RAYONIER ADVANCED MATERIALS INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following analysis of our financial condition and results of operations should be read in conjunction with our Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q and with our 2022 Form 10-K and information contained in subsequent Forms 8-K and other reports filed with the SEC. Forward-Looking Statements Certain statements in this Quarterly Report on Form 10-Q regarding anticipated financial, business, legal or other outcomes, including business and market conditions, outlook and other similar statements relating to future events, developments or financial or operational performance or results, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as “may,” “will,” “should,” “could,” “expect,” “estimate,” “believe,” “intend,” “plan,” “forecast,” “anticipate,” “project,” “guidance” and other similar language. However, the absence of these or similar words or expressions does not mean that a statement is not forward-looking. Forward-looking statements are not guarantees of future performance or events and undue reliance should not be placed on these statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be attained, and it is possible that actual results may differ materially from those indicated by these forward-looking statements due to a variety of risks and uncertainties. T he risk factors contained in Item 1A—Risk Factors of our 2022 Form 10-K, among others, could cause actual results or events to differ materially from our historical experience and those expressed in forward-looking statements made in this report. Forward-looking statements are only as of the date of the filing of this Quarterly Report on Form 10-Q and we undertake no duty to update its forward-looking statements except as required by law. You are advised to review any further disclosures that we have made or may make in our filings and other submissions to the SEC, including those on Forms 10-K, 10-Q, 8-K and other reports. Business Overview We are a global leader of specialty cellulose materials with a broad offering of high purity cellulose specialties, a natural polymer used in the production of a variety of specialty chemical products, including liquid crystal displays, filters, textiles and performance additives for pharmaceutical, food and other industrial applications. Building upon more than 95 years of experience in cellulose chemistry, we provide some of the highest quality high-purity cellulose pulp products that make up the essential building blocks for our customers’ products while providing exceptional service and value. We also produce a unique, lightweight multi-ply paperboard product and a bulky, high-yield pulp product. Our paperboard is used for production in the commercial printing, lottery ticket and high-end packaging sectors. Our high-yield pulp is used by paperboard producers, as well as in traditional printing, writing and specialty paper manufacturing. We operate in the following business segments: High Purity Cellulose, Paperboard and High-Yield Pulp. Recent Business Developments • In July 2023, we secured term loan financing of $250 million in aggregate principal amount, the proceeds of which will be used, together with cash on hand, to redeem the remaining $318 million in aggregate principal balance of the 2024 Notes. • In April 2023, we repurchased $10 million of our 2026 Notes through open-market transactions and retired the notes for cash of $9 million. • In March 2023, we repurchased $5 million of our 2024 Notes through open-market transactions and retired the notes for cash of $5 million. 19 Table of Contents Market Assessment This market assessment represents our best current estimate of our business segments’ future performance. High Purity Cellulose Average sales prices for cellulose specialties in 2023 are expected to be in the high single-digit percent higher than average 2022 sales prices, while sales volumes are expected to decrease from prior year due to softness in sales orders driven principally by significant customer destocking. Market demand for commodity products remains resilient but at lower prices than the first half of the year, in line with industry forecasts. Commodity sales volumes are expected to continue to increase through the end of 2023. The prices for certain inputs have come off the 2022 highs but are expected to remain significantly elevated versus pre-COVID pandemic levels. Paperboard Paperboard prices are expected to moderate over the balance of the year but remain elevated from 2022 levels, while sales volumes are expected to improve in the second half of the year. Raw material prices are expected to moderate further as pulp markets decline. High-Yield Pulp High-yield pulp prices have declined due to soft demand and new paper pulp capacity ramping up. Prices are expected to decline overall in 2023 