EDGAR 10-K Filing

Company CIK: 1597672
Filing Year: 2021
Filename: 1597672_10-K_2021_0001597672-21-000009.json

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ITEM 1. BUSINESS
Item 1. Business
We are a global leader of cellulose-based technologies, which comprise a broad offering of high purity cellulose specialties, a natural polymer commonly used in the production of specialty chemicals and polymers for use in producing LCD displays, filters, fibers, performance additives for pharmaceutical, food and other industrial applications. Starting from a tree and building upon more than 90 years of experience in cellulose chemistry, we provide high quality high-purity cellulose pulp products that make up the essential building blocks for our customers’ products while providing exceptional service and value. In addition, we produce lumber, paperboard, newsprint and high-yield pulp for use in consumer products.
Prior to June 27, 2014, we consisted of Rayonier Inc.’s (“Rayonier’s”) wholly-owned performance fibers business which was engaged primarily in the production of cellulose specialties. On that date, we separated from Rayonier and started our business as an independent, publicly traded company.
In November 2017, we completed the acquisition of Tembec Inc. (the “Acquisition”) which manufactured cellulose specialties, as well as lumber, paperboard, newsprint and high-yield pulp. The Acquisition created a combined company with leading positions across the cellulose specialties product spectrum, including acetate, ethers, high-strength viscose, filtration and other cellulose specialties, as well as adding complementary assets in the forest products, paperboard, high-yield pulp and newsprint businesses.
In November 2019, we sold the Matane pulp mill (the “Matane Mill”), which was acquired in the Acquisition, to Sappi Limited, a global diversified wood fiber company. As a result of the sale, we have reclassified the Matane Mill’s operating results and assets and liabilities for prior periods as discontinued operations. See Note 3 - Discontinued Operations of our consolidated financial statements for additional information.
Following the sale of the Matane Mill, we report the following business segments:
•High Purity Cellulose
•Forest Products
•Paperboard
•Pulp & Newsprint
All prior period disclosures have been conformed to the above segment structure. See Note 21 - Segment and Geographical Information of our consolidated financial statements for more information.
High Purity Cellulose
The High Purity Cellulose segment, and in particular the cellulose specialties product line, is the primary driver of our profitability. Cellulose specialties are natural polymers, used as raw materials to manufacture a broad range of consumer-oriented products such as liquid crystal displays, impact-resistant plastics, thickeners for food products, pharmaceuticals, cosmetics, cigarette filters, high-tenacity rayon yarn for tires and industrial hoses, food casings, paints and lacquers. We manufacture products tailored to the precise and demanding chemical and physical specifications of our customers, achieving industry-leading purity and product functionality. Our ability to consistently manufacture high-quality cellulose specialties products is the result of our proprietary production processes, intellectual property, and more than 90 years of technical expertise and knowledge of cellulosic chemistry.
Additionally, a significant portion of our production capacity is dedicated to manufacturing high-purity commodity products for viscose and absorbent materials applications. Commodity viscose is a raw material required for the manufacture of viscose staple fibers which are used in woven applications such as rayon textiles for clothing and other fabrics, and in non-woven applications such as baby wipes, cosmetic and personal wipes, industrial wipes and mattress ticking. Absorbent materials, typically referred to as fluff fibers, are used as an absorbent medium in products such as disposable baby diapers, feminine hygiene products, incontinence pads, convalescent bed pads, industrial towels and wipes and non-woven fabrics. Cellulose specialties typically contain over 95 percent cellulose, while commodity products typically contain less than 95 percent cellulose.
Products
Cellulose Specialties
Cellulose specialties are a natural polymer primarily derived from either wood or cotton and are used as a principal raw material to manufacture a broad range of products. Cellulose specialties generally command a price premium and earn higher margins relative to other commodity wood pulp products. Cellulose specialties are a dissolving wood pulp product which target a combination of high purity and high viscosity. Unlike other wood pulps used for their physical properties, cellulose specialties are sought after for the unique chemical properties and reactivity they impart on downstream products.
Derived from wood, our cellulose specialties require high levels of purity, consistency and process knowledge. Our products play a significant role in our customers’ manufacturing processes, which require cellulose specialties of high purity and uniformity for efficient production. Therefore, our customers demand products of the highest quality. As a result, our products are custom-engineered and manufactured to each customers’ unique specifications and require a stringent qualification process; our quality and consistency allow our customers to operate more efficiently and cost-effectively.
One of our key competitive advantages is our unique ability to leverage our global manufacturing asset base to provide our customers greater supply chain security for cellulose specialties fibers. With our four facilities and five manufacturing lines capable of producing cellulose specialties, we are the only cellulose specialties producer in the world with flexibility to use both hardwood and softwood fibers, kraft and sulfite cooking processes, and a variety of proprietary chemical treatments to provide customized product functionality. Additionally, we possess significant process knowledge: the understanding of wood fiber properties and their modification under a sequence of chemical processes, accumulated and developed over 90 years of practical application to satisfy a variety of customer needs. This process knowledge, combined with our manufacturing scale and flexibility and knowledge of customers’ applications and specifications, makes us the industry’s most adaptable modifier of cellulose fibers.
Commodity Products
We can shift our High Purity Cellulose segment manufacturing assets between commodity viscose and absorbent materials production. Historically we have opted to participate in both markets and fluctuate production to take advantage of market conditions and generate the most attractive margins.
Commodity viscose is primarily sold to producers of viscose staple fibers which in turn are used to manufacture rayon fibers which are widely used in the clothing and textile industries. Shifts in fashion styles and textile fiber blending have increased demand for viscose staple fibers. Additionally, variability in cotton linter supply and increasing environmental concerns about cotton production have resulted in viscose staple producers shifting volume away from cotton linter pulp to wood-based dissolving pulp.
Absorbent materials, or fluff fibers, are typically used in consumer products such as baby diapers. These fibers provide a medium for fluid acquisition, distribution and retention in the products in which they are incorporated. Pricing for commodity products is typically referenced to published indexes or based on publicly available spot market prices.
Competition
Cellulose Specialties
Significant intellectual property, capital investment and technical expertise are needed to design and manufacture customized cellulose specialties fibers to exacting customer specifications. The product must be formulated to achieve the desired characteristics including parameters for purity, viscosity, brightness, reactivity and other physical properties. Product qualification time can be lengthy, extending six to twenty-four months. Resulting customer relationships are typically long-term and are based on an understanding of our customers’ production processes and technical expertise which we utilize to help solve our customers’ production challenges and support new product development. Further, establishing a production line and obtaining the necessary production technologies requires substantial capital and ongoing maintenance expenditures.
Product performance, technical service and price are principal methods of competition in cellulose specialties. Product performance is primarily determined by the chemical attributes of the pulp, including purity, viscosity and uniformity of the cellulose specialties. Our processes, which are a key element of our intellectual property, are capable of generating cellulose specialties purity levels in excess of 98 percent as well as the highest levels of viscosity derived from wood pulp. Typically, product pricing is set annually in the fourth quarter for the following year based on discussions with customers and the terms of contractual arrangements.
We compete with both domestic and foreign producers in cellulose specialties. Competitors include GP Cellulose, Borregaard, Bracell, Sappi, Nippon, Cosmo Specialty Fibers and Aditya Birla Group. Some competitors use both wood and cotton linter fibers, as a source of cellulose fibers. Our multiple manufacturing lines, processes and intellectual property allow us to compete in more segments of the cellulose specialties market than any of our competitors.
Commodity Products
The principal method of competition in commodity products is price, as purity and uniformity are less critical differentiators. We compete with both domestic and foreign producers of commodity products.
For commodity viscose, many competitors derive their commodity viscose from either wood or cotton. Although cellulose specialties can generally be sold to meet commodity viscose demand, the reverse is not typically true. However, in recent years commodity viscose has continued to supplant cotton as the preferred raw material input for viscose staple fiber production. For commodity viscose, major competitors include Sappi, Austrocell and Bracell.
For absorbent materials, major competitors include GP Cellulose, Domtar and International Paper.
Forest Products
We manufacture and market high-quality, construction-grade softwood lumber, both stud and random lengths, in North America through our six sawmills located in Canada.
In 2020, approximately 67 percent of our lumber sales were exported from Canada to the U.S. On December 28, 2017, the United States Department of Commerce (“USDOC”) issued a determination for countervailing and anti-dumping duties (collectively, the “Duties”) of approximately 20 percent on imports of softwood lumber from Canada. On January 3, 2018, the USDOC issued orders to the United States Customs and Border Protection to collect the Duties on softwood lumber imports from Canada. Through year-end 2020, the Company has paid approximately $91 million of duties. In December 2020, following its administrative review of the period of April 28, 2017 through December 31, 2018 (“First Administrative Review”), the USDOC determined revised rates for the Duties, with the Company now being subject to an anti-dumping duty rate of approximately nine percent.
Products
We manufacture finished dimensional lumber (2 by 4’s, 2 by 8’s, etc.) made of spruce, pine, or fir, used in the construction of residential and multi-family homes, light industrial and commercial facilities, and the home repair and remodel markets. Wood chips, a by-product of the lumber manufacturing process, are used as raw materials in our High Purity Cellulose, Pulp and Newsprint facilities in Canada. Additionally, bark and sawdust are used for fuel in several of our operations.
Competition
The principal method of competition in the Forest Products segment is price, which is based on individual sawmill efficiency, the availability of competitively-priced raw materials, demand for wood products used in the construction of residential and multi-family homes as well as demand from the repair and remodel of existing homes. Residential and multi-family home construction is influenced by demographic factors such as population growth, employment, consumer confidence, consumer income, availability of financing and interest rate levels, and the supply and pricing of existing homes on the market. Repair and remodel activity is affected by the size and age of existing housing inventory and access to home equity financing and other credit.
Our significant competitors include West Fraser Timber Ltd., Resolute Forest Products, Weyerhaeuser, Georgia Pacific, Interfor, Canfor, Eacom and other producers of softwood lumber in North America.
Paperboard
We manufacture paperboard in the Temiscaming plant in Quebec. Paperboard is used for printing documents, brochures, promotional materials, packaging, paperback book or catalog covers, file folders, tags, and tickets. Pricing for paperboard is typically referenced to published indices and marketed through our internal sales team. Our production facility has the capacity to annually produce 180,000 metric tons of paperboard.
Products
Products in the Paperboard business include packaging, printing documents, brochures, promotional materials, paperback book or catalog covers, file folders, tags and tickets.
Competition
The principal method of competition in the Paperboard segment is price and product performance. Price is impacted by the balance between supply and demand as affected by global economic conditions, changes in consumption and capacity, the level of customer and producer inventories, and fluctuations in currency exchange rates. Product performance is determined based on the physical attributes of our products in our customers manufacturing processes. To a lesser extent, quality and service are also considered competitive determinants.
For paperboard, our significant competitors include Westrock, Metsa, Clearwater, and Sappi.
Pulp & Newsprint
We manufacture and market high-yield pulp and newsprint. High-yield pulp, produced in the Temiscaming plant in Quebec, is used by paper manufacturers to produce paperboard, packaging, printing and writing papers and a variety of other paper products. Newsprint, produced in the Kapuskasing plant in Ontario, is a paper grade product used for newspapers, advertising materials and other publications.
Pricing for high-yield pulp and newsprint is typically referenced to published indices marketed through our internal sales team. Our production facilities located in Canada have the capacity to annually produce 300,000 metric tons of high-yield pulp and 205,000 metric tons of newsprint.
Products
We produce high-yield pulp at our Temiscaming plant in Quebec, primarily from hardwood aspen and maple species. These pulps are used by paper manufacturers to produce paperboard products, printing and writing papers and a variety of other paper products. Annually, approximately 65,000 metric tons are used internally for production of Paperboard.
Newsprint, produced in the Kapuskasing plant in Ontario, is a paper grade used for newspapers, advertising materials and other publications. Newsprint pricing is typically referenced to published indices and marketed through our internal sales team.
Competition
The principal method of competition in the Pulp & Newsprint segment is price. Price is impacted by the balance between supply and demand as affected by global economic conditions, changes in consumption and capacity, the level of customer and producer inventories, and fluctuations in currency exchange rates. To a lesser extent, quality and service are also considered competitive determinants.
Significant Pulp competitors include Millar Western, West Fraser, Paper Excellence, Estonia Cell, Sappi and Winstone.
Significant Newsprint competitors include Resolute Forest Products, White Birch Paper and Kruger.
Raw Materials and Input Costs
All our manufacturing operations require significant amounts of wood fiber, in the form of logs or wood chips, as a raw material and energy to produce our products. Additionally, our High Purity Cellulose and Pulp & Newsprint segments’ manufacturing processes require significant amounts of chemicals. These raw materials and input costs are subject to significant changes in prices as a result of weather conditions, supply and demand. To control cost, we continually pursue reductions in usage and costs of key supplies, services and raw materials. We do not foresee any material constraints in the near term from pricing or availability.
Wood
Our Canadian Forest Products operations rely on the consistent supply of substantial quantities of logs. Substantially all timberlands in Canada are government-owned and the right to harvest timber is acquired through provincially-granted licenses. Licenses grant the holder the right to harvest, for a fee, up to a specified quantity of timber annually. Government objectives in granting licenses include responsible management of timber, soils, wildlife, water and fish resources and the preservation of biodiversity and the protection of cultural values. The objectives also include achieving the fullest possible economic utilization of the forest resources and employment in local communities. In addition, license holders are required to replant the trees harvested to ensure re-establishment of the forest after harvesting. Reforestation projects are planned and supervised by our forest resource management staff and subject to approval by relevant government authorities. Our timber harvesting operations are performed directly or carried out by independent contractors under our forest resource management supervision.
In Canada, the High Purity Cellulose and Pulp & Newsprint plants are supplied with wood chips produced as a by-product from the lumber manufacturing process.
In the U.S. and France, we supply wood chips to our High Purity Cellulose plants through the purchase of chips from lumber producers or produce chips through our wood chipping facilities.
Chemicals
Chemicals, which include caustic soda (sodium hydroxide), sulfuric acid, ammonia, sodium chlorate and various specialty chemicals, are purchased under negotiated supply agreements with third parties. The prices for these products are impacted by various factors including supply and demand, environmental regulation, energy prices and overall economic conditions.
Energy
Our energy is primarily produced through the burning of lignin and other residual biomass in recovery and power boilers located at our plants. However, our manufacturing facilities still utilize significant amounts of fuel oil, natural gas and purchased electricity to supplement their energy requirements. In addition, energy prices impact our transportation costs for delivery of raw materials to our manufacturing facilities and delivery of our finished products to customers.
Intellectual Property
Substantially all of our intellectual property relates to our High Purity Cellulose segment. We own patents, trademarks and trade secrets, and have developed significant know-how, particularly in the production of high purity cellulose, which we deem important to our operations. We intend to protect our intellectual property, including, when appropriate, filing patent applications for inventions that we deem important to our business and operations. Our U.S. patents generally have a duration of 20 years from the date of filing. We also require key employees to enter into non-compete agreements as appropriate.
Seasonality
Our operating results are not significantly affected by seasonal changes. However, working capital is affected by the Canadian wood harvest which occurs primarily in the winter months.
Customers
No single customer accounted for more than 10 percent of our consolidated net sales during the year ended December 31, 2020.
Research and Development
Research and development capabilities and activities are focused on the High Purity Cellulose segment. The quality and consistency of our cellulose specialties and research and development capabilities create a significant competitive advantage; they are important factors in achieving an optimal value for our cellulose specialties products. Our research and development efforts are primarily directed at further developing products and technologies, improving the quality of cellulose fiber grades, improving manufacturing efficiency and environmental controls and reducing fossil fuel consumption. We continue to focus our research and development activities to develop and market additional new products and applications.
We spent $7 million, $6 million and $6 million on research and development for the years ended December 31, 2020, 2019 and 2018, respectively.
Environmental Matters
Our manufacturing operations are subject to significant federal, state, provincial and local environmental regulations. For a more detailed discussion, see Item 1A - Risk Factors, Item 3 - Legal Proceedings, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Environmental Regulation. Additionally, see Note 11 - Environmental Liabilities and Note 22 - Commitments and Contingencies of our consolidated financial statements for more information.
Human Capital
Code of Conduct
Within the framework of our core values of Integrity, Accountability, Quality, and People, the Rayonier Advanced Materials Standard of Ethics and Code of Corporate Conduct is our guide to the lawful and ethical performance of our duties. Adherence to the Code is intended to ensure that we:
· Fulfill our obligation to observe the law both in letter and spirit in all countries in which we do business; and
· Deal fairly with shareholders, employees, customers, suppliers, regulators and communities.
We publish and communicate these expectations and values for all employees several times throughout the year as well as include these statements in new hire materials.
Employee Demographics
Rayonier Advanced Materials has production facilities in the United States, Canada, and France with sales offices in the United States, Canada, France, United Kingdom, Japan, and China. Of our approximately 4000 employees, 75 percent are unionized, as all of our manufacturing sites are represented by various local and national unions. We have strong and open relationships with these employee representatives. See Note 22 - Commitments and Contingencies of our consolidated financial statements for more information.
