Business context and reporting period
Rayonier Advanced Materials Inc. filed this unaudited Form 10-Q for the three months ended March 28, 2015. The company manufactures high-value cellulose products, including cellulose specialties and commodity products. The prior-year comparison includes the performance fibers business and allocated parent-company costs before the June 2014 separation; it may not reflect the costs of operating as a standalone public company.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $221.3 million | $243.5 million |
| Gross margin | $36.9 million; 16.7% | $54.8 million; 22.2% |
| Operating income | $23.9 million; 10.9% margin | $43.4 million; 17.7% margin |
| Net income | $10.5 million; $0.25 per diluted share | $30.9 million; $0.73 per diluted share |
| Operating cash flow | $56.2 million | $54.8 million |
| Capital expenditures | $24.5 million | $21.7 million |
| Adjusted free cash flow | $32 million | $33 million |
Cash was $77.6 million at quarter-end, versus $66.0 million at December 31, 2014. Total debt was $924.9 million, down from $944.8 million after $20 million of term-loan repayments. The company reported $222 million available under its revolving credit facility, net of standby letters of credit. Its debt-to-capital ratio was 106%, and stockholders’ deficit was $52.6 million. Management said the company complied with all debt covenants.
Cellulose specialties sales were $179 million, down from $206 million; commodity products and other sales rose to $42 million from $37 million. Cellulose specialties price fell to $1,667 per metric ton from $1,823, and volume declined to 107,000 metric tons from 113,000. Commodity volume rose to 58,000 metric tons from 50,000, while price was broadly unchanged at $686 per metric ton.
Material changes versus the prior comparable period
- Sales declined $22 million, or about 9%, primarily from lower cellulose specialties prices following annual negotiations and lower shipment volumes due to sales timing.
- Operating income fell approximately $19 million. Lower cellulose specialties prices were the main pressure; higher commodity volumes and improved commodity profitability partly offset lower cellulose specialties volume.
- Interest expense was $9.3 million, versus none in Q1 2014, reflecting debt issued in 2014. Selling and general expenses increased to $12.3 million from $8.2 million, partly due to standalone public-company costs and higher professional fees.
- Q1 2014 included $2.8 million of one-time separation and legal costs; none were reported in Q1 2015. EBITDA was $46 million versus $64 million, and company-defined pro forma EBITDA was $46 million versus $67 million.
- Operating cash flow was slightly higher, but adjusted free cash flow slipped to $32 million from $33 million as higher capital spending offset working-capital improvement.
Guidance, outlook, risks and contingencies
Management raised 2015 EBITDA guidance to $210–$225 million, citing progress on cost reductions and favorable chemical and energy input costs. It expects run-rate savings to approach $40 million, with a significant portion captured in 2015. Capital expenditures are forecast at $75–$80 million, including $15–$20 million for boiler MACT requirements; the balance is for maintenance and high-return cost-reduction projects. The expected 2015 effective tax rate is 33%–34%.
Risk exposures include variable-rate debt of approximately $367 million; management estimated that a one-percentage-point rate change would affect annual interest expense by about $4 million. The company had no derivatives or fuel and natural-gas forward contracts outstanding at quarter-end. Cellulose specialties contracts generally extend through 2015–2017, with pricing set in the preceding fourth quarter.
Liabilities for disposed operations totaled $155.7 million. The company estimated reasonably possible additional exposure of up to approximately $64.1 million, while noting some potential liabilities could not be estimated and that reserves may prove insufficient. Standby letters of credit and surety bonds totaled $83.5 million, primarily supporting environmental and other financial-assurance obligations.
In the Altamaha Riverkeeper case concerning the Jesup plant’s permitted effluent discharge, the court granted the company’s summary-judgment motion on the Clean Water Act and Georgia Water Quality Control Act claims on March 31, 2015; state nuisance and negligence claims were dismissed without prejudice for lack of jurisdiction. The plaintiff appealed. Management said other ordinary-course legal claims were not expected to have a material adverse effect. No material changes to the risk factors in the 2014 Form 10-K were reported.
Important facts for investors to verify
- Whether the lower cellulose specialties pricing and sales volumes persist, and how contract pricing resets affect subsequent quarters.
- Progress toward the nearly $40 million run-rate savings target and delivery of the $210–$225 million 2015 EBITDA guidance.
- Capital spending, debt repayment, and liquidity relative to the $75–$80 million spending plan and $222 million revolver availability.
- The adequacy of the $155.7 million disposed-operations liability reserve, including the estimated additional exposure of up to $64.1 million.
- The status and potential consequences of the Altamaha Riverkeeper appeal and environmental financial-assurance obligations.