted stock | — | | | — | | | — | | | — | |
Shares used for determining diluted earnings per share of common stock | 65,226,344 | | | 63,898,761 | | | 64,865,272 | | | 63,837,292 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Anti-dilutive instruments excluded from the computation of diluted earnings per share:share included (not in thousands):
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 | | July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Stock options | Stock options | 78,660 | | | 115,973 | | | 78,660 | | | 115,973 | | Stock options | 46,882 | | | 78,660 | | | 46,882 | | | 78,660 | |
Performance and restricted stock | Performance and restricted stock | 1,517,135 | | | 2,390,153 | | | 3,726,090 | | | 2,390,153 | | Performance and restricted stock | 3,302,332 | | | 3,372,498 | | | 3,302,332 | | | 3,372,498 | |
Total anti-dilutive instruments | Total anti-dilutive instruments | 1,595,795 | | | 2,506,126 | | | 3,804,750 | | | 2,506,126 | | Total anti-dilutive instruments | 3,349,214 | | | 3,451,158 | | | 3,349,214 | | | 3,451,158 | |
14.13. Incentive Stock Plans
The Company’s total stock-based compensation expense for the three months ended September 24, 2022 and September 25, 2021 was $2 million and $1 million, respectively. Stock-based compensation expense for the nine months ended September 24, 2022 and September 25, 2021 was $9 million and $2 million, respectively.as follows:
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Stock-based compensation expense | $ | 1,893 | | | $ | 4,470 | | | $ | 3,371 | | | $ | 6,728 | |
The Company made new grants of restricted stock units, and performance-based stock units to certain employeesand performance-based cash awards during the first nine monthsand second quarters of 2022.2023. The 20222023 restricted stock unit awards cliff vest after three years. The 20222023 performance-based stock unit awards measure total shareholder returncliff vest after three years and are based equally on an absolute basis andTSR relative to peers.peers and three-year cumulative adjusted EBITDA. Participants can earn between 0 and 250200 percent of the target award. Performance below established thresholdsthe threshold for the TSR would result in a zero payout. Therepayout for the TSR metric. The performance-based cash award is a performance-based stock award and cash unit stock award that will be measured using the same objectives as the performance-based stock unit award but is paid and accounted for separately. The portion of the award to be settled inPerformance-based cash isawards are classified as a liability and remeasured to fair value at the end of each reporting period until settlement.
In March 2022,2023, the performance-based sharestock units granted in 2019 vested without meeting2020 were settled with the issuance of 1,257,015 shares of common stock, including incremental shares of 370,366, based on performance thresholds, resulting results.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in no stock units being awarded.thousands unless otherwise stated)
The following table summarizes the 2023 activity of the Company’s incentive stock award activity during the nine months ended September 24, 2022:awards:
| | | Stock Options | | Restricted Stock Units | | Performance-Based Stock Units | | | Stock Options | | Restricted Stock Units | | Performance-Based Stock Units |
| | Options | | Weighted Average Exercise Price | | Awards | | Weighted Average Grant Date Fair Value | | Awards | | Weighted Average Grant Date Fair Value | | | Options | | Weighted Average Exercise Price | | Awards | | Weighted Average Grant Date Fair Value | | Awards | | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2022 | 111,124 | | | $ | 39.47 | | | 927,556 | | | $ | 8.72 | | | 1,459,716 | | | $ | 6.51 | | | |
Outstanding at December 31, 2022 | | Outstanding at December 31, 2022 | 77,767 | | | $ | 39.98 | | | 1,697,587 | | | $ | 6.21 | | | 1,956,919 | | | $ | 6.79 | |
Granted | Granted | — | | | — | | | 1,328,931 | | | 5.50 | | | 1,661,452 | | | 6.97 | | | Granted | — | | | — | | | 972,307 | | | 5.32 | | | 305,764 | | | 9.09 | |
Forfeited | Forfeited | — | | | — | | | (180,103) | | | 5.83 | | | (1,164,249) | | | 6.70 | | | Forfeited | — | | | — | | | (28,363) | | | 5.95 | | | (5,433) | | | 4.73 | |
Exercised or settled | Exercised or settled | — | | | — | | | (307,213) | | | 11.08 | | | — | | | — | | | Exercised or settled | — | | | — | | | (709,800) | | | 5.49 | | | (886,649) | | | 5.95 | |
Expired or cancelled | Expired or cancelled | (32,464) | | | 38.24 | | | — | | | — | | | — | | | — | | | Expired or cancelled | (30,885) | | | 43.35 | | | — | | | — | | | — | | | — | |
Outstanding at September 24, 2022 | 78,660 | | | $ | 39.98 | | | 1,769,171 | | | $ | 6.18 | | | 1,956,919 | | | $ | 6.79 | | | |
Outstanding at July 1, 2023 | | Outstanding at July 1, 2023 | 46,882 | | | $ | 37.76 | | | 1,931,731 | | | $ | 6.03 | | | 1,370,601 | | | $ | 7.83 | |
15.14. Employee Benefit Plans
Defined Benefit Plans
The Company has defined benefit pension and other long-term and postretirement benefit plans covering certain union and non-union employees, primarily in the U.S. and Canada. The defined benefit pension plans are closed to new participants. The liabilities for these plans are calculated using actuarial estimates and management assumptions. These estimates are based on historical information along withand certain assumptions about future events.
During 2019,the three and six months ended June 25, 2022, the Company settled certain Canadian pension liabilities through the purchase of annuity contracts with an insurance company. The settlement resulted in the recognition ofrecorded a $1 million loss duringrelated to the ninefinal asset surplus distribution to the plan participants of certain wound-up Canadian pension plans. During the six months ended September 25, 2021July 1, 2023, the Company recorded a $2 million loss related to the final asset surplus distribution to the plan participants of certain other wound-up Canadian pension plans. The settlements were recognized in “other components of pension and OPEB, excluding service costs” in the Company’s consolidated statements of operations.
The Company recorded an additional $1 million loss in “otherfollowing table presents the components of pension and OPEB, excluding service costs” during the nine months ended September 24, 2022, related to the final asset surplus distribution to the plans’ participants.net periodic benefit costs of these plans:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | Postretirement |
| Three Months Ended | | Three Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Service cost | $ | 1,224 | | | $ | 2,171 | | | $ | 299 | | | $ | 352 | |
Interest cost | 7,237 | | | 4,597 | | | 348 | | | 215 | |
Expected return on plan assets | (7,965) | | | (8,379) | | | — | | | — | |
Amortization of prior service cost | 184 | | | 39 | | | (25) | | | (30) | |
Amortization of (gain) loss | (124) | | | 2,473 | | | (54) | | | 15 | |
Pension settlement loss | — | | | 1,179 | | | — | | | — | |
Net periodic benefit cost | $ | 556 | | | $ | 2,080 | | | $ | 568 | | | $ | 552 | |
| | | | | | | |
| Pension | Postretirement |
| Six Months Ended | | Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Service cost | $ | 2,441 | | | $ | 4,347 | | | $ | 586 | | | $ | 705 | |
Interest cost | 14,382 | | | 9,203 | | | 705 | | | 431 | |
Expected return on plan assets | (15,887) | | | (16,707) | | | — | | | — | |
Amortization of prior service cost | 221 | | | 78 | | | (49) | | | (61) | |
Amortization of (gain) loss | (246) | | | 4,946 | | | (108) | | | 30 | |
Pension settlement loss | 2,317 | | | 1,179 | | | — | | | — | |
Net periodic benefit cost | $ | 3,228 | | | $ | 3,046 | | | $ | 1,134 | | | $ | 1,105 | |
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
The following tables present the components of net periodic benefit costs from these plans:(in thousands unless otherwise stated)
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | Postretirement |
| Three Months Ended | | Three Months Ended |
| September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Service cost | $ | 2,150 | | | $ | 2,619 | | | $ | 352 | | | $ | 358 | |
Interest cost | 4,561 | | | 4,287 | | | 215 | | | 179 | |
Expected return on plan assets | (8,258) | | | (9,586) | | | — | | | — | |
Amortization of prior service cost | 38 | | | 176 | | | (31) | | | (38) | |
Amortization of losses | 2,473 | | | 4,084 | | | 17 | | | 5 | |
Pension settlement loss | (25) | | | 90 | | | — | | | — | |
Total net periodic benefit cost | $ | 939 | | | $ | 1,670 | | | $ | 553 | | | $ | 504 | |
| | | | | | | |
| Pension | Postretirement |
| Nine Months Ended | | Nine Months Ended |
| September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Service cost | $ | 6,497 | | | $ | 7,800 | | | $ | 1,057 | | | $ | 1,083 | |
Interest cost | 13,764 | | | 13,138 | | | 646 | | | 530 | |
Expected return on plan assets | (24,965) | | | (28,865) | | | — | | | — | |
Amortization of prior service cost | 116 | | | 527 | | | (92) | | | (115) | |
Amortization of losses | 7,419 | | | 12,247 | | | 47 | | | 11 | |
Pension settlement loss | 1,154 | | | 980 | | | — | | | — | |
Total net periodic benefit cost | $ | 3,985 | | | $ | 5,828 | | | $ | 1,658 | | | $ | 1,510 | |
Service cost is included in “cost of sales” andor “selling, general and administrative expenses”expense” in the consolidated statements of operations, as appropriate. Interest cost, expected return on plan assets, amortization of prior service cost and amortization of losses(gain) loss are included in “other components of pension and OPEB, excluding service costs” in the consolidated statements of operations.
16.15. Income Taxes
Effective Tax Rate
The Company’sCompany utilized the discrete effective tax rate on its income from continuing operationsmethod for the threesix months ended September 24, 2022July 1, 2023, as allowed by ASC 740-270-30-18 Income Tax—Interim Reporting. The discrete method is applied when the application of the estimated AETR is impractical because it is not possible to reliably estimate the AETR. The discrete method treats the year-to-date period as if it was the annual period and calculates the income tax expense or benefit on a benefitdiscrete basis, rather than forecasting the full year AETR and applying it against current period book earnings. The Company believes the use of 11 percent. the discrete method represents the best estimate of its AETR in the current period.
The effective tax rate on its loss from continuing operations for the nine months ended September 24, 2022 was an expense of 13 percent. The Company’s effective tax rates on its loss from continuing operations for the three and ninesix months ended September 25, 2021 were benefitsJuly 1, 2023 was a benefit of 2418 percent and 5932 percent, respectively.
The 2023 effective tax benefit rate for the three months ended September 24, 2022rates differed from the federal statutory rate of 21 percent primarily due to changes in the valuation allowance on disallowed interest deductions in the U.S. and interest received on overpayments of tax from prior years, partiallynondeductible executive compensation, offset by unfavorableU.S. tax credits, return-to-accrual adjustments. adjustments related to previously filed tax returns and an excess tax benefit on vested stock compensation.
The effective tax expense rate on the loss from continuing operations for the ninethree and six months ended September 24,June 25, 2022 was an expense of 18 percent and 12 percent, respectively. The 2022 effective tax rates differed from the federal statutory rate of 21 percent primarily due to changes in the valuation allowance on disallowed interest deductions in the U.S. and nondeductible executive compensation, partially offset by interest received on overpayments of tax from prior years, U.S. tax credits and favorable tax return-to-accrual adjustments.
The effective tax benefit rate for the nine months ended September 25, 2021 differed from the federal statutory rateDeferred Taxes
As of 21 percent primarily due to a tax benefit recognized by remeasuringJuly 1, 2023 and December 31, 2022, the Company’s Canadian deferred tax assets at a higher Canadian blended statutory tax rate. The Canadian statutory rate is higher as a result of changing the allocation of income between the Canadian provinces after the sale of the Company’s lumbernet DTA included $18 million and newsprint assets. Other factors impacting the effective benefit rate were return-to-accrual adjustments and tax credits, partially offset by nondeductible interest expense in the U.S. and lower tax deductions on vested stock compensation.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
Deferred Taxes
The Company’s deferred tax assets include approximately $17 million, respectively, of disallowed U.S. interest deductions that the Company does not believe it will be able to realize. This asset was reduced by $1 million recognized as tax expense and increased by a net tax benefit of $5 million in the three and nine months ended September 24, 2022, respectively.realized. In December 2019,strict compliance with the American Institute of Certified Public Accountants (“AICPA”) issuedAccountants’ Technical Questions and Answers (“TQA”) 3300.01-02, which asserts that certain material evidence regarding the realizability of disallowed U.S. interest deductions should be ignored when assessing the need for a valuation allowance. In strict compliance with the AICPA’s TQA,allowance, the Company has not recognized a valuation allowance on athis portion of the deferred tax assetsnet DTA generated from disallowed interest.