Diversity
Respect for people is one of Rayonier Advanced Materials core values. To better explain this core value to our external stakeholders, we have published a Human Rights Policy found on our website. We specifically and publicly state that inclusion and diversity are not just words at Rayonier Advanced Materials, they are ideals ingrained in our company values and projected through our business practices and human resources programs. Our diversity allows us to learn and build solutions from different perspectives.
As a means of listening to our employees to ensure we have an appropriate perspective of what we do well and how to improve, we have commissioned a Diversity and Inclusion Advisory Group which is made up of employees across all our major locations, including union leadership. The focus of this group is expanding the recruiting network to ensure more diverse candidates are included in the pipeline.
Safety
Rayonier Advanced Materials has a vision of every employee coming to work and going home injury free. While we have not achieved this vision, we continue to make progress each year with the 2020 company wide injury rate decreasing by 8 percent versus 2019. The organization’s vision of injury free operations is achieved through five leading metrics: housekeeping, leadership engagement, corrective action closure, gas emissions, and life safety programs. We track the progress against these metrics monthly with an annual goal of improvement. In addition, there are subcommittees of leaders across the company that are accountable for one of the leading metrics with these teams reporting to a steering team chaired by our CEO.
Availability of Reports and Other Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports filed or furnished pursuant to Sections 13(a) or 14 of the Securities Exchange Act of 1934 are made available to the public free of charge in the Investor Relations section of our website www.rayonieram.com, shortly after we electronically file such material with, or furnish them to, the SEC. All reports we file with or furnish to the SEC are also available free of charge on the SEC’s website, https://www.sec.gov. Our corporate governance guidelines and charters of all committees of our board of directors are also available on our website.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Our business, financial condition, results of operations, cash flows and equity are subject to a number of risks and potential material adverse events 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 this Report and our other filings and submissions to the SEC. 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.
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.
Our global operations expose us to risks associated with public health crises, including epidemics and pandemics, such as the COVID-19 pandemic which has generated, and may continue to generate, significant volatility, uncertainty and economic disruption across the globe including in many markets in which we or our customers do business. Over the past year, COVID-19 has adversely impacted our business and financial condition in various ways, including impacts associated with preventive and precautionary measures that we, other businesses, governments and individual consumers have taken and are continuing to take to limit the spread of the virus. Examples of such impacts have included: increased operating costs due to social distancing and other strict health and safety protocols implemented at our facilities to protect employees and contractors; reductions and/or unpredictable fluctuations in demand necessitating production adaptations such as the 4-8 weeks of production downtime taken at our Canadian sawmills in early 2020; sharp declines in newsprint volumes driven by the pandemic’s impact on the hospitality and travel sectors; and reduced supply chain reliability due to international shipping congestion associated with global demand surges and fluctuations and empty container imbalances. Impacts could be magnified if the pandemic severity increases or duration persists over an extended period of time. While the full extent of the COVID-19 pandemic’s ongoing and future impacts on our business cannot currently be predicted with certainty, we continue to promote the health and safety of our employees, contractors, suppliers and customers and to closely monitor the pandemic's impacts on our liquidity, access to capital markets, reliability, customers and suppliers, and the macroeconomic conditions relevant to our business, including general economic uncertainty, unemployment rates and recessionary pressures.
Specific risks associated with COVID-19 include, but are not limited to, the following:
•Significant and unpredictable reductions and other fluctuations in demand for certain of our products due to pandemic-driven factors such as end-market weakness and customer security-of-supply concerns.
•Adverse effects on our suppliers, vendors and other global supply chain partners which have impaired and could continue to impair our ability to timely and efficiently move our products through the various steps in the global supply chain process to our end customers.
•Possible workforce disruption to the extent our operational, management or other personnel are impacted in significant numbers by COVID-19 and are not available to perform their duties and tasks, which could create reductions or suspensions of our manufacturing operations and other support functions.
•Restricted access to capital, increased financing costs and/or adverse effects on our liquidity and perceptions of our creditworthiness due to the ongoing adverse impacts of COVID-19 on the global economy and capital markets worldwide.
•Possible heightening of other risks described in the “Risk Factors” section in this Report to the extent that COVID-19 continues to adversely affect our business, financial condition or results of operations.
Macroeconomic and Industry Risks
The businesses we operate are highly competitive and many of them are cyclical, which may result in fluctuations in pricing and volume that can adversely affect our business, financial condition and results of operations.
Competition, demand fluctuations and cyclicality are the most significant drivers of sales volumes and pricing for our products. We face significant competition from domestic and foreign producers in virtually all of our businesses. For example, in our cellulose specialties product line, increased cellulose specialties production capacity from our competitors, some of whom have lower raw material, wood and production costs than us, combined with demand weakness, have collectively contributed to substantially lower cellulose specialties sales prices over the past several years. Likewise, volumes have declined meaningfully in recent years due to these factors. The COVID-19 pandemic has exacerbated these dynamics and may continue to do so. Our high-purity commodity products for viscose and absorbent materials applications are also highly cyclical, and in 2019-2020 were at extremely low pricing levels. While these levels began to slowly rebound during the latter part of 2020, there can be no assurance as to the extent of such rebound or that elevated levels will be sustained over a significant period of time.
With respect to demand for cellulose specialties, and in particular our acetate grades, the majority of these acetate grades are used to manufacture acetate tow, which is used to make the filter component of a cigarette. Significant increases in cigarette costs and potential actions taken by the United States and other countries to discourage smoking, such as tax increases on tobacco products, policy changes and future legislation, may have a material adverse effect on the demand for tobacco products. Additionally, increased use of e-cigarettes, electronically heated tobacco products and smokeless tobacco products, by way of example, may affect demand for traditional cigarettes.
In addition, some of the industries in which our end-use customers participate, such as construction, home building, publishing, packaging, automotive and textiles, are cyclical in nature, thus posing risks to us which are beyond our control. These industries are highly competitive and may experience overcapacity and reductions in end-use demand, each of which may affect demand for and pricing of our products. The consequences of this could include the reduction, delay or cancellation of customer orders.
Our lumber, paper, high yield pulp and paper-related commodity businesses are highly cyclical and influenced by a variety of factors. These include periods of excess product supply due to industry capacity increases, periods of decreased demand due to reduced economic activity or market conditions, inventory de-stocking by customers and fluctuations in currency exchange rates. These factors may cause significant price changes over a short period, such as fluctuations experienced over the past year during the COVID-19 pandemic. To address these factors, we have in the past, and may in the future, elect to schedule production curtailments and shutdowns to address, for example, unfavorable economic conditions, reduced demand for our products or the end products of our customers, lack of economically viable fiber in Canada, reduced market prices and other factors. In particular, our lumber, newsprint and high yield pulp businesses have each been the subject of temporary curtailments at given points over the past two years in reaction to market conditions.
In sum, continued competitive pressures and demand weakness, as well as the cyclicality of our commodity businesses, may have a material adverse impact on our future sales prices and volumes and, therefore, 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.
Raw material costs and energy, such as chemicals, oil and natural gas and electricity are a significant operating expense. The cost of these inputs can be volatile and are susceptible to rapid and substantial increases due to factors beyond our control, such as lack of availability, changing economic and weather conditions, political, civil or other unrest or instability in energy-producing nations, and supply and demand considerations. For example, caustic soda, a key manufacturing input in our high purity cellulose business, has historically had significant price volatility. Similarly, the price of oil and natural gas (including its pipeline transportation element) is subject to fluctuations based on market demand and other factors. In contracts for certain of our products, pricing is set annually or otherwise not subject to change for a contractually-agreed period of time; so in some cases we may have limited ability to pass along fluctuations in these input costs once the contract price for the relevant period has been established. In addition, industrial and other policies of the governments and governmental agencies having jurisdiction over suppliers of raw materials to our facilities may change, due to changes in political leadership or otherwise, which also could adversely impact the cost of energy and its transportation. While we often use various strategies to mitigate the potential impact of this pricing volatility, such as long term contracting and the purchase of derivative commodity contracts, the impact of raw material and energy pricing increases could materially adversely affect our business, financial condition and results of operations.
We are subject to material risks associated with doing business outside of the United States.
We have large manufacturing operations in Canada and France, and a significant portion of our sales are to customers and customer locations outside of the United States, including Canada, China, Japan, South Korea, the European Union and other international markets. Sales to customers outside of the United States made up approximately 61% of our revenue in 2020. The manufacture and sale of our products in non-U.S. markets results in risks that are inherent in conducting business under international laws, regulations and customs. We expect international sales will continue to contribute significantly to our financial condition and future growth. The risks associated with our business outside the United States include:
•maintaining and governing international subsidiaries and managing international operations;
•complying with changes in and reinterpretations of the laws, regulations and enforcement priorities of the countries in which we manufacture and sell our products;
•complying with anti-bribery laws such as the U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions;
•trade protection laws, policies and measures and other regulatory requirements affecting trade and investment, including loss or modification of exemptions for taxes and tariffs, imposition of new tariffs and duties and import and export licensing requirements, as discussed below in more detail;
•complying with data privacy laws such as the European Union’s General Data Privacy Regulation (GDPR);
•repatriating cash from foreign countries to the United States;
•changes in tax laws and their interpretations in the countries in which we do business, including the potential impact on the value of recorded or future deferred tax assets and liabilities;
•product damage or losses incurred during shipping;
•political instability and actual or anticipated military or political conflicts;
•economic instability, inflation, recessions and interest rate and currency exchange rate fluctuations, as discussed below in more detail;
•uncertainties regarding non-U.S. judicial systems, rules and procedures; and
•minimal or limited protection of intellectual property in some countries.
These and other risks of doing business outside of the United States could adversely affect our business, financial condition and results of operations.
Currency fluctuations may have a material negative impact on our business, financial condition and results of operations.
We have manufacturing operations in the United States, Canada and France. We also sell our products all over the world, in either U.S. dollars, Canadian dollars or Euros. As a result, we are exposed to movements in foreign currency exchange rates, and our earnings are affected by increases or decreases in the value of the U.S. dollar and in the value of the Canadian dollar and Euro relative to the U.S. dollar. For example, a strengthening U.S. dollar or a weakening home currency of the countries in which certain of our international competitors manufacture products can adversely impact our competitive position versus these competitors. In addition to ordinary course currency fluctuations, specific events have had, and could in the future have, an impact on currency valuation. Our risk management policy allows management, with oversight from the Audit Committee of its Board of Directors, to hedge a significant portion of its exposure to fluctuations in foreign currency exchange rates, though no hedges are currently in place. To accomplish this, we have used, and may in the future continue to use, derivative instruments, such as currency options and foreign exchange forward contracts, to mitigate our exposure to fluctuations in foreign currency exchange rates, but there can be no assurance that we will be protected against substantial foreign currency fluctuations or that such fluctuations will not have a material adverse 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.
We manufacture our products in the United States, Canada and France, and sell them into more than 40 countries. Our financial results are highly dependent on our ability to sell our products globally. Trade barriers such as tariffs,
countervailing and anti-dumping duties, quotas and similar restrictions on trade have in the past, and could in the future, result in materially reduced revenues and profitability. Examples of the effects of such restrictions on trade and tariffs on our business in China and Canada are set forth below.
China
In 2020, the we had total sales of $357 million of products shipped to customers in China and, of this amount, $256 million were of products manufactured in the United States. Trade tensions and trade-related actions, such as tariffs and duties, between China and the U.S. have impacted our business and our customers’ businesses and could do so in the future. Failure of the U.S. and Chinese governments to reach acceptable agreements regarding trade, as well as continued trade volatility and additional trade-related actions by the Chinese government, could have a material adverse impact on our business, financial condition and results of operations.
Canada
We operate six softwood lumber mills in Ontario and Quebec, Canada, and, in 2020, sold approximately $224 million of softwood lumber into the United States from Canada. The United States and Canada have a history dating to the early 1980s of trade disputes relating to the export of softwood lumber from Canada into the United States. Each dispute has been resolved via agreement or litigation, which generally involved some combination of duties and/or quotas as well as a return of all or most of the duties previously paid by Canadian softwood lumber producers. In October 2015, a ten-year Softwood Lumber Agreement (the “SLA”) between the United States and Canada, which resolved the 2001-2006 lumber dispute between the countries, expired. No agreement was reached to extend or renew it, and as a result, after a one-year cooling-off period the United States commenced a dumping investigation of lumber exports from Canada into the U.S. In 2017, anti-dumping and countervailing duties were assessed by the USDOC on lumber exported into the United States, we were assigned an anti-dumping duty rate of 6 percent and a countervailing duty rate of 14 percent. These duties are being legally challenged by Canada under both the North American Free Trade Agreement (“NAFTA”) and World Trade Organization (“WTO”) dispute resolution processes. In December 2020, following its administrative review of the period of April 28, 2017 through December 31, 2018, USDOC determined revised rates for antidumping and countervailing duties, and we are now subject to an anti-dumping duty rate of 1.57 percent and a countervailing duty rate of 7.42 percent. Canada has filed an appeal under Chapter 10 of the United States-Mexico-Canada Agreement on Trade (“USMCA”) to contest these revised duties. We have paid approximately $91 million in lumber duties to date, but expect to eventually receive most of these duties back in the event of a favorable ruling under the NAFTA or WTO process or a settlement of the dispute. No assurances can be given that the duties will be overturned or repaid through the legal process or a negotiated settlement, or that lumber pricing will be sufficient to substantially offset their impact.
Business and Operational Risks
Our ten largest customers represent approximately 31 percent of our 2020 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.
While we are not dependent on any single customer or group of customers, our ten largest customers accounted for approximately 31 percent of revenue in 2020. Due to the highly competitive nature of our businesses, we regularly bid for new business and to retain/renew existing business and, as such, we are subject to the potential for meaningful revenue and volume gains and losses.
We are also subject to credit risk associated with these customers. If one or more of our ten largest customers were to become bankrupt, insolvent or otherwise were unable to pay for our products, we may incur significant write-offs of accounts that may have a material adverse effect on our business, financial condition and results of operations.
Although we continue to strive to broaden and diversify our customer base, a significant portion of our revenue is derived from these ten customers, and the loss of all or a substantial portion of sales to any of these customers, or significant, unfavorable changes to pricing or terms contained in contracts with them, could materially affect our business, financial condition or results of operations. See Note 21 - Segment and Geographical Information of our consolidated financial statements for more information on our major customers.
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 operation.
Any of our major manufacturing facilities, or a significant portion of any of these facilities, could cease operations unexpectedly or suffer a material disruption to all or a portion of its operations due to a number of material adverse events, including:
•unscheduled outages or downtime due to the need for unexpected maintenance or equipment failure, such as for portions of our facilities that produce steam and electricity (such as boilers and turbines), pollution control equipment, and equipment directly used to manufacture our products, such as reliability issues during the first quarter of 2019 at the Temiscaming, Quebec plant;
•prolonged power interruptions or failures;
•explosion of boilers or other pressure vessels;
•interruptions in the supply of raw materials, including chemicals and wood fiber;
•disruptions to or failures of the transportation infrastructure, such as roads, bridges, railroad tracks and tunnels, as well as lack of availability of rail, trucking and ocean shipping equipment and service from third party transportation providers;
•interruption or material reduction of water supply;
•a chemical spill or release or other event causing impacts to the environment or human health and safety;
•information technology system failures and cybersecurity incidents causing systems to be inaccessible or unusable;
•fires, floods, windstorms, earthquakes, hurricanes or other similar catastrophes, such as the hurricanes which impacted our Jesup, Georgia and Fernandina Beach, Florida plants in 2017;
•labor interruptions, such as strikes and short duration walk-outs such as the walk-out in 2019 at our site in Tartas, France;
•terrorism or threats of terrorism; and
•other operational problems resulting from these and other risks.
Some of these matters are discussed in more detail in other sections of this Item 1A - Risk Factors. Depending on the nature, extent and length of any operational interruption, the event could materially 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.
Wood fiber is the single largest raw material in the manufacturing process for virtually all of our products. Many factors can impact its availability and pricing: One key factor is whether the land on which the timber is grown is owned by private parties or governmental entities. For example, fiber for our U.S. and French facilities is primarily harvested from privately-held lands, while fiber for our Canadian facilities is primarily harvested from lands owned or controlled by the governments of the provinces of Ontario and Quebec, referred to as “Crown lands”. In 2020, approximately 90 percent of the Company’s fiber requirements in Canada were sourced from Crown lands. The Company’s current agreements with provincial authorities grant timber “tenures” for terms varying from five to 20 years and may be subject to renewals every five years. In Canada, the Company currently manages approximately 25 million acres (ten million hectares) of Crown lands for timber production. The price and availability of this Canadian fiber depends, in large part, on the Company’s ability to replace or renew these agreements on acceptable terms or enter into acceptable alternative fiber supply arrangements with provincial authorities. The terms of any replacement, renewal or alternative arrangement are based on legislative and regulatory provisions as well as governmental policy. Therefore, changes in legislation, regulatory regimes or policy in the provinces in which we operate may reduce the availability of fiber and increase costs through the imposition of additional and more stringent harvesting, rehabilitation and silvicultural standards or the alteration of fee structures. Although we expect these agreements to be extended in the ordinary course as they come up for renewal, there can be no assurance that they will be renewed, extended or replaced in the future on acceptable terms, or at all, or that the amount of timber that the Company is permitted to harvest will not decrease.
