Rayonier Advanced Materials Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 24, 2017. The company manufactures high-value cellulose products, including cellulose specialties and commodity products. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $201.2 | $213.6 | $402.6 | $431.3 |
| Gross margin | $33.3; 16.4% | $48.8; 22.9% | $69.8; 17.4% | $89.0; 20.6% |
| Operating income | $13.4 | $38.6 | $39.3 | $70.5 |
| Net income attributable to company | $4.6 | $19.3 | $14.2 | $40.2 |
| Net income available to common shareholders | $1.1 | $19.3 | $7.6 | $40.2 |
| EPS, basic and diluted | $0.03 | $0.46 | $0.18 | $0.95 |
- Revenue declined 6% in both the quarter and first half. Cellulose specialties sales fell to $158 million from $175 million in Q2, reflecting lower prices and volumes; commodity products and other sales rose to $43 million from $39 million, primarily on higher prices.
- Q2 operating margin was 6.4%, versus 18.2% a year earlier; first-half operating margin was 9.6%, versus 16.2%. Lower cellulose specialties prices and volumes, higher costs, and increased SG&A weighed on results.
- Operating cash flow was $86.7 million for the first half, down from $150.8 million. Capital expenditures were $32.4 million; adjusted free cash flow, a non-GAAP measure, was $56 million versus $113 million.
- Cash was $368.7 million and total debt was $781.7 million at June 24. Revolver availability was $243 million; debt-to-capital was 78%. The company reported compliance with debt covenants.
- Interest expense was $9.2 million for Q2 and $18.0 million for the first half. A $2.1 million unrealized foreign-currency collar gain partly offset other costs. First-half 2016 included an $8.8 million debt-extinguishment gain, which did not recur.
Changes, outlook, and material matters
- Management expects 2017 cellulose specialties prices to decline 3%–4%, with volumes roughly flat year over year. Commodity product volumes are expected to be lower. Management anticipates second-half operating income will improve significantly as sales mix shifts toward higher-value cellulose specialties.
- Management raised its expectation to achieve the full $30 million of cost improvements and said it expects net income and pro forma EBITDA near the high end of its respective guidance ranges: $32–$39 million and $190–$200 million. Forecast operating cash flow is $142–$152 million, adjusted free cash flow $90–$100 million, and capital expenditures approximately $60 million.
- The pending Tembec acquisition was amended in July. The approximately $870 million purchase price includes assumption of $481 million in Tembec net debt; proposed funding includes cash, committed bank financing, and approximately 8.4 million company shares. Shareholder approval was obtained; court and regulatory approvals remained outstanding, with some regulatory decisions anticipated in Q4. A Canadian-dollar collar generated the Q2 unrealized gain.
- Acquisition risks include failure or delay in closing, potential termination costs, dilution, added debt and interest burden, and failure to realize expected benefits. The filing also notes that Tembec shareholders could receive up to approximately 19.5% of the company’s shares under the transaction terms described in its risk discussion.
- Disposed-operation liabilities totaled $152.5 million. The company estimated reasonably possible additional exposure of up to approximately $64 million, excluding amounts not currently estimable; actual costs could exceed estimates and materially affect results or cash flows.
- Collective bargaining agreements covering approximately 587 Jesup employees expired June 30, 2017. Negotiations continued under the expired terms; a work stoppage could materially affect the business. The company also disclosed an appeal concerning the Jesup wastewater permit and an ongoing SEC inquiry regarding environmental-reserve documentation; no SEC enforcement action had been brought as of the filing.
- The company declared Q3 dividends of $0.07 per common share and $2.00 per mandatory convertible preferred share. Future dividends remain subject to board discretion and debt restrictions.
Key facts for investors to verify
- Whether cellulose specialties pricing, product mix, and volumes improve as management expects in the second half, and whether the full $30 million cost-improvement target is achieved.
- Actual cash generation and capital spending versus 2017 guidance, especially given first-half operating cash flow and adjusted free cash flow declines.
- Completion, final financing terms, share issuance, regulatory approvals, and integration prospects for the Tembec acquisition, including the resulting leverage and dilution.
- Developments in disposed-site environmental obligations, the Jesup permit appeal, the SEC inquiry, and labor negotiations.
- Preferred-stock dividends and the resulting allocation of earnings to common shareholders; Q2 common EPS was $0.03 despite $4.6 million of net income attributable to the company.