Rayonier Advanced Materials Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Rayonier Advanced Materials manufactures high-purity cellulose and, following its November 2017 Tembec acquisition, also operates forest products, pulp and paper businesses.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $2.134 billion | $961 million |
| Gross margin | $344 million; 16.1% | $143 million; 14.9% |
| Operating income | $198 million; 9.3% | $61 million; 6.4% |
| Net income | $128 million | $325 million |
| Diluted EPS | $1.96 | $5.81 |
| Operating cash flow | $247 million | $130 million |
| Capital expenditures | $132 million | $75 million |
| Adjusted EBITDA (non-GAAP) | $364 million | $212 million |
| Adjusted free cash flow (non-GAAP) | $152 million | $65 million |
Sales increased 122%, primarily because Tembec contributed a full year in 2018 versus approximately six weeks in 2017; the comparison is therefore not like-for-like. Net income declined from 2017, which included a $317 million nontaxable bargain-purchase gain. The 2018 result included a further $20 million bargain-purchase gain. Interest expense rose $20 million to $60 million, reflecting a full year of acquisition-related debt and higher LIBOR rates.
Fourth-quarter 2018 sales were $526 million, gross margin $66 million, operating income $29 million and net income $13 million; diluted EPS was $0.18. The filing does not provide a clear comparable standalone fourth-quarter 2017 operating-results table that isolates comparable business scope.
At year-end, cash was $109 million, total debt approximately $1.188 billion and revolving-credit availability $217 million. The debt-to-capital ratio was 63%; the company reported compliance with debt covenants. Operating cash flow improved, but working capital absorbed cash as receivables and inventories increased. Pension plans were underfunded by approximately $174 million; the company expected about $12 million in mandatory contributions and benefit payments in 2019.
Material changes and segment results
- High Purity Cellulose: Sales were $1.192 billion and operating income $112 million, down from $120 million. Excluding acquisition effects, cellulose-specialties pricing fell about 4%; lower prices and higher costs more than offset acquisition contribution and higher volumes. The resin operations were sold in September for approximately $17 million.
- Forest Products: Sales were $356 million and operating income $25 million. U.S. lumber demand and prices weakened late in the year; approximately $26 million of lumber duties were paid.
- Pulp: Sales were $346 million and operating income $95 million, mainly reflecting the Tembec contribution. High-yield pulp prices were supported during much of the year, but markets weakened in December.
- Paper: Sales were $310 million and operating income $31 million, primarily reflecting the acquired operations.
The company repurchased approximately $40 million of common stock during 2018 under a $100 million authorization and paid common dividends of $0.28 per share, plus $14 million in preferred dividends. Year-end common shares outstanding were approximately 49.3 million.
Outlook, risks and contingencies
- For 2019, management expected cellulose-specialties prices and volumes to each decline about 1%, while commodity-product volumes were forecast to rise by more than 75,000 metric tons. Excluding the resin-sale impact, adjusted EBITDA for High Purity Cellulose was expected to be flat, with roughly 55% in the second half.
- Management expected lumber prices to improve as 2019 progressed, but anticipated softwood duties of about 20% on U.S. sales to continue. Pulp conditions were expected to remain supportive over the medium term, though first-quarter prices were expected lower. Paperboard prices were expected stable; newsprint prices were expected to decline.
- Planned 2019 spending included $95–$105 million of maintenance capital expenditures and approximately $28 million for strategic projects. Management expected to direct more cash flow to debt repayment while continuing the common dividend and considering opportunistic repurchases. The stated long-term net-leverage target is 2.5 times EBITDA.
- Key exposures include cyclical commodity pricing, cellulose-specialties demand weakness (particularly acetate), input and wood-fiber costs, customer concentration (top ten customers represented about 35% of 2018 sales), foreign exchange, and international trade measures. U.S. tariffs on Chinese imports and China’s retaliatory tariff on U.S. wood pulp could affect market access. Canadian lumber duties remain subject to legal challenges; repayment is not assured.
- Environmental liabilities for disposed operations totaled approximately $161 million. The company estimated reasonably possible additional exposure of up to about $69 million, while noting actual costs could exceed estimates. The Jesup wastewater-permit dispute remained under review; the company and state regulator had an order allowing operations under current permit conditions.
- A shareholder securities lawsuit and related derivative demand remained pending; the company disputed the allegations. Other ordinary-course claims were not expected by management to materially affect results.
- Approximately 75% of the workforce was unionized; agreements covering about 800 employees had expired while negotiations continued. The company also cited facility-disruption, environmental-compliance, pension-funding, cyber, acquisition-integration and financing risks.
Most important facts for investors to verify
- How much of 2018’s sales and adjusted EBITDA reflects Tembec’s full-year contribution versus organic performance, and whether integration targets and synergies are being achieved.
- Whether cellulose-specialties pricing and volumes stabilize, and whether planned commodity-volume gains and cost-transformation savings materialize.
- The cash, earnings and recovery impact of lumber duties and U.S.–China trade measures, including whether any Canadian duties are ultimately refunded.
- Debt repayment progress, interest costs and covenant headroom, together with the company’s ability to fund capital needs, dividends and environmental obligations.
- The assumptions and potential range of costs behind the $161 million environmental reserve and up-to-$69 million additional reasonably possible exposure.
- The anticipated August 2019 mandatory conversion of the 8% Series A preferred stock, including dilution and the resulting share count.