Rayonier Advanced Materials Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter ended June 27, 2015; year-to-date figures cover the six months ended June 27, 2015. The company manufactures high-value cellulose products at facilities in Jesup, Georgia, and Fernandina Beach, Florida. Results before its June 2014 separation from Rayonier include allocated parent-company costs and may not be directly comparable with stand-alone results.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $220.9 million | $212.5 million | $442.2 million | $456.0 million |
| Gross margin | $45.0 million; 20.4% | $52.3 million; 24.4% | $81.9 million; 18.6% | $107.1 million; 23.5% |
| Operating income | $8.6 million; 3.6% margin | $6.2 million; 2.8% margin | $32.5 million; 7.5% margin | $49.6 million; 11.0% margin |
| Net income (loss) | $(0.3) million | $4.6 million | $10.2 million | $35.5 million |
| Diluted EPS | $(0.01) | $0.11 | $0.24 | $0.84 |
| Cash from operations | Not reported by quarter in the filing | $88.8 million | $103.0 million |
Q2 sales rose about 4%, as higher commodity-product volume more than offset lower cellulose-specialties prices and volume. Year-to-date sales declined about 3%, principally from lower cellulose-specialties prices and volume, partly offset by commodity growth. Cellulose-specialties average prices were $1,638 per metric ton in Q2, down from $1,768; year-to-date they were $1,653, down from $1,796. Q2 operating income increased despite lower gross margin, reflecting lower separation-related costs than in the prior-year quarter and cost savings; the six-month operating decline primarily reflected price pressure.
Financial position and liquidity
- At June 27, 2015, cash was $73.3 million, total debt was $907.8 million, and revolving-credit availability was $235 million. The company reported covenant compliance.
- Debt consisted of $550 million of 5.50% senior notes due 2024 and variable-rate term loans. Six-month principal repayments were $37.1 million. Total debt declined from $944.8 million at year-end 2014.
- Six-month capital expenditures were $41.3 million. Adjusted free cash flow, a company-defined non-GAAP measure, was $47 million versus $52 million a year earlier.
- Dividends declared were $0.07 per share in Q2; the company subsequently declared another $0.07 per-share dividend payable September 30, 2015.
Strategy, outlook and risks
- Persistent cellulose-specialties oversupply and weaker end-market demand have pressured pricing; management cited an approximately 14% price decline over two years. The company is shifting emphasis away from cellulose-specialties volume growth.
- The Jesup realignment will permanently convert the approximately 190,000-ton C-line to commodity production, reduce cellulose-specialties capacity about 28%, and increase annual fluff and viscose capacity to approximately 245,000 tons. The planned investment is $25 million; expected annual cost savings are approximately $14 million. The filing recorded a $28.5 million non-cash impairment charge in Q2 for abandoned assets.
- For 2015, management expected cellulose-specialties volumes comparable to 2013–2014 levels and prices 7–8% below 2014 average prices; estimated EBITDA of $210–$225 million; capital expenditures of approximately $80 million, including $15–$20 million for the boiler MACT project; and an effective tax rate of 33–34%.
- Management described near-term softness in acetate markets, pressure in ethers markets, and relatively stable high-strength viscose, filtration-media and casings markets. A non-binding letter of intent contemplated a lignin-processing joint venture with Borregaard ASA.
- Risks include failure to complete the Jesup realignment on planned cost or timing or achieve its benefits, continued weak cellulose-specialties markets, and exposure to interest rates. The company had $350 million of variable-rate debt; a one-percentage-point rate change was estimated to affect annual interest expense by approximately $4 million.
Contingencies and unusual items
- Disposed-operations liabilities totaled $154.0 million, including $8.9 million current. The company estimated reasonably possible additional exposure of up to approximately $64 million, while noting that some potential liabilities could not be estimated and reserves may prove insufficient.
- Standby letters of credit and surety bonds totaled $72.3 million, primarily supporting environmental-remediation and post-closure financial-assurance requirements.
- The Altamaha Riverkeeper litigation was dismissed and concluded after the court granted summary judgment on statutory claims and dismissed state-law claims without prejudice; the plaintiff did not appeal. A separate purported securities class action alleged inadequate environmental reserves; the company said it would defend the case and did not expect a material adverse effect.
- Ordinary-course legal claims were not expected by management to have a material adverse effect. The filing reported no derivatives outstanding.
Important facts for investors to verify
- Whether cellulose-specialties pricing and demand stabilize, and how much of earnings pressure reflects market conditions versus product mix and volume.
- Actual Jesup realignment spending, timing, capacity changes and realized annual savings, including whether the anticipated benefits offset reduced cellulose-specialties capacity.
- Progress against 2015 EBITDA, capital-expenditure and tax-rate outlook, and the assumptions underlying those estimates.
- Cash generation and debt repayment capacity, including refinancing and variable-rate exposure.
- Changes in environmental-remediation estimates, the potential additional exposure of up to approximately $64 million, and developments in the securities litigation.