Other
In August 2022, the Company received cash of $23 million, including interest of $2 million, related to a U.S. federal tax refund.
There has been a $1 million increase to the balance of unrecognized tax benefits reported at December 31, 2021.
17. Segment and Geographical Information16. Segments
The Company operates in the following business segments: High Purity Cellulose, Paperboard and High-Yield Pulp and Corporate. ThePulp. Corporate operations consistconsists primarily of senior management, accounting, information systems, human resources, treasury, tax and legal administrative functions that provide support services to the operating business units. The Company allocates a portion of the cost of maintaining these support functions to its operating units.
The Company evaluates the performance of its segments based on operating income.income (loss). Intersegment sales consist primarily of High-Yield Pulp sales to Paperboard. Intersegment sales prices are at rates that approximate market for the respective operating area.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
Net sales, disaggregated by product line, was comprised of the following:
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
| | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 | | July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
High Purity Cellulose | High Purity Cellulose | | | | | | | | High Purity Cellulose | | | | | | | |
Cellulose Specialties | Cellulose Specialties | $ | 243,175 | | | $ | 186,029 | | | $ | 645,169 | | | $ | 521,442 | | Cellulose Specialties | $ | 179,265 | | | $ | 218,440 | | | $ | 405,930 | | | $ | 401,994 | |
Commodity Products | Commodity Products | 92,638 | | | 74,577 | | | 223,151 | | | 195,894 | | Commodity Products | 98,674 | | | 59,758 | | | 222,714 | | | 130,513 | |
Other sales (a) | Other sales (a) | 33,080 | | | 26,902 | | | 84,059 | | | 74,532 | | Other sales(a) | 21,430 | | | 24,343 | | | 44,919 | | | 50,979 | |
Total High Purity Cellulose | Total High Purity Cellulose | 368,893 | | | 287,508 | | | 952,379 | | | 791,868 | | Total High Purity Cellulose | 299,369 | | | 302,541 | | | 673,563 | | | 583,486 | |
Paperboard | Paperboard | 65,039 | | | 52,188 | | | 182,512 | | | 156,799 | | Paperboard | 48,094 | | | 63,236 | | | 107,088 | | | 117,473 | |
High-Yield Pulp | High-Yield Pulp | 39,564 | | | 41,877 | | | 101,992 | | | 106,207 | | High-Yield Pulp | 44,144 | | | 40,287 | | | 86,004 | | | 62,428 | |
| Eliminations | Eliminations | (7,150) | | | (7,559) | | | (19,601) | | | (21,163) | | Eliminations | (6,194) | | | (6,844) | | | (14,481) | | | (12,451) | |
Net sales | Net sales | $ | 466,346 | | | $ | 374,014 | | | $ | 1,217,282 | | | $ | 1,033,712 | | Net sales | $ | 385,413 | | | $ | 399,220 | | | $ | 852,174 | | | $ | 750,936 | |
——————————————
(a)Include Other sales include sales of bioelectricity, lignosulfonates and other productsby-products to third parties.
Operating income (loss) by segment was comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
High Purity Cellulose | $ | 22,536 | | | $ | 1,852 | | | $ | 21,221 | | | $ | 18,903 | |
| | | | | | | |
Paperboard | 11,293 | | | 1,978 | | | 27,579 | | | 10,174 | |
High-Yield Pulp | 5,646 | | | 7,612 | | | 3,910 | | | 8,150 | |
Corporate | (10,946) | | | (8,616) | | | (42,871) | | | (33,498) | |
Operating income (loss) | $ | 28,529 | | | $ | 2,826 | | | $ | 9,839 | | | $ | 3,729 | |
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
High Purity Cellulose | $ | (422) | | | $ | 6,489 | | | $ | 12,512 | | | $ | (1,315) | |
Paperboard | 5,858 | | | 10,447 | | | 15,592 | | | 16,286 | |
High-Yield Pulp | 836 | | | (1,365) | | | 8,092 | | | (1,736) | |
Corporate | (12,728) | | | (18,468) | | | (26,058) | | | (31,925) | |
Operating income (loss) | $ | (6,456) | | | $ | (2,897) | | | $ | 10,138 | | | $ | (18,690) | |
Identifiable assets by segment were as follows:
| | | September 24, 2022 | | December 31, 2021 | | | July 1, 2023 | | December 31, 2022 | |
High Purity Cellulose | High Purity Cellulose | $ | 1,638,666 | | | $ | 1,579,300 | | | High Purity Cellulose | $ | 1,570,974 | | | $ | 1,654,214 | | |
| Paperboard | Paperboard | 114,990 | | | 114,391 | | | Paperboard | 111,554 | | | 112,757 | | |
High-Yield Pulp | High-Yield Pulp | 49,742 | | | 38,147 | | | High-Yield Pulp | 42,103 | | | 50,947 | | |
Corporate and other | 533,023 | | | 713,186 | | | |
| Total identifiable assets | $ | 2,336,421 | | | $ | 2,445,024 | | | |
Corporate | | Corporate | 581,371 | | | 529,610 | | |
Total assets | | Total assets | $ | 2,306,002 | | | $ | 2,347,528 | | |
18.17. Commitments and Contingencies
Commitments
The Company hashad no material changes to the purchase obligations presented in Note 21 — Commitments and Contingencies in the Company’s 2021its 2022 Form 10-K that arewere outside the normal course of business forduring the ninesix months ended September 24, 2022.July 1, 2023. The Company’s purchase obligations continue to primarily consist of commitments for the purchase of natural gas, steam energy and wood chips, and electricity contracts entered into within the normal course of business.chips.
The Company leases certain buildings, machinery and equipment under various operating leases. See Note 5 — 5—Leases for further information.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
Litigation and Contingencies
Duties on Canadian softwood lumber soldSoftwood Lumber Sold to the U.S.
The Company previously operated six softwood lumber mills in Ontario and Quebec, Canada, and exported softwood lumber into the United StatesU.S. from Canada.Canada. In connection with these exports, the Company paid approximately $112 million infor softwood lumber duties throughbetween 2017 and August 28, 2021, including $1 million of ancillary fees, which were recorded as expense in the periods incurred. As part of September 24, 2022,the sale of its lumber assets, the Company retained all rights and obligations to softwood duties generated or incurred through the closing date of the transaction. As of July 1, 2023, the Company had a $38$38 million long-term receivable associated with the USDOC’s December 2020, December 2021 and August 2022 determinations of the revised rates for the 2017, 2018, 2019 and 2020 periods. This amount does not include interest, which will be due on any amounts refunded. The Company estimates interest earned on the total amount of softwood lumber duties paid to be approximately $6 million.
On July 26, 2023, the USDOC completed its fourth administrative review of duties applied to Canadian softwood lumber exports to the U.S. during 2021 and reduced rates applicable to the Company to a combined 8.0 percent. In connection with this development, in the third quarter the Company will record a pre-tax gain of approximately $2 million in “income (loss) from discontinued operations, net of taxes” and increase the long-term receivable related to the USDOC administrative reviews to approximately $40 million.
Cash is not expected to return to the Company until final resolution of the softwood lumber dispute, which remains subject to legal challenges and to USDOC administrative review processes covering periods after December 31, 2020. As part of the sale of its lumber assets, the Company retained all rights and obligations to softwood lumber duties, generated or incurred through the closing date of the transaction.challenges.
Other
In addition to the above, the Company is engaged in various legal and regulatory actions and proceedings and has been named as a defendant in various lawsuits and claims arising in the ordinary course of its business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, the Company has, in certain cases, retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance, business interruption and general liability. These other lawsuits and claims, either individually andor in the aggregate, are not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Guarantees and Other
The Company provides financial guarantees as required by creditors, insurance programs and various governmental agencies. As of September 24, 2022,July 1, 2023, the Company had net exposure of $3834 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. Theliability; the Company would only be liable upon its default on the related payment obligations. The standby letters of credit have various expiration dates and willare expected to be renewed as required.
The Company had surety bonds of $88$86 million as of September 24, 2022,July 1, 2023, primarily to comply with financial assurance requirements relating to environmental remediation and post closure care, to provide collateral for the Company’s workers’ compensation program and to guarantee taxes and duties for products shipped internationally. These surety bonds expire at various dates and are expected to be renewed annually as required.
LignoTech Florida (“LTF”)LTF is a venture in which the Company owns 45 percent and its partner, Borregaard ASA, owns 55 percent. The Company is a guarantor of LTF’s financing agreements and, in the event of default, expects it would only be liable for its proportional share of any repayment under the agreements. The Company’s proportion of the LTF financing agreement guarantee was $31 million at September 24, 2022.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements - (Unaudited) (Continued)
July 1, 2023.The Company has not recorded any liabilities for these financial guarantees in its consolidated balance sheets, either because the Company has recorded the underlying liability associated with the guarantee or the guarantee is dependent on the Company’s own performance and, therefore, is not subject to the measurement requirements or because the Company has calculated the estimated fair value of the guarantee and determined it to be immaterial based upon the current facts and circumstances that would trigger a payment obligation.
It is not possible to determine the maximum potential amount of the liability under these potential obligations due to the unique set of facts and circumstances likely to be involved with each provision.
Rayonier Advanced Materials Inc.
Notes to Consolidated Financial Statements (Unaudited)
(in thousands unless otherwise stated)
As of September 24,December 31, 2022, alla collective bargaining agreement covering approximately 575 unionized employees was expired. The employees continued to work under the terms of the expired contract until negotiations concluded in the second quarter of 2023 and final agreement with the union was reached. All other of the Company’s collective bargaining agreements covering its unionized employees were current.
19. Supplemental Disclosurecurrent as of Cash Flows Information
Supplemental disclosurethe date of cash flows information follows:
| | | | | | | | | | | |
| Nine Months Ended |
| September 24, 2022 | | September 25, 2021 |
Interest paid | $ | 48,384 | | | $ | 34,852 | |
Income taxes received | (16,484) | | | (27,268) | |
Capital assets purchased on account | 16,316 | | | 9,609 | |
| | | |
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this filing.
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 Consolidated Financial Statements” refer to the Notes to Consolidated Financial StatementsThe following analysis of Rayonier Advanced Materials Inc. included in Item 1 of this Quarterly Report on Form 10-Q (the “Report”).
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our Consolidated Financial Statements with a narrative from the perspective of management on our financial condition and results of operations liquidity and certain other factors which may affect future results. This MD&A should be read in conjunction with our AnnualFinancial Statements and the notes thereto included in this Quarterly Report on Form 10-K for the year ended December 31, 2021 (the “202110-Q and with our 2022 Form 10-K”)10-K and information contained in our subsequent Forms 8-K and other reports tofiled with the U.S. Securities and Exchange Commission (the “SEC”).SEC.
Amounts contained in this Report may not always add due to rounding.
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q regarding anticipated financial, business, legal or other outcomes, including business and market conditions, outlook and other similar statements relating to future events, developments or financial or operational performance or results, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as “may,” “will,” “should,” “could,” “expect,” “estimate,” “believe,” “intend,” “plan,” “forecast,” “anticipate,” “project,” “guidance” and other similar language. However, the absence of these or similar words or expressions does not mean that a statement is not forward-looking.
Forward-looking statements are not guarantees of future performance or events and undue reliance should not be placed on these statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be attained, and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. The following risk factors and those contained in Item 1A — 1A—Risk Factors inof our 20212022 Form 10-K, among others, could cause actual results or events to differ materially from the Company’sour historical experience and those expressed in forward-looking statements made in this document.report.
Forward-looking statements are only as of the date they are made,of the filing of this Quarterly Report on Form 10-Q and the Company undertakeswe undertake no duty to update its forward-looking statements except as required by law. You are advised to review any further disclosures that we have made or may make in our filings and other submissions to the SEC, including those on Forms 10-K, 10-Q, 10-K, 8-K and other reports.
Risk Factors
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 2021 Form 10-K 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:
Epidemic and Pandemic Risks
•We are subject to risks associated with epidemics and pandemics, including the COVID-19 pandemic and related impacts. The nature and extent of ongoing and future impacts of the pandemic are highly uncertain and unpredictable.
Macroeconomic and Industry Risks
•The businesses we operate are highly competitive, which may result in fluctuations in pricing and volume that can materially adversely affect our business, financial condition and results of operations.