despite an expected uptick in the fourth quarter, in line with industry forecasts for the global paper pulp market. Sales volumes are expected to decline in the coming quarter as we take downtime in the third quarter due to market conditions. A Sustainable Future We continue to focus on growing our bio-based product offering and expect to grow our biomaterials sales and increase overall margins over time. The bioethanol facility at our Tartas, France plant is under construction and is anticipated to be operational in early 2024. The total estimated cost of the project is approximately $41 million, with $26 million to be spent in 2023. We plan to utilize $28 million of low-cost green loans to help fund the project, including $8 million already raised, and $4 million in grants. The project is expected to provide $8 million to $10 million of annual incremental EBITDA, based on current exchange rates, beginning in 2025. 20 Table of Contents Results of Operations Three Months Ended Six Months Ended (in millions, except percentages) July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 Net sales $ 385 $ 399 $ 852 $ 751 Cost of sales (370) (372) (800) (718) Gross margin 15 27 52 33 Selling, general and administrative expense (18) (28) (37) (48) Foreign exchange gain (loss) (2) 2 (2) 1 Other operating expense, net (2) (4) (3) (5) Operating income (loss) (7) (3) 10 (19) Interest expense (16) (16) (31) (33) Other components of pension and OPEB, excluding service costs 1 — (1) 1 Gain (loss) on GreenFirst equity securities — (4) — 5 Other income, net 3 3 3 3 Loss from continuing operations before income taxes (19) (20) (19) (43) Income tax (expense) benefit 3 (4) 6 (5) Equity in loss of equity method investment — (1) (1) (1) Loss from continuing operations (16) (25) (14) (49) Income (loss) from discontinued operations, net of taxes (1) 2 (1) 1 Net loss $ (17) $ (23) $ (15) $ (48) Gross margin % 3.9 % 6.8 % 6.1 % 4.4 % Operating margin % (1.8) % (0.8) % 1.2 % (2.5) % Effective tax rate 17.9 % (18.1) % 31.5 % (11.8) % Net Sales Three Months Ended Six Months Ended (in millions) July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 High Purity Cellulose $ 300 $ 302 $ 674 $ 583 Paperboard 48 63 107 117 High-Yield Pulp 44 40 86 62 Eliminations (7) (6) (15) (11) Net sales $ 385 $ 399 $ 852 $ 751 Net sales for the quarter ended July 1, 2023 decreased $14 million, or 4 percent, compared to the same prior year quarter, driven by lower commodity products sales prices in our High Purity Cellulose segment and lower sales volumes in cellulose specialties and our Paperboard segment, partially offset by higher sales prices in cellulose specialties, Paperboard and High-Yield Pulp and higher sales volumes in commodity products and High-Yield Pulp. Net sales for the six months ended July 1, 2023 increased $101 million or 13 percent, compared to the same prior year period, driven primarily by higher sales prices across all segments and higher sales volumes in commodity products and our High-Yield Pulp segment, partially offset by lower sales volumes in cellulose specialties and our Paperboard segment. See Operating Results by Segment below for further discussion. 21 Table of Contents Operating Income (Loss) Three Months Ended Six Months Ended (in millions) July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 High Purity Cellulose $ — $ 7 $ 13 $ (1) Paperboard 6 10 16 16 High-Yield Pulp 1 (2) 8 (2) Corporate (14) (18) (27) (32) Operating income (loss) $ (7) $ (3) $ 10 $ (19) Operating loss for the quarter ended July 1, 2023 increased $4 million, or 133 percent, compared to the same prior year quarter, driven by the decrease in net sales and increased labor, maintenance, input and logistics costs, partially offset by a decrease in Corporate expense items. Operating results for the six months ended July 1, 2023 improved $29 million, or 153 percent, compared to the same prior year period, driven by the increase in net sales and a decrease in Corporate expense items, partially offset by increased labor, maintenance, input and logistics costs. Included in operating results in the current three- and six-month periods was the recognition of a $3 million benefit from payroll tax credit carryforwards. See Operating Results by Segment below for further discussion. Non-Operating Income & Expense Included in “other income, net” in the three and six months ended July 1, 2023 was a $2 million gain on a passive land sale and a $1 million net gain on debt extinguishment, partially offset by unfavorable foreign exchange rates. Also included in the six-month period was a pension settlement loss of $2 million. Included in non-operating in the three and six months ended June 25, 2022 was a $4 million loss and a $5 million gain, respectively, associated with the GreenFirst common shares received in connection with the sale of our lumber and newsprint