Rayonier Advanced Materials Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparable period ended March 25, 2017. The 2017 acquisition of Tembec materially expanded the business, so year-over-year comparisons include acquired Forest Products, Pulp and Paper operations and are not fully like-for-like.
Financial performance
| Metric | Q1 2018 | Comparable period |
|---|---|---|
| Net sales | $522 million | $201 million |
| Gross margin | $80 million; 15.4% | $37 million; 18.6% |
| Operating income | $46 million; 8.9% margin | $27 million; 13.4% margin |
| Net income | $24 million | $10 million |
| Net income available to common stockholders | $21 million | $6 million |
| Basic / diluted EPS | $0.41 / $0.38 | $0.15 / $0.15 |
| Cash from operations | $33 million | $38 million |
| Capital expenditures | $29 million | $14 million |
| Adjusted free cash flow (non-GAAP) | $13 million | $24 million |
- Sales increased about 160%, and operating income rose about 70%, primarily due to Tembec. Gross and operating margins declined, reflecting the acquired businesses’ product mix and weaker High Purity Cellulose results.
- High Purity Cellulose sales were $282 million and operating income was $21 million, versus $201 million and $34 million. Excluding Tembec, cellulose specialties pricing was down about 5%; lower volumes reflected maintenance timing and production issues at Jesup and Tartas. Unusually high energy costs also weighed on results.
- Acquired segments reported operating income of $10 million in Forest Products, $23 million in Pulp and $3 million in Paper. Corporate operating loss was $11 million, versus $7 million.
- Interest expense rose to $15 million from $9 million, primarily due to higher debt and rates associated with acquisition financing. The effective tax rate fell to 28.7% from 45.3%, mainly following the U.S. Tax Act rate reduction.
Financial position and liquidity
- At March 31, cash was $89 million; total debt was $1.237 billion, including $1.226 billion of long-term debt. Revolving-credit availability was $217 million. Debt-to-capital was 63%, compared with 64% at year-end 2017.
- Operating cash flow was below the prior-year period as higher earnings were more than offset by working-capital needs, including seasonal wood inventory purchases. Investing outflow was $29 million; financing outflow was $12 million. Cash declined by $7 million from year-end to $89 million.
- The company reported compliance with debt covenants. It said cash flows, revolver availability and potential capital-markets access should be adequate for anticipated needs.
- Common dividends declared were $0.07 per share. The board authorized a $100 million share repurchase program, but the company did not expect to use it immediately. Quarterly share repurchases reported were for employee tax withholding, not the public program.
Outlook, risks and notable items
- High Purity Cellulose: 2018 cellulose specialties prices expected to decline 4–5%, with flat to slightly lower volumes. Management expected profitability to improve through the rest of the year as production issues were resolved and energy prices normalized.
- Forest Products: Lumber prices expected near Q1 levels in Q2. Canadian lumber duties were expected to affect about half of segment sales and reduce 2018 EBITDA by approximately $30 million, while not reducing sales volumes.
- Pulp: High-yield pulp prices were historically high; management expected strong Q2 demand and prices, moderating in the second half.
- Paper: Paperboard markets expected stable to slightly improved, with high pulp prices increasing input costs. Newsprint prices benefited from reduced capacity and duties, but profitability was expected to remain flat due to duties.
- Planned 2018 spending: approximately $100–110 million in maintenance capital and $45 million in strategic projects. Strategic projects were expected to have average payback of less than two years.
- Disposed-operation liabilities totaled $163 million. The company estimated reasonably possible additional exposure of up to approximately $67 million, excluding amounts not currently estimable; additional costs could materially affect results or cash flows.
- Collective bargaining agreements covering about 650 unionized employees had expired; negotiations continued while employees worked under the expired terms. A work stoppage could materially affect the business.
- Other contingencies include $64 million of standby letters of credit, $85 million of surety bonds and a $31 million remaining guarantee associated with the LignoTech Florida facility under construction. Management stated ordinary-course legal claims were not expected to have a material adverse effect.
- Variable-rate debt principal was approximately $635 million; a one-percentage-point rate change was estimated to affect annual interest expense and payments by about $6 million. The filing also identifies cyclical pricing and demand, customer concentration, wood-fiber and energy costs, facility disruption, currency, trade duties, environmental obligations, pensions and acquisition integration as risks.
Important facts for investors to verify
- How much of reported growth and earnings reflects Tembec, and how acquired-segment performance develops on a comparable basis.
- Whether High Purity Cellulose production normalizes and the forecast improvement offsets expected cellulose specialties price declines.
- The realized impact of lumber and newsprint duties, including the estimated $30 million 2018 Forest Products EBITDA effect.
- Working-capital trends, capital spending, adjusted free cash flow and the company’s ability to manage its debt and interest-rate exposure.
- Changes in disposed-operation remediation exposure, labor negotiations and the LignoTech Florida project guarantee.