Rayonier Advanced Materials Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 24, 2016; comparisons are with the periods ended September 26, 2015. The company manufactures cellulose specialties and commodity cellulose products.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $206.5m | $257.6m | $637.9m | $699.8m |
| Gross margin | $50.5m (24.6%) | $70.2m (27.2%) | $139.6m (21.9%) | $152.1m (21.7%) |
| Operating income | $41.4m | $58.0m | $111.9m | $90.5m |
| Net income | $21.6m | $32.3m | $61.8m | $42.5m |
| Diluted EPS | $0.44 | $0.76 | $1.38 | $1.00 |
| Operating cash flow | Not separately presented | Not separately presented | $181.2m | $152.0m |
| Capital expenditures | Not separately presented | Not separately presented | $58.5m | $59.7m |
Q3 sales fell about 19%, principally due to lower cellulose specialties prices and volumes. Cellulose specialties sales were $173m versus $215m; average price was $1,495/metric ton versus $1,623, and volume was 116,000 tons versus 133,000. Operating income declined $16.5m, as lower prices and volumes outweighed cost savings. Management attributed savings primarily to its Transformation Initiative.
For the first nine months, sales declined about 9%, while operating income increased about $21.4m. Net income increased by $19.3m, reflecting the prior-year $28.5m impairment charge being absent in 2016 and a $8.8m gain on debt extinguishment, among other factors. Nine-month pro forma EBITDA was $176m versus $183m; this non-GAAP measure excludes specified items.
Financial position and liquidity
- Cash was $319.7m at September 24, 2016, versus $101.3m at year-end 2015. The company reported $236m available under its revolving credit facility.
- Total debt principal was $792.4m ($783.5m carrying value), down from $868.7m principal at year-end. Debt included $506.4m of 5.50% senior notes due 2024 and floating-rate term loans. The company had no revolver borrowings.
- Management reported a 79% debt-to-capital ratio, compared with 102% at year-end 2015. Stockholders’ equity was $211.9m, versus a deficit of $17.1m, after the preferred stock issuance.
- Nine-month financing cash flow was $93.5m, including $166.6m net proceeds from preferred stock, partly offset by $66.8m in debt repayments/repurchases and $5.9m in dividends. Cash increased $218.4m during the period.
- Management said cash flows, revolver availability and potential capital-market access should be adequate for anticipated needs. The company was in compliance with debt covenants at quarter-end.
Outlook, risks and notable items
- Management raised 2016 guidance: net income of $66–$72m; pro forma EBITDA of $215–$225m, up from $195–$205m; operating cash flow of $210–$215m; adjusted free cash flow of $125–$130m, up from $100–$105m; and capital expenditures of approximately $85m. EBITDA and adjusted free cash flow are non-GAAP measures.
- Management continued to expect 2016 cellulose specialties prices to decline 6–7% and sales volumes to decline 4–5% versus 2015. Contracted 2017 acetate pricing was expected to be approximately 2% below 2016; negotiations for other 2017 grades remained ongoing. Management cited subdued demand, excess capacity and foreign competitors’ currency-related cost advantages.
- In August, the company issued 1.725m shares of 8.00% mandatory convertible preferred stock for $166.6m net proceeds, intended for growth and diversification, innovation, adjacent businesses and potential Transformation Initiative needs. Conversion is expected August 2019 and will dilute common shareholders; preferred dividends are cumulative if declared. The board declared the first preferred dividend and a $0.07-per-share common dividend after quarter-end.
- The company repurchased $43.6m principal amount of 2024 senior notes for $34.1m in Q1, recognizing an $8.8m gain. It also made $32.7m in term-loan principal repayments during the first nine months.
- Disposed-operations liabilities totaled $152.2m. The company estimated reasonably possible additional exposure of up to approximately $64m, excluding amounts not currently estimable; additional costs could materially affect results or cash flows.
- A Georgia administrative decision reversed the new Jesup wastewater permit and remanded the matter to the state regulator. The company and regulator appealed; the plant continued operating under its existing permit. The company was also cooperating with an SEC request for documents concerning environmental reserves and disclosures; no SEC enforcement action had been brought as of the filing.
- Other cited risks include customer concentration, competitive and pricing pressures, environmental requirements, potential pension contributions, labor relations, currency and financing conditions. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the raised full-year guidance is supported by subsequent results, particularly given the Q3 declines in cellulose specialties price and volume.
- Progress on 2017 pricing negotiations, market demand, production capacity and Transformation Initiative cost savings.
- Use of preferred-stock proceeds, future preferred dividends and the potential conversion-related dilution.
- Resolution and financial implications of the Jesup wastewater permit appeal, SEC inquiry and up-to-$64m estimated additional disposed-operations exposure.
- Debt repayment capacity, liquidity needs, and actual capital spending versus the approximately $85m full-year plan.