assets. Income Taxes The effective tax rate on the loss from continuing operations for the three and six months ended July 1, 2023 was a benefit of 18 percent and 32 percent, respectively. The 2023 effective tax rates differed from the federal statutory rate of 21 percent primarily due to disallowed interest deductions in the U.S. and nondeductible executive compensation, offset by U.S. tax credits, return-to-accrual adjustments related to previously filed tax returns and an excess tax benefit on vested stock compensation. The effective tax rate on the loss from continuing operations for the three and six months ended June 25, 2022 was an expense of 18 percent and 12 percent, respectively. The 2022 effective tax rates differed from the federal statutory rate of 21 percent primarily due to disallowed interest deductions in the U.S. and nondeductible executive compensation, partially offset by U.S. tax credits and tax return-to-accrual adjustments. Operating Results by Segment High Purity Cellulose Three Months Ended Six Months Ended (in millions, except where otherwise stated) July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 Net sales $ 300 $ 302 $ 674 $ 583 Operating income (loss) $ — $ 7 $ 13 $ (1) Average sales prices ($ per MT) $ 1,301 $ 1,355 $ 1,313 $ 1,288 Sales volumes (thousands of MTs) 214 206 479 414 22 Table of Contents Net Sales - Three Months Ended Three Months Ended June 25, 2022 Changes Attributable to: Three Months Ended July 1, 2023 (in millions) Price Volume/Mix/Other Cellulose specialties $ 218 $ 20 $ (59) $ 179 Commodity products 60 (4) 43 99 Other sales (a) 24 — (2) 22 Net sales $ 302 $ 16 $ (18) $ 300 —————————————— (a) Includes sales of bioelectricity, lignosulfonates and other by-products to third parties. Net sales of our High Purity Cellulose segment for the quarter ended July 1, 2023 decreased $2 million compared to the same prior year quarter. Included in the current and prior year quarters were $22 million and $24 million, respectively, of other sales primarily from bio-based energy and lignosulfonates. Sales prices decreased 4 percent during the current quarter, driven by a 4 percent decrease in commodity products prices, partially offset by a 13 percent increase in cellulose specialties prices. Total sales volumes increased 4 percent during the current quarter, driven by a 72 percent increase in commodity products volumes, partially offset by a 27 percent decrease in cellulose specialties volumes. Sales volumes for cellulose specialties were negatively impacted by market-driven demand declines primarily due to significant customer destocking, particularly those customers associated with construction markets. Net Sales - Six Months Ended Six Months Ended June 25, 2022 Changes Attributable to: Six Months Ended July 1, 2023 (in millions) Price Volume/Mix/Other Cellulose specialties $ 402 $ 52 $ (48) $ 406 Commodity products 130 4 89 223 Other sales (a) 51 — (6) 45 Net sales $ 583 $ 56 $ 35 $ 674 —————————————— (a) Includes sales of bioelectricity, lignosulfonates and other by-products to third parties. Net sales of our High Purity Cellulose segment for the six months ended July 1, 2023 increased $91 million compared to the same prior year period. Included in the current and prior year periods were $45 million and $51 million, respectively, of other sales primarily from bio-based energy and lignosulfonates. Sales prices increased 2 percent during the current period, driven by increases in cellulose specialties and commodity products prices of 15 percent and 1 percent, respectively. Total sales volumes increased 16 percent during the current period, driven by a 69 percent increase in commodity products volumes, partially offset by a 12 percent decrease in cellulose specialties volumes. Sales volumes for cellulose specialties were negatively impacted by market-driven demand declines primarily due to significant customer destocking, particularly in construction markets. Operating Income - Three Months Ended Three Months Ended June 25, 2022 Gross Margin Changes Attributable to: Three Months Ended July 1, 2023 (in millions, except percentages) Sales Price Sales Volume/Mix/Other (a) Cost SG&A and other Operating income $ 7 $ 16 $ (10) $ (16) $ 3 $ — Operating margin % 2.3 % 4.9 % (2.9) % (5.3) % 1.0 % — % —————————————— (a) Computed based on contribution margin. Operating income of our High Purity Cellulose segment for the quarter ended July 1, 2023 decreased $7 million compared to the same prior year quarter, driven by the lower cellulose specialties sales volumes and commodity products sales prices and increased labor and maintenance costs due to inflation, partially offset by higher cellulose specialties sales prices and commodity products sales volumes and decreased costs of certain inputs. Included in operating income in the current quarter was the recognition of a $3 million benefit from payroll tax credit carryforwards. 