Rayonier Advanced Materials Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company manufactures high-purity cellulose products and, following its November 17, 2017 acquisition of Tembec, lumber, pulp and paper. Tembec is included in reported results only from the acquisition date, so year-over-year comparisons are not fully like-for-like.
Financial results and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $961.3 million | $868.7 million |
| Gross margin | $139.2 million; 14.5% | $181.3 million; 20.9% |
| Operating income | $57.0 million; 5.9% | $137.6 million; 15.9% |
| Net income | $325.0 million | $73.3 million |
| Diluted EPS | $5.81 | $1.55 |
| Cash from operations | $129.8 million | $232.2 million |
| Capital expenditures | $75.0 million | $88.7 million |
| Adjusted EBITDA (non-GAAP) | $212 million | $226 million |
| Adjusted free cash flow (non-GAAP) | $91 million | $147 million |
Reported net income includes a $316.6 million non-taxable bargain-purchase gain and a $7.8 million derivative gain. Other acquisition-related items included $34 million of costs and a $23 million inventory fair-value write-up. Adjusted EBITDA, which excludes specified items including the bargain-purchase and derivative gains, declined from 2016. Fourth-quarter sales were $349.0 million, operating income was $0.04 million and net income was $295.1 million, primarily reflecting the acquisition gain.
Cash and cash equivalents were $96.2 million at year-end, versus $326.7 million in 2016. Total debt was approximately $1.242 billion, up from $783 million; revolving-credit availability was $216 million. Debt to total capitalization was 64%, compared with 79%. The company reported compliance with debt covenants. It paid common dividends of $0.28 per share and approximately $13.8 million in preferred dividends during 2017.
Sales rose 11% including $139 million of post-acquisition Tembec sales; excluding these sales, revenue fell 5%. Lower cellulose-specialties prices and volumes, hurricane impacts and operational disruption weighed on the legacy business. Cellulose-specialties average price fell to $1,460 per metric ton from $1,525, while volume declined to 453,000 metric tons from 456,000. Operating income declined $80.6 million, reflecting lower prices and volumes, higher costs and acquisition-related SG&A.
Acquisition and business changes
The Tembec acquisition expanded the company into Canadian forest products and pulp and paper and added cellulose-specialties capacity and markets. Consideration was approximately $390.4 million, including $249.2 million cash and 8.4 million shares. Preliminary purchase accounting recorded acquired net assets above consideration and a $316.6 million bargain-purchase gain, primarily related to deferred tax assets. Valuations remained preliminary at year-end. Unaudited pro forma results, assuming the acquisition closed at the start of each year, show 2017 revenue of $2.122 billion and net income of $111 million, versus $2.044 billion and $99 million in 2016; these figures are not a forecast or a representation of actual results.
The company’s three operating segments are High Purity Cellulose, Forest Products and Pulp & Paper. Reported 2017 segment sales were $866.9 million, $33.9 million and $65.4 million, respectively. High Purity Cellulose operating income was $116.6 million; Forest Products recorded a small operating loss and Pulp & Paper operating income was $3.1 million. Segment figures include only the post-acquisition period for the acquired businesses.
Outlook, risks and contingencies
- 2018 outlook: Cellulose-specialties prices were expected to decline 4%–5%, mainly due to acetate pricing. Management anticipated strong demand opportunities for ethers and other specialties.
- Trade duties: Canadian softwood lumber duties were expected to affect about 58% of Forest Products sales and reduce 2018 operating income and EBITDA by approximately $25 million, without reducing volume. The company paid about $11 million in lumber duties in 2017 and said recovery depends on legal challenges or settlement. Canadian newsprint faced a preliminary 6.5% countervailing duty; final duties and their impact were uncertain.
- Pulp and paper markets: Management expected unusually high high-yield-pulp prices to moderate during 2018. Newsprint pricing benefited from temporary supply tightness, but declining demand and possible duties were risks.
- Capital allocation: Expected 2018 maintenance capital expenditures were $100–$110 million, with approximately $45 million planned for selected high-return projects. The company’s stated deleveraging target was net leverage of 2.5 times EBITDA. A $100 million share repurchase authorization was approved in January 2018; management did not expect immediate use.
- Other material risks: Cyclical pricing and demand, customer concentration (the ten largest customers represented about 38% of pro forma 2017 revenue), raw-material and energy costs, facility disruptions, foreign exchange, trade restrictions, integration of Tembec, labor negotiations and environmental regulation. Approximately 74% of the workforce was unionized.
- Environmental and legal matters: Accrued liabilities for disposed-operation environmental costs were $164 million; management estimated reasonably possible additional exposure of up to approximately $66 million, subject to significant uncertainty. An appeal concerning the Jesup wastewater permit remained pending. A stockholder securities lawsuit related to earlier public statements was being contested by the company.
- Pensions and controls: Defined-benefit pension plans were underfunded by approximately $139 million at year-end, excluding postretirement obligations. Management and the auditor reported effective financial reporting controls, but the assessment excluded certain Tembec controls; excluded operations represented 59% of consolidated assets and 14% of sales.
Important facts for investors to verify
- Reconcile reported earnings to recurring performance, especially the bargain-purchase gain, derivative gain, acquisition expenses and inventory write-up; compare GAAP results with the company’s non-GAAP reconciliations.
- Review the final Tembec purchase-price allocation, integration progress, realized synergies and the acquired operations’ full-period profitability and cash generation.
- Track debt reduction, cash generation, covenant headroom and the capacity to fund capital spending, dividends and environmental and pension obligations.
- Monitor final lumber and newsprint duty rates, related legal challenges, pricing offsets and their realized effects on segment earnings.
- Assess the sensitivity of cellulose-specialties pricing and volumes, major-customer relationships, and the outlook for acetate, ethers and commodity products.
- Follow updates on the Jesup permit appeal, environmental remediation estimates, pension funding and labor-contract negotiations.