Rayonier Advanced Materials Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2020; comparisons are with the periods ended June 29, 2019. The company produces high-purity cellulose and forest-products, paperboard, pulp and newsprint products. Matane pulp operations, sold in November 2019, are reported as discontinued operations.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $396.8 million | $450.2 million | $806.6 million | $891.3 million |
| Gross margin | $20.2 million (5.1%) | $18.0 million (4.0%) | $30.7 million (3.8%) | $25.6 million (2.9%) |
| Operating loss | $15.4 million | $15.3 million | $27.4 million | $42.9 million |
| Continuing-operations loss | $12.9 million | $19.3 million | $37.8 million | $47.3 million |
| Net loss attributable to company | $12.9 million | $14.9 million | $37.0 million | $37.0 million |
| Basic loss per share | $0.20 | $0.37 | $0.59 | $0.89 |
- Q2 revenue fell 12%; first-half revenue fell 9%. Lower commodity-product, high-yield pulp and newsprint prices, along with lower cellulose-specialties and lumber volumes, were key drivers.
- Q2 operating loss was broadly unchanged year over year; first-half operating loss improved by $15.5 million, mainly from lower costs and improved results in Forest Products and Paperboard. Pulp & Newsprint deteriorated.
- Interest expense was $15.8 million in Q2 and $31.0 million for the first half, up from $14.4 million and $28.0 million, respectively. The first-half tax benefit was $20.6 million, including CARES Act benefits and a valuation-allowance adjustment.
- First-half cash from operations was $11.1 million, versus $18.3 million, including discontinued operations. Continuing-operations operating cash flow was $10.9 million versus $4.2 million. Capital expenditures were $22.6 million; adjusted free cash flow, a non-GAAP measure, was negative $7 million.
- At June 27, cash was $48.7 million; total debt was $1.076 billion and stockholders’ equity was $648.7 million. Debt-to-capital was 62%. Revolver availability was $98 million after the required availability reserve; an additional approximately $19 million was available under a French receivables factoring line.
- Current assets were $595.2 million and current liabilities $305.5 million. The company reported $53.7 million of income-tax receivables, including expected CARES Act refunds and amounts related to IRS examinations.
Material changes and segment results
- High Purity Cellulose: Q2 sales decreased 5% to $255 million; operating income was $6.7 million, essentially unchanged. Cellulose-specialties volumes fell 16%, while commodity-product volumes rose 72%; lower wood and chemical costs offset weaker commodity pricing.
- Forest Products: Q2 sales declined 13% to $70 million, but operating loss narrowed to $3.8 million from $16.3 million. Lumber prices improved, while pandemic-related mill curtailments reduced volumes.
- Paperboard: Q2 sales decreased 14% to $43 million; operating income rose to $6.3 million from $0.6 million, principally due to lower pulp and transportation costs.
- Pulp & Newsprint: Q2 sales fell 34% to $42.8 million and the segment recorded a $5.5 million operating loss versus $5.7 million income. Weak markets reduced prices and volumes, particularly for newsprint.
- Cash declined by $15.3 million from year-end 2019. First-half capital spending was substantially below the prior-year period, and the company paid no common or preferred dividends in the first half of 2020.
Outlook, risks and unusual items
- The company suspended full-year guidance because the scale and timing of recovery from COVID-19 and supply-chain risks were uncertain. Facilities remained operating as essential businesses; management curtailed or adjusted production to demand and emphasized cost, cash and liquidity management.
- Management described cellulose-specialties demand as dependent on economic recovery; paperboard demand as relatively resilient; lumber demand and prices as rebounding late in Q2; and pulp and newsprint markets as weak. Further deterioration could prompt production curtailments.
- On June 5, the company amended its senior secured credit agreement, relaxing financial covenants through 2022 and reducing the minimum revolver availability requirement. At quarter-end, the reported secured leverage ratio was 4.8x against a 6.2x limit, and interest coverage was 2.0x against a 1.6x minimum. The amendment increased borrowing spreads and included a 1% LIBOR floor. Management warned that continued covenant compliance is not assured.
- Debt principal payments include approximately $869 million due in 2024. The company’s debt, refinancing needs, variable-rate exposure and LIBOR transition are material risks. A 1 percentage-point rate change on the reported $499 million of variable-rate debt would change annual interest expense by approximately $5 million.
- After quarter-end, final Section 163(j) tax regulations were issued. The company expected a non-cash tax benefit of approximately $10–15 million in Q3 2020, alongside reductions to certain deferred-tax valuation allowances and uncertain-tax-position liabilities.
- Environmental liabilities totaled $170.3 million. The company estimated reasonably possible additional exposure of up to approximately $77 million, excluding amounts not currently estimable.
- An Ontario electricity-market regulator issued orders seeking CAD $25 million in penalties relating to the Kapuskasing facility. The company is contesting the orders in court and stated it did not expect the dispute’s outcome to be material, while acknowledging no assurance.
- The company reported no long-lived-asset impairment charges in the quarter or first half, but noted impairment assessments depend on highly uncertain future cash-flow estimates. It also had $42 million of standby-letter-of-credit exposure, $87 million of surety bonds and a $33 million proportional guarantee of a joint venture’s financing.
Important facts for investors to verify
- Whether revenue, prices and volumes recover across cellulose specialties, commodity pulp, newsprint and lumber, and whether Q2 lumber-market strength persists.
- Liquidity, covenant headroom and access to financing under the amended credit agreement, especially in view of the large 2024 debt maturity and negative adjusted free cash flow.
- Cash-tax refund timing and realization of tax benefits, including the expected Q3 benefit from final Section 163(j) regulations.
- Potential additional environmental remediation costs and the outcome and financial effect of the disputed IESO penalties.
- Whether COVID-19 impacts, supply-chain delays, customer demand, and possible asset impairments differ materially from management’s assumptions.