Also, Aboriginal communities in Canada, often referred to as “First Nations”, have Aboriginal or treaty rights on most timberlands in Canada. Canadian courts have recognized that Aboriginal people may possess rights in respect of land used
or occupied by their ancestors and have encouraged the federal and provincial governments and Aboriginal people to resolve rights claims through the negotiation of treaties. We operate in territories in which a spectrum of non-treaty and treaty rights exist. To mitigate risks and accommodate the traditional activities of these communities during forestry planning and operations, the Company has concluded agreements, and is currently negotiating other agreements, with many First Nations communities to achieve Aboriginal community acceptance for our forestry operations plans. These agreements support an approach of active engagement with Aboriginal communities that serves to ensure the identification of issues and facilitates constructive problem-solving.
Regulatory developments and environmental litigation also have caused, and may cause in the future, significant reductions in the amount of timber available for commercial harvest from non-Crown lands in Canada and privately-owned lands in the U.S. and France, thereby increasing prices for these sources of wood fiber. In Canada, for example, future legislation and policy changes, litigation advanced by environmental groups and Aboriginal communities concerning rights and limitations on harvesting and use of timberlands, the protection of endangered species, the promotion of forest diversity, control over insect and disease infestations, and the response to and prevention of wildfires could also affect wood fiber supply, pricing and availability.
In addition, much of the wood fiber we use is sourced by or from third party contractors who harvest, chip and/or truck the fiber to our manufacturing facilities, either as logs for lumber and chipping or as chips. Another key factor in fiber supply and pricing is the availability of experienced logging and fiber transportation contractors in the areas in which our manufacturing facilities are located. Sourcing fiber from greater distances from our facilities due to unavailability of more proximately located fiber sources could also impact pricing due to additional transportation cost. Significant reduction in the availability of contractors experienced in harvesting and transporting logs could also impact wood fiber supply, pricing and availability.
Finally, natural conditions, such as weather, timber growth cycles and restrictions on access to timberlands for harvesting (for example, due to prolonged wet or cold conditions) may also limit the availability, and increase the price, of wood, as may other factors, including damage by fire, insect infestation, disease, prolonged drought and natural disasters such as wind storms and hurricanes. For example, in the recent past we have seen more frequent wet weather in the Southeastern U.S. region from which we source our fiber supplied to our Jesup and Fernandina facilities, which can result in reduced availability of supply and higher prices, especially for hardwoods. It is unclear whether these conditions will persist into the future.
In sum, any sustained decrease in harvestable lands or wood supply, or increase in fiber prices, whether sourced from Crown lands in Canada or from private parties in Canada, the U.S. or France, changes in the logging and transportation supply base, or significant changes to historically customary natural conditions, could materially increase our costs and thereby materially impact our business, financial condition and results of operations.
Our operations require substantial capital.
We operate capital intensive businesses and require substantial capital for ongoing maintenance, repair and replacement of existing facilities and equipment. Although we endeavor to maintain our production equipment with regular scheduled maintenance, key pieces of equipment and systems, some of which are large in scale, may need to be repaired or replaced periodically. The costs of repairing or replacing such equipment and the associated downtime of the affected production line could adversely affect our financial condition and results of operations. In addition, new or existing environmental regulations at times require additional capital expenditures for compliance. We believe our capital resources are currently adequate to meet our current projected operating needs, capital expenditures and other cash requirements. However, if for any reason we are unable to provide for our operating needs, capital expenditures and other cash requirements on reasonable economic terms, we could experience a material adverse effect on our business, financial condition and results of operations.
We depend on third parties for transportation services and increases in costs and the availability of transportation could materially adversely affect our business.
Our business depends on transportation services provided by third parties, both domestically and internationally. We rely on these providers for transportation of the products we manufacture as well as delivery of raw materials to our manufacturing facilities. A significant portion of the products we manufacture and raw materials we use are transported by railroad or trucks, and by ship.
If any of our transportation providers were to fail to deliver the goods we manufacture in a timely manner, or damaged them during transport, we may be unable to sell those products at full value, or at all. Similarly, if any of these providers were to fail to deliver raw materials to us in a timely manner, we may be unable to timely manufacture our products in response to customer demand. In addition, the cost of energy, and specifically fuel, may adversely impact the cost of transporting our products. Finally, if any of the ports we commonly use for international shipping, or the port system generally, were to suffer work stoppages, slowdowns or strikes, our business could be materially adversely impacted.
Our failure to maintain satisfactory labor relations could have a material adverse effect on our business.
As of December 31, 2020, approximately 75 percent of our global work force is unionized. As a result, we are required to negotiate the wages, benefits and other terms of employment with these employees collectively. Our financial results could be materially adversely affected if labor negotiations resulted in substantially higher compensation costs or materially restricted how we run our operations. In addition, our inability to negotiate acceptable contracts with any of these labor unions as existing agreements expire could result in strikes or work stoppages by the affected workers. While we do not expect any labor interruptions of significant duration, if our unionized employees were to engage in a strike or other work stoppage (such as the short-duration walk-out in 2019 at our site in Tartas, France) at one or more of our major facilities, we could experience a significant disruption of our operations, which could materially affect our business, financial condition and results of operations.
We are dependent upon attracting and retaining key personnel, the loss of whom could materially adversely affect our business.
We believe our success depends, to a significant extent, upon our ability to attract and retain key senior management and operations management personnel. Changing demographics and labor work force trends may result in the loss of knowledge and skills as experienced workers retire. Furthermore, some of our facilities are in relatively remote locations, which can adversely impact our ability to recruit and retain employees. Our failure to develop and retain key personnel and recruit and develop qualified replacements for retiring or other departing employees could materially adversely affect our business, financial condition or results of operations.
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.
We have an active research and development program to develop new products and new applications for our existing products. However, there can be no assurance this program will be successful, either from a product development or commercialization perspective, or that any particular invention, product or development, or the program as a whole, will lead to significant revenue or profit generation. Moreover, some of our new products and new applications may not contain intellectual property that can be protected under intellectual property laws. Failure to generate meaningful revenue and profit from our research and product development efforts could materially adversely affect our business, financial condition and results of operations in the future.
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.
Like most companies, the Company has been, and expects in the future to continue to be, subject to attempted cyberattacks. Such attacks could include, for example, the increasingly prevalent practice of cyber extortion through the deployment of ransomware. Cyberattacks or cybersecurity breaches could compromise the Company’s intellectual property and confidential business information, cause a disruption to the Company’s operations, or harm the Company’s reputation. Moreover, the recent pandemic-driven increase in remote working and virtual interactions has only served to expand the Company’s “attack surface”. The Company’s information technology systems, some of which are dependent on services provided by third parties, serve an important role in the efficient operation of its business. This role includes ordering and managing equipment, parts and raw materials from suppliers, managing inventory, managing the processes we use to produce finished products, facilitating order entry and fulfillment and processing of transactions, summarizing and reporting financial results, facilitating internal and external communications, administering human resources functions, retaining certain personal information and providing other processes necessary to manage our business. While the
Company has implemented and maintains what it believes to be appropriate cybersecurity policies, programs, controls and systems, there can be no assurance a cyberattack would not be successful, or that such a cybersecurity breach will not occur. Such an event could have a material adverse impact on the Company’s results of operations and financial condition.
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.
Our plants are subject to environmental laws, regulations and permits that may require significant capital to enable our compliance, or which could limit our operations and production. Many of our operations are subject to environmental laws, regulations and permits that contain stringent conditions governing how we operate our facilities including how much and, in some cases, what types of products we can produce. These laws, regulations and permits, now and in the future, may materially adversely restrict our current production, limit our ability to increase production and impose significant costs on our operations with respect to environmental compliance. It is expected that, overall, compliance-related capital and operating costs will likely increase over time as environmental laws, regulations and permit conditions become stricter, and as the expectations of the communities in which we operate become more demanding.
Environmental laws, regulations and permits are constantly changing and are generally becoming more restrictive. Laws, regulations, permits and related judicial decisions and administrative interpretations affecting our business are subject to change, and new laws and regulations are frequently enacted. These laws and regulations may limit, prohibit or affect, among other things, air emissions, wastewater discharges, receiving water quality, water withdrawal, remedial standards for contaminated property and groundwater, and the type of chemicals we use in our manufacturing processes. Over time, the complexity and restrictions imposed by these laws and regulations have increased and regulatory enforcement efforts have intensified. Environmental regulatory authorities have pursued a number of initiatives which, if implemented, could impose additional operational and pollution control obligations on industrial facilities like ours, especially in the area of air emissions, wastewater and storm water control. See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Environmental Regulation of this Report for further information. Environmental laws and regulations will likely continue to become more restrictive and over time could materially adversely affect our business, financial condition and results of operations.
Environmental groups, Aboriginal communities (in Canada) and interested individuals may seek to delay or prevent a variety of our operations. We expect that environmental groups, Aboriginal communities and interested individuals will intervene with increasing frequency in the regulatory processes in areas where we operate plants and manage and operate timberlands. External engagement with these groups and communities is a requirement of our licenses to manage and operate timberlands in Quebec and Ontario. Consultation with indigenous communities may also be required during the environmental permitting process for renewal of existing permits and expansions or modifications of our manufacturing operations in these provinces. Delays, restrictions and increased cost caused by the intervention of these groups or interested individuals could adversely affect our operating results. In addition to intervention in regulatory proceedings, interested groups and individuals may file or threaten to file lawsuits that seek to prevent us from obtaining permits, implementing capital improvements or pursuing operating plans. For example, in March 2014, litigation was commenced in federal court by the Altamaha Riverkeeper (“ARK”) alleging violations of federal and state environmental laws relating to permitted wastewater discharges from our Jesup plant (although it was dismissed by the court on summary judgment in 2015), and in January of 2016 the same group brought an action in the Georgia Office of Administrative Hearings against the Georgia Environmental Protection Division of the Natural Resources (“EPD”) in opposition to the issuance by EPD of a renewed wastewater treatment permit for our Jesup plant. While these proceedings have been decided, to date, largely in our favor, we expect continuing attempts at legal intervention by ARK and others.
We currently own or may acquire properties that require environmental remediation or otherwise are subject to environmental and other liabilities. We currently own, or may acquire in the future, properties which are subject to environmental liabilities, such as remediation of soil, sediment and groundwater contamination and other liabilities, and we may have such liabilities at properties, such as formerly operated manufacturing facilities, that we do not currently own. The cost of assessment and remediation of contaminated properties could be substantial and materially adversely affect financial results. These costs could include, without limitation, costs of investigation and assessment, corrective measures, installation of pollution control equipment and other remediation and closure costs, as well as resolution of third-party
claims for property damage and personal injury as a result of alleged violations of, or liabilities arising out of, environmental laws and regulations. Although we believe we currently have adequate liabilities recorded, legal requirements relating to assessment and remediation of contaminated properties continue to become more stringent and there can be no assurance that actual expenditures will not exceed current liabilities and forecasts, or that other presently unknown liabilities will not be discovered in the future. See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Environmental Regulation of this Report and Note 11 - Environmental Liabilities of our consolidated financial statements.
The potential longer-term impacts of climate-related risks remain uncertain at this time.
In 2020, focus and attention to climate-related risks and opportunities continued to increase in importance to our customers, investors and other stakeholders. Certain investors have expressed a desire for issuers to improve their climate-related disclosures and have advocated for use of a disclosure framework created by the Task Force on Climate-Related Financial Disclosures (TCFD). The Company is working to incorporate a focus on climate-related risks and opportunities into its business processes, and to that end has begun to track and publish (on its Company website) meaningful and actionable information including Sustainable Accounting Standards Board (SASB)-aligned metrics for “greenhouse gas” (“GHG”) emissions, air quality, water management and supply chain management. At this time, the Company does not expect climate-related issues to have a material adverse impact on its business, financial condition or results of operations in the near term.
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.
Regulatory. There are numerous international, federal and state-level initiatives and proposals to address domestic and global climate issues. Within the United States, Canada and France, where the Company has operations, most of these initiatives and proposals would or currently regulate and/or tax, in one fashion or another, the production of carbon dioxide and other GHGs to facilitate the reduction of carbon compound emissions into the atmosphere, and provide tax and other incentives to produce and use more “clean energy.” Initiatives that could materially impact purchased electricity prices could increase our manufacturing costs, especially in our Canadian operations, because our operations in Canada use more purchased electricity (on a percentage basis) than those in our U.S. facilities, which generate most of the electricity needed to operate. In addition, the federal government of Canada has indicated its intent to regulate priority air pollutants and GHGs under the Clean Air Act and the Canadian Environmental Protection Act. Under the proposed regulatory targets, the Company’s Canadian pulp and paper mills may be required to reduce air pollutants, such as particulate matter (“PM”), sulphur oxides (“SOx”) emissions, nitrogen oxides (“NOx”) and GHGs. While industry consultations are ongoing with the federal government, the cost of making any such reductions is currently unknown; however, the requirements associated with PM, SOx and NOx are not expected to be material to the Company given its current operations and pollution control systems.
The federal government of Canada adopted the Greenhouse Gas Pollution Pricing Act which implements the federal carbon pollution pricing system. Under the provisions of the Greenhouse Gas Pollution Pricing Act, the provinces, who have implemented their own carbon pollution price or a “cap-and-trade” system, will not be subject to the federal program provided their program meets the minimum federal pricing and emissions reduction targets. Quebec implemented a “cap-and-trade” program for GHGs which meets the said minimum criteria and, at this time. Only the Company’s Temiscaming site in Québec was a net purchaser of credits under these programs in 2020. On the other hand, Ontario is subjected to the federal program. The Greenhouse Gas Pollution Pricing Act is being challenged by various provincial governments, including the government of Ontario. To date, the cost of GHG credits under cap and trade programs purchased by our business and incorporated into the overall cost of our purchased wood fiber has not been material, though no assurances can be given that they will not substantially increase in the future, and especially in Canada after 2022 (when the current programs expire) because the future state of the law and cost of GHG credits after such date is currently not known.
Transition. The transition to a low carbon economy, as predicted by many investors and other stakeholders, poses both risks and opportunities for the Company that are, as yet, not quantified. Similar to other manufacturers in our sector, we use biomass, natural gas, liquid fossil fuels and purchased electricity to power our plants. Changes in policy, regulation or technology related to fuels that we use, or our electricity providers use, could materially increase our costs.
At the same time, our main product lines (cellulose specialties and viscose grade commodity dissolving wood pulps) as well as all of our other products, are made from wood as their primary raw material, which is a renewable, natural raw material. In addition, our cellulose specialty products are natural polymers that potentially can be used as an effective, more climate-friendly substitute for certain applications which currently use fossil fuel-based products. However, these opportunities, as well as their attendant risks, are not fully known or understood at this time.
Physical. The potential impacts of extreme weather which could result from the impacts of climate change, such as hurricanes, blizzards, and heavy rain, are factored into our enterprise risk assessment process and the mitigation measures we currently take to protect our assets and business. It is not clear whether increased frequency of these or similar events would materially change our risk profile, analyses or mitigation measures, but there can be no assurance that they would not require additional expenditures which could be material.
In sum, additional business and regulatory initiatives may be implemented to address GHG emissions and other climate-change-related concerns. If such initiatives are implemented, we may be required to incur additional capital expenditures, increased operating costs for wood fiber or raw materials, and/or mitigating expenses, such as carbon taxes or other charges, to address and comply with any such initiatives. No assurance can be given that the increased costs associated with compliance of future GHG-related requirements will not have a material adverse effect on our business, financial condition and results of operations.
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 a qualified non-contributory defined benefit pension plan, which covers many of our salaried and hourly employees in the United States. The Federal Pension Protection Act of 2006 requires certain capitalization levels be maintained in each of these benefit plans. Our non-U.S. pension plans, while currently adequately funded, will also require periodic contributions to ensure that applicable legal requirements are met. Because it is unknown what the investment return on pension assets will be in future years or what interest rates may be at any point in time, no assurances can be given that applicable law will not require us to make future material plan contributions. In addition, it is possible new or additional accounting rules and changes to actuarial requirements (for example, if life expectancy assumptions for participants are increased) may also result in the need for additional contributions to the plans. Any such contributions could materially adversely affect our financial condition. See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Use of Estimates of this Report for additional information about these plans, including funding status.
We have debt obligations that could materially adversely affect our business and our ability to meet our obligations.
As of December 31, 2020, our total combined indebtedness was approximately $1.1 billion. This significant amount of debt could have material adverse consequences to us and our investors, including:
•requiring a substantial portion of our cash flows from operations to make interest payments on this debt;
•making it more difficult to satisfy debt service and other obligations;
•increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs and limit the future availability of debt financing;
•increasing our vulnerability to general adverse economic and industry conditions;
•reducing the cash flows available to fund capital expenditures and other corporate purposes and to grow our business;
•limiting our flexibility in planning for, or reacting to, market or other changes in our businesses and industry;
•placing us at a competitive disadvantage to our competitors that may not be as highly leveraged with debt;
•limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase common stock; and
•limiting access to liquidity, including through our variable asset-based revolving credit facility.