23 Table of Contents Operating Income (Loss) - Six Months Ended Six Months Ended June 25, 2022 Gross Margin Changes Attributable to: Six Months Ended July 1, 2023 (in millions, except percentages) Sales Price Sales Volume/Mix/Other (a) Cost SG&A and other Operating income (loss) $ (1) $ 56 $ 16 $ (62) $ 4 $ 13 Operating margin % (0.2) % 8.8 % 1.9 % (9.2) % 0.6 % 1.9 % —————————————— (a) Computed based on contribution margin. The operating results of our High Purity Cellulose segment for the six months ended July 1, 2023 improved $14 million compared to the same prior year period, driven by the higher cellulose specialties and commodity products sales prices and commodity products sales volumes and decreased costs of certain inputs, partially offset by the decrease in cellulose specialties sales volumes and higher labor and maintenance costs due to inflation. Included in operating income in the current period was the recognition of a $3 million benefit from payroll tax credit carryforwards. Paperboard Three Months Ended Six Months Ended (in millions, except where otherwise stated) July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 Net sales $ 48 $ 63 $ 107 $ 117 Operating income $ 6 $ 10 $ 16 $ 16 Average sales prices ($ per MT) $ 1,498 $ 1,439 $ 1,536 $ 1,384 Sales volumes (thousands of MTs) 32 44 70 85 Net Sales - Three Months Ended Three Months Ended June 25, 2022 Changes Attributable to: Three Months Ended July 1, 2023 (in millions) Price Volume/Mix Net sales $ 63 $ 2 $ (17) $ 48 Net sales of our Paperboard segment for the quarter ended July 1, 2023 decreased $15 million compared to the same prior year quarter due to a 27 percent decrease in sales volumes, driven by lower productivity and customer destocking, partially offset by a 4 percent increase in sales prices, driven by continued demand for sustainable packaging. Net Sales - Six Months Ended Six Months Ended June 25, 2022 Changes Attributable to: Six Months Ended July 1, 2023 (in millions) Price Volume/Mix Net sales $ 117 $ 11 $ (21) $ 107 Net sales of our Paperboard segment for the six months ended July 1, 2023 decreased $10 million compared to the same prior year period due to an 18 percent decrease in sales volumes, driven by lower productivity and customer destocking, partially offset by an 11 percent increase in sales prices, driven by continued demand for sustainable packaging. Operating Income - Three Months Ended Three Months Ended June 25, 2022 Gross Margin Changes Attributable to: Three Months Ended July 1, 2023 (in millions, except percentages) Sales Price Sales Volume/Mix (a) Cost SG&A and other Operating income $ 10 $ 2 $ (6) $ — $ — $ 6 Operating margin % 15.9 % 2.6 % (6.0) % — % — % 12.5 % —————————————— (a) Computed based on contribution margin. 24 Table of Contents Operating income of our Paperboard segment for the quarter ended July 1, 2023 decreased $4 million compared to the same prior year quarter, driven by the lower sales volumes, partially offset by the higher sales prices. Operating Income - Six Months Ended Six Months Ended June 25, 2022 Gross Margin Changes Attributable to: Six Months Ended July 1, 2023 (in millions, except percentages) Sales Price Sales Volume/Mix (a) Cost SG&A and other Operating income $ 16 $ 11 $ (8) $ (3) $ — $ 16 Operating margin % 13.7 % 7.4 % (3.3) % (2.8) % — % 15.0 % —————————————— (a) Computed based on contribution margin. Operating income of our Paperboard segment for the six months ended July 1, 2023 was flat compared to the same prior year period, as the higher sales prices were offset by the lower sales volumes and higher purchased pulp, chemicals and energy costs. High-Yield Pulp Three Months Ended Six Months Ended (in millions, except where otherwise stated) July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 Net sales $ 44 $ 40 $ 86 $ 62 Operating income (loss) $ 1 $ (2) $ 8 $ (2) Average sales prices ($ per MT) (a) $ 633 $ 603 $ 691 $ 586 Sales volumes (thousands of MTs) (a) 60 55 103 85 —————————————— (a) External sales only. For the three months ended July 1, 2023 and June 25, 2022, the High-Yield Pulp segment sold 14,000 MTs and 17,000 MTs of high-yield pulp to the Paperboard segment for $6 million and $7 million, respectively. For the six months ended July 1, 2023 and June 25, 2022, the High-Yield Pulp segment sold 32,000 MTs and 31,000 MTs of high-yield pulp to the Paperboard segment for $15 million and $13 million, respectively. Net Sales - Three Months Ended Three Months Ended June 25, 2022 Changes Attributable to: Three Months Ended July 1, 2023 (in millions) Price Volume/Mix Net sales $ 40 $ 2 $ 2 $ 44 Net sales of our High-Yield Pulp segment for the quarter ended July 1, 2023 increased $4 million compared to the same prior year quarter, driven by 5 percent and 9 percent increases in sales prices and sales volumes, respectively, driven by stronger demand, increased productivity and easing logistics constraints. Net Sales - Six Months Ended Six Months Ended June 25, 2022 Changes Attributable to: Six Months Ended July 1, 2023 (in millions) Price Volume/Mix Net sales $ 62 $ 13 $ 11 $ 86 Net sales of our High-Yield Pulp segment for the six months ended July 1, 2023 increased $24 million compared to the same prior year period, driven by 18 percent and 21 percent increases in sales prices and sales volumes, respectively, driven by stronger demand, increased productivity and easing logistics constraints. 