•Changes in raw material and energy availability and prices could have a material adverse effect on our business, results of operations and financial condition.
•We are subject to material risks associated with doing business outside of the United States.
•Currency fluctuations may have a material 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, could materially adversely affect our ability to access certain markets.
•Our business, financial condition and results of operations could be adversely affected by disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine or other geopolitical conflict.
Business and Operational RisksOverview
•Our ten largest customers represented approximately 40 percent of our 2021 revenue, 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 materially adversely affect our business, financial condition and results of operations.
•The availability of, and prices for, wood fiber may have a material adverse impact on our business, results of operations and financial condition.
•Our operations require substantial capital.
•We depend on third parties for transportation services and increases in costs and the availability of transportation could materially adversely affect our business.
•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 materially 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 material negative impact on our business.
•The risk of loss of the Company’s intellectual property and sensitive data, or disruption of its manufacturing operations, in each case due to cyberattacks or cybersecurity breaches, could materially adversely impact the Company.
Regulatory Risks
•Our business is subject to extensive environmental laws, regulations and permits that may materially restrict or adversely affect how we conduct business and our financial results.
•The Company considers and evaluates climate-related risks in three general categories: Regulatory, Transition to a low-carbon economy, and Physical risks related to climate change.
•The potential longer-term impacts of climate-related risks remain uncertain at this time.
Financial Risks
•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 debt obligations that could materially adversely affect our business and our ability to meet our obligations.
•The phase-out of the London Interbank Offered Rate as an interest rate benchmark in 2023 may impact our borrowing costs.
•Challenges in the commercial and credit environments, including material increases in interest rates, 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.
Company’s Common Stock and Certain Corporate Matters Risks
•Your percentage of ownership in the Company may be diluted in the future.
•Certain provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, could prevent or delay an acquisition of the Company, which could decrease the price of our common stock.
Details on the above risk factors are more specifically described in Item 1A — Risk Factors in our 2021 Form 10-K and in Item 1A — Risk Factors of this Report.
Business
We are a global leader of cellulose-based technologies, which comprisespecialty cellulose materials with a broad offering of high purity cellulose specialties, a natural polymer commonly used in the production of a variety of specialty chemicals and polymers for use in producingchemical products, including liquid crystal displays, filters, textiles and performance additives for pharmaceutical, food and other industrial applications. Starting from a tree and buildingBuilding upon more than 95 years of experience in cellulose chemistry, we provide highsome of the highest quality high-purityhigh-purity cellulose materialspulp products that make up the essential building blocks for our customers’ products while providing exceptional service and value. We also produce a unique, lightweight multi-ply paperboard product and a bulky, high-yield pulp product. Our paperboard is used for useproduction in consumer products.the commercial printing, lottery ticket and high-end packaging sectors. Our high-yield pulp is used by paperboard producers, as well as in traditional printing, writing and specialty paper manufacturing.
We operate in fourthe following business segments: High Purity Cellulose, Paperboard and High-Yield Pulp and Corporate.
As a result of the sale of the lumber and newsprint facilities and certain related assets completed in August 2021, the lumber and newsprint operations are presented as discontinued operations and certain prior year amounts are reclassified to conform to this presentation. Unless otherwise stated, information in this MD&A relates to continuing operations. See Note 2 — Discontinued Operations to our Consolidated Financial Statements for further information on the sale.Pulp.
Recent Business Developments
•In October 2022,July 2023, we repaid a Canadian dollar fixed interest ratesecured term loan financing of $250 million in aggregate principal amount, the amountproceeds of CAD $12which will be used, together with cash on hand, to redeem the remaining $318 million (USD $9 million).in aggregate principal balance of the 2024 Notes.
•During the third quarter of 2022,In April 2023, we repurchased $15$10 million of our 5.50% senior notes due 2024 (the “Unsecured Notes”) through open-market transactions and retired the notes for approximately $15 million in cash.
•During the third quarter of 2022, we repaid a Canadian dollar fixed interest rate term loan in the amount of CAD $12 million (USD $9 million).
•During the second quarter of 2022, we repurchased $20 million of our Unsecured2026 Notes through open-market transactions and retired the notes for approximately $20 million in cash.cash of $9 million.
•During the second quarter of 2022,In March 2023, we sold the 28.7repurchased $5 million shares of GreenFirst common stock we received in connection with the August 2021 sale of our lumber2024 Notes through open-market transactions and newsprint assetsretired the notes for $43cash of $5 million. The shares sale agreement contains a purchase price protection clause whereby we are entitled to participate in further stock price appreciation under certain circumstances over the next 18 months.
•Our business has experienced a significant increase in the costs for wood, chemicals, energy and supply chain. In response, we announced a $146 per metric ton (“MT”) cost surcharge applicable to all shipments of our cellulose specialties, effective starting with shipments made on April 1, 2022 and later.
•As of March 2022, our fluff pulp qualifies as an “Inspected Raw Material” by Nordic Swan Ecolabelling. The Nordic Swan Ecolabel sets strict environmental requirements in all phases of manufacturing, including requirements for eco-friendly chemicals used in ecolabeled products. The status will appear on products made with our fluff pulp and indicates to consumers and commercial buyers that the product is sustainably produced and environmentally friendly.
•On March 21, 2022, our Board of Directors adopted a shareholder rights plan and declared a dividend of one preferred share purchase right for each outstanding share of our common stock, par value $0.01 per share. See Note 12 — Stockholders’ Equityto our Consolidated Financial Statementsfor further information.
Market Assessment
This market assessment represents our best current estimate of our business segments’ future performance.
We have updated our Adjusted EBITDA guidance to exceed $175 million for 2022, subject to ongoing supply chain constraints. Additionally, we remain on track to reduce our net debt level to $725 million by the end of the year. We have reduced our net leverage ratio to 5.1 times as of the end of the third quarter and as we continue to reduce this ratio towards 4.0 times, we expect to have opportunities to refinance our senior notes due June 2024 in the near future.
High Purity Cellulose
DemandAverage sales prices for cellulose specialties and commodity products remains strong albeit somewhat tempered as global economic growth slows. As such, average sales pricesin 2023 are expected to be down modestly in the fourth quarter driven by a greater mix of commodityhigh single-digit percent higher than average 2022 sales prices, while sales volumes as production and logistics constraints improve. Key raw material inflation isare expected to decrease from prior year due to softness in sales orders driven principally by significant customer destocking. Market demand for commodity products remains resilient but at lower prices than the first half of the year, in line with industry forecasts. Commodity sales volumes are expected to continue to increase through the end of 2023. The prices for certain inputs have come off the 2022 highs but are expected to remain elevated. Adjusted EBITDA for the segment is expected to be down slightly compared to the third quarter but higher for the full year 2022 compared to 2021.
significantly elevated versus pre-COVID pandemic levels.Paperboard
Paperboard prices are expected to moderate over the balance of the year but remain elevated from 2022 levels, while sales volumes are expected to improve in the second half of the year. Raw material prices are expected to moderate further as pulp markets decline.
High-Yield Pulp
High-yield pulp prices have declined due to soft demand and new paper pulp capacity ramping up. Prices are expected to decline overall in 2023 despite an expected uptick in the fourth quarter, driven by strong demand in bothline with industry forecasts for the commercial printing and packaging end-use markets.global paper pulp market. Sales volumes and raw material costs are expected to remain steady.As a result, Paperboard is anticipated to deliver another solid quarter of Adjusted EBITDA.
High-Yield Pulp
High-yield pulp markets appear to be peaking as global economic demand slows. However, due to the sales lag experienced in this segment, realized prices are still expected to increase in the fourth quarter. Sales volumes are anticipated to increase significantly as production and logistics constraints improve.As such, Adjusted EBITDA for High-Yield Pulp is anticipated to improvedecline in the coming quarter.quarter as we take downtime in the third quarter due to market conditions.
A Sustainable Future
For over 95 years, we have invested in renewable product offerings and our biorefinery model provides a platform to grow existing and new products to address needs of the changing economy. We continue to focus on growing our bio-based product offering. In the first nine months of 2022, other sales in the High Purity Cellulose segment were $84 million primarily related to sales of bioelectricityoffering and lignosulfonates. We expect to grow theseour biomaterials sales and increase overall margins over time.
Our investment into a The bioethanol facility at our Tartas, France facilityplant is under construction and is anticipated to be operational in 2024, subjectearly 2024. The total estimated cost of the project is approximately $41 million, with $26 million to be spent in 2023. We plan to utilize $28 million of low-cost green loans to help fund the approvalproject, including $8 million already raised, and $4 million in grants. The project is expected to provide $8 million to $10 million of certain permits.Further updates will be provided as the schedule is finalized.annual incremental EBITDA, based on current exchange rates, beginning in 2025.
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
(in millions, except percentages) | September 24, 2022 | | September 25, 2021 | | % Change | | September 24, 2022 | | September 25, 2021 | | % Change |
Net Sales | $ | 466 | | | $ | 374 | | | 25% | | $ | 1,217 | | | $ | 1,034 | | | 18% |
Cost of Sales | (419) | | | (355) | | | | | (1,138) | | | (972) | | | |
Gross Margin | 47 | | | 19 | | | 147% | | 79 | | | 62 | | | 27% |
| | | | | | | | | | | |
Selling, general and administrative expenses | (20) | | | (17) | | | | | (68) | | | (52) | | | |
| | | | | | | | | | | |
Foreign exchange gains | 3 | | | 3 | | | | | 4 | | | 1 | | | |
Other operating expense, net | (1) | | | (2) | | | | | (5) | | | (7) | | | |
Operating Income | 29 | | | 3 | | | 867% | | 10 | | | 4 | | | 150% |
Interest expense | (16) | | | (17) | | | | | (49) | | | (49) | | | |
Interest income and other, net | 3 | | | 2 | | | | | 6 | | | — | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other components of pension and OPEB, excluding service costs | 1 | | | 1 | | | | | 2 | | | 2 | | | |
Gain (loss) on GreenFirst equity securities | — | | | (8) | | | | | 5 | | | (8) | | | |
Gain on debt extinguishment | — | | | 2 | | | | | — | | | 2 | | | |
Income (Loss) From Continuing Operations Before Income Taxes | 17 | | | (17) | | | 200% | | (26) | | | (49) | | | 47% |
Income tax (expense) benefit | 2 | | | 4 | | | | | (3) | | | 29 | | | |
Equity in loss of equity method investment | (1) | | | — | | | | | (2) | | | (1) | | | |
Income (Loss) from Continuing Operations | 18 | | | (13) | | | 238% | | (31) | | | (21) | | | (48)% |
Income from discontinued operations, net of taxes | 12 | | | 9 | | | | | 12 | | | 112 | | | |
Net Income (Loss) | $ | 30 | | | $ | (5) | | | | | $ | (19) | | | $ | 90 | | | |
| | | | | | | | | | | |
Gross Margin % | 10 | % | | 5 | % | | | | 7 | % | | 6 | % | | |
Operating Margin % | 6 | % | | 1 | % | | | | 1 | % | | — | % | | |
Effective Tax Rate % | (11) | % | | 24 | % | | | | (13) | % | | 59 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Six Months Ended | | |
(in millions, except percentages) | July 1, 2023 | | June 25, 2022 | | | | July 1, 2023 | | June 25, 2022 | | |
Net sales | $ | 385 | | | $ | 399 | | | | | $ | 852 | | | $ | 751 | | | |
Cost of sales | (370) | | | (372) | | | | | (800) | | | (718) | | | |
Gross margin | 15 | | | 27 | | | | | 52 | | | 33 | | | |
Selling, general and administrative expense | (18) | | | (28) | | | | | (37) | | | (48) | | | |
Foreign exchange gain (loss) | (2) | | | 2 | | | | | (2) | | | 1 | | | |
Other operating expense, net | (2) | | | (4) | | | | | (3) | | | (5) | | | |
Operating income (loss) | (7) | | | (3) | | | | | 10 | | | (19) | | | |
Interest expense | (16) | | | (16) | | | | | (31) | | | (33) | | | |
Other components of pension and OPEB, excluding service costs | 1 | | | — | | | | | (1) | | | 1 | | | |
Gain (loss) on GreenFirst equity securities | — | | | (4) | | | | | — | | | 5 | | | |
| | | | | | | | | | | |
Other income, net | 3 | | | 3 | | | | | 3 | | | 3 | | | |
Loss from continuing operations before income taxes | (19) | | | (20) | | | | | (19) | | | (43) | | | |
Income tax (expense) benefit | 3 | | | (4) | | | | | 6 | | | (5) | | | |
Equity in loss of equity method investment | — | | | (1) | | | | | (1) | | | (1) | | | |
Loss from continuing operations | (16) | | | (25) | | | | | (14) | | | (49) | | | |
Income (loss) from discontinued operations, net of taxes | (1) | | | 2 | | | | | (1) | | | 1 | | | |
Net loss | $ | (17) | | | $ | (23) | | | | | $ | (15) | | | $ | (48) | | | |
| | | | | | | | | | | |
Gross margin % | 3.9 | % | | 6.8 | % | | | | 6.1 | % | | 4.4 | % | | |
Operating margin % | (1.8) | % | | (0.8) | % | | | | 1.2 | % | | (2.5) | % | | |
Effective tax rate | 17.9 | % | | (18.1) | % | | | | 31.5 | % | | (11.8) | % | | |
Net Sales
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(in millions) | (in millions) | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 | (in millions) | July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
High Purity Cellulose | High Purity Cellulose | $ | 369 | | | $ | 288 | | | $ | 952 | | | $ | 792 | | High Purity Cellulose | $ | 300 | | | $ | 302 | | | $ | 674 | | | $ | 583 | |
Paperboard | Paperboard | 66 | | | 52 | | | 183 | | | 157 | | Paperboard | 48 | | | 63 | | | 107 | | | 117 | |
High-Yield Pulp | High-Yield Pulp | 40 | | | 42 | | | 102 | | | 106 | | High-Yield Pulp | 44 | | | 40 | | | 86 | | | 62 | |
| Eliminations | Eliminations | (9) | | | (8) | | | (20) | | | (21) | | Eliminations | (7) | | | (6) | | | (15) | | | (11) | |
Net Sales | $ | 466 | | | $ | 374 | | | $ | 1,217 | | | $ | 1,034 | | |
Net sales | | Net sales | $ | 385 | | | $ | 399 | | | $ | 852 | | | $ | 751 | |
Net sales increased by $92for the quarter ended July 1, 2023 decreased $14 million, and $183 million, respectively, during the three and nine months ended September 24, 2022 whenor 4 percent, compared to the same prior year periods,quarter, driven by lower commodity products sales prices in our High Purity Cellulose segment and lower sales volumes in cellulose specialties and our Paperboard segment, partially offset by higher sales prices in cellulose specialties, Paperboard and High-Yield Pulp and higher sales volumes in commodity products and High-Yield Pulp.