To the extent we incur additional indebtedness, the risks described above could increase. In addition, our actual cash requirements in the future may be greater than expected. Our cash flows from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt.
The phase-out of LIBOR as an interest rate benchmark in 2023 may impact our borrowing costs.
The reporting of financial information used to determine LIBOR is scheduled to be phased out beginning in 2023. As of December 31, 2020, we had no indebtedness outstanding with interest payment terms based on LIBOR. However, under the terms of the recently closed asset-based revolving credit facility, loans are subject to LIBOR or a comparable or successor widely-published alternative rate designated by the administrative agent. We have not yet been advised by the administrative agent of its selected alternative rate, and although the Secured Overnight Financing Rate (“SOFR”) is expected to be the alternative rate that replaces LIBOR, we cannot predict what margin adjustments and related terms would be negotiated with our loan counterparties. As a result, our interest expense could increase. While we do not believe that a change from LIBOR to an alternative rate will have a material impact on our borrowing costs or ability to access capital, no assurances relating to the potential impact can be provided at this time.
Challenges in the commercial and credit environments may materially adversely affect our future access to capital.
Our ability to issue debt or equity or enter into other financing arrangements on acceptable terms could be materially adversely affected if there continues to be a material decline in the pricing or sales volume for our products, or if significantly unfavorable changes in economic conditions occur. Volatility in the world financial markets could increase borrowing or other costs of capital or affect our ability to gain access to the capital markets, which could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
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.
We may need to seek additional financing for general corporate purposes. For example, we may need to increase our investment in research and development activities, make strategic investments in our facilities or require funding to invest in joint ventures or make acquisitions. We may be unable to obtain desired additional financing on terms favorable to us, if at all. For example, during periods of volatile credit markets, there is a risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their credit commitments and obligations, including but not limited to extending credit up to the maximum permitted by a credit facility and otherwise accessing capital and/or honoring loan commitments. If our lenders are unable to fund borrowings under their loan commitments or we are unable to borrow, it could be difficult to replace such loan commitments on similar terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund growth opportunities, successfully develop or enhance products or respond to competitive pressures, any of which could negatively affect our business. If we raise additional funds through the issuance of equity securities, our stockholders will experience dilution of their ownership interest. If we raise additional funds by issuing debt, the terms of such debt may subject us to limitations on our operations and ability to pay dividends due to restrictive covenants in addition to those that are expected to be in place pursuant to our existing indebtedness.
Company’s Common Stock and Certain Corporate Matters Risks
Your percentage of ownership in the Company may be diluted in the future.
In the future, your percentage ownership in the Company may be diluted because of equity issuances for acquisitions, capital market transactions or other corporate purposes, including equity awards we will grant to our directors, officers and employees. Our employees have options to purchase shares of our common stock, and we anticipate our compensation committee will grant additional stock options or other stock-based awards to our employees. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock. From time to time, we will issue additional options or other stock-based awards to our employees under our employee benefits plans.
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.
Our amended and restated certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could issue preferred stock and grant the holders thereof the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
The following table details the material properties we owned or leased at December 31, 2020:
Segment/Location Annual Production Capacity Owned/Leased
High Purity Cellulose Facilities (a):
Jesup, Georgia, United States 330,000 metric tons of cellulose specialties or commodity products
245,000 metric tons of commodity products Owned
Fernandina Beach, Florida, United States 155,000 metric tons of cellulose specialties or commodity products Owned
Temiscaming, Quebec, Canada 150,000 metric tons of cellulose specialties or commodity products Owned
Tartas, France 140,000 metric tons of cellulose specialties or commodity products Owned
Forest Products Facilities (b):
La Sarre, Quebec, Canada 135,000 thousand board feet of lumber Owned
Bearn, Quebec, Canada 110,000 thousand board feet of lumber Owned
Chapleau, Ontario, Canada 135,000 thousand board feet of lumber Owned
Cochrane, Ontario, Canada 160,000 thousand board feet of lumber Owned
Hearst, Ontario, Canada 110,000 thousand board feet of lumber Owned
Kapuskasing, Ontario, Canada 105,000 thousand board feet of lumber Owned
Paperboard Facilities (a):
Temiscaming, Quebec, Canada 180,000 metric tons of paperboard Owned
Pulp & Newsprint Facilities (a):
Kapuskasing, Ontario, Canada 205,000 metric tons of newspaper Owned
Temiscaming, Quebec, Canada 300,000 metric tons of high-yield pulp Owned
Corporate and Other:
Jacksonville, Florida, United States Corporate Headquarters Leased
Montreal, Quebec, Canada Corporate Office Leased
Toronto, Ontario, Canada Corporate Office
Leased
(a) Capacity is based on historic average production and is not adjusted for potential market related downtime and/or reliability issues. Due to reduced demand from the COVID-19 pandemic, the newsprint facility operated at 50 percent capacity in 2020. In October 2020, the Huntsville facility in Ontario, Canada, which has a production capacity of 15,000 thousand board feet of lumber, was sold.
(b) Capacity represents targeted production for these facilities. On average, these facilities produce at approximately 80 percent of capacity due to economic conditions, wood availability, and downtime.
Our manufacturing facilities are maintained through ongoing capital investments, regular maintenance and equipment upgrades. As a result, production capacities may vary from the amounts listed above.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
The Company is engaged in various legal and regulatory actions and proceedings, and has been named as a defendant in various lawsuits and claims arising in the ordinary course of its business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, the Company has in certain cases retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance,
business interruption and general liability. While there can be no assurance, the ultimate outcome of these actions, either individually or in the aggregate, is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows, except as may be noted below.
IESO Investigation of the Kapuskasing Facility
Since 2014, the Market Assessment and Compliance Division (“MACD”) branch of the Independent Electricity System Operator (“IESO”), the governmental agency responsible for operating the wholesale electricity market and directing the operation of the bulk electrical system in the province of Ontario, Canada, has been engaged in reviewing the Company's compliance with the published rules that govern the operation of the wholesale electricity market in Ontario, Canada. MACD has been specifically reviewing issues relating to payments made by IESO to the Company’s facility in Kapuskasing, Ontario. The inquiry has focused primarily on payments made by IESO between 2010 and 2019 under market rules in connection with multiple planned, extended and unplanned forced outages that caused extensive downtime in respect of parts or the entire Kapuskasing facility.
In May 2020, MACD finalized two of its four investigations into the Company’s electricity management practices at its Kapuskasing facility, and orders claiming penalties of CAD $25 million in connection therewith were issued by the IESO. More particularly, the orders would require the Company to pay penalties of CAD $3 million immediately and CAD $12 million over a 10-year period, with the remaining CAD $10 million to be deferred and ultimately forgiven assuming the Company otherwise complied with the remaining terms of the orders. The Company believes it has complied in all material respects with the published rules and is vigorously contesting IESO’s orders, including filing of proceedings with the divisional Court (Superior Court of Justice) of Ontario seeking invalidation of the orders. The Company does not believe the ultimate outcome of this dispute will be material to its business or financial condition, although no assurances can be given.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
Part II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the New York Stock Exchange under the trading symbol “RYAM”.
Holders
The number of record holders of our common stock at February 24, 2021 was 4,022.
Dividends
On September 6, 2019, our Board of Directors suspended our quarterly common stock dividend to use the cash flow to pay down debt and fund capital investments as well as working capital needs. The declaration and payment of future common stock dividends, if any, will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and other factors the Board of Directors deem relevant. In addition, our debt facilities place limitations on the declaration and payment of future dividends. No dividends were declared in 2020.
Dividends per share data can be found in Item 6 - Selected Financial Data and Note 14 - Stockholders' Equity of our consolidated financial statements.
Issuer Purchases of Equity Securities
The following table provides information regarding our purchases of Rayonier Advanced Materials common stock during the quarter ended December 31, 2020:
Period Total Number of Shares Purchased (b) 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 (a)
September 27 to October 31 - $ - - $ 60,294,000
November 1 to November 28 156 $ 3.43 - $ 60,294,000
November 29 to December 31 931 $ 6.25 - $ 60,294,000
Total 1,087 -
(a) As of December 31, 2020, approximately $60 million of share repurchase authorization remains under the authorization declared by the Board of Directors on January 29, 2018. Refer to Note 14 - Stockholders' Equity for additional information.
(b) Repurchased to satisfy the tax withholding requirements related to the issuance of stock under the Rayonier Advanced Materials Incentive Stock Plan.
Securities Authorized for Issuance under Equity Compensation Plans
See Part III, Item 12 of this report for information relating to our equity compensation plans.
Stock Performance Graph
The following graph compares the performance of Rayonier Advanced Material’s common stock (assuming reinvestment of dividends) with a broad-based market index, Standard & Poor’s (“S&P”) Small Cap 600, and an industry-specific index, the S&P 500 Materials Index. The table and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from December 31, 2015 to December 31, 2020.
The data in the following table was used to create the previous graph:
12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
Rayonier Advanced Materials $ 100 $ 162 $ 218 $ 115 $ 42 $ 72
S&P Small Cap 600 $ 100 $ 126 $ 143 $ 131 $ 161 $ 179
S&P 500 Materials Index $ 100 $ 117 $ 145 $ 123 $ 154 $ 185
Recent Sales of Unregistered Securities
During 2020, we did not issue or sell any unregistered equity securities.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
The following financial data should be read in conjunction with our consolidated financial statements. Amounts presented for the years ended December 31, 2019, 2018 and 2017 exclude the Matane Mill which was sold in November 2019. The Matane Mill was initially acquired as part of the November 2017 acquisition of Tembec.
(millions of dollars except per share amounts) 2020 2019 2018 2017 (c) 2016
Statement of Income Data:
Net Sales $ 1,739 $ 1,775 $ 1,957 $ 940 $ 869
Gross margin 138 54 291 141 186
Operating income (loss) 27 (83) 148 59 143
Income (loss) from continuing operations - (119) 99 323 73
Diluted income (loss) from continuing operations per share of common stock (a) $ - $ (2.33) $ 1.52 $ 5.78 $ 1.55
Dividends declared per share of common stock $ - $ 0.14 $ 0.28 $ 0.28 $ 0.28
Balance Sheet Data:
Total assets $ 2,530 $ 2,480 $ 2,679 $ 2,643 $ 1,422
Property, plant and equipment, net 1,275 1,316 1,364 1,391 801
Total debt 1,084 1,082 1,188 1,241 783
Stockholders’ equity 695 683 707 694 212
Statement of Cash Flows Data:
Cash provided by operating activities $ 124 $ 42 $ 247 $ 130 $ 232
Cash provided by (used for) investing activities (78) 53 (116) (277) (87)
Cash provided by (used in) financing activities (19) (138) (116) (84) 80
Capital expenditures (d) (77) (105) (129) (75) (89)
Non-GAAP Measures (b):
EBITDA $ 169 $ 65 $ 327 $ 477 $ 235
Adjusted EBITDA $ 153 $ 76 $ 311 $ 209 $ 226
Adjusted Free Cash Flows $ 73 $ (53) $ 130 $ 62 $ 147
(a) For the years ended December 31, 2019, 2018, 2017 and 2016, basic and diluted earnings per share include the impact of the Company’s Preferred Stock. See Note 14 - Stockholders' Equity of our consolidated financial statements for more information.
(b) EBITDA, adjusted EBITDA and adjusted free cash flows are non-GAAP measures. See “Note about Non-GAAP Financial Measures” on page 2 for limitations associated with non-GAAP measures. Also see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Performance and Liquidity Indicators for definitions of these non-GAAP measures as well as a reconciliation of EBITDA, adjusted EBITDA and adjusted free cash flows to their most directly comparable GAAP financial measure.
(c) On November 17, 2017, the Company acquired all of the outstanding common shares of Tembec for an aggregate purchase price of approximately $317 million Canadian dollars cash and 8.4 million shares of the Company’s common stock, par value $0.01 per share.
(d) Capital expenditures for the years ended December 31, 2019, 2018 and 2017 exclude the capital spending of the Matane Mill, which was sold in November 2019.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a diversified forest products business that operates in the following business segments:
•High Purity Cellulose
•Forest Products
•Paperboard
•Pulp & Newsprint
Our High Purity Cellulose business has leading positions in the acetate and ethers high purity cellulose end-use markets. In addition, our other business segments provide a more diversified earnings stream.
The following significant events occurred in 2020, 2019 and 2018:
•Our businesses have been significantly impacted by the coronavirus ("COVID-19") pandemic in 2020. However, due to the role they play in producing critical raw materials for pharmaceutical, food, cleaning and other products, our manufacturing facilities in the U.S., Canada and France have remained operating. In order to mitigate the impact of COVID-19 on our financial results and operations, we have taken the following actions:
◦To ensure the safety of our employees and the continuity of our operations, we have implemented exacting protocols to reduce the potential spread of COVID-19 in our operating facilities and work spaces.
◦To control costs and minimize pandemic driven losses, we have curtailed operations as necessary to match production with market demand.
◦Due to the financial impacts of COVID-19, we are actively monitoring the recoverability of the carrying value of our long-term assets. During the year ended December 31, 2020, we did not recognize any impairment charges related to long-lived assets held for use. We will continue to evaluate the recoverability of these and other assets as necessary.
•In December 2020, we issued $500 million in aggregate principal amount of 7.625 percent senior secured notes due 2026 (the “Senior Secured Notes”), at an offering price of 100 percent of the principal amount thereof. We also entered into a five-year senior secured asset-based revolving credit facility with an initial committed amount of $200 million (the “ABL Revolving Credit Facility”). In connection with these transactions, we terminated all commitments and repaid all outstanding obligations under our Senior Secured Credit Facilities and recorded a loss on debt extinguishment of $8 million. See Note 10 - Debt and Finance Leases of our consolidated financial statements for additional information.
•In December 2020, the USDOC finalized the First Administrative Review and determined a reduction of duties on softwood lumber imported into the U.S. from 20 percent to 9 percent for the Company for such duties paid during 2017 and 2018.
•In November 2019, we completed the sale of the Matane Mill for $175 million and used $100 million of the net proceeds to repay borrowings under our Senior Secured Credit Facilities. As a result of the sale, the Matane Mill’s operating results have been classified as discontinued operations and we reorganized our operating and reportable segments to align with our new management reporting structure. Included in discontinued operations is allocated interest expense, due to the required loan payments, and professional fees incurred to sell the operation. See Note 3 - Discontinued Operations of our consolidated financial statements for additional information.
•In October 2019, we settled certain Canadian pension liabilities through the purchase of annuity contracts with an insurance company. The settlement resulted in the recognition of approximately $9 million in settlement expenses which were recognized in “Other components of net periodic benefit costs” in our financial statements. See Note 18 - Employee Benefit Plans of our consolidated financial statements for additional information.
•In September 2019, and again in June 2020, we amended our Senior Secured Credit Facilities. See Note 10 - Debt and Finance Leases of our consolidated financial statements for additional information.
•In September 2019, we announced our Board of Directors determined to suspend the quarterly common stock dividend to improve cash flow.
•In September 2018, we sold our resins business for $17 million, a non-core asset originally acquired as part of our acquisition of Tembec. The resulting gain on sale of $7 million was treated as an adjustment to the bargain purchase gain in 2018.
High Purity Cellulose
We manufacture and market high purity cellulose, which is sold as either cellulose specialties or commodity products. We are the leading global producer of cellulose specialties, which are primarily used in dissolving chemical applications that require a highly purified form of cellulose. Pricing for our cellulose specialties products is typically set by contract for a duration of at least one year based on discussions with customers. Our commodity products primarily consist of commodity viscose and absorbent materials. Commodity viscose is a raw material required for the manufacture of viscose staple fibers which are used in woven and non-woven applications. Absorbent materials, typically referred to as fluff fibers, are used as an absorbent medium in consumer products. Pricing for commodity products is typically referenced to published indexes or based on publicly available spot market prices. Sales of chemicals and energy, a majority of which are by-products, are included in the high purity cellulose segment.
Our four production facilities, located in the U.S., Canada and France, have a combined annual production capacity of approximately 775,000 metric tons of cellulose specialties or commodity products. Additionally, we have dedicated approximately 250,000 metric tons of annual production to commodity products.
Wood fiber, chemicals, and energy represent approximately 28 percent, 14 percent and 6 percent, respectively, of the per metric ton cost of sales. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Forest Products
We manufacture and market high-quality construction-grade lumber in North America. The lumber, primarily spruce, pine, or fir, is used in the construction of residential and multi-family homes, light industrial and commercial facilities, and the home repair and remodel markets. The chips, manufactured as a by-product of the lumber manufacturing process, are used in our Canadian High Purity Cellulose, Pulp and Newsprint plants. Pricing for lumber is typically referenced to published indexes marketed through our internal sales team. Our six production facilities located in Canada have a targeted annual production capacity of approximately 755 million board feet of lumber.
