INCENTIVE STOCK PLANS

The Rayonier Advanced Materials Incentive Stock Plan (“the Stock Plan”) provides for up to 5.2 million shares of stock to be granted for incentive stock options, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and restricted stock units, subject to certain limitations. At December 31, 2014, approximately 4.1 million shares were available for future grants under the Stock Plan.

In connection with the separation from Rayonier, incentive stock options, performance shares and restricted stock awards issued to employees and directors under the Rayonier Incentive Stock Plan prior to the Distribution were adjusted or converted, as applicable, into new awards using formulas generally designed to preserve the value of the awards immediately prior to the Distribution.

The Employee Matters Agreement between Rayonier and the Company, which was executed in connection with the Distribution and filed with the Form 10, describes how the Rayonier stock awards were treated. Refer to the respective sections below for a summary of how each type of award was converted through the Distribution.

The Company recognizes stock based compensation expense on a straight-line basis over the service period of the award. The Company’s total stock based compensation cost, including allocated amounts, for the years ended December 31, 2014, 2013, and 2012 was $8.7 million, $6.2 million, and $8.2 million, respectively. These amounts may not reflect the cost of current or future equity awards nor results we would have experienced, or expect to experience, as an independent, publicly traded company.

Total stock based compensation expense was allocated for the years ended December 31, as follows:



	2014		2013		2012
Selling and general expenses	$	7,763	$	5,006	$	7,561
Cost of sales	975		1,224		666
Total stock-based compensation expense	$	8,738	$	6,230	$	8,227

The Company’s employee stock option compensation program generally provides accelerated vesting (i.e., a waiver of the remaining period of service required to earn an award) for awards held by employees at the time of their retirement. Stock-based compensation expense for awards is recognized over the shorter of: (1) the service period (i.e., the stated period of time required to earn the award); or (2) the period beginning at the start of the service period and ending when an employee first becomes eligible for retirement.

Fair Value Calculations by Award

All option, restricted stock and performance share awards are presented for Rayonier Advanced Materials stock only, including those awards held by Rayonier Inc. employees.

Non-Qualified Employee Stock Options

Stock options are granted with an exercise price equal to the market value of the underlying stock on the grant date. They generally vest ratably over three years, and have a maximum term of 10 years and two days from the grant date.

At the time of the Distribution, Rayonier stock options were converted into both an adjusted Rayonier stock option and a Company stock option. Adjustments were made to the exercise price and number of shares in order to preserve the aggregate intrinsic value of the original award as measured immediately before and immediately after the Distribution.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. All stock option awards granted prior to the Distribution were valued based on Rayonier’s share price and assumptions. For all options granted before the Separation, the expected volatility is based on historical volatility for each grant and is calculated using the historical change in the daily market price of Rayonier’s underlying stock over the expected life of the award. For options granted after the Separation, the expected volatility is based on the Company’s and peer companies’ historical volatilities for each grant and is calculated, on a weighted average basis, using the historical change in the daily market price of the companies’ underlying stock over the expected life of the award. The expected life is based on prior exercise behavior. The Company has elected to value each grant in total and recognize the expense for stock options on a straight-line basis over three years.

The following chart provides a tabular overview of the weighted average assumptions and related fair value calculations of options granted for the three years ended December 31:



	2014			2013			2012
Expected volatility	40.1		%	39.0		%	39.3		%
Dividend yield	4.2		%	3.4		%	3.6		%
Risk-free rate	2.2		%	1.0		%	1.3		%
Expected life (in years)	6.3			6.3			6.4
Fair value per share of options granted	$	9.31		$	14.00		$	11.85
Fair value of options granted (in millions)	$	0.9		$	0.7		$	0.7

A summary of the Company’s stock option activity is presented below for the year ended December 31, 2014:



