Overview

General

We are the leading global producer of cellulose specialties, a natural polymer, used as a raw material to manufacture a broad range of consumer-oriented products such as cigarette filters, liquid crystal displays, impact-resistant plastics, thickeners for food products, pharmaceuticals, cosmetics, high-tenacity rayon yarn for tires and industrial hoses, food casings, paints and lacquers. The manufacture and sale of cellulose specialties products are the primary driver of the Company’s profitability. Pricing for our cellulose specialties products is typically set annually in the fourth quarter for the following year based on discussions with customers and the terms of contractual arrangements.

We also produce commodity products, primarily commodity viscose and absorbent materials. Commodity viscose is a raw material for the manufacture of viscose staple fibers which are used in woven applications such as textiles for clothing and other fabrics, and in non-woven applications such as baby wipes, cosmetic and personal wipes, industrial wipes and mattress ticking. Absorbent materials, typically referred to as fluff fibers, are used as an absorbent medium in products such as disposable baby diapers, feminine hygiene products, incontinence pads, convalescent bed pads, industrial towels and wipes and non-woven fabrics. Pricing for commodity products is typically referenced to published indexes or based on publicly available spot market prices.

Our production facilities in Jesup, Georgia and Fernandina Beach, Florida, have a combined annual cellulose specialties production capacity of approximately 485,000 metric tons of cellulose specialties. Additionally, we have dedicated approximately 245,000 metric tons to commodity products.

Our products are sold throughout the world to companies for use in various industrial applications and to produce a wide variety of products. Approximately 60 percent of our sales are to export customers, primarily in Asia and Europe. Our top ten customers represent approximately 75 percent of our sales.

Cost of sales includes the cost of wood, chemicals, energy, depreciation, manufacturing overhead and transportation used to manufacture and deliver our products. Significant components and percentages of per metric ton cost are as follows:

Wood, chemicals and energy are subject to significant changes in price and availability. We continually pursue reductions in usage and costs of key raw materials, supplies and services and do not foresee any material constraints in the near term from pricing or availability. We currently have limited ability to pass cost increases on to our customers.

Rayonier Advanced Materials Four Pillars of Strategic Growth

In 2016, we launched a four-pronged approach aimed at transforming our business and growing EBITDA to drive long-term success for our stockholders. Our plan centers on strategic focus on the following four pillars:

LignoTech Florida

In December 2016, we announced the settlement of all conditions precedent related to the our venture with Borregaard ASA (“Borregaard”) to manufacture, market and sell natural lignin-based products from our Fernandina Beach, Florida facility. We received final approvals from our boards of directors and secured the necessary permits to begin construction of the new lignin facility at our Fernandina Beach plant. The venture, LignoTech Florida (LTF), will serve the growing global demand for natural lignin-based products.

Lignin, a natural component of wood, is a co-product of our sulphite cellulose specialties manufacturing process and is currently used for energy at our Fernandina plant. LTF will process the lignin into higher-value products that provide environmentally-friendly alternatives to fossil fuel based products used globally in construction, agriculture and other industrial applications. LTF will allow us to lower our overall cost position at our Fernandina Beach plant while providing an opportunity to generate revenue in new and attractive growth markets.

We will own 45 percent and Borregaard will own 55 percent. Borregaard will provide its market leading technical knowledge and global sales distribution network, while we will supply raw materials, site services and other support.

The LTF plant is expected to be completed in two phases over five years and require an aggregate capital investment of approximately $135 million to yield an annual capacity of 150,000 metric tons. In addition to contributions from the LTF partners, we expect to fund a portion of the total investment through financing at the project level. Construction for the project began in December 2016. LTF operations are slated to begin mid-2018.

Preferred Stock Offering

On August 4, 2016, we completed a registered public offering of 1,725,000 shares of 8.00% Series A Mandatory Convertible Preferred Stock (the “Preferred Stock”), at a public offering price of $100.00 per share. Net proceeds from the offering were approximately $167 million. We intend to use the funds generated from our Preferred Stock equity issuance to grow and diversify our business through our four pillars of strategic growth. See Note 10 — Stockholders' Equity (Deficit) for more information on our Preferred Stock.