Wood fiber and energy represents approximately 46 percent and 4 percent, respectively, of the per million board feet cost of sales. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Paperboard
We manufacture and market paperboard that is used for printing documents, brochures, promotional materials, packaging, paperback book or catalog covers, file folders, tags, and tickets.
Pricing for paperboard is typically referenced to published indices and marketed through our internal sales team. Our production facility located in Canada has the capacity to annually produce 180,000 metric tons of paperboard. Wood pulp, chemicals, and energy represent approximately 60 percent, 15 percent and 6 percent, respectively, of the per metric ton cost of sales. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Pulp & Newsprint
Pulp
We manufacture and market high-yield pulp which is used by paper manufacturers to produce paperboard, packaging, printing and writing papers and a variety of other paper products. Pricing for high-yield pulp is typically referenced to published indexes marketed through our internal sales team. Our production facility located in Canada has the capacity to annually produce 300,000 metric tons of high-yield pulp.
Wood fiber, chemicals, and energy represent approximately 22 percent, 12 percent and 11 percent, respectively, of the per metric ton cost of sales. Labor, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Newsprint
We manufacture newsprint, a paper grade used to print newspapers, advertising materials and other publications. Pricing for newsprint is typically referenced to published indices and marketed through our internal sales team. Our production facility located in Canada has the capacity to annually produce 205,000 metric tons of newsprint.
Wood fiber and chemicals represent approximately 13 percent and 4 percent, respectively, of the per metric ton cost of sales. Labor, energy, manufacturing and maintenance supplies, depreciation, manufacturing overhead and transportation costs represent the remaining cost of sales.
Market Assessment
The market assessment represents our best current estimate of each business in this environment.
High Purity Cellulose
We are experiencing increased strong demand for our commodity products and stable demand for our high-value cellulose specialties products. Prices for cellulose specialties are expected to decline slightly relative to 2020 while prices for commodity products, fluff and viscose pulps, will increase significantly in the first quarter and are forecasted to remain elevated for the near-term. Overall, we expect increased pricing from 2020 levels while total volumes and mix for 2021 are expected to remain steady compared to 2020 as increased productivity will be offset by an extended maintenance outage at the Jesup facility in the second quarter.
Key costs, including wood, energy and commodity chemical prices declined in 2020 from prior year levels due to both market conditions and our strategic actions. However, certain chemical prices are now trending higher and, overall, future input prices and availability of these inputs remain difficult to predict due to the current unprecedented economic conditions. We will also continue to invest in our business to reduce costs, improve reliability and provide new platforms for growth. Our 2020 investment in a green energy project at our Tartas facility will deliver lower costs and improved reliability starting in 2021.
Forest Products
Prices for lumber continue to remain near all-time high levels driven by exceptional demand in the U.S with housing starts in January 2021 of 1.6 million units, seasonally adjusted, and building permits of 1.9 million, while repair and remodel activity remains elevated as investment in homes remains attractive. With the absence of market downtime experienced in the first half of 2020 and new investments to increase productivity, we expect to produce an incremental 40 million board feet, an increase of 7 percent, compared to prior year.
In December 2020, the U.S. Department of Commerce finalized its administrative review of the period of April 28, 2017 through December 31, 2018 and determined a reduction of duties on softwood lumber imported into the U.S from 20 percent to 9 percent for the Company. We will benefit from the reduced amount of duties expense on lumber sold into the U.S; however there remains no discussion about a full resolution to the softwood lumber dispute which, based on most recent disputes, would likely result in the U.S. returning all or the vast majority of the duties previously paid. Since 2017, we have paid a total of $91 million in duties.
Paperboard
Paperboard prices are expected to increase slightly in early 2021 given solid demand for packaging grades and announced price increases from larger competitors in the industry. Overall profitability is expected to remain flat as price and volume benefits are expected to be offset by increased raw material costs.
Pulp & Newsprint
Pulp and newsprint markets are beginning to recover from lows in 2020 as economies recover from the impacts caused by COVID-19. Larger competitors in both pulp and newsprint markets have recently announced price increases, and we expect higher prices for both products in the near-term. Additionally, we continue to manage production of our newsprint facility in order to minimize costs and improve sales mix. As such, we expect lower newsprint volumes and higher prices in 2021 compared to 2020. Further, we are maintaining focus on the expansion of the Envirosmart™ food service bag, launched in late third quarter, targeting the quick service restaurant end-market and used for items such as sandwiches and to-go orders, which have grown and remain strong in the post COVID-19 environment.
Reconciliation of Non-GAAP measures
For a reconciliation of EBITDA to net income, see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Performance and Liquidity Indicators.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities in our consolidated financial statements. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates.
New Accounting Pronouncements
See Note 2 - Summary of Significant Accounting Policies and New Accounting Pronouncements of our consolidated financial statements for a discussion of recently issued accounting pronouncements that may affect our financial results and disclosures in future periods.
Accounting Policies:
Revenue Recognition and Measurement
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of our contracts have a single performance obligation to transfer products. Accordingly, we recognize revenue when control has been transferred to the customer. Generally, control transfers upon delivery to a location in accordance with terms and conditions of the sale. Changes in customer contract terms and conditions, as well as the timing of orders and shipments, may have an impact on the timing of revenue recognition.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring our products and is generally based upon contractual arrangements with customers or published indices. We sell our products both directly to customers and through distributors and agents typically under agreements with payment terms less than 90 days.
The nature of our contracts may give rise to variable consideration, which may be constrained, including sales volume-based rebates to customers. We estimate the level of volumes based on anticipated purchases at the beginning of the period and record a rebate accrual for each purchase toward the requisite rebate volume. These estimated rebates are included in the transaction price as a reduction to net sales.
These methodologies are consistent with the manner in which we have historically accounted for the recognition of revenue.
Property, Plant & Equipment
Depreciation expense is computed using the units-of-production method for our High Purity Cellulose, Paperboard, Pulp & Newsprint plant and equipment and the straight-line method for all other property, plant and equipment over the useful economic lives of the assets involved. The total units of production used to calculate depreciation expense is determined by factoring annual production days, based on normal production conditions, by the economic useful life of the asset involved. The physical life of equipment, however, may be shortened by economic obsolescence caused by environmental regulation, competition or other causes. We depreciate our non-production assets, including office, lab, and transportation equipment, using the straight-line depreciation method over 3 to 25 years. Buildings and land improvements are depreciated using the straight-line method over 15 to 35 years and 5 to 30 years, respectively. We believe these depreciation methods are the most appropriate, versus other generally accepted accounting methods, as they most closely match revenues with expenses.
Gains and losses on the retirement of assets are included in operating income. Long-lived assets are reviewed annually for impairment or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets that are held and used is measured by net undiscounted cash flows expected to be generated by the asset. Property, plant and equipment are grouped for purposes of evaluating recoverability at the combined plant level, the lowest level for which independent cash flows are identifiable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Accounting Estimates:
Environmental liabilities
At December 31, 2020, we had $172 million of accrued liabilities for environmental costs relating to disposed operations. Numerous price, quantity, cost and probability assumptions are used in estimating these obligations. Factors affecting these estimates include changes in the nature or extent of contamination, changes in the content or volume of the material discharged or treated in connection with one or more impacted sites, requirements to perform additional or different assessment or remediation, changes in technology that may lead to additional or different environmental remediation strategies, approaches and work-plans, discovery of additional or unanticipated contaminated soil, groundwater or sediment on or off-site, changes in remedy selection, changes in law or interpretation of existing law and the outcome of negotiations with governmental agencies or non-governmental parties. We periodically review our environmental liabilities and also engage third-party consultants to assess our ongoing remediation of contaminated sites. Quarterly, we review our environmental liabilities related to assessment activities and remediation costs and adjust them as necessary. Liabilities for financial assurance, monitoring and maintenance activities and other activities are assessed annually. A significant change in any of these estimates could have a material effect on our results of operations. See Note 11 - Environmental Liabilities of our consolidated financial statements for more information.
Determining the adequacy of pension and other postretirement benefit assets and liabilities
Our defined benefit pension and postretirement plans for employees in the U.S., Canada and France require numerous estimates and assumptions to determine the proper amount of pension and postretirement liabilities and annual expense to record in our financial statements. The key assumptions include discount rate, return on assets, salary increases, health care cost trends, mortality rates, longevity and service lives of employees. Although authoritative guidance on how to select most of these assumptions exists, we exercise some degree of judgment when selecting these assumptions based on input from our actuary and other advisors. Different assumptions, as well as actual versus expected results, would change the periodic benefit cost and funded status of the benefit plans recognized in the financial statements.
Our long-term return plan assets assumption was established based on historical long-term rates of return on broad equity and bond indices, discussions with our actuary and investment advisors and consideration of the actual historical annualized rate of returns. In determining future pension obligations, we select a discount rate based on information supplied by our actuary. The actuarial rates are developed by models which incorporate high-quality (AA rated), long-term corporate bond rates into their calculations. The weighted average discount rate decreased from 3.46 percent at December 31, 2019 to 2.48 percent at December 31, 2020.
Our defined pension plans were underfunded by $188 million at December 31, 2020. The underfunded status increased by $25 million in 2020, primarily due to lower discount rates. In 2021, pension expense is expected to increase due to an increase in service cost, higher amortization of actuarial losses partly offset by lower interest cost. Future pension expense will be impacted by many factors including actual investment performance, changes in discount rates, timing of contributions and other employee related matters. See Note 18 - Employee Benefit Plans of our consolidated financial statements for more information.
During 2020, we started the process of winding up certain Canadian pension plans and as a result recorded a settlement gain of $3 million. In 2019, we purchased annuity contracts from a third-party insurance company who has assumed responsibility for future pension benefits for certain participants in our Canadian defined benefit plans. As required under Accounting Standards Codification (“ASC”) 715 Compensation-Retirement Benefits, a loss of $9 million was recorded in 2019 on the settlement and de-recognition of the projected benefit obligation.
In 2020, we made mandatory contributions and benefit payments to plan participants of approximately $10 million. During 2021, we expect to make mandatory and discretionary benefit payments to plan participants of approximately $8 million. Future mandatory contribution requirements will vary depending on actual investment performance, changes in valuation assumptions, interest rates and legal requirements to maintain a certain funding status.
The sensitivity of pension expense and projected benefit obligation related to our pension plans to changes in economic assumptions is highlighted below:
Impact on (in millions):
Effect on 2021 Pension Expense Effect on December 31, 2020 Projected Benefit Obligation
Change in Assumption (Decrease)/Increase Increase (Decrease)
50 bp decrease in discount rate $4 $72
50 bp increase in discount rate $(3) $(65)
50 bp decrease in long-term return on assets $4
50 bp increase in long-term return on assets $(4)
Realizability of both recorded and unrecorded tax assets and tax liabilities
We have recorded certain deferred tax assets we believe will be realized in future periods. The recognition of these tax assets is based on our analysis of both positive and negative evidence about the future realization of the tax benefit of each existing deductible temporary difference or carryforward. Future realization is based on the existence of sufficient taxable income of the appropriate character, within the appropriate taxing jurisdiction (for example country, state or province), and within the carryback and carryforward periods available under the applicable tax laws. The strongest form of positive evidence is the evaluation of adjusted historical earnings and future earnings projections within the applicable carryforward periods. This evidence supports the realizability of most recorded deferred tax assets. Tax assets are reviewed periodically for realizability. This review requires management to make assumptions and estimates about future profitability affecting the realization of these tax assets. If the review indicates the realizability may be less than likely, a valuation allowance is recorded.
Our income tax returns are subject to examination by U.S. federal and state taxing authorities as well as foreign jurisdictions, including Canada and France. In evaluating the tax benefits associated with various tax filing positions, we record a tax benefit for an uncertain tax position if it is more-likely-than-not to be realized upon ultimate settlement of the issue. We record a liability for an uncertain tax position that does not meet this criterion. The liabilities for unrecognized tax benefits are adjusted in the period in which it is determined the issue is settled with the taxing authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new facts or information become available. See Note 20 - Income Taxes of our consolidated financial statements for more information.
Results of Operations
Summary of our results of operations for each of the following years ended December 31:
Financial Information (in millions, except percentages)
2020 2019 2018
Net Sales $ 1,739 $ 1,775 $ 1,957
Cost of Sales (1,601) (1,721) (1,666)
Gross Margin 138 54 291
Selling, general and administrative expenses (85) (90) (105)
Duties (a) (10) (22) (26)
Other operating expense, net (16) (25) (12)
Operating Income (Loss) 27 (83) 148
Interest expense (64) (60) (56)
Interest income and other, net (7) - 5
Other components of net periodic benefit (expense) 6 (5) 8
Gain on bargain purchase - - 20
Gain (loss) on debt extinguishment (8) - 1
Income (Loss) from Continuing Operations before Income Taxes (46) (148) 126
Income Tax (Expense) Benefit 47 30 (27)
Equity in income (loss) of equity method investments (1) - -
Income (Loss) from Continuing Operations $ - $ (119) $ 99
Income from discontinued operations, net of taxes
1 96 29
Net Income $ 1 $ (22) $ 128
Gross Margin % 7.9 % 3.1 % 14.9 %
Operating Margin % 1.6 % (4.7) % 7.6 %
Effective Tax Rate % (101.3) % (20.0) % 21.4 %
(a) The year ended December 31, 2020 includes the $21 million reduction in duties expense. See discussion in the Forest Products portion of the Results of Operations herein.
Results of Operations, Year Ended December 31, 2020 versus December 31, 2019
Net sales by segment were as follows:
2020 2019
Net Sales (in millions)
High Purity Cellulose $ 1,051 $ 1,127
Forest Products 392 299
Paperboard 190 200
Pulp & Newsprint 172 215
Eliminations (66) (66)
Total Net Sales $ 1,739 $ 1,775
Net sales decreased $36 million or 2 percent, in 2020 compared to 2019. The decrease was primarily driven by lower high purity cellulose sales prices and lower newsprint sales prices and volumes, partially offset by strong lumber sales prices. For further assessment of changes in net sales, see the discussion of operating results by segment.
Operating income by segment was as follows:
2020 2019
Operating income (in millions)
High Purity Cellulose $ 7 $ 7
Forest Products 80 (31)
Paperboard 18 4
Pulp & Newsprint (25) 2
Corporate (53) (65)
Total Operating Income $ 27 $ (83)
Operating income for 2020 improved by $110 million when compared to the prior year. The increase was primarily driven by higher prices for lumber and lower costs driven by improved operating reliability, partly offset by declines in newsprint sales prices and volumes. In addition, 2020 reflects the $21 million reduction in duties expense resulting from the U.S. Department of Commerce determination on Canadian softwood lumber imports into the U.S. For further assessment of changes of operating income, see the discussion of Operating Results by Segment.
Non-operating Expenses
Interest expense for 2020 increased $4 million driven by the higher interest rate margin from the amendments to our credit facilities held during most of 2020, as well as increased amortization of debt issuance costs. In December 2020, the Company issued $500 million of 7.625 percent Senior Secured Notes due 2026 (the “Senior Secured Notes”) and closed on its five-year, $200 million senior secured asset-based revolving credit facility (the “ABL Credit Facility”). The Company used the net proceeds from the sale of the Senior Secured Notes, together with cash on hand, to repay all outstanding obligations under its previous Senior Secured Credit Facility. In connection with the early repayment of the Senior Secured Credit Facility, we recorded a loss from extinguishment of long-term debt of $8 million, primarily from writing off unamortized deferred financing fees. For additional information, see Note 10 - Debt and Finance Leases.
Other components of net periodic benefit (expense) changed by $11 million to a $6 million benefit during 2020 as a result of a $3 million pension settlement and curtailment gain recorded during the fourth quarter of 2020 whereas 2019 included a $9 million pension net settlement loss. See Note 18 - Employee Benefit Plans.
Income Taxes
The effective tax benefit rate for 2020 was a benefit of 101 percent. The 2020 effective tax rate benefit differs from the federal statutory rate of 21 percent primarily due to benefits from the CARES Act, the release of certain valuation allowances related to nondeductible interest expense, tax return to accrual adjustments, and tax credits, partially offset by increases to uncertain tax position reserves, nondeductible executive compensation, and lower tax deductions on vested stock compensation. The 2019 effective tax rate from continuing operations was a benefit of 20 percent. See Note 20 - Income Taxes of our consolidated financial statements for additional information.
Discontinued Operations
The Company has presented the operating results for its Matane operations, which were sold in November 2019, as discontinued operations for the years ended December 31, 2020, 2019 and 2018. Included in discontinued operations is allocated interest expense for debt that was required to be repaid upon completion of the sale. In addition, legal and administrative costs to sell the operations are included in discontinued operations. Income from discontinued operations during the year ended December 31, 2020 included a $1 million benefit resulting from the final working capital adjustment as required by the sale agreement. Income from discontinued operations increased $67 million during 2019 compared to 2018 and reflects the $84 million gain from the sale of the operations. See Note 3 - Discontinued Operations of our consolidated financial statements for additional information.