Net sales for the six months ended July 1, 2023 increased $101 million or 13 percent, compared to the same prior year period, driven primarily by higher sales prices across all segments.segments and higher sales volumes in commodity products and our High-Yield Pulp segment, partially offset by lower sales volumes in cellulose specialties and our Paperboard segment. See Operating Results by Segment below for further discussion.
Operating Income (Loss)
| | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Six Months Ended |
(in millions) | (in millions) | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 | (in millions) | July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
High Purity Cellulose | High Purity Cellulose | $ | 22 | | | $ | 2 | | | $ | 21 | | | $ | 19 | | High Purity Cellulose | $ | — | | | $ | 7 | | | $ | 13 | | | $ | (1) | |
Paperboard | Paperboard | 12 | | | 2 | | | 28 | | | 10 | | Paperboard | 6 | | | 10 | | | 16 | | | 16 | |
High-Yield Pulp | High-Yield Pulp | 6 | | | 8 | | | 4 | | | 8 | | High-Yield Pulp | 1 | | | (2) | | | 8 | | | (2) | |
Corporate | Corporate | (11) | | | (9) | | | (43) | | | (33) | | Corporate | (14) | | | (18) | | | (27) | | | (32) | |
Operating Income | $ | 29 | | | $ | 3 | | | $ | 10 | | | $ | 4 | | |
Operating income (loss) | | Operating income (loss) | $ | (7) | | | $ | (3) | | | $ | 10 | | | $ | (19) | |
Operating incomeloss for the three and nine monthsquarter ended September 24, 2022July 1, 2023 increased $26$4 million, and $6 million, respectively, whenor 133 percent, compared to the same prior year periods duequarter, driven by the decrease in net sales and increased labor, maintenance, input and logistics costs, partially offset by a decrease in Corporate expense items. Operating results for the six months ended July 1, 2023 improved $29 million, or 153 percent, compared to higherthe same prior year period, driven by the increase in net sales prices across all segments,and a decrease in Corporate expense items, partially offset by increased costs resultinglabor, maintenance, input and logistics costs. Included in operating results in the current three- and six-month periods was the recognition of a $3 million benefit from inflation on key inputs, including chemicals, wood fiber and energy costs, lower sales volumes due to supply chain constraints and lower productivity when comparing the nine-month periods.payroll tax credit carryforwards. See Operating Results by Segment below for further discussion.
Non-Operating ExpensesIncome & Expense
Included in “other income, net” in the three and six months ended July 1, 2023 was a $2 million gain on a passive land sale and a $1 million net gain on debt extinguishment, partially offset by unfavorable foreign exchange rates. Also included in the six-month period was a pension settlement loss of $2 million.
Included in non-operating expenses forin the ninethree and six months ended September 24,June 25, 2022 was a $4 million loss and a $5 million gain, respectively, associated with the GreenFirst common shares received in connection with the sale of our lumber and newsprint assets. A loss of $8 million was recognized on the shares during the three and nine months ended September 25, 2021. The shares were sold in May 2022 for $43 million. See Note 10 — Fair Value Measurements to our Consolidated Financial Statements for further information.
Income Tax (Expense) BenefitTaxes
The effective tax rate on the third quarter 2022 income from continuing operations was a benefit of 11 percent, compared to a benefit of 24 percent on the loss from continuing operations in the same quarter of 2021. The effective tax rate on the loss from continuing operations for the ninethree and six months ended September 24, 2022July 1, 2023 was an expense of 13 percent, compared to a benefit of 5918 percent for the comparable prior year period.
and 32 percent, respectively. The 20222023 effective tax rates differdiffered from the federal statutory rate of 21 percent primarily due to changes in the valuation allowance on disallowed interest deductions in the U.S., and nondeductible executive compensation, interest received on overpayments of tax from prior years,offset by U.S. tax credits, return-to-accrual adjustments related to previously filed tax returns and an excess tax return-to-accrual adjustments.benefit on vested stock compensation.
The effective tax rate on the loss from continuing operations for the ninethree and six months ended SeptemberJune 25, 2021 differs2022 was an expense of 18 percent and 12 percent, respectively. The 2022 effective tax rates differed from the federal statutory rate of 21 percent primarily due to a tax benefit recognized by remeasuring our Canadian deferred tax assets at a higher Canadian blended statutory tax rate. The Canadian statutory tax rate is higher as a result of changing the allocation of income between the Canadian provinces after the sale of our lumber and newsprint assets. Other factors impacting the effective benefit rate were return-to-accrual adjustments and tax credits, partially offset by nondeductibledisallowed interest expensedeductions in the U.S. and lowernondeductible executive compensation, partially offset by U.S. tax deductions on vested stock compensation. See Note 16 — Income Taxes to our Consolidated Financial Statements for further information.
Discontinued Operations
The sale of our lumbercredits and newsprint facilities and certain related assets was completed in August 2021. The cash received at closing was preliminary and remains subject to final purchase price and other sale-relatedtax return-to-accrual adjustments. During the first quarter of 2022, we trued-up certain sale-related items with GreenFirst for a total net cash outflow of $3 million, as expected and previously disclosed. No adjustments have been made in 2022 to the gain on sale recorded during the year ended December 31, 2021. Pursuant to the terms of the asset purchase agreement, we and GreenFirst continue efforts to finalize the closing inventory valuation adjustment.
During the third quarter of 2022, the U.S. Department of Commerce (the “USDOC”) completed the third administrative review of duties applied to Canadian softwood lumber exports to the U.S. and reduced rates applicable to us to a combined 8.6 percent. We recorded a $16 million gain, pre-tax, in connection with this development and increased the total long-term receivable related to the USDOC’s administrative reviews to $38 million. Cash is not expected to return to us until final resolution of the softwood lumber dispute.
Operating Results by Segment
High Purity Cellulose
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in millions) | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Net Sales | $ | 369 | | | $ | 288 | | | $ | 952 | | | $ | 792 | |
Operating Income | $ | 22 | | | $ | 2 | | | $ | 21 | | | $ | 19 | |
Average Sales Prices ($ per metric ton) | $ | 1,402 | | | $ | 1,159 | | | $ | 1,329 | | | $ | 1,111 | |
Sales Volumes (thousands of metric tons) | 240 | | | 225 | | | 653 | | | 646 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in millions, except where otherwise stated) | July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Net sales | $ | 300 | | | $ | 302 | | | $ | 674 | | | $ | 583 | |
Operating income (loss) | $ | — | | | $ | 7 | | | $ | 13 | | | $ | (1) | |
Average sales prices ($ per MT) | $ | 1,301 | | | $ | 1,355 | | | $ | 1,313 | | | $ | 1,288 | |
Sales volumes (thousands of MTs) | 214 | | | 206 | | | 479 | | | 414 | |
Net Sales —- Three Months Ended
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 25, 2021 | | Changes Attributable to: | | Three Months Ended September 24, 2022 |
(in millions) | Price | | Volume/Mix/Other | |
Cellulose Specialties | $ | 186 | | | $ | 48 | | | $ | 9 | | | $ | 243 | |
Commodity Products | 75 | | | 13 | | | 5 | | | 93 | |
Other sales (a) | 27 | | | — | | | 6 | | | 33 | |
Net Sales | $ | 288 | | | $ | 61 | | | $ | 20 | | | $ | 369 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 25, 2022 | | Changes Attributable to: | | Three Months Ended July 1, 2023 |
(in millions) | Price | | Volume/Mix/Other | |
Cellulose specialties | $ | 218 | | | $ | 20 | | | $ | (59) | | | $ | 179 | |
Commodity products | 60 | | | (4) | | | 43 | | | 99 | |
Other sales(a) | 24 | | | — | | | (2) | | | 22 | |
Net sales | $ | 302 | | | $ | 16 | | | $ | (18) | | | $ | 300 | |
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(a)Includes sales of bioelectricity, lignosulfonates and other by-products to third parties.
Net sales of our High Purity Cellulose segment for the three monthsquarter ended September 24, 2022 increased $81July 1, 2023 decreased $2 million when compared to the same prior year quarter. Cellulose specialties sales prices increased 25 percent, inclusive ofIncluded in the $146/MT cost surcharge effective April 2022,current and sales volumes increased 5 percent due to the impact of contract negotiations. Commodity product sales pricesprior year quarters were $22 million and sales volumes rose 13 percent and 9 percent,$24 million, respectively, driven by higher demand. Included within net sales for the period was $33 million of other sales primarily from bio-based energy and lignosulfonates. Sales prices decreased 4 percent during the current quarter, driven by a 4 percent decrease in commodity products prices, partially offset by a 13 percent increase in cellulose specialties prices. Total sales volumes increased 4 percent during the current quarter, driven by a 72 percent increase in commodity products volumes, partially offset by a 27 percent decrease in cellulose specialties volumes. Sales volumes for cellulose specialties were negatively impacted by market-driven demand declines primarily due to significant customer destocking, particularly those customers associated with construction markets.
Net Sales — Nine- Six Months Ended
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 25, 2021 | | Changes Attributable to: | | Nine Months Ended September 24, 2022 |
(in millions) | Price | | Volume/Mix/Other | |
Cellulose Specialties | $ | 521 | | | $ | 101 | | | $ | 23 | | | $ | 645 | |
Commodity Products | 196 | | | 39 | | | (12) | | | 223 | |
Other sales (a) | 75 | | | — | | | 9 | | | 84 | |
Net Sales | $ | 792 | | | $ | 140 | | | $ | 20 | | | $ | 952 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 25, 2022 | | Changes Attributable to: | | Six Months Ended July 1, 2023 |
(in millions) | Price | | Volume/Mix/Other | |
Cellulose specialties | $ | 402 | | | $ | 52 | | | $ | (48) | | | $ | 406 | |
Commodity products | 130 | | | 4 | | | 89 | | | 223 | |
Other sales(a) | 51 | | | — | | | (6) | | | 45 | |
Net sales | $ | 583 | | | $ | 56 | | | $ | 35 | | | $ | 674 | |
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(a)Includes sales of bioelectricity, lignosulfonates and other by-products to third parties.