Outlook

Cellulose specialties markets are mixed as demand for acetate products remains suppressed. Ethers and other cellulose specialties markets are improving, providing opportunities for volume growth. Overall, cellulose specialties markets continue to be impacted by foreign competitors benefiting from weak global currencies relative to the U. S. dollar. Given these market conditions, we have expanded our presence in non-acetate products, although at lower prices than acetate. We expect 2017 cellulose specialties prices to decline three to four percent reflecting a shift in our cellulose specialties mix as well as previously disclosed lower acetate prices. Cellulose specialties sales volumes are expected to be relatively flat compared to 2016. We expect $25 to $30 million of cost improvements to partially offset declines in revenue, resulting in forecasted net income of $41 to $48 million and EBITDA of $190 to $200 million. Cash flows from operations and adjusted free cash flows are expected to be $140 to $150 million and $80 to $90 million. We anticipate capital expenditures of approximately $60 million , including our investment in the LignoTech Florida project.

Reconciliation of Non-GAAP measures

For a reconciliation of EBITDA to net income, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Performance and Liquidity Indicators.

EBITDA guidance for 2017 of $190 to $200 million represents expected 2017 net income of $41 to $48 million excluding estimated income tax expense, interest expense, net, and depreciation and amortization of $27 to $30 million , $37 million and $85 million , respectively.

Adjusted Free Cash Flows Guidance for 2017 of $80 to $90 million represents expected 2017 operating cash flows of $140 to $150 million excluding capital expenditures of $60 million .

Critical Accounting Policies and Use of Estimates

The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities in our Consolidated Financial Statements. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information management believes are reasonable. Actual results may differ from these estimates.

Principles of Consolidation

Prior to the Separation, our results of operations, financial position and cash flows consisted of Rayonier’s performance fibers business. Our financial statements are presented as if the performance fibers business had been combined with the Company for all periods presented. All intercompany transactions are eliminated.

The statements of income for periods prior to the Separation include allocations of certain costs from Rayonier related to the operations of the performance fibers business. The statements of income also include expense allocations for certain corporate functions historically performed by Rayonier and not allocated to its operating segments. Management believes the methodologies employed for the allocation of costs were reasonable in relation to the historical reporting of Rayonier, but may not necessarily be indicative of costs had the Company operated on a stand-alone basis during the periods prior to the Separation, nor what the costs may be in the future.

Revenue Recognition

Rayonier Advanced Materials generally recognizes sales when the following criteria are met: (i) persuasive evidence of an agreement exists, (ii) delivery has occurred, (iii) the price to the buyer is fixed and determinable and (iv) collectibility is reasonably assured. Generally, title passes upon delivery to the agreed upon location. Based on the time required to reach each location, customer orders are generally received in one period with the corresponding revenue recognized in a subsequent period. As such, there could be substantial variation in orders received and revenue recognized from period to period. Payments from customers made in advance of the recognition of revenue are included in accrued customer incentives and prepayments.

Property, Plant & Equipment

Depreciation expense is computed using the units-of-production method for our plant and equipment and the straight-line method on all other property, plant and equipment over the useful economic lives of the assets involved. The total units of production used to calculate depreciation expense is determined by factoring annual production days, based on normal production conditions, by the economic useful life of the asset involved. On average, the units-of-production and straight-line methodologies accounted for approximately 94 percent and 6 percent of depreciation expense, respectively. The physical life of equipment, however, may be shortened by economic obsolescence caused by environmental regulation, competition or other causes. We depreciate our non-production assets, including office, lab and transportation equipment, using the straight-line depreciation method over 3 to 25 years. Buildings and land improvements are depreciated using the straight-line method over 15 to 35 years and 5 to 30 years, respectively. Management believes these depreciation methods are the most appropriate, versus other generally accepted accounting methods, as they most closely match revenues with expenses.

Gains and losses on the retirement of assets are included in operating income. Long-lived assets are reviewed annually for impairment or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets that are held and used is measured by net undiscounted cash flows expected to be generated by the asset. Property, plant and equipment are grouped for purposes of evaluating recoverability at the combined plant level, the lowest level for which independent cash flows are identifiable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Environmental liabilities associated with disposed operations