Operating Results by Segment
High Purity Cellulose
($ in million) 2020 2019
Net Sales $ 1,051 $ 1,127
Operating Income $ 7 $ 7
Average Sales Prices ($ per metric ton): $ 992 $ 1,083
Sales Volumes (thousands of metric tons): 976 964
Changes in High Purity Cellulose net sales are as follows:
Net Sales (in millions) 2019 Changes Attributable to: 2020
Price Volume/Mix
Cellulose specialties $ 765 $ 11 $ (91) $ 685
Commodity products and other 280 (44) 47 283
Other sales (a) 82 - 1 83
Total Net Sales $ 1,127 $ (33) $ (43) $ 1,051
(a) Other sales include sales of electricity, lignin and other by-products to third parties.
Total net sales decreased $76 million, or 7 percent, in 2020. Sales prices for cellulose specialties increased 2 percent during the year ended December 31, 2020 whereas commodity prices declined 17 percent primarily driven by COVID-19 and China trade dispute related impacts on demand on the larger commodity pulp and textile markets. Cellulose specialties sale volumes declined 12 percent primarily due to the impact on demand driven by COVID-19. Commodity sales volumes increased 21 percent for the full year compared to 2019 driven by the recovery of the textile markets in the second half of 2020.
Changes in High Purity Cellulose operating income are as follows:
Operating Income (in millions) Gross Margin Changes Attributable to:
2019 Price Volume/
Sales Mix (a) Cost SG&A and other 2020
Operating Income $ 7 $ (33) $ (37) $ 68 $ 2 $ 7
Operating Margin % 0.6 % (3.0) % (3.6) % 6.5 % 0.2 % 0.7 %
(a) Volume/Sales Mix computed based on contribution margin.
Operating income remained essentially flat in 2020 when compared to the prior year. Lower wood and chemical costs, improved reliability and higher commodity volumes were offset by the impact of lower cellulose specialty volumes and commodity sale price declines during 2020. Included in SG&A and other costs is our share of the loss of the lignin joint venture of $4 million and $5 million during 2020 and 2019, respectively.
Forest Products
(in millions) 2020 2019
Net Sales $ 392 $ 299
Operating income $ 80 $ (31)
Average Sales Prices ($ per thousand board feet):
Lumber $ 523 $ 373
Sales Volumes (millions of board feet):
Lumber 611 617
Changes in Forest Products net sales are as follows:
Net Sales (in millions) 2019 Changes Attributable to: 2020
Price Vol/Mix/Other (a)
Lumber $ 230 $ 92 $ (3) $ 319
Other sales (a) 69 - 4 73
Total Net Sales $ 299 $ 92 $ 1 $ 392
(a) Other sales include sales of logs, wood chips, and other by-products to third-parties and other segments.
Total net sales increased $93 million, or 31 percent, in 2020. Lumber sales prices improved 40 percent due to strong demand while lumber sales volumes decreased by 1 percent as a result of market downtime taken in the first half of the year to address the initial negative impact on demand driven by the COVID-19 pandemic. Other sales were up from higher wood chip sales during the year ended December 31, 2020.
Changes in Forest Products operating income are as follows:
Operating Income (in millions) Gross Margin Changes Attributable to:
2019 Price Volume/
Sales Mix (a) Cost SG&A and other 2020
Operating Income $ (31) $ 92 $ 1 $ 6 $ 12 $ 80
Operating Margin % (10.5) % 26.0 % 0.2 % 1.5 % 3.1 % 20.3 %
(a) Volume/Sales Mix computed based on contribution margin.
Operating income increased $111 million in 2020. The improvement was primarily driven by the 40 percent increase in lumber sales prices and lower costs driven by the curtailments of production in the early part of 2020. Additionally the Company reversed $21 million of prior expenses related to import duties as the USDOC announced its final determination in December 2020 to reduce the duties on Canadian softwood lumber imported into the U.S. from 20 percent to 9 percent for such duties paid during 2017 and 2018. The years ended December 31, 2020 and 2019 include $10 million and $23 million in softwood lumber duties, respectively. Duties incurred during 2020 take into account the $21 million reduction previously discussed.
Paperboard
(in millions) 2020 2019
Net Sales $ 190 $ 200
Operating income $ 18 $ 4
Average Sales Prices ($ per metric tons) (a):
Paperboard $ 1,076 $ 1,103
Sales Volumes (in thousands of metric tons) (a):
Paperboard 176 181
Changes in Paperboard net sales are as follows:
Net Sales (in millions) 2019 Changes Attributable to: 2020
Price Volume/Mix
Paperboard $ 200 $ (5) $ (5) $ 190
Total net sales declined $10 million, or 5 percent in 2020. Paperboard sales prices declined 2 percent due to increased competition. Paperboard sales volumes decreased 3 percent.
Changes in Paperboard operating income are as follows:
Operating Income (in millions) Gross Margin Changes Attributable to:
2019 Price Volume/
Sales Mix (a) Cost SG&A and other 2020
Operating Income $ 4 $ (5) $ (2) $ 21 $ - $ 18
Operating Margin % 2.0 % (2.5) % (1.1) % 11.1 % - % 9.5 %
(a) Computed based on contribution margin.
Operating income increased $14 million in 2020 due to decreased costs from lower pulp raw material prices as well as lower transportation costs.
Pulp & Newsprint
(in millions) 2020 2019
Net Sales $ 172 $ 215
Operating income $ (25) $ 2
Average Sales Prices ($ per metric ton):
Pulp $ 470 $ 499
Newsprint $ 418 $ 524
Sales Volumes (in metric tons):
Pulp 217 207
Newsprint 112 166
Changes in Pulp & Newsprint net sales are as follows:
Net Sales (in millions) 2019 Changes Attributable to: 2020
Price Volume/Mix
Pulp $ 128 $ (8) $ 5 $ 125
Newsprint 87 (12) (28) 47
Total Net Sales $ 215 $ (20) $ (23) $ 172
(a) Average sales prices and volumes for external sales only. The Pulp segment sold approximately 66,000 metric tons and 66,000 metric tons of high-yield pulp for $23 million and $25 million to the Paperboard segment for the production of paperboard during 2020 and 2019, respectively.
Total net sales declined $43 million, or 20 percent, in 2020. Average pulp sales prices declined 6 percent due to weak market conditions during 2020. Pulp sales volumes increased 5 percent. Newsprint sales prices and volumes declined 20 percent and 33 percent, respectively, due to weak demand and market-related downtime resulting from the COVID-19 pandemic.
Changes in Pulp & Newsprint operating income are as follows:
Operating Income (in millions) Gross Margin Changes Attributable to:
2019 Price Volume/
Sales Mix (a) Cost SG&A and other 2020
Operating Income $ 2 $ (20) $ (13) $ 5 $ 1 $ (25)
Operating Margin % 0.8 % (10.2) % (8.7) % 2.9 % 0.6 % (14.6) %
(a) Computed based on contribution margin.
Operating income for Pulp & Newsprint decreased $27 million during 2020, driven by lower pulp and newsprint prices and newsprint volumes, partly offset by higher pulp sales volumes. Costs improved primarily from lower transportation expenses, partially offset by higher energy costs.
Corporate
(in millions) 2020 2019
Operating loss $ (53) $ (65)
The operating loss for Corporate decreased by $12 million to $53 million in 2020, when compared to 2019, primarily due to lower environmental reserves charges and reduced spending, partially offset by higher non-cash amortization of technology costs and unfavorable currency impacts in the current year and the impact of an insurance recovery in the prior year.
Results of Operations, Year Ended December 31, 2019 versus December 31, 2018
2019 2018
Net Sales (in millions)
High Purity Cellulose $ 1,127 $ 1,192
Forest Products 299 356
Paperboard 200 197
Pulp & Newsprint 215 282
Eliminations (66) (70)
Total Net Sales $ 1,775 $ 1,957
Net sales decreased $182 million, or 9 percent, in 2019 compared to 2018. The decrease was primarily driven by lower cellulose specialties, lumber, high-yield pulp and newsprint sales. For further assessment of changes in net sales, see the discussion of Operating Results by Segment.
Operating income by segment was as follows:
2019 2018
Operating Income (in millions)
High Purity Cellulose $ 7 $ 112
Forest Products (31) 25
Paperboard 4 4
Pulp & Newsprint 2 72
Corporate (65) (65)
Total Operating Income $ (83) $ 148
Operating income for 2019 decreased $231 million when compared to the prior year. The decrease was primarily driven by lower sales prices and higher costs. For further assessment of changes of operating income, see the discussion of Operating Results by Segment.
Non-operating Expenses
Interest expense for 2019 increased $4 million driven by higher debt levels throughout most of 2019, increased interest rate margin from the amendment to our credit facilities, increased amortization of deferred loan costs from the $100 million pay-down of our Senior Secured Credit Facilities as a result of the Matane Mill sale, partially offset by lower LIBOR rates. For additional information, see Note 10 - Debt and Finance Leases.
Interest income and other, net, decreased in 2019 as a result of the reduced impact of foreign exchange on the re-measurement of certain debt instruments as a result of our hedging programs.
Other components of net periodic benefit (expense) changed by $13 million to $5 million of expense in 2019 as a result of lower expected long term returns on pension assets and the $9 million pension settlement loss recorded during the fourth quarter of 2019. See Note 18 - Employee Benefit Plans.
We recognized a $20 million gain on bargain purchase during 2018 primarily from tax-related adjustments and the sale of the resins business as a result of finalizing the purchase price allocation of the Acquisition. See Note 4 - Tembec Acquisition.
Income Taxes
The full year 2019 effective tax rate from continuing operations was a benefit of 20 percent compared to an expense of 21 percent for the same period in 2018. The effective tax rate benefit differs from the federal statutory rate of 21 percent primarily due to nondeductible interest expense in the U.S., tax credits, excess tax deductions on vested stock compensation, U.S. Global Intangible Low-Taxed Income, and different statutory tax rates of foreign operations. See Note 20 - Income Taxes of our consolidated financial statements for additional information.
Discontinued Operations
Income from discontinued operations increased $67 million and reflects the $84 million gain from the sale of the Matane Mill in 2019. Excluding the gain, income from discontinued operations declined $17 million during 2019 principally driven from lower sales prices and professional fees to sell the operations. See Note 3 - Discontinued Operations of our consolidated financial statements for additional information.
Operating Results by Segment
High Purity Cellulose
($ in million) 2019 2018
Net Sales $ 1,127 $ 1,192
Operating Income $ 7 $ 112
Average Sales Prices ($ per metric ton): $ 1,083 $ 1,167
Sales Volumes (thousands of metric tons): 964 922
Changes in High Purity Cellulose net sales are as follows:
Net Sales (in millions) 2018 Changes Attributable to: 2019
Price Volume/Mix
Cellulose specialties $ 832 $ (16) $ (51) $ 765
Commodity products and other 244 (33) 69 280
Other sales (a) 117 - (34) 82
Total Net Sales $ 1,192 $ (49) $ (16) $ 1,127
(a) Other sales include sales of electricity, resins, lignin and other by-products to third parties. The absence of the resins business in 2019 resulted in the decline of $26 million in Other sales.
Total net sales decreased $65 million, or 5 percent, in 2019. Cellulose specialties sales prices declined in 2019 by 2 percent primarily due to duties on products sold in China, in line with expectations. Cellulose specialties sales volumes declined by 6 percent due to weakness in the acetate, automotive and construction markets as a result of global trade issues and was partially offset by the timing of shipments which favorably impacted revenue recognition. Commodity product sales prices decreased 10 percent primarily due to weaker markets a result of global trade issues; however, the decline was more than offset by a 27 percent increase in sales volumes due to lower demand for cellulose specialties, improved commodity product production and contractual changes to the sales terms and conditions with certain customers. Other sales declined as a result of the sale of the resin business in September 2018.
Changes in High Purity Cellulose operating income are as follows:
Operating Income (in millions) Gross Margin Changes Attributable to:
2018 Price Volume/ Sales Mix (a) Cost SG&A and other 2019
Operating Income $ 112 $ (49) $ (29) $ (31) $ 4 $ 7
Operating Margin % 9.4 % (3.9) % (2.5) % (2.8) % 0.4 % 0.6 %
(a) Volume/Sales Mix computed based on contribution margin.
Operating income decreased $106 million in 2019. The decrease was driven by lower cellulose specialties sales prices and volumes and a decline in other sales, partially offset by higher commodity sales volumes. Costs increased by $31 million as overall higher sales volumes, as well as higher wood and maintenance costs were only partially offset by lower chemical prices, primarily caustic, and the sale of the resin business. The sale of the resin business negatively impacted operating income $5 million during 2019. Included in SG&A and other costs is our share of the loss of the lignin joint venture of $5 million and $4 million incurred during 2019 and 2018, respectively.
Forest Products
(in millions) 2019 2018
Net Sales $ 299 $ 356
Operating income $ (31) $ 25
Average Sales Prices ($ per thousand board feet):
Lumber $ 373 $ 471
Sales Volumes (millions of board feet):
Lumber 617 604
Changes in Forest Products net sales are as follows:
Net Sales (in millions) 2018 Changes Attributable to: 2019
Price Vol/Mix/Other (a)
Lumber $ 285 $ (60) $ 5 $ 230
Other sales (a) 71 $ - $ (2) 69
Total Net Sales $ 356 $ (60) $ 3 $ 299
(a) Other sales include sales of logs, wood chips, and other by-products to third-parties and other segments.
Total net sales declined $57 million, or 16 percent, in 2019. Lumber sales prices declined 21 percent due to weak demand while lumber sales volumes increased by 2 percent as a result of efforts to reduce inventory levels were partially offset by market downtime taken at the production facilities.
Changes in Forest Products operating income are as follows:
Operating Income (in millions) Gross Margin Changes Attributable to:
2018 Price Volume/
Sales Mix (a) Cost SG&A and other 2019
Operating Income $ 25 $ (60) $ - $ 3 $ 1 $ (31)
Operating Margin % 7.0 % (18.8) % - % 1.0 % 0.3 % (10.5) %
(a) Volume/Sales Mix computed based on contribution margin.
Operating income decreased $56 million in 2019. The decline was driven by lower lumber sales prices, partially offset by higher lumber sales volumes. Lower costs were driven by lower wood costs and the reversal of the net realizable inventory reserve of $6 million, partially offset by higher depreciation, transportation and energy costs. SG&A and other costs improved
due to lower softwood lumber duties as a result of lower lumber sales prices. The years ended December 31, 2019 and 2018 included $23 million and $26 million in softwood lumber duties, respectively.
Paperboard
(in millions) 2019 2018
Net Sales $ 200 $ 197
Operating income $ 4 $ 4
Average Sales Prices ($ per metric tons) (a):
Paperboard $ 1,103 $ 1,130
Sales Volumes (in thousands of metric tons) (a):
Paperboard 181 174
Changes in Paperboard net sales are as follows:
Net Sales (in millions) 2018 Changes Attributable to: 2019
Price Volume/Mix
Paperboard $ 197 $ (5) $ 8 $ 200
Total net sales increased $3 million, or 2 percent in 2019 Paperboard sales prices declined 2 percent due to increased competition. Paperboard sales volumes increased 4 percent primarily due to efforts to reduce inventories.
Changes in Paperboard operating income are as follows:
Operating Income (in millions) Gross Margin Changes Attributable to:
2018 Price Volume/
Sales Mix (a) Cost SG&A and other 2019
Operating Income $ 4 $ (5) $ 3 $ 2 $ - $ 4
Operating Margin % 2.0 % (2.5) % 1.5 % 1.0 % - % 2.0 %
(a) Computed based on contribution margin.
Operating income was flat in 2019. Paperboard prices declined by 2 percent, partially offset by higher paperboard sales volumes. Costs decreased due to lower pulp raw material prices partially offset by higher transportation and warehousing costs.
Pulp & Newsprint
(in millions) 2019 2018
Net Sales $ 215 $ 282
Operating income $ 2 $ 72
Average Sales Prices ($ per metric ton):
Pulp $ 499 $ 669
Newsprint $ 524 $ 592
Sales Volumes (in metric tons):
Pulp 207 214
Newsprint 166 191
Changes in Pulp & Newsprint net sales are as follows:
Net Sales (in millions) 2018 Changes Attributable to: 2019
Price Volume/Mix
Pulp (a) $ 169 $ (37) $ (4) $ 128
Newsprint 113 (11) (15) 87
Total Net Sales $ 282 $ (48) $ (19) $ 215
(a) Average sales prices and volumes for external sales only. The Pulp segment sold approximately 66,000 metric tons and 65,000 metric tons of high-yield pulp for $25 million and $26 million to the Paperboard segment for the production of paperboard during 2019 and 2018, respectively.
Total net sales declined $67 million, or 24 percent, in 2019. Average pulp sales prices declined 25 percent due to weak demand as a result of global trade issues. Pulp sales volumes decreased 3 percent due to market downtime and production reliability issues at the Temiscaming mill. Newsprint sales prices and volumes declined 11 percent and 13 percent, respectively. The decrease in prices are primarily due to the effects of the removal of duties on newsprint imported into the U.S. and the continued decline in demand. The newsprint volume decline was primarily as a result of reliability issues at the Kapuskasing mill.
