Business context and reporting period
Rayonier Advanced Materials Inc. filed this Form 10-K for the fiscal year ended December 31, 2021. The company manufactures high-purity cellulose products, paperboard and high-yield pulp, with operations in the United States, Canada and France. Its continuing segments are High Purity Cellulose, Paperboard and High-Yield Pulp.
The company completed the sale of its Canadian lumber and newsprint operations to GreenFirst on August 28, 2021. Those operations are reported as discontinued operations, so continuing-operation results are the better measure of the remaining business.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Net sales | $1.408 billion | $1.344 billion |
| Gross margin | $74.7 million; 5.3% | $63.4 million; 4.8% |
| Operating income (loss) | $(10.4) million; (0.7)% margin | $(30.4) million; (2.2)% margin |
| Continuing-operations net income (loss) | $(49.8) million | $(38.1) million |
| Net income attributable to the company | $66.4 million | $0.6 million |
| Adjusted EBITDA | $128 million | $100 million |
| Continuing-operations operating cash flow | $73.7 million | $54.3 million |
| Adjusted free cash flow from continuing operations | $(2) million | $9 million |
Reported 2021 net income included $116.2 million of income from discontinued operations; continuing operations remained loss-making. Cash flow from all operations was $233.2 million, including $159.5 million from discontinued operations.
At year-end, cash and cash equivalents were $253.3 million, net availability under the asset-based revolver was $103 million, total debt was approximately $929 million, and the debt-to-capital ratio was 53%. Stockholders’ equity was $814.3 million. The company reported compliance with debt covenants. No common dividends were declared in 2021 or 2020.
Segment sales and operating income (loss) in 2021 were: High Purity Cellulose, $1.091 billion and $19.7 million; Paperboard, $208.3 million and $13.4 million; High-Yield Pulp, $135.7 million and $6.7 million. Corporate operating loss was $50.2 million.
Material changes versus 2020
- Sales rose 5%, mainly from higher prices across all three continuing segments. Operating loss narrowed by $19.9 million, while adjusted EBITDA increased $28 million.
- High Purity Cellulose operating income improved by $12.7 million, reflecting higher commodity prices and cellulose-specialties volumes, partly offset by increased costs. Overall segment volume fell 9%; cellulose-specialties volume rose 7%, while commodity volume fell 28%.
- Paperboard operating income declined $4.5 million as higher input costs outweighed improved pricing and volume. High-Yield Pulp returned to operating income of $6.7 million, primarily due to higher prices.
- Interest expense increased $10.9 million to $66.4 million. During 2021, the company repurchased approximately $127 million principal amount of its 5.50% notes due 2024 for about $124 million cash and redeemed $25 million principal amount of its 7.625% notes due 2026.
- Cash increased to $253.3 million from $93.7 million, in large part due to proceeds from the lumber and newsprint sale. Continuing-operations capital expenditures increased to $95.2 million from $63.3 million.
Outlook, risks and unusual items
Management expected 2022 High Purity Cellulose sales prices to rise by a double-digit percentage and volumes to increase, with segment adjusted EBITDA expected to exceed 2021. It cautioned that planned maintenance outages at several facilities, production reliability issues, supply-chain constraints and higher raw-material and energy costs could weigh on the start of the year. Paperboard demand and prices were strengthening; High-Yield Pulp prices were expected to be lower in the first quarter of 2022. No full-year numerical earnings or cash-flow guidance was provided.
- Sale and related uncertainty: The GreenFirst transaction had estimated purchase-price adjustments still unresolved, including a $6 million inventory-valuation adjustment. The company received GreenFirst shares valued at $42 million and recorded a $4 million unrealized loss on them during 2021. It also expects a net cash outflow of approximately $3–4 million from transaction adjustments.
- Environmental exposure: Accrued environmental liabilities were $171.2 million, principally related to disposed operations. The company estimated reasonably possible additional exposure of up to approximately $86 million.
- Softwood lumber duties: The company paid approximately $112 million in duties through the asset-sale closing and retained rights and obligations for duties incurred through that date. A $20 million receivable was recorded, but recovery depends on ongoing legal and administrative processes.
- Debt and commitments: Debt principal payments include approximately $380 million due in 2024 and $485 million in 2026. Non-cancellable purchase obligations were $771 million, including about $402 million under a 20-year wood-chip and residual-fiber supply agreement.
- Operating and market risks: Key exposures include cyclical product pricing, inflation in fiber, chemicals, energy and transport, shipping constraints, plant reliability and planned outages, labor relations, foreign exchange and trade restrictions. The ten largest customers represented approximately 36% of 2021 revenue; international sales represented about 66%.
- Other items: A $6 million U.S. pension settlement expense and a further $2 million Canadian pension settlement loss were recorded in 2021. The company also recognized a $35 million income-tax benefit, primarily related to remeasurement of Canadian deferred tax assets. Its Tartas 2G bioethanol project targeted commercial sales beginning in mid-2023.
Grant Thornton LLP issued unqualified opinions on the financial statements and internal control over financial reporting. The filing identifies environmental-liability estimates and realizability of deferred tax assets as critical audit matters.
Important facts for investors to verify
- How much of 2021’s reported profit and cash generation came from discontinued operations and the asset sale, versus ongoing operations?
- Whether High Purity Cellulose price and volume expectations, planned outages and reliability improvements translated into the forecast higher segment adjusted EBITDA.
- The final GreenFirst sale adjustments, fair value of retained GreenFirst shares, and ultimate recovery (if any) of the softwood lumber duties receivable.
- Whether environmental remediation costs remain within the $171.2 million accrual and whether the potential additional exposure of up to $86 million changes.
- Liquidity and refinancing plans for the 2024 and 2026 debt maturities, alongside the company’s purchase commitments and capital needs.