Net sales of our High Purity Cellulose segment for the ninesix months ended September 24, 2022July 1, 2023 increased $160$91 million when compared to the same prior year period. Cellulose specialties sales prices increased 19 percent, inclusive ofIncluded in the $146/MT cost surcharge effective April 2022,current and sales volumes increased 4 percent due to the impact of contract negotiations. Commodity product sales prices rose 19 percent, driven by higher demand, while commodity product sales volumes decreased 4 percent due to lower production, supply chain constraintsprior year periods were $45 million and lower commodities volumes in favor of higher specialties volumes. Included within net sales for the period was $84$51 million, respectively, of other sales primarily from bio-based energy and lignosulfonates.
Sales prices increased 2 percent during the current period, driven by increases in cellulose specialties and commodity products prices of 15 percent and 1 percent, respectively. Total sales volumes increased 16 percent during the current period, driven by a 69 percent increase in commodity products volumes, partially offset by a 12 percent decrease in cellulose specialties volumes. Sales volumes for cellulose specialties were negatively impacted by market-driven demand declines primarily due to significant customer destocking, particularly in construction markets.Operating Income —- Three Months Ended
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 25, 2021 | | Gross Margin Changes Attributable to: | | | | Three Months Ended September 24, 2022 |
(in millions) | Sales Price | | Sales Volume/ Mix/Other (a) | | Cost | | SG&A and other | |
Operating Income | $ | 2 | | | $ | 61 | | | $ | 13 | | | $ | (54) | | | $ | — | | | $ | 22 | |
Operating Margin % | 0.7 | % | | 17.4 | % | | 2.5 | % | | (14.6) | % | | — | % | | 6.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 25, 2022 | | Gross Margin Changes Attributable to: | | | | Three Months Ended July 1, 2023 |
(in millions, except percentages) | Sales Price | | Sales Volume/Mix/Other(a) | | Cost | | SG&A and other | |
Operating income | $ | 7 | | | $ | 16 | | | $ | (10) | | | $ | (16) | | | $ | 3 | | | $ | — | |
Operating margin % | 2.3 | % | | 4.9 | % | | (2.9) | % | | (5.3) | % | | 1.0 | % | | — | % |
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(a)Sales volume computed Computed based on contribution margin.
Operating income of our High Purity Cellulose segment increased $20for the quarter ended July 1, 2023 decreased $7 million during the three months ended September 24, 2022 to $22 million when compared to the same prior year quarter. Salesquarter, driven by the lower cellulose specialties sales volumes and commodity products sales prices for the segmentand increased 21 percent duringlabor and maintenance costs due to inflation, partially offset by higher cellulose specialties sales prices and commodity products sales volumes and decreased costs of certain inputs. Included in operating income in the current quarter driven bywas the recognition of a 25 percent increase, inclusive$3 million benefit from payroll tax credit carryforwards.
Operating Income — Nine(Loss) - Six Months Ended
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 25, 2021 | | Gross Margin Changes Attributable to: | | | | Nine Months Ended September 24, 2022 |
(in millions) | Sales Price | | Sales Volume/ Mix/Other (a) | | Cost | | SG&A and other | |
Operating Income | $ | 19 | | | $ | 140 | | | $ | 19 | | | $ | (154) | | | $ | (3) | | | $ | 21 | |
Operating Margin % | 2.4 | % | | 14.7 | % | | 1.6 | % | | (16.2) | % | | (0.3) | % | | 2.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 25, 2022 | | Gross Margin Changes Attributable to: | | | | Six Months Ended July 1, 2023 |
(in millions, except percentages) | Sales Price | | Sales Volume/Mix/Other(a) | | Cost | | SG&A and other | |
Operating income (loss) | $ | (1) | | | $ | 56 | | | $ | 16 | | | $ | (62) | | | $ | 4 | | | $ | 13 | |
Operating margin % | (0.2) | % | | 8.8 | % | | 1.9 | % | | (9.2) | % | | 0.6 | % | | 1.9 | % |
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(a)Sales volume computed Computed based on contribution margin.
Operating incomeThe operating results of our High Purity Cellulose segment increased $2 million duringfor the ninesix months ended September 24, 2022 to $21July 1, 2023 improved $14 million when compared to the same prior year period. Sales prices for the segment increased 19 percent during the current period, driven by 19 percent increases in boththe higher cellulose specialties inclusive of the $146/MT cost surcharge, and commodity prices. Totalproducts sales prices and commodity products sales volumes increased 1 percent, drivenand decreased costs of certain inputs, partially offset by a 4 percent increasethe decrease in cellulose specialties sales volumes that was almost entirely offset by a 4 percent decreaseand higher labor and maintenance costs due to inflation. Included in commodity product sales volumes that resulted from lower productivity, supply chain constraints and lower commodities volumes in favor of higher specialties volumes. Costs increased compared to the prior year period driven by inflation on key inputs, including chemicals, wood fiber and energy costs, as well as higher supply chain expenses, partially offset by improved productivity in the most recent quarter. Offsetting higher energy costsoperating income in the current period were $12was the recognition of a $3 million of excess emission allowances sales associated with the operations in Tartas, France.benefit from payroll tax credit carryforwards.
Paperboard | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in millions) | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Net Sales | $ | 66 | | | $ | 52 | | | $ | 183 | | | $ | 157 | |
Operating Income | $ | 12 | | | $ | 2 | | | $ | 28 | | | $ | 10 | |
Average Sales Prices ($ per metric ton) | $ | 1,587 | | | $ | 1,184 | | | $ | 1,450 | | | $ | 1,149 | |
Sales Volumes (thousands of metric tons) | 41 | | | 44 | | | 126 | | | 137 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in millions, except where otherwise stated) | July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Net sales | $ | 48 | | | $ | 63 | | | $ | 107 | | | $ | 117 | |
Operating income | $ | 6 | | | $ | 10 | | | $ | 16 | | | $ | 16 | |
Average sales prices ($ per MT) | $ | 1,498 | | | $ | 1,439 | | | $ | 1,536 | | | $ | 1,384 | |
Sales volumes (thousands of MTs) | 32 | | | 44 | | | 70 | | | 85 | |
Net Sales —- Three Months Ended
| | | Three Months Ended September 25, 2021 | | Changes Attributable to: | | Three Months Ended September 24, 2022 | | Three Months Ended June 25, 2022 | | Changes Attributable to: | | Three Months Ended July 1, 2023 |
(in millions) | (in millions) | Price | | Volume/Mix | | (in millions) | Price | | Volume/Mix | |
Net Sales | $ | 52 | | | $ | 17 | | | $ | (3) | | | $ | 66 | | |
Net sales | | Net sales | $ | 63 | | | $ | 2 | | | $ | (17) | | | $ | 48 | |
Net sales of our Paperboard segment for the three monthsquarter ended September 24, 2022 increased $14July 1, 2023 decreased $15 million compared to the same prior year periodquarter due to a 3427 percent decrease in sales volumes, driven by lower productivity and customer destocking, partially offset by a 4 percent increase in sales prices, driven by strongcontinued demand partially offset by a 7 percent decrease in sales volumes due to lower productivity.
for sustainable packaging.Net Sales — Nine- Six Months Ended
| | | Nine Months Ended September 25, 2021 | | Changes Attributable to: | | Nine Months Ended September 24, 2022 | | Six Months Ended June 25, 2022 | | Changes Attributable to: | | Six Months Ended July 1, 2023 |
(in millions) | (in millions) | Price | | Volume/Mix | | (in millions) | Price | | Volume/Mix | |
Net Sales | $ | 157 | | | $ | 38 | | | $ | (12) | | | $ | 183 | | |
Net sales | | Net sales | $ | 117 | | | $ | 11 | | | $ | (21) | | | $ | 107 | |
Net sales of our Paperboard segment for the ninesix months ended September 24, 2022 increased $26 million compared to the same prior year period due to a 26 percent increase in sales prices, driven by strong demand, partially offset by an 8 percent decrease in sales volumes due to lower productivity.
Operating Income — Three Months Ended
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 25, 2021 | | Gross Margin Changes Attributable to: | | | | Three Months Ended September 24, 2022 |
(in millions) | Sales Price | | Sales Volume/Mix (a) | | Cost | | SG&A and other | |
Operating Income | $ | 2 | | | $ | 17 | | | $ | (1) | | | $ | (6) | | | $ | — | | | $ | 12 | |
Operating Margin % | 3.8 | % | | 23.7 | % | | (0.3) | % | | (9.0) | % | | — | % | | 18.2 | % |
——————————————(a) Sales volume computed based on contribution margin.
Operating income of our Paperboard segment for the three months ended September 24, 2022 increasedJuly 1, 2023 decreased $10 million when compared to the same prior year period due to higher sales prices, partially offset by higher raw material pulp, chemicals and logistics costs as well as lower sales volumes.
Operating Income — Nine Months Ended
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| Nine Months Ended September 25, 2021 | | Gross Margin Changes Attributable to: | | | | Nine Months Ended September 24, 2022 |
(in millions) | Sales Price | | Sales Volume/Mix (a) | | Cost | | SG&A and other | |
Operating Income | $ | 10 | | | $ | 38 | | | $ | (4) | | | $ | (16) | | | $ | — | | | $ | 28 | |
Operating Margin % | 6.4 | % | | 18.2 | % | | (0.6) | % | | (8.7) | % | | — | % | | 15.3 | % |
——————————————(a) Sales volume computed based on contribution margin.
Operating income of our Paperboard segment for the nine months ended September 24, 2022 increased $18 million when compared to the same prior year period due to higher sales prices, partially offset by higher raw material pulp, chemicals and logistics costs as well as lower sales volumes.
High-Yield Pulp
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in millions) | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Net Sales | $ | 40 | | | $ | 42 | | | $ | 102 | | | $ | 106 | |
Operating Income | $ | 6 | | | $ | 8 | | | $ | 4 | | | $ | 8 | |
Average Sales Prices ($ per metric ton) (a) | $ | 712 | | | $ | 618 | | | $ | 630 | | | $ | 549 | |
Sales Volumes (metric tons) (a) | 45 | | | 55 | | | 130 | | | 154 | |
——————————————(a) External sales only. For the three months ended September 24, 2022 and September 25, 2021, the High-Yield Pulp segment sold 16,000 metric tons and 17,000 metric tons of high-yield pulp for $7 million and $8 million, respectively, to the Paperboard segment. For the nine months ended September 24, 2022 and September 25, 2021, the High-Yield Pulp segment sold 47,000 metric tons and 51,000 metric tons of high-yield pulp for $20 million and $22 million, respectively, to the Paperboard segment.
Net Sales — Three Months Ended
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 25, 2021 | | Changes Attributable to: | | Three Months Ended September 24, 2022 |
(in millions) | Price | | Volume/Mix | |
Net Sales | $ | 42 | | | $ | 4 | | | $ | (6) | | | $ | 40 | |
| | | | | | | |
Net sales of our High-Yield Pulp segment for the three months ended September 24, 2022 decreased $2 million compared to the same prior year period due to an 18 percent decrease in sales volumes, driven by lower productivity and customer destocking, partially offset by a 15an 11 percent increase in sales prices, driven by continued demand for sustainable packaging.
Operating Income - Three Months Ended
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 25, 2022 | | Gross Margin Changes Attributable to: | | | | Three Months Ended July 1, 2023 |
(in millions, except percentages) | Sales Price | | Sales Volume/Mix(a) | | Cost | | SG&A and other | |
Operating income | $ | 10 | | | $ | 2 | | | $ | (6) | | | $ | — | | | $ | — | | | $ | 6 | |
Operating margin % | 15.9 | % | | 2.6 | % | | (6.0) | % | | — | % | | — | % | | 12.5 | % |
——————————————
(a) Computed based on contribution margin.
Operating income of our Paperboard segment for the quarter ended July 1, 2023 decreased $4 million compared to the same prior year quarter, driven by the lower sales volumes, partially offset by the higher sales prices.
Operating Income - Six Months Ended
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| Six Months Ended June 25, 2022 | | Gross Margin Changes Attributable to: | | | | Six Months Ended July 1, 2023 |
(in millions, except percentages) | Sales Price | | Sales Volume/Mix(a) | | Cost | | SG&A and other | |
Operating income | $ | 16 | | | $ | 11 | | | $ | (8) | | | $ | (3) | | | $ | — | | | $ | 16 | |
Operating margin % | 13.7 | % | | 7.4 | % | | (3.3) | % | | (2.8) | % | | — | % | | 15.0 | % |
——————————————
(a) Computed based on contribution margin.