Changes in Pulp & Newsprint operating income are as follows:
Operating Income (in millions) Gross Margin Changes Attributable to:
2018 Price Volume/
Sales Mix (a) Cost SG&A and other 2019
Operating Income $ 72 $ (48) $ (11) $ (10) $ (1) $ 2
Operating Margin % 25.5 % (15.3) % (4.2) % (4.7) % (0.5) % 0.8 %
(a) Computed based on contribution margin.
Operating income for Pulp & Newsprint decreased $70 million in 2019. This was driven by lower pulp sales prices and volumes as well as decreases in newsprint sales prices and volumes. Costs increased due to the lower newsprint production levels, higher maintenance and transportation costs.
Corporate
(in millions) 2019 2018
Operating loss $ (65) $ (65)
The operating loss for Corporate remained flat at $65 million in 2019, when compared to 2018, due to lower incentive compensation expense, higher insurance recoveries and the absence of severance expense that is reflected in 2018, offset by higher legal and administrative costs incurred from the loan amendment that was finalized during the fourth quarter of 2019, and unfavorable currency changes. In addition, 2019 had higher environmental expenses from changes to the Port Angeles remediation project and higher cost assumptions for financial assurance on the environmental projects as a result of the increase in our perceived credit risk.
Liquidity and Capital Resources
Cash flows from operations, primarily driven by operating results, have historically been our primary source of liquidity and capital resources. However, our operating cash flows have been volatile in recent years due to decreases in market prices for our commodity products as well as the impact on demand driven by the COVID-19 pandemic. In response, we have maintained a key focus on cash, managing working capital closely and optimizing the timing and level of our capital expenditures. We amended our previous Credit Agreement in 2019 and again in 2020 to provide us with financial flexibility. In December 2020, we completed the private placement of $500 million 7.625% Senior Secured Notes due 2026 (the “Senior Secured Notes”) and concurrently entered into a five-year senior secured asset-based revolving credit agreement (the “ABL Credit Facility”) in an initial aggregate principal amount of $200 million. In connection with these transactions, we terminated all commitments and repaid all outstanding obligations under the existing Credit Agreement. See Note 10 - Debt and Finance Leases of our consolidated financial statements for additional information.
As of December 31, 2020, we are in compliance with all financial and other customary covenants. We continue to believe our future cash flows from operations and availability under our ABL Credit Facility, as well as our ability to access the capital markets, if necessary or desirable, will be adequate to fund our operations and anticipated long-term funding requirements, including capital expenditures, defined benefit plan contributions, and repayment of debt maturities.
The non-guarantor subsidiaries had assets of $797 million, year-to-date revenue of $204 million, covenant EBITDA for the last twelve months is a $9 million loss and liabilities of $283 million as of December 31, 2020.
On September 6, 2019, our Board of Directors suspended our quarterly common stock dividend to use the cash flow to pay down debt and fund capital investments as well as working capital needs. The declaration and payment of future common stock dividends, if any, will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and other factors the Board of Directors deem relevant. In addition, our debt facilities place limitations on the declaration and payment of future dividends. No dividends were declared in 2020.
On January 29, 2018, our Board of Directors authorized a $100 million common stock share buyback program. For the years ended December 31, 2020 and 2019, we did not repurchase any common shares under this buyback program. We do not expect to utilize any further authorization in the near future. During 2018, we repurchased and retired 2,570,449 shares of common stock under this buyback program at an average price of $15.44 per share, excluding commissions, for an aggregate purchase price of approximately $40 million.
A summary of liquidity and capital resources is shown below (in millions of dollars):
As of December 31,
2020 2019 2018
Cash and cash equivalents (a) $ 94 $ 64 $ 109
Availability under the ABL Credit Facility (b) 102 - -
Availability under the Revolving Credit Facility (c) - 87 217
Total debt (d) 1,084 1,082 1,188
Stockholders’ equity 695 683 707
Total capitalization (total debt plus equity) 1,779 1,765 1,895
Debt to capital ratio 61 % 61 % 63 %
(a) Cash and cash equivalents consisted of cash, money market deposits and time deposits with original maturities of 90 days or less.
(b) Amounts available under the ABL Credit Facility fluctuate based on eligible accounts receivable and inventory levels. At December 31, 2020, we had $146 million of gross availability and net available borrowings of $102 million after taking into account standby letters of credit of approximately $44 million. In addition to the availability under the ABL Credit Facility, we have $19 million available under an accounts receivable factoring line of credit in France. See Note 22 - Commitments and Contingencies of our consolidated financial statements for additional information.
(c) Amounts available under the Revolving Credit Facility have been reduced by $33 million and $34 million as of December 31, 2019 and 2018, respectively. We were also required to maintain between $80 million and $90 million of availability on our Revolving Credit Facility, therefore we show this as a reduction to the December 31, 2019 availability.
(d) See Note 10 - Debt and Finance Leases of our consolidated financial statements for more information.
Cash Flows (in millions of dollars)
The following table summarizes our cash flows from operating, investing and financing activities for each of the following years ended December 31:
Cash Provided by (Used for): 2020 2019 2018
Operating activities $ 124 $ 42 $ 247
Investing activities $ (78) $ 53 $ (116)
Financing activities $ (19) $ (138) $ (116)
Cash Provided by Operating Activities
Cash provided by operating activities during the year ended December 31, 2020 increased $82 million, compared to the prior year period, due to improvements in our operating results, mostly from higher lumber prices and lower costs from improved reliability. The increase was partly offset by an increase in income tax receivables that are expected to be refunded during 2021. Included in cash provided by operating activities for the year ended December 31, 2019 was $20 million of cash provided by discontinued operations.
Cash provided by operating activities in 2019 decreased $205 million when compared to the prior year ended December 31, 2018, primarily due to a decline in our operating results mostly from lower prices across all segments, partially offset by a decrease in environmental spending in 2019. Included in cash provided by operating activities for the year ended December 31, 2018 was $25 million of cash provided by discontinued operations.
Cash Provided by (Used for) Investing Activities
Cash used for investing activities during the year ended December 31, 2020 was $78 million compared to cash provided by investing activities of $53 million during the same prior year period. The year ended December 31, 2019 included proceeds from discontinued operations of $158 million that were received from the November 2019 sale of the Matane mill and $3 million of discontinued operations capital spending. Capital expenditures from continuing operations decreased $28 million during the year ended December 31, 2020 when compared to the same prior year period. The current year included proceeds of $4 million from the sale of assets and $4 million of contributions for our investment in Anomera. See Note 2-Summary of Significant Accounting Policies and New Accounting Pronouncements for additional information on the investment.
Cash used for investing activities of continuing operations during 2019 decreased $10 million when compared to the prior year from a decrease in capital spending. In addition, the year ended December 31, 2018 included $16 million of proceeds received from the sale of the resins business. Included in cash provided by investing activities of discontinued operations for the year ended December 31, 2019 were $155 million of proceeds from the sale of the Matane mill, partly offset by approximately $3 million of capital spending.
Cash Provided by (Used for) Financing Activities
Cash used for financing activities decreased $119 million primarily due a decrease of $109 million in our net long-term debt payments during 2020 when compared to the year ended December 31, 2019. In addition, the year ended December 31, 2020 included $5 million of short term borrowings from the France factoring line. Common stock dividends paid decreased by $9 million due to the suspension of the quarterly $0.07 dividend starting in the third quarter of 2019. In addition, the preferred stock dividend payments declined by $10 million in 2020 as the preferred stock automatically converted to common stock in August 2019. During 2020, the Company incurred $24 million of debt issuance costs primarily from the Senior Secured Notes due 2026 that were issued in December 2020. Common shares repurchased decreased by $6 million during 2020 when compared to the same prior year period due to fewer shares in lieu of income taxes repurchased. See Note 10 - Debt and Finance Leases and Note 14 - Stockholders' Equity for additional information.
Cash used for financing activities during 2019 increased $22 million when compared to the prior year, primarily due to a net increase in long-term debt payments of $64 million during the year ended December 31, 2019, partially offset by a $36 million decrease in common stock repurchases due to the absence of the share repurchases under the buyback program that occurred in 2018. In addition, common stock and preferred stock dividends decreased in total by $10 million during 2019. In addition, debt issuance costs of $4 million were incurred in 2019.
Performance and Liquidity Indicators
The discussion below is presented to enhance the reader’s understanding of our operating performance, liquidity, ability to generate cash and satisfy rating agency and creditor requirements. This information includes the following measures of financial results: EBITDA, adjusted EBITDA and adjusted free cash flows. These measures are not defined by U.S. Generally Accepted Accounting Principles (“GAAP”) and the discussion of EBITDA, adjusted EBITDA and adjusted free cash flows is not intended to conflict with or change any of the GAAP disclosures described above. Our management uses these non-GAAP measures to compare our performance to that of prior periods for trend analyses, purposes of determining management incentive compensation and budgeting, forecasting and planning purposes. Our management considers these measures, in addition to operating income, to be important to estimate the enterprise and stockholder values of the Company, and for making strategic and operating decisions. In addition, analysts, investors and creditors use these measures when analyzing our operating performance, financial condition and cash generating ability. Our management uses EBITDA and adjusted EBITDA as performance measures and adjusted free cash flows as a liquidity measure. See “Note about Non-GAAP Financial Measures” on page 2 for limitations associated with non-GAAP measures.
EBITDA is defined by SEC rules as earnings from continuing operations before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined by the Company as EBITDA before the pension settlement loss, duties reversal, insurance recoveries, loan amendment costs, non-recurring expenses related to the Company’s review of its commodity asset portfolio, severance expense, gain on bargain purchase, acquisition related costs, inventory write-up to fair value, gain on derivative instrument, gain on debt extinguishment, non-cash impairment, and one-time separation and legal costs. EBITDA and adjusted EBITDA are not necessarily indicative of results that may be generated in future periods.
Below is a reconciliation of Income (Loss) from Continuing Operations to EBITDA and Adjusted EBITDA for each of the years ended December 31 (in millions of dollars):
Income (Loss) from Continuing Operations to EBITDA and Adjusted EBITDA Reconciliations 2020 2019 2018 2017 2016
Income (loss) from continuing operations $ - $ (118) $ 99 $ 323 $ 73
Depreciation and amortization 152 153 146 97 88
Interest expense, net 64 60 55 38 35
Income tax expense (benefit) (47) (30) 27 19 39
EBITDA 169 65 327 477 235
Pension settlement (gain) loss (3) 9 - - -
Insurance recovery - (4) - - -
Loan amendment costs - 4 - - -
Non-recurring expense (a) - 1 - - -
Severance expense - 1 4 - -
Gain on bargain purchase - - (20) (317) -
Acquisition related costs - - - 34 -
Inventory write-up to fair value - - - 23 -
Gain on derivative instrument - - - (8) -
Loss (gain) on debt extinguishment 8 - - - (9)
Duties reversal (b)
(21) - - - -
Adjusted EBITDA $ 153 $ 76 $ 311 $ 209 $ 226
(a) Non-recurring expenses are related to the Company’s review of its commodity asset portfolio.
(b) The U.S. Department of Commerce announced its final determination in December 2020 to reduce the Company’s duties on Canadian softwood lumber imported into the U.S. from 20 percent to 9 percent. As a result the Company reflected a $21 million reversal of prior period expense during the year ended December 31, 2020.
EBITDA and Adjusted EBITDA for 2020 increased compared to 2019, primarily due to higher earnings from operations as a result of higher lumber sales prices and lower costs, primarily from improved reliability. EBITDA and Adjusted EBITDA for 2019 decreased compared to 2018, primarily due to lower earnings from operations as a result of lower sales prices on all our products. For additional information regarding operating results see Results of Operations section of Item 7 - Management Discussion and Analysis.
Adjusted free cash flows is defined as cash provided by operating activities of continuing operations adjusted for capital expenditures, net of proceeds from sale of assets, excluding strategic capital expenditures. Adjusted free cash flows, as defined by the Company, is a non-GAAP measure of cash generated during a period which is available for debt reduction, strategic capital expenditures and acquisitions and repurchase of the Company’s common stock. Adjusted free cash flows is not necessarily indicative of the adjusted free cash flows that may be generated in future periods.
Below is a reconciliation of cash flows from operations to adjusted free cash flows for each of the following years ended December 31 (in millions of dollars):
Cash Flows from Operations to Adjusted Free Cash Flows Reconciliation
2020 2019 2018 2017 2016
Cash provided by operating activities-continuing operations $ 124 $ 22 $ 222 $ 126 $ 232
Capital expenditures, net (a) (51) (75) (92) (64) (85)
Adjusted free cash flows $ 73 $ (53) $ 130 $ 62 $ 147
(a) Capital expenditures, net of proceeds from sale of assets, exclude strategic capital expenditures which we deem discretionary. Strategic capital expenditures for the years ended December 31, 2020, 2019, 2018, 2017 and 2016 were $22 million, $27 million, $37 million, $11 million and $4 million, respectively.
Adjusted free cash flows in 2020 increased compared to 2019 primarily due to strong lumber prices and lower costs driven by improved reliability, partly offset by lower capital expenditures.
Adjusted free cash flows in 2019 decreased compared to 2018 primarily due lower cash from operating activities driven by lower earnings as a result of lower sales prices on all our products. This was partially offset by our actions to decrease capital expenditures to preserve cash flow.
Off Balance Sheet Arrangements
We utilize off-balance sheet arrangements to provide credit support for certain suppliers and vendors in case of their default on critical obligations, collateral for certain of our self-insurance programs and guarantees for the completion of our remediation of environmental liabilities. These arrangements consist of standby letters of credit and surety bonds. As part of our ongoing operations, we also periodically issue guarantees to third parties. Off-balance sheet arrangements are not considered a source of liquidity or capital resources and do not expose us to material risks or material unfavorable financial impacts. See Note 22 - Commitments and Contingencies of our consolidated financial statements for more information.
Contractual Financial Obligations
Information regarding the letters of credit, surety bonds and other guarantees as of December 31, 2020 is hereby incorporated by reference to Note 22 - Commitments and Contingencies of our consolidated financial statements.
The following table aggregates our contractual financial obligations as of December 31, 2020 and anticipated cash spending by period:
Contractual Financial Obligations (in millions) Total Payments Due by Period
2021 2022-2023 2024-2025 Thereafter
Long-term debt, including current maturities $ 1,093 $ 17 $ 40 $ 517 $ 519
Interest payments on long-term debt and finance lease obligations (a)
310 70 138 94 8
Purchase obligations (b) 342 138 76 35 93
Postretirement obligations (c) 19 2 4 4 9
Finance lease obligations 2 - 1 1 -
Operating leases (d) 21 7 11 2 1
Total contractual cash obligations $ 1,787 $ 234 $ 270 $ 653 $ 630
(a)Projected interest payments were calculated based on outstanding principal amounts and interest rates as of December 31, 2020. See Note 10 - Debt and Finance Leases for additional information.
(b)Purchase obligations primarily consist of payments expected to be made on natural gas, steam energy and wood chip purchase contracts. Purchase obligations exclude arrangements the Company can cancel without penalty.
(c)Amounts include estimated postretirement benefit payments and do not include pension funding obligations. See Note 18 - Employee Benefit Plans, for additional information on our pension and postretirement benefit plans.
(d)See Note 5 -Leases for additional information.
Environmental Regulation
We are subject to stringent environmental laws and regulations concerning air emissions, wastewater discharges, waste handling and disposal, and assessment and remediation of environmental contamination, which impact both our current ongoing operations and about 20 former operating facilities or third party-owned sites classified as disposed operations. These include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state laws and regulations impacting U.S. facilities, as well as requirements relating to ancillary matters such as financial assurance of our legal obligations for facility closure and post-closure care. Similar laws and legal requirements also impact current and former operating sites in Canada and France, respectively. Management closely monitors our environmental responsibilities and believes we are in material compliance with current requirements. In addition to ongoing compliance with laws and regulations, our facilities operate in accordance with various permits, which are issued by state and federal environmental agencies. Many of these permits impose operating conditions on us which require significant expenditures to ensure compliance. Upon renewal and renegotiation of these permits, the issuing agencies often seek to impose new or additional conditions in response to new environmental laws and regulations, or more stringent interpretations of existing laws and regulations. In addition, under many federal environmental laws, private citizens and organizations, such as environmental advocacy groups, have the right to legally challenge permitting and other decisions made by regulatory agencies.
Our operations are subject to constantly changing environmental requirements, and interpretations of existing requirements, which are often impacted by new policy initiatives, new and amended legislation and regulation, negotiations involving state and federal governmental agencies and various other stakeholders, as well as, at times, litigation. For additional information, see Item 1A - Risk Factors for a discussion of the potential impact of environmental risks on our business, and Item 3 - Legal Proceedings, for a discussion of any environmental-related litigation.
Our future spending requirements in the area of environmental compliance could change significantly based on the passage of new environmental laws and regulations.
