Rayonier Advanced Materials Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed March 2, 2020. The company manufactures high-purity cellulose products and forest, paperboard, pulp and newsprint products. 2019 results reflect the Matane mill as discontinued operations following its November sale; continuing-operations figures are used below unless noted.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $1.775 billion | $1.957 billion |
| Gross margin | $54 million; 3.1% | $291 million; 14.9% |
| Operating income (loss) | $(83) million; (4.7)% margin | $148 million; 7.6% margin |
| Income (loss) from continuing operations | $(119) million | $99 million |
| Net income (loss) | $(22) million | $128 million |
| Diluted EPS | $(0.57) | $1.96 |
| Operating cash flow | $42 million total; $22 million from continuing operations | $247 million total; $222 million from continuing operations |
| Capital expenditures | $103 million | $129 million |
| Adjusted free cash flow | $(53) million | $130 million |
| Adjusted EBITDA | $76 million | $311 million |
| Total debt at year-end | $1.082 billion | $1.188 billion |
| Cash at year-end | $64 million | $109 million |
| Revolver availability | $87 million | $217 million |
Debt to total capitalization was 61%, versus 63% in 2018. The company reported $499 million of variable-rate debt; a one-percentage-point rate change would affect annual interest expense by approximately $5 million. Adjusted EBITDA and adjusted free cash flow are non-GAAP measures.
Material changes and operating drivers
- Sales fell 9% and operating income declined by $231 million, primarily due to lower prices across product lines and higher costs. Commodity markets were weak; the company also cited reliability issues and market-related downtime at certain mills.
- High Purity Cellulose sales declined 5% to $1.127 billion and operating income fell to $7 million from $112 million. Cellulose-specialties price and volume were lower; commodity-product volume rose but prices fell.
- Forest Products sales decreased 16% to $299 million and shifted to a $31 million operating loss from $25 million of income, principally reflecting a 21% decline in lumber pricing.
- Paperboard sales were $200 million and operating income remained approximately $4 million. Pulp & Newsprint sales fell 24% to $215 million and operating income declined to $2 million from $72 million, mainly on lower prices and volumes.
- The Matane mill was sold for $175 million gross proceeds, approximately $158 million net proceeds. The company used $100 million to repay secured-facility borrowings and recorded an $84 million after-tax disposal gain. Including discontinued operations, 2019 net income was $(22) million.
- Common shares increased after mandatory convertible preferred stock converted in August 2019, issuing approximately 13.4 million shares. The quarterly common dividend was suspended beginning in the third quarter; 2019 common dividends declared were $0.14 per share.
Outlook, risks and unusual items
- Management said 2020 priorities were cost control and cash preservation to maintain covenant compliance. It targeted $60–$70 million of EBITDA and fixed-cost benefits from operating efficiencies, corporate cost reductions, lower capital spending and working-capital improvements. Further measures could include asset sales, workforce reductions, curtailments or permanent closures.
- For 2020, management expected cellulose-specialties prices to rise about 2% contractually, with lower specialty volumes; commodity prices were expected to improve progressively but average below 2019. High Purity Cellulose EBITDA was expected to increase modestly, subject to commodity pricing and China-related uncertainty.
- Management expected improved Forest Products results, citing stronger housing demand and a preliminary U.S. duty determination that would reduce the company’s softwood lumber duties from 20.2% to 8.2% beginning in August, subject to a final determination. Paperboard prices and volumes were expected to be broadly stable; Pulp & Newsprint results were expected to be flat to slightly higher.
- The September 2019 credit amendment relaxed leverage and interest-coverage tests through 2021, but increased borrowing margins by up to 1.25 percentage points, added collateral and required minimum revolver availability. The company was compliant at year-end, but warned future compliance was not assured. Covenant relief expires December 31, 2021.
- Environmental liabilities were $171 million at year-end; the company estimated reasonably possible additional exposure of up to approximately $80 million. The Port Angeles remediation estimate increased substantially during 2019.
- Other material risks include cyclical pricing and demand, customer concentration (top ten customers represented about 33% of 2019 sales), wood-fiber and energy costs, trade restrictions, foreign exchange, facility reliability, pension funding and substantial debt. The company had paid approximately $59 million in Canadian lumber duties through year-end 2019.
- As of the filing, management expected China to eliminate tariffs on certain dissolving and fluff pulp imports by late Q1 or early Q2 2020, based on a then-recent notice. Coronavirus-related impacts were uncertain; high-yield pulp orders had slowed, while cellulose-specialties orders and collections had not yet shown a slowdown.
- Unusual 2019 items included a $9 million pension settlement loss, $4 million of credit-amendment costs, and a $4.5 million insurance settlement gain. The 2019 fourth quarter included the Matane disposal gain; excluding it, continuing operations reported a quarterly loss.
Most important facts for investors to verify
- Whether 2020 cost, working-capital and capital-spending actions deliver the targeted $60–$70 million benefit and sufficient liquidity.
- Headroom under amended debt covenants, the required revolver-availability reserve, debt maturities and the effect of higher borrowing margins.
- Actual market-price and volume trends in cellulose specialties, commodity pulp, lumber, paperboard and newsprint, including China demand and tariff changes.
- Final U.S. lumber-duty determination and the timing or likelihood of recovering duties already paid.
- Environmental remediation costs versus the $171 million recorded liability and potential additional exposure of up to approximately $80 million.
- The extent to which reported earnings and cash generation depend on the Matane gain, non-GAAP adjustments and continued access to credit.