Rayonier Advanced Materials Inc. — Q3 2020 Form 10-Q
Business context and period: The filing covers the three and nine months ended September 26, 2020. Rayonier Advanced Materials makes high-purity cellulose products and operates Forest Products, Paperboard, and Pulp & Newsprint businesses. Results shown are primarily continuing operations; the Matane pulp mill was sold in November 2019 and is presented as discontinued operations in prior-year comparisons.
Financial performance and liquidity
- Third-quarter revenue: $423.9 million, up 2% from $416.1 million. Gross margin was $50.0 million (11.8% of sales), versus $16.6 million (4.0%). Operating income was $17.4 million versus an $8.6 million loss.
- Third-quarter earnings: Continuing-operations pretax income was $1.4 million; a $27.5 million income-tax benefit contributed to continuing-operations net income of $28.9 million and diluted EPS of $0.45. The tax benefit makes the reported effective tax rate unrepresentative of underlying performance.
- Nine-month results: Revenue was $1.230 billion, down 6%. Gross margin was $80.6 million versus $42.2 million; operating loss narrowed to $10.0 million from $51.5 million. Continuing-operations net loss was $8.9 million versus $61.6 million; diluted loss per share was $0.14 versus $1.36.
- Cash flow: Nine-month operating cash flow was $63.1 million, up from $4.6 million for continuing operations in the prior-year period. Capital expenditures were $42.8 million; management’s non-GAAP adjusted free cash flow was $34 million versus negative $58 million. Cash ended at $82.9 million, compared with $64.0 million at year-end 2019.
- Debt and liquidity: Total debt was $1.078 billion, little changed from $1.082 billion at year-end; debt-to-capital remained 61%. Revolver availability was $97 million after required availability and letters of credit, with a further approximately $16 million available under a French factoring line. A substantial $869.6 million of principal payments is scheduled for 2024, including the senior notes.
- Other balance-sheet items: Current assets were $641.1 million and current liabilities $300.7 million. Stockholders’ equity was $700.1 million. Environmental liabilities totaled $171.3 million, including $11.1 million current.
Material changes and business drivers
- Third-quarter operating improvement was led by Forest Products: segment operating income was $25.2 million versus a $5.1 million loss, supported by a 62% increase in average lumber prices. Nine-month Forest Products operating income was $20.1 million versus a $26.7 million loss.
- High Purity Cellulose posted third-quarter operating income of $7.8 million, broadly comparable to $6.7 million. Lower input costs and higher cellulose-specialties prices offset weaker specialty volumes and lower commodity prices.
- Paperboard operating income improved to $3.4 million for the quarter and $14.3 million year to date, largely due to lower pulp and transportation costs, despite weaker sales.
- Pulp & Newsprint reported a third-quarter operating loss of $6.2 million and a nine-month loss of $17.6 million. Newsprint sales fell amid pandemic-related demand weakness and production curtailments.
- Year-to-date cash generation also benefited from lower planned capital spending. The company had no common or preferred dividends in the first nine months of 2020; preferred stock had converted to common stock in 2019.
Outlook, risks and unusual items
- Guidance: Management suspended full-year guidance because the timing and scale of economic recovery and possible supply-chain disruptions were uncertain. Management expected higher fourth-quarter commodity sales volumes, strong lumber volumes and historically high lumber prices, and elevated pulp volumes from improved logistics. These expectations remain subject to market conditions.
- COVID-19: Facilities remained operating, with safety measures and production adjusted to demand. Management warned that pandemic effects on demand, supply chains, operations, liquidity and capital access could remain material and unpredictable. Long-lived assets were monitored for impairment; none was recorded through the quarter, but estimates rely on uncertain projected cash flows.
- Credit agreement: A June 2020 amendment relaxed financial covenants through 2022 and reduced required revolver availability. At quarter-end, reported covenant ratios were 4.0x gross secured leverage against a 6.65x limit, and 2.4x interest coverage against a 1.4x minimum. Compliance and continued liquidity remain important given substantial debt.
- Tax items: The CARES Act enabled carrybacks of 2019 and 2020 tax losses to higher-rate years. The company recognized a $20 million tax benefit from remeasurement and reported a $33 million current receivable expected in Q4 2020, plus a separate $22 million current receivable related to IRS examination years. A valuation-allowance reversal and other tax adjustments also materially affected reported earnings; management noted some recognized deferred tax assets may never be realized.
- Contingencies: Ontario’s electricity system operator issued orders seeking CAD $25 million in penalties concerning Kapuskasing facility operations. The company is contesting the orders; it said it did not expect the outcome to be material, but gave no assurance. Environmental exposure beyond recorded reserves was estimated at up to approximately $78 million, excluding amounts not currently estimable.
- Controls: Management concluded disclosure controls were effective as of September 26, 2020 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether operating cash flow, segment performance and liquidity remain resilient if lumber prices weaken or pandemic-related demand and supply-chain pressures persist.
- Timing and receipt of the disclosed tax refunds, and how much reported earnings depends on tax benefits that may not translate into future cash or recurring results.
- Debt repayment and refinancing capacity, especially the large 2024 principal maturity, covenant headroom and actual revolver availability.
- Outcome of the Kapuskasing IESO dispute and whether environmental costs exceed recorded reserves or the stated estimated exposure.
- Whether management resumes guidance and whether expected fourth-quarter volumes and market conditions materialize.