25 Table of Contents Operating Income (Loss) - Three Months Ended Three Months Ended June 25, 2022 Gross Margin Changes Attributable to: Three Months Ended July 1, 2023 (in millions, except percentages) Sales Price Sales Volume/Mix (a) Cost SG&A and other Operating income (loss) $ (2) $ 2 $ 1 $ — $ — $ 1 Operating margin % (5.0) % 5.0 % 2.3 % — % — % 2.3 % —————————————— (a) Computed based on contribution margin. The operating results of our High-Yield Pulp segment for the quarter ended July 1, 2023 improved $3 million compared to the same prior year quarter, driven by the higher sales prices and sales volumes. Operating Income (Loss) - Six Months Ended Six Months Ended June 25, 2022 Gross Margin Changes Attributable to: Six Months Ended July 1, 2023 (in millions, except percentages) Sales Price Sales Volume/Mix (a) Cost SG&A and other Operating income (loss) $ (2) $ 13 $ 4 $ (7) $ — $ 8 Operating margin % (3.2) % 17.9 % 2.8 % (8.2) % — % 9.3 % —————————————— (a) Computed based on contribution margin. The operating results of our High-Yield Pulp segment for the six months ended July 1, 2023 improved $10 million compared to the same prior year period, driven by the higher sales prices and sales volumes, partially offset by increased wood and logistics costs and higher labor and maintenance costs due to inflation. Corporate Three Months Ended Six Months Ended (in millions) July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022 Operating loss $ (14) $ (18) $ (27) $ (32) The Corporate operating loss for the three and six months ended July 1, 2023 decreased $4 million and $5 million, respectively, compared to the same prior year periods, driven by lower variable stock-based compensation costs and lower severance, partially offset by unfavorable foreign exchange rates in the current year periods. Liquidity and Capital Resources Overview Cash flows from operations, primarily driven by operating results, have historically been our primary source of liquidity and capital resources. As operating cash flows can be negatively impacted by fluctuations in market prices for our commodity products and changes in demand for our products, we maintain a key focus on cash, managing working capital closely and optimizing the timing and level of our capital expenditures. Our Board of Directors suspended our quarterly common stock dividend in September 2019. No dividends have been declared since. The declaration and payment of future common stock dividends, if any, will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements and other factors that the Board of Directors deems relevant. In addition, our debt facilities place limitations on the declaration and payment of future dividends. In January 2018, our Board of Directors authorized a $100 million common stock share buyback program. We did not repurchase any shares under this program during the three and six months ended July 1, 2023 and June 25, 2022, and do not expect to utilize any authorization in the future. 26 Table of Contents As of July 1, 2023, we were in compliance with all financial and other customary covenants under our credit arrangements. We believe our future cash flows from operations, availability under our ABL Credit Facility and our ability to access the capital markets, if necessary or desirable, will be adequate to fund our operations and anticipated long-term funding requirements, including capital expenditures, defined benefit plan contributions and repayment of debt maturities. Our non-guarantor subsidiaries had assets of $466 million, liabilities of $139 million, year-to-date revenue of $79 million and a trailing twelve month ABL Credit Facility covenant EBITDA for continuing operations of $34 million as of July 1, 2023. Our liquidity and capital resources are summarized below: (in millions, except ratios) July 1, 2023 December 31, 2022 Cash and cash equivalents (a) $ 157 $ 152 Availability under the ABL Credit Facility (b) 109 130 Total debt (c) 834 853 Stockholders’ equity 814 829 Total capitalization (total debt plus stockholders’ equity) 1,648 1,682 Debt to capital ratio 51 % 51 % —————————————— (a) Cash and cash equivalents consist of cash, money market deposits and time deposits with original maturities of 90 days or less. (b) Amounts available under the ABL Credit Facility fluctuate