Operating income of our Paperboard segment for the six months ended July 1, 2023 was flat compared to the same prior year period, as the higher sales prices were offset by the lower sales volumes and higher purchased pulp, chemicals and energy costs.
High-Yield Pulp
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in millions, except where otherwise stated) | July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Net sales | $ | 44 | | | $ | 40 | | | $ | 86 | | | $ | 62 | |
Operating income (loss) | $ | 1 | | | $ | (2) | | | $ | 8 | | | $ | (2) | |
Average sales prices ($ per MT)(a) | $ | 633 | | | $ | 603 | | | $ | 691 | | | $ | 586 | |
Sales volumes (thousands of MTs)(a) | 60 | | | 55 | | | 103 | | | 85 | |
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(a) External sales only. For the three months ended July 1, 2023 and June 25, 2022, the High-Yield Pulp segment sold 14,000 MTs and 17,000 MTs of high-yield pulp to the Paperboard segment for $6 million and $7 million, respectively. For the six months ended July 1, 2023 and June 25, 2022, the High-Yield Pulp segment sold 32,000 MTs and 31,000 MTs of high-yield pulp to the Paperboard segment for $15 million and $13 million, respectively.
Net Sales — Nine- Three Months Ended
| | | Nine Months Ended September 25, 2021 | | Changes Attributable to: | | Nine Months Ended September 24, 2022 | | Three Months Ended June 25, 2022 | | Changes Attributable to: | | Three Months Ended July 1, 2023 |
(in millions) | (in millions) | Price | | Volume/Mix | | (in millions) | Price | | Volume/Mix | |
Net Sales | $ | 106 | | | $ | 10 | | | $ | (14) | | | $ | 102 | | |
| Net sales | | Net sales | $ | 40 | | | $ | 2 | | | $ | 2 | | | $ | 44 | |
Net sales of our High-Yield Pulp segment for the nine monthsquarter ended September 24, 2022 decreasedJuly 1, 2023 increased $4 million compared to the same prior year period due to a 16quarter, driven by 5 percent decreaseand 9 percent increases in sales prices and sales volumes,partially offset respectively, driven by a 15stronger demand, increased productivity and easing logistics constraints.
Net Sales - Six Months Ended
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 25, 2022 | | Changes Attributable to: | | Six Months Ended July 1, 2023 |
(in millions) | Price | | Volume/Mix | |
Net sales | $ | 62 | | | $ | 13 | | | $ | 11 | | | $ | 86 | |
Net sales of our High-Yield Pulp segment for the six months ended July 1, 2023 increased $24 million compared to the same prior year period, driven by 18 percent increaseand 21 percent increases in sales prices.prices and sales volumes, respectively, driven by stronger demand, increased productivity and easing logistics constraints.
Operating Income —(Loss) - Three Months Ended
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 25, 2021 | | Gross Margin Changes Attributable to: | | | | Three Months Ended September 24, 2022 |
(in millions) | Sales Price | | Sales Volume/Mix (a) | | Cost | | SG&A and other | |
Operating Income | $ | 8 | | | $ | 4 | | | $ | (3) | | | $ | (3) | | | $ | — | | | $ | 6 | |
Operating Margin % | 19.0 | % | | 7.1 | % | | (3.6) | % | | (7.5) | % | | — | % | | 15.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 25, 2022 | | Gross Margin Changes Attributable to: | | | | Three Months Ended July 1, 2023 |
(in millions, except percentages) | Sales Price | | Sales Volume/Mix(a) | | Cost | | SG&A and other | |
Operating income (loss) | $ | (2) | | | $ | 2 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | |
Operating margin % | (5.0) | % | | 5.0 | % | | 2.3 | % | | — | % | | — | % | | 2.3 | % |
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(a)Sales volume computed Computed based on contribution margin.
Operating incomeThe operating results of our High-Yield Pulp segment for the three monthsquarter ended September 24, 2022 decreased $2July 1, 2023 improved $3 million when compared to the same prior year period, as higher sales prices were more than offset by lower sales volumes due to lower productivity, logistics constraints and higher input and supply chain costs.
Operating Income — Nine Months Ended
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 25, 2021 | | Gross Margin Changes Attributable to: | | | | Nine Months Ended September 24, 2022 |
(in millions) | Sales Price | | Sales Volume/Mix (a) | | Cost | | SG&A and other | |
Operating Income | $ | 8 | | | $ | 10 | | | $ | (6) | | | $ | (8) | | | $ | — | | | $ | 4 | |
Operating Margin % | 7.5 | % | | 8.0 | % | | (3.8) | % | | (7.8) | % | | — | % | | 3.9 | % |
——————————————(a) Sales volume computed based on contribution margin.
Operating income of our High-Yield Pulp segment for the nine months ended September 24, 2022 decreased $4 million when compared to the same prior year period, as higher sales prices were more than offset by lower sales volumes due to lower productivity, logistics constraints and higher input and supply chain costs.
Corporate
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in millions) | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Operating Loss | $ | (11) | | | $ | (9) | | | $ | (43) | | | $ | (33) | |
The operating loss of our Corporate segment for the three months ended September 24, 2022 increased $2 million when compared to the same prior year quarter, driven primarily by the higher variable stock-based compensation costs.sales prices and sales volumes.
Operating Income (Loss) - Six Months Ended
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 25, 2022 | | Gross Margin Changes Attributable to: | | | | Six Months Ended July 1, 2023 |
(in millions, except percentages) | Sales Price | | Sales Volume/Mix(a) | | Cost | | SG&A and other | |
Operating income (loss) | $ | (2) | | | $ | 13 | | | $ | 4 | | | $ | (7) | | | $ | — | | | $ | 8 | |
Operating margin % | (3.2) | % | | 17.9 | % | | 2.8 | % | | (8.2) | % | | — | % | | 9.3 | % |
29——————————————
(a)
Computed based on contribution margin.The operating lossresults of our CorporateHigh-Yield Pulp segment for the ninesix months ended September 24, 2022 increasedJuly 1, 2023 improved $10 million when compared to the same prior year period, driven primarily by an increase in severancethe higher sales prices and sales volumes, partially offset by increased wood and logistics costs and higher labor and maintenance costs due to inflation.
Corporate
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in millions) | July 1, 2023 | | June 25, 2022 | | July 1, 2023 | | June 25, 2022 |
Operating loss | $ | (14) | | | $ | (18) | | | $ | (27) | | | $ | (32) | |
The Corporate operating loss for the three and six months ended July 1, 2023 decreased $4 million and $5 million, respectively, compared to the same prior year periods, driven by lower variable stock-based compensation costs and lower severance, partially offset by favorableunfavorable foreign exchange impacts.rates in the current year periods.
Liquidity and Capital Resources
Overview
Cash flows from operations, primarily driven by operating results, have historically been our primary source of liquidity and capital resources. As operating cash flows can be negatively impacted by fluctuations in market prices for our commodity products as well asand changes in demand for our products, we maintain a key focus on cash, managing working capital closely and optimizing the timing and level of our capital expenditures.
Our Board of Directors suspended our quarterly common stock dividend in September 2019. No dividends have been declared since. The declaration and payment of future common stock dividends, if any, will be at the discretion of theour Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and other factors that the Board of Directors deemdeems relevant. In addition, our debt facilities place limitations on the declaration and payment of future dividends.
In January 2018, our Board of Directors authorized a $100 million common stock share buyback program. We did not repurchase any shares under this program during the three and ninesix months ended September 24,July 1, 2023 and June 25, 2022, and September 25, 2021, and do not expect to utilize any authorization in the near future.
As of September 24, 2022,July 1, 2023, we were in compliance with all financial and other customary covenants.covenants under our credit arrangements. We believe our future cash flows from operations, and availability under our ABL Credit Facility as well asand our ability to access the capital markets, if necessary or desirable, will be adequate to fund our operations and anticipated long-term funding requirements, including capital expenditures, defined benefit plan contributions and repayment of debt maturities.
Our non-guarantor subsidiaries had assets of $799$466 million, liabilities of $234$139 million, year-to-date revenue of $187$79 million and a trailing twelve month ABL Credit Facility covenant EBITDA for continuing operations of $34 million as of September 24, 2022.July 1, 2023.
Our liquidity and capital resources are summarized below:
| | | | | | | | | | | |
(in millions, except ratios) | September 24, 2022 | | December 31, 2021 |
Cash and cash equivalents (a) | $ | 132 | | | $ | 253 | |
Availability under the ABL Credit Facility (b) | 128 | | | 103 | |
Total debt (c) | 873 | | | 929 | |
Stockholders’ equity | 780 | | | 814 | |
Total capitalization (total debt plus stockholders’ equity) | 1,653 | | | 1,743 | |
Debt to capital ratio | 53 | % | | 53 | % |
| | | | | | | | | | | |
(in millions, except ratios) | July 1, 2023 | | December 31, 2022 |
Cash and cash equivalents(a) | $ | 157 | | | $ | 152 | |
Availability under the ABL Credit Facility(b) | 109 | | | 130 | |
Total debt(c) | 834 | | | 853 | |
Stockholders’ equity | 814 | | | 829 | |
Total capitalization (total debt plus stockholders’ equity) | 1,648 | | | 1,682 | |
Debt to capital ratio | 51 | % | | 51 | % |
——————————————
(a) ConsistsCash and cash equivalents consist of cash, money market deposits and time deposits with original maturities of 90 days or less.
(b) Amounts available under the ABL Credit Facility fluctuate based on eligible accounts receivable and inventory levels. At September 24, 2022,July 1, 2023, we had $166$143 million of gross availability and net available borrowings of $128$109 million after taking into account standby letters of credit of $38$34 million. In addition to the availability under the ABL Credit Facility, we have $23$6 million available under anour accounts receivable factoring line of credit in France.
(c) See Note 7 —7—Debt and Finance Leases to our Consolidated Financial Statements for further information.
Other Sources of Cash
In May 2022, we sold our GreenFirst shares for $43 million. See Note 2 — Discontinued Operations to our Consolidated Financial Statements for further information.
In August 2022, we received a U.S. federal tax refund of $23 million. See Note 16 — Income Taxes to our Consolidated Financial Statements for further information.
Cash Requirements
We experienced increased operating expenses and capital spend during the nine months ended September 24, 2022, including for the extensive planned maintenance outages performed in the first half of the year.
Contractual Commitments
Our principal contractual commitments include standby letters of credit, surety bonds, guarantees, purchase obligations and leases. We utilize arrangements such as standby letters of credit and surety bonds to provide credit support for certain suppliers and vendors in case of their default on critical obligations, collateral for certain of our self-insurance programs and guarantees for the completion of our remediation of environmental liabilities. As part of our ongoing operations, we also periodically issue guarantees to third parties. Our primary purchase obligationsobligation payments relate to natural gas, steam energy and wood chips purchase contracts. There have been no material changes to our contractual commitments outside the ordinary course of business during the ninesix months ended September 24, 2022.July 1, 2023. See Note 17—Commitments and Contingenciesto our Financial Statements for further information.
Senior Notes and Term Loan
During the nine months ended September 24, 2022,In March 2023, we repurchased $35$5 million of our Unsecured2024 Notes through open marketopen-market transactions and retired the notes for cash of approximately $35$5 million.
With our next significant debt maturity in mid-2024,In April 2023, we continue to monitor the capital markets and are prepared to opportunistically refinance the Unsecured Notes at the appropriate time considering market conditions and all other relevant factors. We are confident that by executing on our strategy to improve our credit profile, we can obtain a refinancing at acceptable terms based on market conditions. We may also use a portionrepurchased $10 million of our 2026 Notes through open-market transactions and retired the notes for cash balances to opportunistically repay debt or assist in a holistic refinancing of our capital structure.$9 million.
Canadian Dollar Term Loans
During the nine months ended September 24, 2022,In July 2023, we repaid a Canadian dollar fixed interest ratesecured term loan financing of $250 million in aggregate principal amount and received net proceeds of $243 million after original issue discount, which will be used, together with cash on hand, to redeem the amountremaining $318 million in aggregate principal balance of CAD $12 million (USD $9 million). In October 2022, we repaidthe 2024 Notes and pay fees and expenses related to the transaction. The 2027 Term Loan matures in July 2027, bears interest at an additional term loan inannual rate equal to three-month Term SOFR (or, if greater, 3.00 percent) plus 8.00 percent and requires quarterly principal payments of 0.50 percent of the amountinitial principal amount.
