Business context and reporting period
Rayonier Advanced Materials Inc. manufactures high-value cellulose products for industrial, consumer and other applications. This unaudited Form 10-Q covers the quarter and six months ended June 25, 2016; comparisons are with periods ended June 27, 2015.
Financial performance and position
| Metric | Three months ended June 25, 2016 | Six months ended June 25, 2016 |
|---|---|---|
| Net sales | $213.6 million | $431.3 million |
| Gross margin | $48.8 million; 22.9% | $89.0 million; 20.6% |
| Operating income | $38.6 million; 18.2% margin | $70.5 million; 16.2% margin |
| Net income | $19.3 million; $0.46 diluted EPS | $40.2 million; $0.95 diluted EPS |
| Cash from operations | Not separately presented for the quarter | $150.8 million |
Six-month adjusted free cash flow, a non-GAAP measure, was $113 million, versus $47 million a year earlier. Cash and equivalents were $166.0 million at June 25, up from $101.3 million at year-end 2015. Total debt was $803.1 million, including $7.9 million of current maturities; revolving-credit availability was $236 million. Stockholders’ equity was $23.8 million, and the reported debt-to-capital ratio was 97%.
Changes versus prior comparable periods
Second-quarter sales declined about 3% from $220.9 million, mainly as lower cellulose-specialties prices outweighed slightly higher volumes. Net income improved from a $0.3 million loss. For the first half, sales declined about 2% from $442.2 million, as lower cellulose-specialties pricing was partly offset by higher commodity-product volume. Net income increased from $10.2 million. First-half operating income rose to $70.5 million from $32.5 million, aided by lower production costs, cost initiatives and the prior-year period’s $28.5 million impairment charge. First-half cash from operations increased to $150.8 million from $88.8 million.
In the first quarter, the company repurchased and retired $43.6 million principal amount of 2024 Senior Notes for approximately $34.1 million, recording an $8.8 million gain. First-half debt repayments and repurchases totaled $46.8 million in cash-flow reporting.
Outlook, risks and notable matters
- Management raised 2016 guidance to net income of $51–$57 million, pro forma EBITDA of $195–$205 million and adjusted free cash flow of $100–$105 million. Operating cash flow is forecast at $190–$195 million and capital expenditures at approximately $90 million, including some lignin joint-venture capital. These EBITDA and free-cash-flow measures are non-GAAP.
- Management expected 2016 cellulose-specialties prices to decline 6–7% and volumes 4–5% versus 2015; 2017 acetate pricing was expected to be about 2% below 2016. It cited relatively flat acetate demand and continued Chinese tow inventory destocking, while noting improving demand in some other specialty markets. Viscose markets were expected to strengthen moderately; absorbent-material markets could face pressure from added capacity.
- The three-year Transformation Initiative targets $75–$90 million of savings during 2016–2018. Management said second-half cash flows would be materially lower, reflecting higher capital spending, the planned Fernandina maintenance outage beginning in September, working-capital timing and a $10 million voluntary pension contribution.
- Environmental liabilities for disposed operations totaled $155.3 million. The company estimated reasonably possible additional exposure of up to approximately $65 million, while warning that costs could exceed that estimate and that some potential liabilities were not estimable. It said recorded reserves were sufficient for probable costs expected over 20 years, but gave no assurance.
- A challenge to the Jesup plant wastewater permit remained pending, with a decision expected later in 2016; the plant continued operating under its existing permit. The company was cooperating with an SEC staff request for documents concerning former operations and environmental reserves; no enforcement action had been brought as of the filing. A securities class-action complaint was dismissed with final judgment for the company in July 2016.
- After quarter-end, the company repaid $20 million of Term A-1 debt and contributed $10 million to its pension plan. It declared a $0.07-per-share third-quarter dividend. Management reported compliance with debt covenants at June 25, 2016; no derivatives were outstanding.
Important facts for investors to verify
- Progress against the $75–$90 million Transformation Initiative target and the assumptions underlying raised 2016 guidance.
- Realized cellulose-specialties pricing, sales volumes and 2017 contract negotiations, alongside commodity-market conditions.
- Cash generation after the planned maintenance outage, higher capital spending, pension contribution and working-capital changes.
- Debt repayment pace, liquidity, covenant headroom and the effect of variable-rate debt; a 1-percentage-point rate move was estimated to change annual interest expense by about $3 million.
- Environmental reserve adequacy and developments in the Jesup permit matter and SEC inquiry.