Rayonier Advanced Materials Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 25, 2022. Rayonier Advanced Materials produces high-purity cellulose, paperboard and high-yield pulp. Lumber and newsprint operations, sold in August 2021, are presented as discontinued operations; comparisons with 2021 are therefore affected by that sale.
Financial results
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $399.2 | $341.0 | $750.9 | $659.7 |
| Gross margin | $26.7 (6.7%) | $22.3 (6.5%) | $32.6 (4.3%) | $42.7 (6.5%) |
| Operating income (loss) | $(2.9) | $1.4 | $(18.7) | $0.9 |
| Continuing-operations income (loss) | $(24.9) | $8.3 | $(49.3) | $(7.9) |
| Net income (loss), including discontinued operations | $(23.3) | $122.2 | $(48.1) | $95.2 |
| Diluted EPS | $(0.36) | $1.89 | $(0.75) | $1.50 |
| Adjusted EBITDA, continuing operations | $34 | $34 | $54 | $66 |
- Revenue and segment trends: Sales rose 17% in Q2 and 14% in the first half, mainly from higher prices across segments. Q2 High Purity Cellulose sales were $302.5 million, Paperboard $63.2 million, and High-Yield Pulp $40.3 million. Higher input costs and supply-chain constraints offset much of the pricing benefit.
- Cash flow: First-half continuing-operations cash flow was $(36.3) million, versus $45.8 million provided in the prior-year period. Capital expenditures were $86.7 million; adjusted free cash flow, a company-defined non-GAAP measure, was $(107) million. Management attributed weaker cash flow to working-capital changes, planned maintenance outages and higher capital spending.
- Liquidity and debt: Cash and equivalents were $147.7 million at June 25, down from $253.3 million at year-end 2021. Total debt was $905.5 million, compared with $928.7 million; the debt-to-capital ratio was 54%. The company reported $108 million available under its ABL facility after letters of credit, plus $18 million under a French factoring line, and said it was in compliance with covenants. The next significant maturity is the $349.2 million of 5.5% notes due in June 2024; the company repurchased and retired $20 million of those notes in May.
Material changes, outlook and risks
- Operating results weakened despite higher sales: first-half operating income swung from $0.9 million to a $18.7 million loss. Management cited inflation in chemicals, wood fiber and energy, supply-chain costs, lower production and constrained volumes. Corporate costs also rose, including severance and variable stock-based compensation.
- Management expected 2022 adjusted EBITDA to exceed $160 million, subject to ongoing supply-chain constraints, and targeted year-end net debt of $725 million. It expected to refinance the June 2024 notes when market conditions were appropriate.
- Management expected High Purity Cellulose sales prices to remain elevated and volumes to increase in Q3 after planned maintenance outages, but noted supply-chain dependence. Paperboard adjusted EBITDA was expected to remain stable; High-Yield Pulp adjusted EBITDA was expected to improve. These are forward-looking expectations, not guarantees.
- A $146-per-metric-ton surcharge on cellulose-specialties shipments took effect April 1, 2022 in response to higher costs. A bioethanol project in Tartas, France, expected to operate in mid-2023, was behind schedule due to permitting delays.
- The company sold its GreenFirst shares on May 2 for $43 million. A purchase-price protection clause provides potential participation in share-price appreciation under specified circumstances over the following 18 months. The final closing inventory valuation adjustment with GreenFirst remained unresolved.
- Environmental liabilities totaled $171.0 million. The company estimated reasonably possible additional exposure of up to approximately $85 million, while noting that some potential liabilities could not be estimated and actual costs could exceed the estimate.
- Other exposures include a $22 million long-term receivable for Canadian softwood-lumber duties, subject to ongoing legal and administrative review; $38 million of standby letters of credit; $89 million of surety bonds; and a $32 million guarantee related to its share of LignoTech Florida financing. Approximately $20 million of deferred revenue related to Canadian wage-subsidy claims remained subject to mandatory audit and possible repayment.
- Additional risks include geopolitical disruption from the Russia-Ukraine conflict, particularly European energy, raw-material and transportation costs; customer concentration (the ten largest customers represented about 40% of 2021 revenue); commodity-price, currency, facility-disruption, labor, pension, environmental and refinancing risks. The company adopted a shareholder rights plan in March 2022, expiring March 20, 2023.
Key facts for investors to verify
- Whether Q3 production recovery and pricing are sufficient to offset inflation and supply-chain costs, and whether the $160 million adjusted EBITDA outlook remains achievable.
- Cash generation, working-capital needs and capital spending, given negative first-half operating cash flow and adjusted free cash flow.
- Progress toward the $725 million year-end net-debt target and refinancing of the 2024 notes, including market access and terms.
- Resolution of the GreenFirst inventory adjustment and any value realized under the share-sale price-protection clause.
- Environmental exposure, lumber-duty recovery and wage-subsidy audit outcomes, including potential cash and earnings effects.
- The basis and comparability of reported net income: the prior-year figures include substantial discontinued-operations income, while current results principally reflect continuing operations.