Rayonier Advanced Materials Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparison is with the three months ended March 30, 2019. Amounts are in U.S. dollars unless stated otherwise. The company makes high-purity cellulose products and also operates forest products, paperboard, and pulp and newsprint businesses. Matane pulp operations, sold in November 2019, are reported as discontinued operations.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $409.8 million | $441.1 million |
| Gross margin | $10.5 million; 2.6% of sales | $7.6 million; 1.7% of sales |
| Operating loss | $12.0 million | $27.6 million |
| Loss from continuing operations | $24.8 million | $28.0 million |
| Net loss attributable to the company | $24.1 million | $22.1 million |
| Basic and diluted loss per share | $0.38 | $0.52 |
| Cash from operating activities | $(12.7) million | $(26.9) million |
| Capital expenditures | $12.6 million | $31.4 million |
Sales declined 7%, primarily from lower commodity prices and reduced cellulose specialties volumes. Operating results improved by $15.6 million, with lower costs and a $6 million foreign-exchange gain among the factors; interest expense rose to $15.2 million from $13.6 million. The net loss comparison includes $0.7 million of 2020 discontinued-operation income from a Matane sale working-capital adjustment, versus $5.9 million of discontinued-operation income in 2019. The 2020 tax benefit included a CARES Act benefit.
Balance sheet, liquidity and debt
- At March 28, cash was $42.7 million, down from $64.0 million at year-end 2019. Total debt was $1.075 billion; stockholders’ equity was $639.6 million. Debt-to-capital was 63%, compared with 61% at year-end.
- Reported revolving-credit availability was $90 million, after specified reductions, with approximately $13 million additionally available under a French factoring line. The company said it was required to maintain $80–$90 million of revolver availability.
- First-quarter covenant compliance: net secured leverage ratio was 4.1x versus a 5.4x limit; interest coverage was 2.2x versus a 1.75x requirement. The company cautioned that covenant relief under its credit amendment expires December 31, 2021 and future compliance is not assured.
- Adjusted free cash flow, a non-GAAP measure, was negative $23 million, compared with negative $58 million. The company attributed the improvement mainly to lower capital spending and reduced cash used in operations.
- The debt schedule shows approximately $869 million of principal due in 2024. Canadian-dollar term-loan principal payments were deferred in 2020, but interest continued to be paid; the final maturity was not extended.
Segments and material changes
- High Purity Cellulose: Sales fell 13% to $250 million and operating loss widened to $4.9 million from $2.8 million. Cellulose specialties volume declined 18%; commodity-product prices fell 30%, partly offset by higher commodity volumes.
- Forest Products: Sales rose 9% to $82 million; operating loss narrowed to $1.3 million from $5.2 million, supported by higher lumber prices and volumes.
- Paperboard: Sales rose 7% to $50 million and operating income improved to $4.7 million from a $2.4 million loss, mainly due to lower raw-material pulp costs.
- Pulp & Newsprint: Sales declined 8% to $46.7 million and the segment moved from $1.9 million operating income to a $5.9 million loss. Lower pulp and newsprint prices outweighed higher pulp volumes and lower costs.
Outlook, risks and unusual items
- Management said the full-year outlook was difficult to predict given COVID-19 and uncertainty about the timing and trajectory of economic recovery. The financial impact could not be reasonably estimated. Facilities were deemed essential and remained open during the quarter; the company implemented safety measures.
- Management’s 2020 priority was cost control and cash preservation to remain compliant with debt covenants. It expected $60–$70 million of benefits to increase EBITDA and cover fixed costs; further measures could include asset sales, workforce reductions, curtailments, or permanent closures.
- Cellulose specialties demand was described as relatively resilient, but contracted volumes were expected to decline 7–8% (11–12% after anticipated sales timing) and contracted prices to rise about 2% year over year before currency effects. Viscose pulp markets were weak; the company could shift production toward fluff and paper-grade pulp.
- COVID-19 effects varied by market: paperboard demand was generally resilient; newsprint demand had fallen significantly, and lumber markets weakened sharply in late March. After quarter-end, the company curtailed some lumber and newsprint production.
- Environmental liabilities were $170.3 million. The company estimated reasonably possible additional exposure of up to approximately $75 million, while noting this estimate excludes certain currently unestimable matters. It also reported $40 million net exposure under standby letters of credit and $84 million of surety bonds.
- Derivative fair values shifted from a net asset of $3.4 million at year-end to a net liability of $31.2 million at quarter-end; unrealized derivative losses contributed to other comprehensive loss. The company uses derivatives for risk management, not speculation.
- The Jesup plant permit appeal concluded in the company’s favor after the administrative law judge affirmed the permit and the opposing party did not appeal by the deadline.
Investor verification priorities
- Track quarterly cash generation, available borrowing capacity, and compliance with amended debt covenants, especially as covenant relief approaches expiration.
- Test whether the expected $60–$70 million in EBITDA and fixed-cost benefits is achieved, and whether additional cost actions or asset sales become necessary.
- Monitor COVID-19 effects on customer demand, operating continuity, supply chains, and subsequent production curtailments.
- Assess refinancing or repayment plans for the large 2024 debt maturity and the implications of deferred Canadian-loan principal payments.
- Review environmental exposure, derivative-related volatility, and the timing and realization of CARES Act and other tax receivables.