Cash Flows
The following table summarizes our cash flows:
| | | Nine Months Ended | | Six Months Ended |
(in millions) | (in millions) | September 24, 2022 | | September 25, 2021 | (in millions) | July 1, 2023 | | June 25, 2022 |
Cash flows provided by (used in): | Cash flows provided by (used in): | | | | Cash flows provided by (used in): | | | |
Operating activities-continuing operations | $ | 7 | | | $ | 45 | | |
Operating activities-discontinued operations | — | | | 162 | | |
Operating activities | | Operating activities | $ | 84 | | | $ | (36) | |
| Investing activities-continuing operations | Investing activities-continuing operations | (114) | | | (65) | | Investing activities-continuing operations | (54) | | | (87) | |
Investing activities-discontinued operations | Investing activities-discontinued operations | 44 | | | 183 | | Investing activities-discontinued operations | — | | | 43 | |
Financing activities | Financing activities | (51) | | | (138) | | Financing activities | (26) | | | (22) | |
Cash flows provided by operating activities of continuing operations decreased $38increased $120 million during the nine months ended September 24, 2022, to $7 million, when compared to the same prior year periodprimarily due to changes inincreased cash inflows from working capital, and other items, which were influenced by the impact of the extensive planned maintenance outages through the second quarter of 2022, partially offset by the receipt of a $23 million U.S. federal tax refund.payments on deferred energy liabilities associated with our Tartas facility operations.
Cash flows used in investing activities of continuing operations increased $49decreased $33 million during the nine months ended September 24, 2022 when compared to the same prior year period primarily due to increasedlower capital spending related to the planned maintenance outages in the current year.spending.
Cash flows provided by investing activities of discontinued operations decreased $139of $43 million during the nine months ended September 24,in 2022 to $44 million, when comparedrelated to the same prior year period. The cash inflow in 2022 was the result ofproceeds from the sale of GreenFirst common stock as well as the first installment on the credit note associated with the sale of our lumber and newsprint assets in August 2021. The cash inflow in 2021 consisted of the net cash received in connection with the sale of the lumber and newsprint assets.
Cash flows used in financing activities decreased $87increased $4 million during the nine months ended September 24, 2022, to $51 million, when compared to the same prior year period, primarily due to a decrease in repaymenthigher repurchases of common stock to satisfy tax withholding requirements related to the issuance of stock under our incentive stock plans and decreased borrowings of long-term debt, partially offset by lower repayments of long-term debt.
Performance and Liquidity Indicators
The discussion below is presented to enhance the reader’s understanding of our operating performance, liquidity and ability to generate cash and satisfy rating agency and creditor requirements. This information includes the non-GAAP financial measures of EBITDA, adjusted EBITDA and adjusted free cash flows. These measures are not defined by GAAP and our discussion of them is not intended to conflict with or change any of our GAAP disclosures provided in this Report.report.
We believe these non-GAAP financial measures provide useful information to our Board of Directors, management and investors regarding our financial condition and results of operations. Our management uses these non-GAAP financial measures to compare our performance to that of prior periods for trend analyses, to determine management incentive compensation and for budgeting, forecasting and planning purposes. Our management considers these non-GAAP financial measures, in addition to operating income, to be important in estimating theour enterprise and stockholder values of the Company and for making strategic and operating decisions. In addition, analysts, investors and creditors use these non-GAAP financial measures when analyzing our operating performance, financial condition and cash-generating ability. We use EBITDA and adjusted EBITDA as performance measures and adjusted free cash flows as a liquidity measure.
We do not consider non-GAAP financial measures an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that 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 our non-GAAP financial measures to their most directly comparable GAAP financial measures are provided below. Non-GAAP financial measures are not necessarily indicative of results that may be generated in future periods and should not be relied upon, in whole or part, in evaluating theour financial condition, results of operations or future prospects of the Company.prospects.
EBITDA and Adjusted EBITDA
EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is not necessarily indicativedefined as EBITDA adjusted for the settlement of results that may be generated in future periods.certain pension plans and other items.
Below are reconciliationsReconciliations of income (loss) from continuing operations to EBITDA from continuing operations, by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | High Purity Cellulose | | Paperboard | | High-Yield Pulp | | Corporate & Other | | Total | |
Three Months Ended September 24, 2022 | | | | | | | | | | | | |
Income (loss) from continuing operations | | | $ | 23 | | | $ | 12 | | | $ | 6 | | | $ | (23) | | | $ | 18 | | |
Depreciation and amortization | | | 30 | | | 3 | | | — | | | 2 | | | 35 | | |
Interest expense, net | | | — | | | — | | | — | | | 17 | | | 17 | | |
Income tax benefit | | | — | | | — | | | — | | | (2) | | | (2) | | |
EBITDA and Adjusted EBITDA from continuing operations | | | $ | 53 | | | $ | 15 | | | $ | 6 | | | $ | (6) | | | $ | 68 | | |
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Three Months Ended September 25, 2021 | | | | | | | | | | | | |
Income (loss) from continuing operations | | | $ | 2 | | | $ | 2 | | | $ | 8 | | | $ | (25) | | | $ | (13) | | |
Depreciation and amortization | | | 30 | | | 4 | | | 1 | | | — | | | 35 | | |
Interest expense, net | | | — | | | — | | | — | | | 17 | | | 17 | | |
Income tax benefit | | | — | | | — | | | — | | | (4) | | | (4) | | |
EBITDA from continuing operations | | | 32 | | | 6 | | | 9 | | | (12) | | | 35 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Gain on debt extinguishment | | | — | | | — | | | — | | | (2) | | | (2) | | |
Adjusted EBITDA from continuing operations | | | $ | 32 | | | $ | 6 | | | $ | 9 | | | $ | (14) | | | $ | 33 | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Nine Months Ended September 24, 2022 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Income (loss) from continuing operations | | | $ | 22 | | | $ | 29 | | | $ | 5 | | | $ | (87) | | | $ | (31) | | |
Depreciation and amortization | | | 83 | | | 10 | | | 1 | | | 2 | | | 96 | | |
Interest expense, net | | | — | | | — | | | — | | | 49 | | | 49 | | |
Income tax expense | | | — | | | — | | | — | | | 3 | | | 3 | | |
EBITDA from continuing operations | | | 105 | | | 39 | | | 6 | | | (33) | | | 117 | | |
Pension settlement loss | | | — | | | — | | | — | | | 1 | | | 1 | | |
Severance | | | — | | | — | | | — | | | 4 | | | 4 | | |
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| | | | | | | | | | | | |
Adjusted EBITDA from continuing operations | | | $ | 105 | | | $ | 39 | | | $ | 6 | | | $ | (28) | | | $ | 122 | | |
| | | | | | | | | | | | |
Nine Months Ended September 25, 2021 | | | | | | | | | | | | |
Income (loss) from continuing operations | | | $ | 20 | | | $ | 11 | | | $ | 9 | | | $ | (61) | | | $ | (21) | | |
Depreciation and amortization | | | 85 | | | 11 | | | 2 | | | 3 | | | 101 | | |
Interest expense, net | | | — | | | — | | | — | | | 49 | | | 49 | | |
Income tax benefit | | | — | | | — | | | — | | | (29) | | | (29) | | |
EBITDA from continuing operations | | | 105 | | | 22 | | | 11 | | | (38) | | | 100 | | |
Pension settlement loss | | | — | | | — | | | — | | | 1 | | | 1 | | |
| | | | | | | | | | | | |
Gain on debt extinguishment | | | — | | | — | | | — | | | (2) | | | (2) | | |
Adjusted EBITDA from continuing operations | | | $ | 105 | | | $ | 22 | | | $ | 11 | | | $ | (39) | | | $ | 99 | | |
For the three and nine months ended September 24, 2022, EBITDA from continuing operations increased $33 million and $17 million, respectively, and Adjusted EBITDA from continuing operations, increased $35by segment, follow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | High Purity Cellulose | | Paperboard | | High-Yield Pulp | | Corporate & Other | | Total | |
Three Months Ended July 1, 2023 | | | | | | | | | | |
Income (loss) from continuing operations | $ | — | | | $ | 6 | | | $ | 1 | | | $ | (23) | | | $ | (16) | | |
Depreciation and amortization | 28 | | | 4 | | | — | | | 1 | | | 33 | | |
Interest expense, net | — | | | — | | | — | | | 14 | | | 14 | | |
Income tax benefit | — | | | — | | | — | | | (3) | | | (3) | | |
EBITDA-continuing operations | 28 | | | 10 | | | 1 | | | (11) | | | 28 | | |
Gain on debt extinguishment | — | | | — | | | — | | | (1) | | | (1) | | |
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Adjusted EBITDA-continuing operations | $ | 28 | | | $ | 10 | | | $ | 1 | | | $ | (12) | | | $ | 27 | | |
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Three Months Ended June 25, 2022 | | | | | | | | | | |
Income (loss) from continuing operations | $ | 6 | | | $ | 11 | | | $ | (1) | | | $ | (41) | | | $ | (25) | | |
Depreciation and amortization | 30 | | | 3 | | | 1 | | | — | | | 34 | | |
Interest expense, net | — | | | — | | | — | | | 16 | | | 16 | | |
Income tax expense | — | | | — | | | — | | | 4 | | | 4 | | |
EBITDA-continuing operations | 36 | | | 14 | | | — | | | (21) | | | 29 | | |
Pension settlement loss | — | | | — | | | — | | | 1 | | | 1 | | |
Severance | — | | | — | | | — | | | 4 | | | 4 | | |
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Adjusted EBITDA-continuing operations | $ | 36 | | | $ | 14 | | | $ | — | | | $ | (16) | | | $ | 34 | | |
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Six Months Ended July 1, 2023 | | | | | | | | | | |
Income (loss) from continuing operations | $ | 13 | | | $ | 16 | | | $ | 8 | | | $ | (51) | | | $ | (14) | | |
Depreciation and amortization | 59 | | | 7 | | | 1 | | | 1 | | | 68 | | |
Interest expense, net | — | | | — | | | — | | | 29 | | | 29 | | |
Income tax benefit | — | | | — | | | — | | | (6) | | | (6) | | |
EBITDA-continuing operations | 72 | | | 23 | | | 9 | | | (27) | | | 77 | | |
Pension settlement loss | — | | | — | | | — | | | 2 | | | 2 | | |
Gain on debt extinguishment | — | | | — | | | — | | | (1) | | | (1) | | |
Adjusted EBITDA-continuing operations | $ | 72 | | | $ | 23 | | | $ | 9 | | | $ | (26) | | | $ | 78 | | |
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Six Months Ended June 25, 2022 | | | | | | | | | | |
Income (loss) from continuing operations | $ | (1) | | | $ | 17 | | | $ | (1) | | | $ | (64) | | | $ | (49) | | |
Depreciation and amortization | 53 | | | 7 | | | 1 | | | — | | | 61 | | |
Interest expense, net | — | | | — | | | — | | | 32 | | | 32 | | |
Income tax expense | — | | | — | | | — | | | 5 | | | 5 | | |
EBITDA-continuing operations | 52 | | | 24 | | | — | | | (27) | | | 49 | | |
Pension settlement loss | — | | | — | | | — | | | 1 | | | 1 | | |
Severance | — | | | — | | | — | | | 4 | | | 4 | | |
Adjusted EBITDA-continuing operations | $ | 52 | | | $ | 24 | | | $ | — | | | $ | (22) | | | $ | 54 | | |
EBITDA from continuing operations for the quarter ended July 1, 2023 decreased $1 million and $23 million, respectively, when compared to the same prior year periods. These increases were primarilyquarter, driven by higherthe decrease in net sales prices across all segments, partially offset by higher keyand increased labor, maintenance, input and logistics costs, dueoffset by a decrease in Corporate expense items and the recognition of a $3 million benefit from payroll tax credit carryforwards. EBITDA from continuing operations for the six months ended July 1, 2023 increased $28 million compared to inflation, lower volumes due to supply chain constraintsthe same prior year period, driven by the increase in net sales, a decrease in Corporate expense items and lower productivity when comparing the nine-month periods. For a full discussion of changes to operating income seerecognized on the payroll tax credit carryforwards, partially offset by increased labor, maintenance, input and logistics costs. See Results of Operations above.above for additional discussion of the changes in our operating results.
