Rayonier Advanced Materials Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 24, 2022. Unless stated otherwise, figures below are for continuing operations; the former lumber and newsprint business is reported as discontinued operations. Dollar amounts are in millions except per-share data.
Business context and period
Rayonier Advanced Materials produces high-purity cellulose, paperboard and high-yield pulp. Its segments are High Purity Cellulose, Paperboard, High-Yield Pulp and Corporate. The August 2021 sale of lumber and newsprint assets to GreenFirst is reflected as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $466.3 | $374.0 | $1,217.3 | $1,033.7 |
| Gross margin | $46.5 (10.0%) | $19.3 (5.2%) | $79.2 (6.5%) | $62.0 (6.0%) |
| Operating income | $28.5 (6.1%) | $2.8 (0.8%) | $9.8 (0.8%) | $3.7 (0.4%) |
| Continuing-operations income (loss) | $18.4 | ($13.4) | ($31.0) | ($21.3) |
| Net income (loss), including discontinued operations | $29.6 | ($4.8) | ($18.5) | $90.4 |
| Diluted earnings (loss) per share | $0.45 | ($0.07) | ($0.28) | $1.43 |
Quarterly sales increased 25%; nine-month sales rose 18%. Management attributed the increase primarily to higher selling prices. Q3 adjusted EBITDA from continuing operations, a non-GAAP measure, was $68 million versus $33 million; nine-month adjusted EBITDA was $122 million versus $99 million.
Cash provided by continuing operating activities was $7.4 million for the first nine months, down from $44.7 million. Continuing-operations capital expenditures were $114.2 million; adjusted free cash flow, the company’s non-GAAP measure, was negative $85 million. Cash and equivalents were $131.7 million at September 24, versus $253.3 million at year-end 2021.
Total debt principal was $879.4 million (carrying value $872.6 million), compared with $937.2 million principal at year-end 2021. Net ABL availability was $128 million after letters of credit; an additional $23 million was available under a French factoring line. The company reported a 53% debt-to-capital ratio and net leverage of 5.1x at quarter-end. It remained in compliance with debt covenants.
Material changes versus the comparable period
- Higher selling prices across segments lifted Q3 gross margin and operating income, though inflation in chemicals, wood fiber, energy and logistics, plus supply constraints and productivity issues, offset some gains.
- High Purity Cellulose Q3 sales rose to $368.9 million from $287.5 million and operating income to $22.5 million from $1.9 million. Paperboard operating income increased to $11.3 million from $2.0 million. High-Yield Pulp operating income declined to $5.6 million from $7.6 million.
- Nine-month net income fell to a loss, in part because the 2021 comparison included substantial income from the asset sale. The 2022 nine-month result also includes a $5.2 million gain on GreenFirst shares; those shares were sold in May for $43 million.
- Foreign-currency translation reduced other comprehensive income by $30.6 million during the first nine months of 2022.
Outlook, risks and unusual items
- Management raised 2022 adjusted EBITDA guidance to exceed $175 million, subject to supply-chain constraints. It said it remained on track to reduce net debt to $725 million by year-end and expects refinancing opportunities for the 2024 notes as leverage moves toward 4.0x.
- For Q4, management expected High Purity Cellulose adjusted EBITDA to decline slightly from Q3, while remaining higher for full-year 2022 than 2021; Paperboard was expected to deliver another solid quarter; and High-Yield Pulp adjusted EBITDA was expected to improve. These are forward-looking expectations, not guarantees.
- Management cited inflation, supply-chain and logistics constraints, slower global economic growth, commodity price and volume exposure, foreign-currency risk, customer concentration, and potential manufacturing disruptions. It added geopolitical disruption related to the Russia-Ukraine conflict as a risk, including higher European energy, transport and raw-material costs.
- The USDOC’s revised softwood-lumber duty rates resulted in a $16 million pre-tax gain in discontinued operations and a $38 million long-term receivable. Recovery depends on final resolution of the dispute and legal/administrative processes; cash is not expected until then.
- Environmental liabilities were $170.3 million. The company estimated reasonably possible additional exposure of up to approximately $84 million, with some potential liabilities not currently estimable.
- In October 2022, the company repaid a CAD $12 million (approximately $9 million) term loan. It also reported a $23 million U.S. federal tax refund received in August 2022. The quarterly dividend remained suspended; no share repurchases were made under the public buyback program.
Important facts for investors to verify
- Whether operating cash generation improves after the unusually high maintenance spending and working-capital uses, and how capital expenditures evolve.
- Progress toward the $725 million year-end net-debt goal, the reported leverage trajectory, and refinancing terms for the $334 million principal amount of 2024 notes.
- Delivery against the greater-than-$175-million adjusted EBITDA outlook and the impact of input-cost inflation, sales mix, volumes and supply-chain conditions.
- Timing and amount of any cash recovery on the $38 million softwood-lumber-duty receivable, including remaining sale-related adjustments with GreenFirst.
- Potential environmental costs above recorded reserves, including the disclosed estimated additional exposure of up to approximately $84 million.