Rayonier Advanced Materials Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 25, 2021. Unless noted, financial amounts are in U.S. dollars; statements present lumber and newsprint as discontinued operations following their August 28, 2021 sale.
Business context and results
The company’s continuing businesses are High Purity Cellulose, Paperboard and High-Yield Pulp. It sold its Ontario and Quebec lumber and newsprint operations to GreenFirst for stated consideration of $232 million, comprising $193 million cash, GreenFirst shares valued at $42 million and a credit note valued at approximately $5 million. Purchase-price adjustments remained preliminary.
| Metric | Q3 2021 | Q3 2020 | First nine months 2021 | First nine months 2020 |
|---|---|---|---|---|
| Net sales, continuing operations | $374.0 million | $323.5 million | $1,033.7 million | $972.1 million |
| Gross margin | $19.3 million | $21.6 million | $62.0 million | $52.4 million |
| Operating income (loss) | $2.8 million | ($1.1 million) | $3.7 million | ($13.4 million) |
| Continuing-operations income (loss), after tax | ($13.4 million) | $12.6 million | ($21.3 million) | ($8.9 million) |
| Net income (loss), including discontinued operations | ($4.8 million) | $28.9 million | $90.4 million | ($8.1 million) |
| Basic earnings (loss) per share | ($0.07) | $0.46 | $1.43 | ($0.13) |
Q3 sales rose 16%, but gross margin fell as higher input and maintenance costs, shipping constraints and equipment reliability issues offset stronger prices. Nine-month sales rose 6% and operating results improved by $17 million year over year, led by stronger cellulose prices and volumes and improved High-Yield Pulp results. Q3 included an $8.0 million unrealized loss on GreenFirst shares and a $2.3 million gain on debt extinguishment. Nine-month net income included $111.8 million of discontinued-operations income, including the sale gain; it should not be read as continuing-business earnings.
Cash flow, debt and liquidity
- Cash and cash equivalents were $279.2 million at September 25, versus $93.7 million at December 31, 2020. Total debt was $946.5 million, down from $1,083.9 million; debt to capitalization declined to 55% from 61%.
- Nine-month cash from operations was $206.9 million in total, including $44.7 million from continuing operations and $162.2 million from discontinued operations. Continuing-operations cash flow was down from $56.6 million a year earlier.
- Net capital expenditures were $61.0 million; continuing-operations investing cash outflow was $65.2 million, including a $4.1 million investment in Anomera. Adjusted free cash flow, a company-defined non-GAAP measure, was negative $6 million versus positive $32 million a year earlier.
- Net availability under the ABL facility was $76 million after approximately $40 million of standby letters of credit; a French factoring line had a further $23 million available. The company reported covenant compliance and said it expects cash flow, facility availability and potential capital-market access to meet anticipated needs.
- During Q3, the company repurchased approximately $127 million face value of 5.50% notes due 2024 for about $124 million cash. On October 7, after quarter-end, it redeemed $25 million of 7.625% secured notes due 2026 at 103% of par.
Outlook, management commentary and risks
- Management reported strong cellulose-specialties demand and expects 2022 pricing increases, while forecasting full-year High Purity Cellulose segment volumes to decline, chiefly due to logistics constraints, planned outages and a Jesup kiln disruption. It expected Q4 and 2022 volumes to remain strong, subject to shipping constraints.
- Energy, wood, chemicals and logistics costs had risen significantly and were expected to increase further in Q4 and into 2022. Paperboard prices were expected to rise further on demand and constrained industry supply; High-Yield Pulp prices had recently declined, with lower realized prices expected for the rest of 2021. The filing provides no quantified company-wide earnings guidance.
- The company plans 2022 reliability investment and is evaluating strategic growth projects. It expects the operational Tartas green-energy project to generate $10 million in annualized benefits; this is management’s estimate, not a reported realized result.
- COVID-19 effects remained uncertain. Other key risks include cyclical product prices and demand, inflation and raw-material availability, transport and labor constraints, foreign exchange, customer concentration, facility disruption, debt and pension obligations, and environmental regulation. Approximately half of cellulose-specialties contracted volumes were under multi-year contracts expiring between 2021 and 2023.
- Environmental liabilities totaled $170.2 million; the company estimated reasonably possible additional exposure of up to approximately $78 million, with some exposures not currently estimable. The IESO settlement requires fixed payments totaling CAD $12 million over five years; an additional suspended CAD $10.4 million could become payable following specified uncured breaches or defaults.
- The company retained rights and obligations for Canadian softwood-lumber duties incurred through the sale closing and reported a $20 million long-term receivable. Collection timing depends on ongoing legal and administrative processes. GreenFirst shares received as sale consideration were subject to a minimum six-month holding restriction and fair-value changes.
Important facts for investors to verify
- Separate continuing results and cash generation from discontinued-operations earnings and sale proceeds when assessing recurring performance.
- Track the final GreenFirst purchase-price adjustments, realizable value of the restricted shares and credit note, and any retained lumber-duty recoveries.
- Monitor whether pricing increases and cost inflation, shipping capacity, planned maintenance and the Jesup kiln disruption affect volumes, margins and cash flow as management anticipated.
- Review debt maturities, interest costs, facility availability and the company’s capacity to fund capital spending and pension obligations.
- Assess environmental exposure, IESO settlement compliance and other contingent obligations, including letters of credit, surety bonds and the LignoTech Florida guarantee.