Business context and reporting period
Rayonier Advanced Materials Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The November 2017 acquisition of Tembec added Forest Products, Pulp and Paper businesses to the existing High Purity Cellulose business. As a result, 2018 revenue and operating income are not directly comparable with 2017, which largely reflects the pre-acquisition company.
Financial and operating performance
Amounts below are in millions of dollars except per-share figures and percentages.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $541.7 | $201.2 | $1,063.7 | $402.6 |
| Gross margin | $101.5 | $34.3 | $181.8 | $71.7 |
| Gross margin percentage | 18.7% | 17.0% | 17.1% | 17.8% |
| Operating income | $66.2 | $14.5 | $112.5 | $41.6 |
| Operating margin | 12.2% | 7.2% | 10.6% | 10.3% |
| Net income attributable to Rayonier Advanced Materials | $53.4 | $4.6 | $77.8 | $14.2 |
| Net income available to common stockholders | $49.9 | $1.1 | $71.0 | $7.6 |
| Basic / diluted EPS | $0.97 / $0.83 | $0.03 / $0.03 | $1.38 / $1.22 | $0.18 / $0.18 |
- Cash flow: First-half cash from operations was $89.2 million, versus $86.7 million. Capital expenditures were $63.6 million versus $32.4 million. Company-defined adjusted free cash flow, a non-GAAP measure, was $48 million versus $56 million; 2018 included about $23 million of strategic capital spending.
- Liquidity and debt: June 30 cash was $79.8 million, down from $96.2 million at year-end. Total debt was $1.224 billion, compared with $1.242 billion; revolver availability was $217 million. Debt-to-capital was 62%, versus 64% at year-end. The company reported compliance with debt covenants.
- Segments: Q2 operating income was $28.1 million for High Purity Cellulose, $16.5 million for Forest Products, $26.2 million for Pulp, and $6.9 million for Paper; Corporate operating loss was $11.5 million. High Purity Cellulose income declined from $31.3 million in Q2 2017, principally due to lower prices and volume, partly offset by the acquisition.
Material changes, outlook and risks
- Sales rose 170% in Q2 and 164% for the first half, while operating income rose 371% and 173%, respectively; management attributed the increases primarily to Tembec. Interest expense increased $6 million in Q2 and $12 million year to date, reflecting higher debt balances and rates associated with acquisition financing.
- Q2 and first-half results include a $14.7 million non-operating increase to the Tembec bargain-purchase gain, including recognition of a $13 million tax reserve release and a $2 million favorable contingent-liability settlement. This is an unusual, non-recurring item; the acquisition valuation remained subject to finalization.
- Management outlook: Cellulose-specialties prices were expected to decline about 4% in 2018, with volumes down about 2%; second-half profitability was expected to improve, with approximately 55% of annual EBITDA expected in the second half. Lumber prices were expected to ease from recent highs, and duties were expected to reduce Forest Products EBITDA by about $30 million in 2018. High-yield pulp prices were expected to remain near historically high levels in the near term before moderating by year-end. Paperboard was expected to remain stable; newsprint profitability was expected to remain stable near term, subject to tariff and demand risks.
- 2018 capital spending was forecast at $100–$110 million for maintenance and about $45 million for strategic projects. The filing provides segment-level commentary but no consolidated earnings or revenue guidance.
- Trade and operating risks: Lumber duties had cost about $8 million in Q2 and $15 million in the first half. Preliminary U.S. duties on certain Canadian newsprint producers totaled 28.69% (6.53% countervailing and 22.16% anti-dumping); the company said it was challenging them. The filing also cites potential further U.S.-China trade measures, commodity cyclicality, customer concentration, raw-material and energy costs, facility disruptions, foreign exchange, and acquisition integration risks.
- Contingencies: Disposed-operation liabilities totaled $160.4 million; reasonably possible additional exposure was estimated at up to about $67 million, excluding amounts not currently estimable. About 820 unionized employees were covered by expired agreements while negotiations continued; a work stoppage could materially affect operations. The filing also discusses a contested Jesup plant permit and a stockholder lawsuit, which the company intended to defend. Standby letters of credit were $37 million and surety bonds $86 million; the company reported a $33 million remaining guarantee related to its 45%-owned LignoTech Florida venture.
Important facts for investors to verify
- How much of reported growth and earnings reflects Tembec versus comparable organic performance, and whether expected synergies and second-half improvement materialize.
- Whether lumber and newsprint duties, and potential additional trade actions, change the stated EBITDA outlook or market access.
- Cash conversion, working-capital needs, capital spending, and debt reduction against the company’s dividend and share-repurchase plans.
- Final Tembec purchase accounting and the recurrence or non-recurrence of the bargain-purchase adjustment.
- Developments in environmental remediation estimates, the Jesup permit matter, labor negotiations, and the stockholder lawsuit.