Rayonier Advanced Materials Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 25, 2017; comparative period ended March 26, 2016. The company manufactures high-value cellulose products, including cellulose specialties and commodity products, at facilities in Georgia and Florida. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $201.4 million | $217.7 million |
| Gross margin | $36.4 million; 17.9% reported | $40.2 million; 18.3% |
| Operating income | $26.0 million; 12.9% margin | $31.9 million; 14.7% margin |
| Net income | $9.6 million | $20.9 million |
| Net income available to common stockholders | $6.5 million; diluted EPS $0.15 | $20.9 million; diluted EPS $0.49 |
| Cash provided by operations | $37.7 million | $74.0 million |
| Capital expenditures | $13.5 million | $20.4 million |
| Adjusted free cash flow (non-GAAP) | $24 million | $54 million |
At March 25, 2017, cash was $345.1 million and total debt was $781.5 million, including $10.3 million of current maturities. Net debt was approximately $436.4 million. The company also had $229 million available under its revolving credit facility. Debt-to-capital was 78%; the company reported compliance with all debt covenants. Common dividends declared were $0.07 per share.
Changes versus the prior period
- Sales declined about 8%, mainly due to lower cellulose specialties prices and lower commodity product volumes. Cellulose specialties revenue was $157 million versus $165 million; commodity products and other revenue was $44 million versus $53 million.
- Cellulose specialties average selling price fell to $1,473 per metric ton from $1,555, while volume was approximately flat at 107,000 versus 106,000 metric tons. Commodity volume fell to 59,000 from 75,000 metric tons; its average price increased to $718 from $680.
- Operating income decreased $6 million. Lower prices and commodity volume were partly offset by lower production costs from the cost transformation initiative. SG&A rose, primarily due to higher stock-based compensation.
- Operating cash flow was down $36 million. Management attributed the decline primarily to lower earnings and the prior-year benefit from working-capital movements; lower regulatory capital spending partly offset the decrease in adjusted free cash flow.
- Q1 2016 included an $8.8 million gain on debt extinguishment; Q1 2017 did not. Q1 2017 common earnings also reflect $3.2 million of mandatory convertible preferred stock dividends.
Outlook, risks and unusual items
- Management expects 2017 cellulose specialties prices to decline 3%–4% and sales volumes to be relatively flat versus 2016; it expects commodity volumes to finish the year above 2016.
- The company now expects to achieve the full $30 million of cost improvements and said it expects full-year results at the high end of its initial guidance: net income of $41–$48 million and EBITDA of $190–$200 million. Cash-flow guidance was raised by $10 million to operating cash flow of $150–$160 million and adjusted free cash flow of $90–$100 million. Capital expenditures are expected to be about $60 million, including the LignoTech Florida project.
- The Q1 effective tax rate was 45.3%, versus 34.9% a year earlier. A $2.3 million tax expense related to vested awards increased the rate by 13.1 percentage points. The company adopted new stock-compensation guidance in 2017.
- Disposed-operation liabilities totaled $152.8 million. The company estimated reasonably possible additional exposure of up to approximately $64 million, excluding amounts that are not currently estimable; additional costs could materially affect results, financial position or cash flows.
- The Jesup wastewater permit was affirmed by a Georgia court in March 2017; an environmental group subsequently sought discretionary review by the Georgia Court of Appeals, with no ruling reported as of the filing. The company is cooperating with an SEC staff inquiry concerning documents and disclosures related to former operations and environmental reserves; no enforcement action had been brought as of the filing.
- Other cited risks include pricing and demand pressures, customer concentration, foreign-currency effects, environmental regulation and costs, pension funding, labor relations, and debt and financing obligations. Management reported no derivatives outstanding at quarter-end; a 1-percentage-point rate change would affect annual interest expense by about $3 million on variable-rate debt.
Important facts for investors to verify
- Whether pricing, commodity volumes and cost savings develop in line with management’s 2017 assumptions and guidance.
- The durability of operating cash flow and whether the projected $90–$100 million of adjusted free cash flow is achieved; this is a non-GAAP measure.
- The effect of mandatory convertible preferred stock, including its $172.5 million liquidation preference and dividends, on future common-share earnings and dilution.
- Potential changes in disposed-site liabilities, the Jesup permit appeal and the SEC inquiry, including any new estimates or developments.
- Debt repayment, interest-rate exposure, liquidity availability and continued compliance with debt covenants.