Rayonier Advanced Materials Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 27, 2021; unaudited. Comparisons are with the three months ended March 28, 2020. Unless noted otherwise, amounts are in U.S. dollars.
Business context and results
Rayonier Advanced Materials produces high-purity cellulose and cellulose specialties, as well as lumber, paperboard, pulp and newsprint. Results improved substantially year over year, led by record-strength lumber prices, higher High Purity Cellulose commodity prices, increased cellulose-specialties volumes and lower operating costs.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $465.1 million | $409.8 million |
| Gross margin | $84.2 million; 18.1% of sales | $10.5 million; 2.6% of sales |
| Operating income (loss) | $54.8 million | $(12.0) million |
| Income (loss) before income taxes | $37.2 million | $(26.5) million |
| Net income (loss) | $(27.0) million | $(24.1) million |
| Diluted EPS | $(0.43) | $(0.38) |
| Cash provided by (used for) operations | $38.2 million | $(12.7) million |
| Capital expenditures, net | $19.5 million | $12.6 million |
| EBITDA (non-GAAP) | $91 million | $27 million |
| Adjusted free cash flow (non-GAAP) | $21 million | $(23) million |
Despite positive pretax income, the company reported a net loss after recording $63.9 million of income tax expense, including $61.7 million of deferred tax expense. The effective tax rate was an expense of 172%, primarily reflecting GILTI, U.S. disallowed interest deductions and differences in foreign tax rates. Management expects minimal cash taxes in 2021 and 2022 from 2021 earnings.
Segments and material changes
- High Purity Cellulose: Sales were $249.8 million, essentially flat; operating income improved to $6.4 million from a $4.9 million loss. Cellulose-specialties volumes rose 6%, while commodity-product volumes fell 23%; higher commodity prices supported results.
- Forest Products: Sales rose to $146.8 million from $82.3 million and operating income reached $60.8 million from a $1.3 million loss. Lumber prices increased 118%; volumes were slightly lower.
- Paperboard: Sales declined to $47.8 million from $50.5 million, while operating income increased to $5.8 million from $4.7 million, mainly on lower operating costs.
- Pulp & Newsprint: Sales fell to $39.0 million from $46.7 million; operating loss remained about $5.9 million. Newsprint volumes declined amid weak pandemic-related demand and operation of only one of two newsprint lines.
- Corporate: Operating loss increased to $12.2 million from $4.6 million, primarily due to unfavorable foreign-exchange effects and a higher reserve associated with the IESO settlement.
Financial position and liquidity
- At March 27, cash was $106.8 million, total debt was approximately $1.083 billion, and stockholders’ equity was $658.8 million. Debt to total capitalization was 62%, versus 61% at year-end 2020.
- ABL availability was $142 million after letters of credit; a French factoring line provided an additional $19 million of availability. The company reported compliance with financial and customary covenants.
- Current assets were $699.4 million and current liabilities were $309.8 million. Inventory increased to $295.5 million from $233.5 million at year-end, contributing to seasonal working-capital use.
- Operating cash flow improved by $51 million year over year, although inventory growth used $63.1 million of cash. Net investing cash outflow was $20.5 million; financing cash outflow was $3.5 million.
- Most debt is fixed-rate; reported variable-rate debt was $4 million. Scheduled debt principal payments are concentrated in 2024 and thereafter, including the $500 million senior notes due 2024 and $500 million secured notes due 2026.
Outlook, developments and risks
- Asset sale: On April 12, 2021, the company announced a sale of its Ontario and Quebec lumber and newsprint assets to GreenFirst for approximately $214 million, including an assumed $74 million of inventory subject to adjustment. Payment is 85% cash and the remainder in GreenFirst shares; an additional CDN$8 million credit note is tied to future wood-chip purchases. Closing was expected in the second half of 2021, not before July 31, subject to conditions. The assets had a March 27 carrying value of $238 million, including $107 million of inventory. The company estimated a cash tax impact below $10 million in 2022, while noting tax effects remained under evaluation. These businesses generated approximately $439 million revenue and $55 million operating income in 2020. Proceeds are intended to support investment in high-purity cellulose and the BioFuture.
- Operating outlook: Management expected High Purity Cellulose commodity prices to rise further in Q2, with full-year segment volumes broadly stable and a more favorable specialty mix. Lumber prices were exceptionally strong; paperboard prices had risen 5% from Q4 2020 and were expected to rise further. Pulp and newsprint prices also increased, with further near-term increases anticipated. Input costs, including energy and commodity chemicals, rose rapidly and were difficult to predict. No quantified full-year earnings guidance is provided in the supplied filing text.
- COVID-19 and operations: Demand and pricing had begun recovering, but management warned that conditions remained vulnerable to renewed pandemic effects. Shipping constraints affected High Purity Cellulose and other segment volumes; the Jesup annual maintenance outage was underway in Q2.
- IESO settlement: On April 19, 2021, the company finalized settlement of all Kapuskasing electricity-market investigations for CAD$12 million over five years, including CAD$4.5 million upfront. A further CAD$10.4 million is conditionally payable for an uncured breach or default; it declines as scheduled payments are made and is extinguished if the settlement terms are met.
- Contingencies and market exposures: The company estimated up to approximately $78 million of reasonably possible additional environmental liabilities beyond recorded reserves; some exposures were not estimable. A $21 million long-term receivable for revised Canadian softwood-lumber duty rates remains subject to legal challenges and further reviews; the company had paid approximately $98 million in duties to date. Other risks include cyclical pricing and demand, raw-material and energy costs, foreign exchange, trade duties, customer concentration, facility disruption, pension funding, leverage and COVID-19 impacts.
- The quarterly dividend had been suspended since 2019. The company did not expect to use the remaining approximately $60 million share-buyback authorization in the near future; Q1 share purchases were for employee tax withholding, not the public buyback program.
Important facts for investors to verify
- Completion terms and final proceeds from the GreenFirst asset sale, including inventory adjustments, stock consideration, the credit note and tax consequences.
- Whether lumber prices, volumes and unusually high Forest Products margins persist, and the implications of divesting businesses that generated $439 million of 2020 revenue.
- The drivers and cash implications of the large Q1 tax expense, including deferred tax balances, GILTI and expected tax receivables.
- Working-capital and capital-spending needs, debt maturities, covenant headroom and continued access to credit facilities.
- Progress and compliance under the IESO settlement, resolution of lumber-duty claims, and the adequacy of environmental reserves against potential additional exposure.