At December 31, 2016 , we had $153 million of accrued liabilities for environmental costs relating to disposed operations. Numerous cost assumptions are used in estimating these obligations. Factors affecting these estimates include changes in the nature or extent of contamination, changes in the content or volume of the material discharged or treated in connection with one or more impacted sites, requirements to perform additional or different assessment or remediation, changes in technology that may lead to additional or different environmental remediation strategies, approaches and work-plans, discovery of additional or

unanticipated contaminated soil, groundwater or sediment on or off-site, changes in remedy selection, changes in law or interpretation of existing law and the outcome of negotiations with governmental agencies or non-governmental parties. We periodically review our environmental liabilities and also engage third-party consultants to assess our ongoing remediation of contaminated sites. Quarterly, we review our environmental liabilities related to assessment activities and remediation costs and adjust them as necessary. Liabilities for financial assurance, monitoring and maintenance activities and other activities are assessed annually. A significant change in any of these estimates could have a material effect on the results of our operations. See Note 14 — Liabilities for Disposed Operations for additional information.

Determining the adequacy of pension and other postretirement benefit assets and liabilities

Certain employees participate in the Company’s defined benefit pension and postretirement health and life insurance plan. The defined benefit pension plan is closed to new participants. Numerous estimates and assumptions are required to determine the proper amount of pension and postretirement liabilities and annual expense to record in our financial statements. The key assumptions include discount rate, return on assets, salary increases, health care cost trends, mortality rates, longevity and service lives of employees. Although authoritative guidance on how to select most of these assumptions exists, we exercise some degree of judgment when selecting these assumptions based on input from our actuary. Different assumptions, as well as actual versus expected results, would change the periodic benefit cost and funded status of the benefit plans recognized in the financial statements.

Our long-term return assumption was established based on historical long-term rates of return on broad equity and bond indices, discussions with our actuary and investment advisors and consideration of the actual annualized rate of return from 1994 (the date of Rayonier’s spin-off from ITT Corporation) through 2016 . At the end of 2016 , we reviewed this assumption for reasonableness and determined the 2016 long-term rate of return assumption should be 8.50 percent . Beginning in 2017, we will reduce the expected long-term rate of return on plan assets to 7.75 percent . In 2017, we will also change the method we use to determine the service and interest cost components of net periodic benefit cost. Historically, we have determined the cost using a single weighted-average discount rate derived from the yield curve. Under the new method, known as the spot rate approach, individual spot rates along the yield curve that correspond with the timing of each benefit payment will be used. We believe this change will provide a more precise measurement of service and interest costs by improving the correlation between projected cash outflows and corresponding spot rates on the yield curve. This change does not affect the measurement of plan obligations but generally results in lower pension expense in periods where the yield curve is upward sloping. We will account for this change prospectively as a change in accounting estimate.

In determining future pension obligations, we select a discount rate based on information supplied by our actuary. The actuarial rates are developed by models which incorporate high-quality (AA rated), long-term corporate bond rates into their calculations. The discount rate decreased from 4.03% at December 31, 2015 to 3.88% at December 31, 2016 .

Our pension plans were underfunded by $139 million at December 31, 2016 . The funded status is essentially flat as compared to 2015 as actual investment performance and higher voluntary contributions to the pension plan in the current year were offset by a decrease in the discount rate. We did not have any mandatory pension contributions in 2016 , 2015 or 2014 . In July of 2016, we made a $10 million voluntary contribution to the pension plan. No discretionary contributions to our qualified pension plan were made in 2015 or 2014 . Future contribution requirements will vary depending on actual investment performance, changes in valuation assumptions, interest rates and requirements under the Pension Protection Act. No contributions are expected to be made in 2017.

In 2017 , we expect pension expense to be approximately the same as 2016 . Future pension expense will be impacted by many factors including actual investment performance, changes in discount rates, timing of contributions and other employee related matters. See Note 16 — Employee Benefit Plans for additional information.

The sensitivity of pension expense and projected benefit obligation related to our two qualified pension plans to changes in economic assumptions is highlighted below:

Realizability of both recorded and unrecorded tax assets and tax liabilities

We have recorded certain deferred tax assets we believe will be realized in future periods. The realization of tax assets is based on our historical profitability and unlimited carryforward periods on a majority of our deferred tax assets. These assets are reviewed periodically in order to assess their realizability. This review requires management to make assumptions and estimates about future profitability affecting the realization of these tax assets. If the review indicates the realizability may be less than likely, a valuation allowance is recorded.