Environmental Liabilities
For information and details relating to our estimated environmental liabilities, see Item 1A - Risk Factors and Note 11 - Environmental Liabilities of our consolidated financial statements for more information.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market and Other Economic Risks
We are exposed to various market risks, primarily changes in interest rates, currency and commodity prices. Our objective is to minimize the economic impact of these market risks. We may use derivatives in accordance with policies and procedures approved by the Audit Committee of our Board of Directors. Derivatives are managed by a senior executive committee whose responsibilities include initiating, managing and monitoring resulting exposures. See Note 12 - Derivative Instruments for additional information.
We manage our foreign currency exposures by balancing certain assets and liabilities denominated in foreign currencies. We may 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.
The prices, sales volumes and margins of the commodity products of our High Purity Cellulose segment and all the products of the Forest Products and Pulp & Newsprint segments have historically been cyclically affected by economic and market shifts, fluctuations in capacity, and changes in foreign currency exchange rates. In general, these products are commodities that are widely available from other producers; because these products have few distinguishing qualities from producer to producer, competition is based primarily on price, which is determined by supply relative to demand. The overall levels of demand for the products we manufacture, and consequently our sales and profitability, reflect fluctuations in end user demand. Our cellulose specialties product prices are impacted by market supply and demand, raw material and processing costs, changes in global currencies and other factors. 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, approximately half of our cellulose specialties contracted volumes are under multi-year contracts that expire between 2021 and 2023.
As of December 31, 2020, we had $5 million of variable rate debt which is subject to interest rate risk. At this borrowing level, a hypothetical one-percentage point increase/decrease in interest rates would result in an immaterial increase/decrease in interest payments and expense over a 12-month period.
The fair market value of our long-term fixed interest rate debt is also subject to interest rate risk. However, we intend to hold most of our debt until maturity. The estimated fair value of our fixed-rate debt at December 31, 2020 was $1,050 million compared to the $1,088 million principal amount. We use quoted market prices to estimate the fair value of our fixed-rate debt. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise.
We may periodically enter into commodity forward contracts to fix some of our energy costs that are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. Such forward contracts partially mitigate the risk of changes to our gross margins resulting from an increase or decrease in these costs. Forward contracts which are derivative instruments are reported in the consolidated balance sheets at their fair values, unless they qualify for the normal purchase normal sale ("NPNS") exception and such exception has been elected. If the NPNS exception is elected, the fair values of such contracts are not recognized on the balance sheet.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and related financial statement schedule, together with the report of independent registered accounting firm, appear at pages through of this Annual Report on Form 10-K for the year ended December 31, 2020.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Rayonier Advanced Materials management is responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed with the objective of ensuring that information required to be disclosed in reports filed under the Exchange Act, such as this annual report on Form 10-K, is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Because of the inherent limitations in all control systems, no control evaluation can provide absolute assurance all control exceptions and instances of fraud have been prevented or detected on a timely basis. Even systems determined to be effective can provide only reasonable assurance their objectives are achieved.
Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K, our management, including the Chief Executive Officer and Chief Financial Officer, concluded the design and operation of the disclosure controls and procedures were effective as of December 31, 2020.
Internal Control over Financial Reporting
With regard to our internal control over financial reporting as defined in paragraph (f) of Rule 13a-15(f), see Management’s Report on Internal Control over Financial Reporting on page, followed by the Reports of Independent Registered Public Accounting Firm on page, included in Item 8 - Financial Statements and Supplementary Data of this annual report on Form 10-K.
For the quarter ended December 31, 2020, based upon the evaluation required by paragraph (d) of Rule 13a-15, there were no changes in our internal control over financial reporting that would materially affect or are reasonably likely to materially affect our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
Part III
Certain information required by Part III is incorporated by reference from the Company’s definitive Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for the Company’s 2021 Annual Meeting of Stockholders (the “Proxy Statement”). We will make the Proxy Statement available on our website at www.rayonieram.com as soon as it is filed with the SEC.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.
Information about our Directors, Executive Officers and Corporate Governance
The information required by this Item with respect to directors, executive officers and corporate governance is incorporated by reference from the sections entitled “Commitment to Best Practices in Corporate Governance,” and “Election of Directors,” and the subsections entitled “Executive Compensation Tables and Related Information-Executive Officers and Delinquent Section 16(a) Reports” and “Ratification of the Appointment of Independent Registered Public Accounting Firm-Audit Committee Financial Experts” in the Proxy Statement. The information required by this Item with respect to disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act is incorporated by reference to the section entitled “Delinquent Section 16(a) Reports” in the Proxy Statement.
Our Standard of Ethics and Code of Corporate Conduct, which is applicable to our principal executive officer and financial and accounting officers, is available on our website, www.rayonieram.com. Any amendments to or waivers of the Standard of Ethics and Code of Corporate Conduct will also be disclosed on our website.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11.
Executive Compensation
The information called for by Item 11 is incorporated herein by reference from the sections entitled “Compensation Discussion & Analysis,” “Report of the Compensation and Management Development Committee” and “Executive Compensation Tables and Related Information,” and the subsection entitled “Commitment to Best Practices in Corporate Governance-Director Compensation,” in the Proxy Statement.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information called for by Item 12 is incorporated herein by reference from the subsections entitled “Executive Compensation Tables and Related Information-Stock Ownership of Directors and Executive Officers, Security Ownership of Certain Beneficial Owners and Equity Compensation Plan Information” in the Proxy Statement.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information called for by Item 13 is incorporated herein by reference from the section entitled “Election of Directors,” and the subsections entitled “Commitment to Best Practices in Corporate Governance-Corporate Governance Principles, Director Independence and Related Person Transactions” in the Proxy Statement.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.
Principal Accounting Fees and Services
The information called for by Item 14 is incorporated herein by reference from the subsection entitled “Ratification of the Appointment of Independent Registered Public Accounting Firm-Information Regarding Independent Registered Public Accounting Firm” in the Proxy Statement.
Part IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.
Exhibits, Financial Statement Schedules
(a) 1. Consolidated Financial Statements.
For a list of the consolidated financial information included herein, see page.
2. Financial Statement Schedules.
All other schedules have been omitted as the required information is not applicable or the information is presented in the Consolidated Financial Statements or notes thereto under Item 8 herein. The following consolidated financial statement schedule is included in Item 8:
Schedule II-Valuation and Qualifying Accounts
3. Exhibits.
(b) Exhibits.
See Item 15(a)(3).
(c) Financial Statement Schedule.
See Item 15(a)(2).
Exhibit No. Description Location
2.1
Separation and Distribution Agreement between Rayonier Advanced Materials Inc. and Rayonier Inc., dated as of May 28, 2014
Incorporated herein by reference to Exhibit 2.1 to the Registrant’s Amendment No. 4 to the Registration Statement on Form 10 filed on May 29, 2014
2.2
Arrangement Agreement by and between Tembec Inc. and Rayonier Advanced Materials Inc. dated as of May 24, 2017*
Incorporated herein by reference to Exhibit 2.1 to the Registrant’s Form 8-K filed on May 25, 2017
2.3
Amending Agreement, dated as of July 23, 2017, to the Arrangement Agreement by and between Tembec Inc. and Rayonier Advanced Materials Inc. dated as of May 24, 2017
Incorporated herein by reference to Exhibit 2.1 to the Registrant’s Form 8-K filed on July 24, 2017
3.1
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
3.2
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
3.3
Amended and Restated Bylaws of Rayonier Advanced Materials Inc.
Incorporated herein by reference to Exhibit 3.2 to the Registrant’s Form 8-K filed on June 30, 2014
4.1
Indenture among Rayonier A.M. Products Inc., the guarantors party thereto from time to time and Wells Fargo Bank, National Association, as Trustee, dated as of May 22, 2014
Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Amendment No. 4 to Registration Statement on Form 10 filed on May 29, 2014
4.2
Description of Common Stock
Incorporated herein by reference to Exhibit 4.2 to the Registrant’s Form 10-K filed on March 2 2020
4.3
Indenture, dated as of December 23, 2020, by and among Rayonier A.M. Products Inc., the Guarantors party thereto and Wells Fargo Bank, National Association as trustee and as notes collateral agent
Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed on December 23, 2020
4.4
Form of 7.625% Senior Secured Notes due 2026, included as Exhibit A to the Indenture
Incorporated herein by reference to Exhibit 4.2 to the Registrant’s Form 8-K filed on December 23, 2020
10.1
Transition Services Agreement, dated as of June 27, 2014, by and between Rayonier Inc. and Rayonier Advanced Materials Inc. Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed on June 30, 2014
10.2
Tax Matters Agreement, dated as of June 27, 2014, by and among Rayonier Inc., Rayonier Advanced Materials Inc., Rayonier TRS Holdings Inc. and Rayonier A.M. Products Inc. Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed on June 30, 2014
10.3
Employee Matters Agreement, dated as of June 27, 2014, by and between Rayonier Inc. and Rayonier Advanced Materials Inc. Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Form 8-K filed on June 30, 2014
10.4
Intellectual Property Agreement, dated as of June 27, 2014, by and between Rayonier Inc. and Rayonier Advanced Materials Inc. Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Form 8-K filed on June 30, 2014
10.5
Rayonier Advanced Materials Inc. Incentive Stock Plan, as amended effective May 23, 2016**
Incorporated herein by reference to Appendix C to the Registrant’s Proxy Statement filed on April 8, 2016
10.6
Rayonier Advanced Materials Inc. 2017 Incentive Stock Plan, effective May 22, 2017**
Incorporated herein by reference to Appendix B to the Registrant’s Proxy Statement filed on April 7, 2017
10.7
Rayonier Advanced Materials Inc. 2017 Incentive Stock Plan, effective December 15, 2017**
Incorporated herein by reference to Exhibit 10.10 to the Registrant’s Form 10-K filed on March 1, 2018
10.8
Rayonier Advanced Materials Inc. 2017 Incentive Stock Plan (as amended effective December 15, 2017)** Incorporated herein by reference to Appendix A to the Registrant’s Proxy Statement filed on April 6, 2018
10.9
First Amendment to the Rayonier Advanced Materials Inc. 2017 Incentive Stock Plan, effective May 22, 2017**
Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 10-Q filed on November 7, 2019
10.10
Form of Rayonier Advanced Materials Inc. Incentive Stock Plan Restricted Stock Unit Award Agreement, effective 2017**
Incorporated herein by reference to Exhibit 10.12 to the Registrant’s Form 10-K filed on March 1, 2018
10.11
Form of Rayonier Advanced Materials Inc. 2021 Restricted Stock Unit Award Agreement** Filed herewith
10.12
Form of Rayonier Advanced Materials Inc. 2021 Performance Share Unit Award Agreement** Filed herewith
10.13
Form of Rayonier Advanced Materials Inc. 2021 Performance Cash Unit Award Agreement** Filed herewith
10.14
Form of Rayonier Advanced Materials Inc. Incentive Stock Plan Supplemental Terms Applicable to the 2019 Equity Award Grant**
Incorporated herein by reference to Exhibit 10.16 to the Registrant’s Form 10-K filed on March 1, 2019
10.15
Form of Rayonier Advanced Materials Inc. Incentive Stock Plan Supplemental Terms Applicable to the 2020 Equity Award Grant** Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 10-Q filed on May 7, 2020
10.16
Form of Rayonier Advanced Materials Inc. Incentive Stock Plan Supplemental Terms Applicable to the 2021 Equity Award Grant** Filed herewith
10.17
Description of Rayonier Advanced Materials Inc. 2019 Performance Share Award Program**
Incorporated herein by reference to Exhibit 10.19 to the Registrant’s Form 10-K filed on March 1, 2019
10.18
Description of Rayonier Advanced Materials Inc. 2020 Performance Share Award Program** Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Form 10-Q filed on May 7, 2020
10.19
Rayonier Advanced Materials Inc. Non-Equity Incentive Plan, as amended effective May 23, 2016**
Incorporated herein by reference to Appendix B to the Registrant’s Proxy Statement filed on April 8, 2016
10.20
Rayonier Advanced Materials Inc. Executive Severance Pay Plan, Amended and Restated effective October 21, 2019**
Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Form 10-Q filed on November 7, 2019
10.21
Rayonier Advanced Materials Inc. Non Change In Control Executive Severance Plan**
Incorporated herein by reference to Exhibit 10.20 to the Registrant’s Form 10-K filed on February 26, 2016
10.22
First Amendment to the Rayonier Advanced Materials Inc. Non Change In Control Executive Severance Plan**
Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Form 10-Q filed on November 7, 2019
10.23
Trust Agreement for Rayonier Advanced Materials Inc. Legal Resources Trust, dated June 28, 2014, by and between Rayonier Advanced Materials Inc. and Wells Fargo Bank, National Association**
Incorporated herein by reference to Exhibit 10.23 to the Registrant’s Form 10-Q/A filed on September 4, 2014
10.24
Rayonier Advanced Materials Inc. Excess Benefit Plan, effective June 27, 2014**
Incorporated herein by reference to Exhibit 10.24 to the Registrant’s Form 10-Q/A filed on September 4, 2014
10.25
Rayonier Advanced Materials Inc. Excess Savings and Deferred Compensation Plan, effective June 28, 2014**
Incorporated herein by reference to Exhibit 10.25 to the Registrant’s Form 10-Q/A filed on September 4, 2014
10.26
Form of Rayonier Advanced Materials Inc. Excess Savings and Deferred Compensation Plan Agreements, effective June 28, 2014**
Incorporated herein by reference to Exhibit 10.18 to the Registrant’s Form 10-K filed on February 27, 2015
10.27
Retirement Plan for Salaried Employees of Rayonier Advanced Materials Inc., effective June 27, 2014 and Amended and Restated as of October 21, 2019**
Incorporated herein by reference to Exhibit 10.5 to the Registrant’s Form 10-Q filed on November 7, 2019
10.28
Rayonier Advanced Materials Inc. Investment and Savings Plan for Salaried Employees, effective January 1, 2015**
Incorporated herein by reference to Exhibit 10.24 to the Registrant’s Form 10-K filed on February 24, 2017
10.29
Amendment to Rayonier Advanced Materials Inc. Investment and Savings Plan for Salaried Employees, effective January 1, 2015**
Incorporated herein by reference to Exhibit 10.25 to the Registrant’s Form 10-K filed on February 24, 2017
10.30
Amendment to Rayonier Advanced Materials Inc. Investment and Savings Plan for Salaried Employees, effective January 1, 2016**
Incorporated herein by reference to Exhibit 10.26 to the Registrant’s Form 10-K filed on February 24, 2017
10.31
Amendment to Rayonier Advanced Materials Inc. Investment and Savings Plan for Salaried Employees, effective January 1, 2016**
Incorporated herein by reference to Exhibit 10.27 to the Registrant’s Form 10-K filed on February 24, 2017
10.32
Amendment to Rayonier Advanced Materials Inc. Investment and Savings Plan for Salaried Employees, effective October 1, 2016**
Incorporated herein by reference to Exhibit 10.28 to the Registrant’s Form 10-K filed on February 24, 2017
10.33
Amendment to Rayonier Advanced Materials Inc. Investment and Savings Plan for Salaried Employees, effective February 13, 2017**
Incorporated herein by reference to Exhibit 10.29 to the Registrant’s Form 10-K filed on February 24, 2017
10.34
Form of Indemnification Agreement between Rayonier Advanced Materials Inc. and individual directors or officers**
Incorporated herein by reference to Exhibit 10.5 to the Registrant’s Amendment No. 4 to the Registration Statement on Form 10 filed on May 29, 2014
10.35
Form of Rayonier Advanced Materials Inc. Outside Directors Compensation Program/Cash Deferral Option Agreement, effective January 1, 2020** Filed herewith
10.36
Asset Purchase Agreement by and between Sappi Canada Enterprises Inc., as purchaser and Sappi Papier Holding GmbH, as Purchaser guarantor, on the one hand, and Rayonier A.M. Canada G.P., Rayonier A.M. Compagnie de Construction Inc. and Rayonier A.M. Enterprises Inc., collectively the Seller, and Rayonier Advanced Materials Inc., as Seller guarantor, dated as of July 31, 2019***
Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 10-Q filed on August 7, 2019
10.37
Revolving Credit Agreement, dated as of December 10, 2020, among Rayonier Advanced Materials Inc., Rayonier A.M. Products Inc., the other subsidiaries of Rayonier Advanced Materials Inc. party thereto, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent. Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed on December 23, 2020
Subsidiaries of the registrant
Filed herewith
23.1
Consent of Grant Thornton LLP
Filed herewith
Powers of attorney
Filed herewith
31.1
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
31.2
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 The following financial information from our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, formatted in Extensible Business Reporting Language (“XBRL”), includes: (i) the Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018; (ii) the Consolidated Balance Sheets as of December 31, 2020 and 2019; (iii) the Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018; and (iv) the Notes to the Consolidated Financial Statements Filed herewith
104 Cover Page Interactive Data File - formatted as Inline XBRL and contained in Exhibit 101
* The exhibits to the Arrangement Agreement have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish copies of any such schedules and exhibits to the U.S. Securities and Exchange Commission upon request.
** Management contract or compensatory plan.
***Certain confidential portions of this exhibit were omitted by means of marking such portions with asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.