	Stock Options
	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2014	—		$	—	—	$	—
Awards converted in connection with Separation	500,951		31.16		—	—
Granted	5,130		39.07		—	—
Exercised	(30,156	)	21.54		—	—
Forfeited or canceled	(9,910	)	37.73		—	—
Outstanding at December 31, 2014	466,015		$	31.73	6.0	$	312,852
Options vested and expected to vest	466,015		$	31.73	6.0	$	312,852
Options exercisable at December 31, 2014	316,513		$	28.25	4.9	$	312,852

A summary of additional information pertaining to stock options granted to employees is presented below:



	2014		2013		2012
(Amounts in millions)
Intrinsic value of options exercised (a)	$	0.3	$	0.8	$	3.6
Fair value of options vested	$	0.1	$	0.6	$	0.6


(a)	Intrinsic value of stock options exercised is based on the market price of the Company’s stock at December 31, 2014 and of Rayonier's stock at December 31, 2013 and 2012.

As of December 31, 2014, there was $0.6 million of unrecognized compensation costs related to the Company’s stock options. This cost is expected to be recognized over a weighted average period of 1.0 year. As a result of the Separation, some of the Company’s employees hold Rayonier options. As of December 31, 2014, there was $1.4 million of unrecognized compensation costs related to Rayonier stock options, the cost of which is expected to be recognized over a weighted average period of 1.0 years.

Restricted Stock

As a result of the Separation, holders of Rayonier restricted stock, including Rayonier non-employee directors, retained those awards and also received one share of Company restricted stock for every three shares of Rayonier restricted stock held prior to the Separation. The adjusted awards resulted in incremental compensation expense of $2.3 million to be recognized over a two year period following the Distribution.

Restricted stock granted in connection with the Company’s performance share plan, and in connection with Rayonier’s incentive plan prior to the Separation, generally vests upon completion of a one to three year period. The fair value of each share granted is equal to the share price of the underlying stock on the date of grant. As of December 31, 2014, there was $3.9 million of unrecognized compensation cost related to the Company’s outstanding restricted stock. This cost is expected to be recognized over a weighted average period of 1.4 years. As a result of the Separation, some of the Company’s employees hold Rayonier restricted shares. As of December 31, 2014, there was $0.5 million of unrecognized compensation costs related to Rayonier restricted shares, the cost of which is expected to be recognized over a weighted average period of 1.3 years.

The following table summarizes the activity of restricted shares granted to employees for the three years ended December 31:



	2014		2013		2012
Restricted shares granted	172,894		10,200		600
Weighted average price of restricted shares granted	$	41.51	$	56.00	$	44.34
(Amounts in millions)
Intrinsic value of restricted stock outstanding (a)	$	3.2	$	0.7	$	0.3
Fair value of restricted stock vested	$	0.1	$	—	$	—


(a)	Intrinsic value of restricted stock outstanding is based on the market price of the Company’s stock at December 31, 2014, and of Rayonier’s stock at December 31, 2013 and 2012.

A summary of the Company’s restricted stock activity is presented below for the year ended December 31, 2014:



	Restricted Stock
	Awards		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2014	—		$	—
Awards converted in connection with Separation	145,201		42.43
Granted	27,693		36.71
Vested	(2,708	)	37.06
Forfeited	(25,101	)	41.17
Outstanding at December 31, 2014	145,085		$	41.66

In addition to the restricted stock awards noted above, the Company also issued a $4.0 million fixed award at the separation from Rayonier to be settled in the Company’s common stock. The award will vest on August 31, 2018 contingent on certain factors. The number of shares issued will be determined based on an average of the stock’s closing price prior to vesting.

Performance Share Awards

The Company’s performance share awards generally vest upon completion of a three-year period. The number of shares, if any, that are ultimately awarded is contingent upon the Company’s total shareholder return versus selected peer group companies for the post-Separation business. The performance share payout is based on a market condition and as such, the awards are valued using a Monte Carlo simulation model. The model generates the fair value of the award at the grant date, which is then amortized over the vesting period.

