Rayonier Advanced Materials Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 26, 2016; comparisons are with the three months ended March 28, 2015. The company manufactures high-value cellulose products, including cellulose specialties and commodity products, at facilities in Georgia and Florida.
Financial and operating results
- Revenue: $217.7 million, down 1.6% from $221.3 million. Cellulose specialties sales were $165 million versus $179 million; commodity products and other sales were $53 million versus $42 million.
- Profitability: Gross margin was $40.2 million (18.3% of sales), versus $36.9 million (16.7%). Operating income was $31.9 million, versus $23.9 million. Net income was $20.9 million, or $0.49 diluted EPS, versus $10.5 million, or $0.25 per diluted share.
- Unusual item: Net income included an $8.8 million gain on extinguishing debt. The company reported pro forma EBITDA, which excludes this gain, of $54 million versus $46 million.
- Cash flow: Operating cash flow was $74.0 million versus $56.2 million; capital expenditures were $20.4 million versus $24.5 million. Adjusted free cash flow was $54 million versus $32 million. Cash ended the quarter at $110.1 million.
- Debt and liquidity: Total debt was $804.8 million, down from $858.1 million at year-end 2015. The company repaid $10.6 million of term loans and repurchased $43.6 million principal amount of 2024 notes for approximately $34.1 million. It had $236 million available under its revolving facility and reported compliance with debt covenants. Stockholders’ equity was $2.9 million, compared with a $17.1 million deficit at year-end.
- Other: Interest expense was $8.7 million versus $9.3 million. The effective tax rate rose to 34.9% from 28.2%. The quarterly dividend remained $0.07 per share.
Changes versus the prior-year quarter
Sales declined modestly as lower cellulose specialties prices more than offset higher commodity product volumes. Cellulose specialties average price was $1,555 per metric ton, down from $1,667; volume was 106,000 metric tons versus 107,000. Commodity volume increased to 75,000 metric tons from 58,000, while average price was $680 versus $686. Operating income improved by about $8 million, supported by $12 million lower costs, including cost-reduction initiatives and lower chemical, energy, and transportation costs, as well as lower SG&A and other expenses. The prior-year quarter also included a Fernandina plant maintenance outage.
Outlook, risks, and contingencies
- Management raised 2016 guidance to pro forma EBITDA of $185–$200 million and adjusted free cash flow of $85–$95 million, citing progress on cost savings and benign inflation.
- Management expected 2016 cellulose specialties prices to decline 6%–7% and volumes to decline 4%–5% versus 2015. Contracted 2017 acetate pricing was expected to be about 2% below 2016.
- A transformation initiative targets $75–$90 million in savings over 2016–2018. The company also aims to generate 20% of revenue from new products within a decade.
- Disposed-operation liabilities totaled $156.2 million. The company estimated reasonably possible additional exposure of up to approximately $65 million, excluding potential liabilities not currently estimable; actual costs could exceed reserves and materially affect results or cash flows.
- A securities class action concerning environmental liabilities was dismissed without prejudice in April 2016; plaintiffs could seek to file an amended complaint. The company said it considers the allegations baseless and intends to defend the matter.
- Outstanding financial commitments included $14.2 million of standby letters of credit and $56.2 million of surety bonds, primarily supporting environmental and other obligations. The company reported no derivatives outstanding. It said other risk factors had not materially changed from its 2015 Form 10-K.
Key facts for investors to verify
- Whether cellulose specialties pricing and volume declines track management’s 2016 expectations and contracted 2017 acetate pricing.
- Progress toward the $75–$90 million transformation savings target and the company’s annual EBITDA and adjusted free cash flow guidance.
- Cash generation, capital spending, debt reduction, and the company’s capacity to manage its substantial debt and environmental obligations.
- Developments in disposed-site remediation estimates and the securities litigation, including any amended complaint.