based on eligible accounts receivable and inventory levels. At July 1, 2023, we had $143 million of gross availability and net available borrowings of $109 million after taking into account standby letters of credit of $34 million. In addition to the availability under the ABL Credit Facility, we have $6 million available under our accounts receivable factoring line of credit in France. (c) See Note 7—Debt and Finance Leases to our Financial Statements for further information. Cash Requirements Contractual Commitments Our principal contractual commitments include standby letters of credit, surety bonds, guarantees, purchase obligations and leases. We utilize arrangements such as standby letters of credit and surety bonds to provide credit support for certain suppliers and vendors in case of their default on critical obligations, collateral for certain of our self-insurance programs and guarantees for the completion of our remediation of environmental liabilities. As part of our ongoing operations, we also periodically issue guarantees to third parties. Our primary purchase obligation payments relate to natural gas, steam energy and wood chips purchase contracts. There have been no material changes to our contractual commitments outside the ordinary course of business during the six months ended July 1, 2023. See Note 17—Commitments and Contingencies to our Financial Statements for further information. Senior Notes and Term Loan In March 2023, we repurchased $5 million of our 2024 Notes through open-market transactions and retired the notes for cash of $5 million. In April 2023, we repurchased $10 million of our 2026 Notes through open-market transactions and retired the notes for cash of $9 million. In July 2023, we secured term loan financing of $250 million in aggregate principal amount and received net proceeds of $243 million after original issue discount, which will be used, together with cash on hand, to redeem the remaining $318 million in aggregate principal balance of the 2024 Notes and pay fees and expenses related to the transaction. The 2027 Term Loan matures in July 2027, bears interest at an annual rate equal to three-month Term SOFR (or, if greater, 3.00 percent) plus 8.00 percent and requires quarterly principal payments of 0.50 percent of the initial principal amount. 27 Table of Contents Cash Flows Six Months Ended (in millions) July 1, 2023 June 25, 2022 Cash flows provided by (used in): Operating activities $ 84 $ (36) Investing activities-continuing operations (54) (87) Investing activities-discontinued operations — 43 Financing activities (26) (22) Cash provided by operating activities increased $120 million primarily due to increased cash inflows from working capital, partially offset by payments on deferred energy liabilities associated with our Tartas facility operations. Cash used in investing activities of continuing operations decreased $33 million due to lower capital spending. Cash provided by investing activities of discontinued operations of $43 million in 2022 related to the proceeds from the sale of GreenFirst equity securities. Cash used in financing activities increased $4 million primarily due to higher repurchases of common stock to satisfy tax withholding requirements related to the issuance of stock under our incentive stock plans and decreased borrowings of long-term debt, partially offset by lower repayments of long-term debt. Performance and Liquidity Indicators The discussion below is presented to enhance the reader’s understanding of our operating performance, liquidity and ability to generate cash and satisfy rating agency and creditor requirements. This information includes the non-GAAP financial measures of EBITDA, adjusted EBITDA and adjusted free cash flows. These measures are not defined by GAAP and our discussion of them is not intended to conflict with or change any of our GAAP disclosures provided in this report. We believe these non-GAAP financial measures provide useful information to our Board of Directors, management and investors regarding our financial condition and results of operations. Our management uses these non-GAAP financial measures to compare our performance to that of prior periods for trend analyses, to determine management incentive compensation and for budgeting, forecasting and planning purposes. Our management considers these non-GAAP financial measures, in addition to operating income, to be important in estimating our enterprise and stockholder values and for making strategic and operating decisions. In addition, analysts, investors and creditors use these non-GAAP financial measures when analyzing our operating performance, financial condition and cash-generating ability. We use EBITDA and adjusted EBITDA as performance measures and adjusted free cash flows as a liquidity measure. We do not consider non-GAAP financial measures