In connection with the Separation, Rayonier’s performance share plans were adjusted or converted, as applicable, into new plans in accordance with the Employee Matters Agreement between Rayonier and the Company. As a result, at December 31, 2014 the Company’s performance share plans were structured as follows:

•

Performance-based stock unit awards granted in 2012 (with a 2012-2014 performance period) remain subject to the same performance criteria as applied immediately prior to the Separation, except that total shareholder return at the end of the performance period will be based on the combined stock prices of Rayonier and the Company and any payment with respect to a Rayonier Advanced Materials performance share award will be made in shares of the Company’s common stock. The number of shares, if any, that are ultimately awarded is contingent upon the Company’s total shareholder return versus selected peer group companies. The conversion ratio for the 2012 performance share awards is between 0 and 200 percent of target. The payout is based on a market condition and as such, the awards are valued using a Monte Carlo simulation model. The model generates the fair value of the award at the grant date, which is then amortized over the vesting period.


•	Performance-based stock unit awards granted in 2013 (with a 2013-2015 performance period) were canceled as of the distribution date and replaced with restricted stock awards of the Company that will vest 24 months after the distribution date, generally subject to the holder’s continued employment.

•

Performance-based stock unit awards granted in 2014 (with a 2014-2016 performance period) were canceled and replaced with performance-based restricted stock of the Company and will be subject to the achievement of performance criteria that relate to the post-Separation business during a performance period ending December 31, 2016. The number of shares, if any, that are ultimately awarded is contingent upon the Company’s total shareholder return versus selected peer group companies. The conversion ratio for the 2014 performance share awards is between 0 and 200 percent of target. The payout is based on a market condition and as such, the awards are valued using a Monte Carlo simulation model. The model generates the fair value of the award at the grant date, which is then amortized over the vesting period.

As of December 31, 2014, there was $4.9 million of unrecognized compensation cost related to the Company’s performance share awards. This cost is expected to be recognized over a weighted average period of 2.0 years.

In connection with the separation from Rayonier, performance shares held by the Company’s employees were converted to the Rayonier Advanced Materials Stock Plan. The following table summarizes the activity of the Company’s performance share units granted to its employees for the three years ended December 31:



	2014				2013		2012
	Performance-Based Stock Units		Performance-Based Restricted Stock		Performance-Based Stock Units		Performance-Based Stock Units
Common shares of stock reserved for performance shares	95,952		286,737		52,900		57,000
Weighted average fair value of performance share units granted	$	42.27	$	40.41	$	58.99	$	56.36
(Amounts in millions)
Intrinsic value of outstanding performance share units (a)	$	1.1	$	3.2	$	3.6	$	4.8
Fair value of performance shares vested	$	—	$	—	$	1.0	$	2.5
Cash used to pay the minimum withholding tax requirements in lieu of receiving common shares	$	—	$	—	$	1.2	$	0.4


(a)	Intrinsic value of outstanding performance share units is based on the market price of the Company’s stock at December 31, 2014, and of Rayonier’s stock at December 31, 2013 and 2012.

A summary of the Company’s performance-share activity is presented below for the year ended December 31, 2014:



	Performance-Based Stock Units				Performance-Based Restricted Stock
	Awards		Weighted Average Grant Date Fair Value		Awards		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2014	—		$	—	—		$	—
Awards converted in connection with Separation	49,811		42.27		146,732		39.67
Granted	—		—		17,860		46.51
Forfeited	(1,834	)	42.27		(21,223	)	39.67
Outstanding at December 31 2014	47,977		$	42.27	143,369		$	40.52

Expected volatility for the 2013 and 2012 grants was estimated using daily returns on Rayonier’s common stock for the three-year period ending on the grant date. For the 2014 grant, expected volatility is based on representative price returns using the stock price of several peer companies. The risk-free rate was based on the 3-year U.S. treasury rate on the date of the award. The following chart provides a tabular overview of the weighted average assumptions used in calculating the fair value of the awards granted for the three years ended December 31:



	2014		2013		2012
Expected volatility	16.9	%	23.2	%	36.9	%
Risk-free rate	0.7	%	0.4	%	0.4	%