Rayonier Advanced Materials Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context
The company is a single-segment producer of cellulose specialties and commodity cellulose products, with facilities in Jesup, Georgia, and Fernandina Beach, Florida. Cellulose specialties are the main source of profitability. About 60% of 2016 sales were exports; the ten largest customers represented about 75% of sales. Three customers accounted individually for 25%, 17%, and 14% of sales.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $868.7 million | $941.4 million |
| Gross margin | $181.3 million; 20.9% | $202.5 million; 21.5% |
| Operating income | $137.6 million; 15.9% | $119.5 million; 12.8% |
| Net income | $73.3 million | $55.3 million |
| Diluted EPS | $1.55 | $1.30 |
| Cash from operations | $232.2 million | $201.7 million |
| Capital expenditures | $88.7 million | $77.4 million |
| Adjusted free cash flow | $147 million | $124 million |
| EBITDA / pro forma EBITDA | $235 million / $226 million | $209 million / $238 million |
| Cash and cash equivalents | $326.7 million | $101.3 million |
| Total debt | $783.3 million | $858.1 million |
| Revolver availability | $229 million | $236 million |
Cellulose specialties revenue fell to $694.6 million from $766.9 million: average price declined 7% to $1,525 per metric ton and volume fell 2% to 456,000 metric tons. Commodity product revenue was broadly flat at $174.1 million, with volume rising to 249,000 metric tons. The debt-to-capital ratio improved to 79% from 102%; the company reported compliance with debt covenants. Current assets were $519.5 million and current liabilities $127.0 million at year-end.
Fourth-quarter 2016 sales were $230.9 million, operating income $25.7 million, and net income $11.5 million, compared with $241.6 million, $29.0 million, and $12.8 million, respectively, in fourth-quarter 2015.
Material changes and unusual items
- Annual sales declined about 8%, principally due to weaker cellulose specialties pricing and lower volume. Management cited cost transformation and working-capital improvements as offsets.
- Operating income increased despite lower sales, in part because 2015 included a $28.5 million non-cash Jesup asset impairment and higher other operating charges. The 2016 results included an $8.8 million gain on debt extinguishment from repurchasing senior notes.
- Cash rose substantially, reflecting operating cash generation and $166.6 million net proceeds from the issuance of 8.00% mandatory convertible preferred stock. The preferred shares are expected to convert to common stock in August 2019 and carry cumulative dividends; common dividends are subordinated to required preferred dividends.
- Environmental liabilities for disposed operations totaled $152.9 million at year-end. The company estimated reasonably possible additional exposure of up to approximately $66 million, while noting that some potential costs cannot currently be estimated.
Outlook, management commentary, and key risks
For 2017, management forecast cellulose specialties prices down 3%–4% and volumes broadly flat. It expected $25–$30 million of cost improvements, net income of $41–$48 million, EBITDA of $190–$200 million, operating cash flow of $140–$150 million, adjusted free cash flow of $80–$90 million, and capital expenditures of about $60 million, including LignoTech Florida.
The LignoTech Florida joint venture with Borregaard (45% company-owned) began construction in December 2016. The project is planned in two phases over five years, with approximately $135 million aggregate investment and operations expected to start in mid-2018. The company is a guarantor under the construction contract; disclosed maximum potential payment was $82.4 million.
- Competitive oversupply and demand weakness: cellulose specialties prices had fallen about 13% over two years, with further 2017 declines expected.
- Customer and end-market concentration, including exposure to acetate tow and cigarette-filter demand; approximately 55% of sales over the preceding three years related to acetate tow production.
- Environmental and permitting uncertainty: an administrative decision reversed the renewed Jesup wastewater permit under low river-flow conditions. The company and Georgia regulators appealed; the plant continued operating under its existing permit pending resolution.
- The SEC requested documents concerning environmental regulators and former operations. The company said it was cooperating; no enforcement action had been brought as of the filing.
- Jesup labor agreements covering about 48% of the workforce were due to expire June 30, 2017; negotiations were underway. About 65% of the workforce was unionized.
- Other exposures include foreign-currency competitiveness, raw-material and energy costs, interest rates, pension funding, and the company’s $153 million environmental reserve estimate.
The filing states that the independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether 2017 price and volume expectations, cost savings, and cash-flow guidance were achieved.
- Renewal or renegotiation outcomes for major customer contracts, especially given customer concentration and contract expirations from 2017 to 2019.
- Resolution and operating implications of the Jesup wastewater-permit appeal, and any developments in the SEC inquiry.
- Actual environmental remediation spending versus the $152.9 million recorded liability and up-to-$66 million reasonably possible additional exposure.
- LignoTech Florida’s project costs, funding, construction guarantee exposure, schedule, and expected returns.
- Preferred-stock dividend and conversion effects on common shareholders, leverage, and future capital allocation.