an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they may exclude significant expense and income items that are required by GAAP to be recognized in our Financial Statements. In addition, they reflect the exercise of management’s judgment about which expense and income items are excluded or included in determining these non-GAAP financial measures. In order to compensate for these limitations, reconciliations of our non-GAAP financial measures to their most directly comparable GAAP financial measures are provided below. Non-GAAP financial measures are not necessarily indicative of results that may be generated in future periods and should not be relied upon, in whole or part, in evaluating our financial condition, results of operations or future prospects. 28 Table of Contents EBITDA and Adjusted EBITDA EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for the settlement of certain pension plans and other items. Reconciliations of income (loss) from continuing operations to EBITDA and Adjusted EBITDA from continuing operations, by segment, follow: (in millions) High Purity Cellulose Paperboard High-Yield Pulp Corporate & Other Total Three Months Ended July 1, 2023 Income (loss) from continuing operations $ — $ 6 $ 1 $ (23) $ (16) Depreciation and amortization 28 4 — 1 33 Interest expense, net — — — 14 14 Income tax benefit — — — (3) (3) EBITDA-continuing operations 28 10 1 (11) 28 Gain on debt extinguishment — — — (1) (1) Adjusted EBITDA-continuing operations $ 28 $ 10 $ 1 $ (12) $ 27 Three Months Ended June 25, 2022 Income (loss) from continuing operations $ 6 $ 11 $ (1) $ (41) $ (25) Depreciation and amortization 30 3 1 — 34 Interest expense, net — — — 16 16 Income tax expense — — — 4 4 EBITDA-continuing operations 36 14 — (21) 29 Pension settlement loss — — — 1 1 Severance — — — 4 4 Adjusted EBITDA-continuing operations $ 36 $ 14 $ — $ (16) $ 34 Six Months Ended July 1, 2023 Income (loss) from continuing operations $ 13 $ 16 $ 8 $ (51) $ (14) Depreciation and amortization 59 7 1 1 68 Interest expense, net — — — 29 29 Income tax benefit — — — (6) (6) EBITDA-continuing operations 72 23 9 (27) 77 Pension settlement loss — — — 2 2 Gain on debt extinguishment — — — (1) (1) Adjusted EBITDA-continuing operations $ 72 $ 23 $ 9 $ (26) $ 78 Six Months Ended June 25, 2022 Income (loss) from continuing operations $ (1) $ 17 $ (1) $ (64) $ (49) Depreciation and amortization 53 7 1 — 61 Interest expense, net — — — 32 32 Income tax expense — — — 5 5 EBITDA-continuing operations 52 24 — (27) 49 Pension settlement loss — — — 1 1 Severance — — — 4 4 Adjusted EBITDA-continuing operations $ 52 $ 24 $ — $ (22) $ 54 29 Table of Contents EBITDA from continuing operations for the quarter ended July 1, 2023 decreased $1 million compared to the same prior year quarter, driven by the decrease in net sales and increased labor, maintenance, input and logistics costs, offset by a decrease in Corporate expense items and the recognition of a $3 million benefit from payroll tax credit carryforwards. EBITDA from continuing operations for the six months ended July 1, 2023 increased $28 million compared to the same prior year period, driven by the increase in net sales, a decrease in Corporate expense items and the income recognized on the payroll tax credit carryforwards, partially offset by increased labor, maintenance, input and logistics costs. See Results of Operations above for additional discussion of the changes in our operating results. Adjusted Free Cash Flows Adjusted free cash flows is defined as cash provided by operating activities of continuing operations adjusted for capital expenditures, net of proceeds from the sale of assets and excluding strategic capital expenditures deemed discretionary by management. Adjusted free cash flows is a non-GAAP financial measure of cash generated during a period, which is available for debt reduction, strategic capital expenditures, acquisitions and repurchases of our common stock. Adjusted free cash flows is not necessarily indicative of the adjusted free cash flows that may be generated in future periods. Cash flows of operating activities of continuing operations is reconciled to adjusted free cash flows as follows: Six Months Ended (in millions) July 1, 2023 June 25, 2022 Cash provided by (used in) operating activities-continuing operations $ 84 $ (36) Capital expenditures, net (a) (32) (71) Adjusted free cash flows-continuing operations $ 52 $ (107) —————————————— (a) Net of proceeds from the sale of assets and excluding strategic capital expenditures. Strategic capital expenditures for the six months ended July 1, 2023 and June 25, 2022 were $22 million and $16 million, respectively. Adjusted free cash flows of continuing operations increased primarily due to changes in working capital and lower capital expenditures. See Cash Flows above for additional discussion of our operating cash flows.