Adjusted Free Cash Flows
Adjusted free cash flows is defined as cash provided by operating activities of continuing operations adjusted for capital expenditures, net of proceeds from the sale of assets and excluding strategic capital expenditures deemed discretionary by management. Adjusted free cash flows as defined by us, is a non-GAAP financial measure of cash generated during a period, which is available for debt reduction, strategic capital expenditures, and acquisitions and repurchaserepurchases 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 reconciliationCash flows of cash flows from operationsoperating activities of continuing operations is reconciled to adjusted free cash flows - continuing operations for the respective periods:as follows:
| | | | | | | | | | | |
| Nine Months Ended |
(in millions) | September 24, 2022 | | September 25, 2021 |
Cash provided by operating activities-continuing operations | $ | 7 | | | $ | 45 | |
Capital expenditures (a) | (92) | | | (51) | |
Adjusted Free Cash Flows-continuing operations | $ | (85) | | | $ | (6) | |
| | | | | | | | | | | |
| Six Months Ended |
(in millions) | July 1, 2023 | | June 25, 2022 |
Cash provided by (used in) operating activities-continuing operations | $ | 84 | | | $ | (36) | |
Capital expenditures, net(a) | (32) | | | (71) | |
Adjusted free cash flows-continuing operations | $ | 52 | | | $ | (107) | |
——————————————
(a) Net of proceeds from the sale of assets and excluding strategic capital expenditures. Strategic capital expenditures for the ninesix months ended July 1, 2023 and June 25, 2022 and 2021 were approximately $22 million and $10$16 million, respectively.
Adjusted free cash flows of continuing operations declinedincreased primarily due to changes in working capital and other items as well as higherlower capital expenditures. For a full discussion of operating cash flows, seeSee Cash Flows above.above for additional discussion of our operating cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market and Other Economic Risks
We are exposed to various market risks, primarily changes in interest rates, foreign currency and commodity prices. Our objective is to minimize the economic impact of these market risks. We may use derivatives in accordance with policies and procedures approved by the AuditFinance & Strategic Planning Committee of our Board of Directors. Derivatives are managed by a senior executive committee whose responsibilities include initiating, managing and monitoring resulting exposures. See Note 9 — Derivative Instruments to our Consolidated Financial Statements for further information.
Foreign Currency
We manage our foreign currency exposures by balancing certain assets and liabilities denominated in foreign currencies. We previously have used, and may do so again,also use foreign currency forward contracts to manage these exposures. The principal objective of such contracts is to minimize the potential volatility and financial impact of changes in foreign currency exchange rates. We do not utilize financial instruments for trading or other speculative purposes.
Prices
The prices, sales volumes and margins of the commodity products of our High Purity Cellulose segment and all the products of the High-Yield Pulp segment have historically been cyclically affected by economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates. In general, these products are commodities that are widely available from other producers. Because theseThese products have fewless distinguishing qualities from producer to producer and competition is based primarily on price, which is determined by market supply relative to demand. The overall levels of demand for the products we manufacture, and consequently our sales and profitability, reflect fluctuations in end user demand. Our cellulose specialties product prices are impacted by market supply and demand, raw material and processing costs, changes in global currencies and other factors. While these prices are not directly correlated to commodity dissolving wood pulp and paper pulp prices, changes in commodity dissolving wood pulp and paper pulp prices may impact competitors’ actions which can lead to an impact in prices for cellulose specialties products. In addition, slightly over half of our cellulose specialties contracted volumes are under multi-year contracts that expire between 2022 and 2024.
As of September 24, 2022, we had $2 million of variable rate debt which is subject to interest rate risk. At this borrowing level, a hypothetical one percent change in interest rates would result in an immaterial increase/decrease in interest payments and expense over a 12-month period.
The fairCertain key input costs, such as wood fiber, chemicals and energy, may experience significant price fluctuations, also impacted by market value of our long-term fixed interest rate debt is also subject to interest rate risk. However, we intend to hold most of our debt until maturity. The estimated fair value of our fixed-rate debt at September 24, 2022 was $823 million compared to the $869 million carrying value of principal amount. We use quoted market prices to estimate the fair value of our fixed-rate debt. Generally, the fair market value of fixed-rate debt will increase as interest rates fallshifts, fluctuations in capacity and decrease as interest rates rise.
other demand and supply dynamics. We may periodically enter into commodity forward contracts to fix some of our energy costs that are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. Such forward contracts partially mitigate the risk of changes to our gross margins resulting from an increase or decrease in these costs. Forward contracts that are derivative instruments are reported in theour consolidated balance sheets at their fair values, unless they qualify for the normal purchase normal sale (“NPNS”) exception and such exception has been elected. If the NPNS exception is elected, in which case, the fair values of such contracts are not recognized onin the balance sheet.
Variable Interest Rates
As of July 1, 2023 and December 31, 2022, we had $2 million and $4 million, respectively, of variable rate debt subject to interest rate risk. At these borrowing levels, a hypothetical one percent change in interest rates would have resulted in an immaterial change in interest expense for the respective periods.
In July 2023, we secured variable-rate term loan financing of $250 million in aggregate principal amount, the proceeds of which will be used toward the redemption of the remaining $318 million in aggregate principal amount of our fixed-rate 5.50 percent 2024 Notes. The 2027 Term Loan bears interest at a per annum rate equal to three-month Term SOFR (or, if greater, 3.00 percent) plus 8.00 percent. For this new debt, a hypothetical one percent change in current interest rates would result in a $2 million annual change in interest expense.
The fair market value of our long-term fixed interest rate debt is also subject to interest rate risk when the debt becomes due or if we do not hold the debt until maturity. The estimated fair value of our fixed-rate debt at July 1, 2023 and December 31, 2022 was $770 million and $839 million, respectively, compared to its respective $835 million and $854 million principal amounts. We use quoted market prices to estimate the fair value of our fixed-rate debt. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise.
Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)),Act) are designed with the objective of ensuring that information required to be disclosed in reports filed under the Exchange Act, such as this quarterly reportQuarterly Report on Form 10-Q, is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Because of the inherent limitations in all control systems, no control evaluation can provide absolute assurance that all control exceptions and instances of fraud have been prevented or detected on a timely basis. Even systems determined to be effective can provide only reasonable assurance their objectives are achieved.
Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly reportQuarterly Report on Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, concluded the design and operation of the disclosure controls and procedures were effective as of September 24, 2022.July 1, 2023.
DuringInternal Control over Financial Reporting
For the quarter ended September 24, 2022,July 1, 2023, based upon the evaluation required by paragraph (d) of SEC Rule 13a-15,13a-15(d), there were no changes in our internal control over financial reporting that would materially affect or are reasonably likely to materially affect our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
The Company is engaged in various legal and regulatory actions and proceedings and has been named as a defendant in various lawsuits and claims arising in the ordinary course of its business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, the Company has, in certain cases, retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance, business interruption and general liability. While there can be no assurance, the ultimate outcomeoutcomes of these actions, either individually or in the aggregate, isare not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Item 1A. Risk Factors
In additionThere have been no material changes or updates to the risk factors previously disclosed in our 2021 Annual Report on2022 Form 10-K, the following risk factor is hereby added:
Our business, financial condition and results of operations could be adversely affected by disruptions in the global economy caused by the ongoing conflict between Russia and Ukraine or other geopolitical conflict.
The military conflict between Russia and Ukraine, along with economic sanctions placed by Western countries on certain industry sectors and parties in Russia, have negatively impacted the global economy. While we have no direct operations in Russia or Ukraine, we have significant operations in Europe which have experienced shortages in key input materials and increased costs for transportation, energy, and raw materials due to this conflict. Further escalation of geopolitical tensions could result in, among other things, gas shortages in Europe and disruptions of operations for us, our customers and our suppliers, cyberattacks, lower consumer demand and changes to foreign exchange rates and financial markets, any of which would adversely affect our business. These impacts could also directly affect North America and adversely impact our operations in this region. In addition, the effects of the ongoing conflict could heighten many of our known risks described in this Item 1A — Risk Factors of our 2021 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information regardingsummarizes our purchases of Rayonier Advanced MaterialsRYAM common stock during the quarter ended September 24, 2022:July 1, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Total Number of Shares Purchased(a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Dollar Value of Shares That May Yet be Purchased Under the Publicly Announced Plans or Programs(b) | April 2 to May 6 | 11,442 | | | $ | 8.40 | | | — | | | $ | 60,294,000 | | May 7 to June 3 | 17,809 | | | $ | 4.30 | | | — | | | $ | 60,294,000 | | June 4 to July 1 | — | | | $ | — | | | — | | | $ | 60,294,000 | | Total | 29,251 | | | | | — | | | |
Total Number of Shares Purchased (a)
| | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (b)
|
June 26 to July 30 | — | | | $ | — | | | — | | | $ | 60,294,000 | |
July 31 to August 27 | — | | | $ | — | | | — | | | $ | 60,294,000 | |
August 28 to September 24 | — | | | $ | — | | | — | | | $ | 60,294,000 | |
Total | — | | | | | — | | | |
——————————————(a) RepurchasedRepresents shares repurchased to satisfy the tax withholding requirements related to the issuance of stock under the Rayonier Advanced Materials Incentive Stock Plan.our stock incentive plans.
(b) As of September 24, 2022, approximatelyJuly 1, 2023, $60 million of share repurchase authorization remains under the authorization declared by theour Board of Directors on January 29, 2018.
Directors.
Item 6. Exhibits
| | | | | | | | | | | | | | |
Exhibit No. | | Description | | Location |
| | Amended and Restated Certificate of Incorporation of Rayonier Advanced Materials Inc. | | Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on June 30, 2014 |
| | Certificate of Designations of 8.00% Series A Mandatory Convertible Preferred Stock of Rayonier Advanced Materials Inc., filed with the Secretary of State of the State of Delaware and effective August 10, 2016 | | Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on August 10, 2016 |
| | Certificate of Designations of Series A Junior Participating Preferred Stock | | Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on March 21, 2022 |
| | Amended and Restated Bylaws of Rayonier Advanced Materials Inc., effective October 19, 2022 | | Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on October 19, 2022 |
| Certificate of Designations of Series A Junior Participating Preferred | Rayonier Advanced Materials Inc. 2023 Incentive Stock Plan, effective May 17, 2023 | | Incorporated herein by reference to Exhibit 3.1D to the Registrant’s Form 8-KRegistrant's Definitive Proxy Statement on Schedule 14A filed on March 21, 202231, 2023 |
| Rights | Term Loan Credit Agreement, dated as of March 21, 2022, betweenJuly 20, 2023, by and among RYAM Lux SARL, Rayonier Advanced Materials Inc., the other subsidiaries of Rayonier Advanced Materials Inc. party thereto, the lenders party thereto, Oaktree Fund Administration, LLC, as administrative agent, and Computershare Trust Company, N.A., which includes the form of Certificate of Designations as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit Ccollateral agent | | Incorporated herein by reference to Exhibit 4.110.1 to the Registrant’s Form 8-K filed on March 21, 2022July 20, 2023 |
| | Seventh Amendment to Retirement Plan for Salaried EmployeesLoan Agreement, dated as of July 20, 2023, by and among RYAM Lux SARL, Rayonier Advanced Materials Inc. and the other subsidiaries of Rayonier Advanced Materials Inc., effective December 31, 2022 party thereto | | Filed herewithIncorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed on July 20, 2023 |
| | First Amendment No. 2 to Revolving Credit Agreement, dated as of July 20, 2023, among Rayonier Advanced Materials Inc. Excess Benefit Plan, effective December 31, 2022, Rayonier A.M. Products Inc., the lenders and issuing banks party thereto and Bank of America, N.A. as administrative agent and collateral agent | | Filed herewithIncorporated herein by reference to Exhibit 10.3 to the Registrant’s Form 8-K filed on July 20, 2023 |
| | Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
| | Certification of Periodic Financial Reports Under Section 906 of the Sarbanes-Oxley Act of 2002 | | Furnished herewith |
101 | | Interactive data files (formatted in Inline XBRL) pursuant to Rule 405 of Regulation S-T | | Filed herewith |
104 | | Cover page interactive data file (formatted in Inline XBRL and contained in Exhibit 101) pursuant to Rule 406 of Regulation S-T | | Filed herewith |
* Management contract or compensatory plan
SignatureSIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| Rayonier Advanced Materials Inc. |
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| By: | /s/ MARCUS J. MOELTNER |
| | Marcus J. Moeltner Chief Financial Officer and Senior Vice President, Finance (Duly Authorized Officer and Principal Financial Officer) |
| | Date: August 9, 2023 |
Date: November 2, 2022