Our income tax returns are subject to examination by U.S. federal and state taxing authorities. In evaluating the tax benefits associated with various tax filing positions, we record a tax benefit for an uncertain tax position if it is more-likely-than-not to be realized upon ultimate settlement of the issue. We record a liability for an uncertain tax position that does not meet this criterion. The liabilities for unrecognized tax benefits are adjusted in the period in which it is determined the issue is settled with the taxing authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new facts or information become available. See Note 13 — Income Taxes for additional information.

New Accounting Standards

See Note 1 — Basis of Presentation and New Accounting Pronouncements for a discussion of recently issued accounting pronouncements that may affect our financial results and disclosures in future periods.

Summary of our results of operations for the three years ended December 31 :

Results of Operations, Year Ended December 31, 2016 versus December 31, 2015

Total net sales were $72 million lower, or approximately 8 percent, in 2016 , primarily due to a 7 percent decline in cellulose specialties prices which reflects the anticipated declines from the prior year. Additionally, cellulose specialties sales volumes decreased approximately 11 thousand tons, or 2 percent as a result of weak market conditions. This decrease was slightly less than expected due to the timing of revenue recognition in the fourth quarter of 2016.

In 2016 , operating income and margin percentage increased $18 million and 3.1 percentage points versus prior year. Lower cellulose specialties prices and sales volumes were partially offset by lower costs driven by the Company’s cost improvements. Selling, general and administrative (“SG&A”) and other expenses decreased $40 million primarily as a result of the Jesup asset impairment recognized in the second quarter of 2015. Additionally, lower professional fees, stock compensation expense and pension expense in 2016 compared to 2015 contributed to the decrease in SG&A and other.

We incurred $35 million of interest expense in 2016 compared with $37 million of interest expense in 2015 . The decrease in interest expense reflects the repurchase of Senior Notes in the first quarter of 2016 , partially offset by higher LIBOR rates on floating rate debt. See Note 6 — Debt for additional information.

Our effective tax rate for 2016 was 34.9 percent , compared with 33.3 percent for 2015 . The increase from the prior year period reflects the impact of the domestic manufacturing tax deduction being limited in the current year. The Company anticipates it will have no taxable income for 2016 as a result of higher tax depreciation and a tax accounting method change related to the deductibility of certain repair expenditures. As the manufacturing deduction is limited by taxable income, there is no benefit recognized in the current year. See Note 13 — Income Taxes for additional information.

Results of Operations, Year Ended December 31, 2015 versus December 31, 2014

Total net sales were $17 million lower, or approximately 2 percent, in 2015 , primarily due to lower cellulose specialties prices. Additionally, cellulose specialties volumes declined approximately 12 thousand tons, or 2 percent, as we worked with our customers during the fourth quarter to assist them in balancing their inventories to address lower demand as a result of acetate supply chain de-stocking. Partially offsetting the decline were higher commodity sales volumes, driven by improved operational run rates and reduced inventory levels.

For 2015 , operating income and margin percentage increased $57 million and 6.2 percentage points versus prior year. Lower cellulose specialties prices and volumes were partially offset by higher commodity products sales volumes and lower costs as a result of the Company’s cost improvement initiatives and lower raw material and other input prices. Selling, general and administrative (“SG&A”) and other expenses decreased $78 million as the $28 million impairment charge related to the Jesup plant repositioning was more than offset by lower environmental liability adjustments of $81 million, lower impairment charges for disposed operations of $7 million and lower one-time separation and legal costs of $26 million. SG&A and other expenses for 2015 were also negatively impacted by increased costs of being an independent public company. See Note 12 — Other Operating Expense, Net for additional information about the 2014 environmental liability adjustments and impairment charges.

We incurred $37 million of interest expense in 2015 compared with $22 million of interest expense in 2014 . The increase in interest expense reflects a full year of outstanding debt in 2015 as compared to six months in the prior year. See Note 6 — Debt for additional information.

Our effective tax rate for 2015 was 33.3 percent , compared with 21.8 percent for 2014 . The prior year period reflects a higher relative benefit from the domestic manufacturing deduction as a result of large, one-time environmental liability adjustments, which are not currently deductible for tax purposes and therefore lowered pre-tax income without reducing the domestic manufacturing deduction benefit in that period.

The 2015 effective tax rate was below the federal rate of 35 percent, primarily due to the benefit of the domestic manufacturing tax deduction and state tax credits, partially offset by an adjustment to the state deferred tax rate. See Note 13 — Income Taxes for additional information.