Rayonier Advanced Materials Inc. — Q1 2019 10-Q
Business context and period. The company manufactures high-purity cellulose and operates Forest Products, Pulp and Paper businesses. This unaudited filing covers the three months ended March 30, 2019; comparisons are with the three months ended March 31, 2018. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $482.8 million | $522.0 million |
| Gross margin | $17.2 million; 3.6% of sales | $80.4 million; 15.4% of sales |
| Operating income (loss) | $(18.5) million | $46.3 million |
| Net income (loss) | $(22.1) million | $24.5 million |
| Common EPS | $(0.52) | $0.41 |
| Operating cash flow | $(26.9) million | $32.5 million |
| Capital expenditures | $31.4 million | $29.0 million |
| Adjusted free cash flow (non-GAAP) | $(54) million | $13 million |
| EBITDA (non-GAAP) | $20 million | $86 million |
At March 30, cash was $68.0 million, total debt was $1.223 billion, and revolving-credit availability was $182 million. Net debt was approximately $1.155 billion. The debt-to-capital ratio was 64%, versus 63% at year-end 2018. Current assets were $684.9 million and current liabilities were $328.9 million. Interest expense was $14.8 million, approximately unchanged year over year. The company reported compliance with debt covenants.
Material changes and operating drivers
- Sales fell 7%, while cost of sales rose 5%; gross margin contracted sharply and operating results swung to a loss. The company attributed the decline to weaker sales prices and volumes in several businesses, manufacturing and reliability problems, and higher costs.
- High Purity Cellulose: sales were $286 million, up slightly, but the segment recorded a $3 million operating loss versus $21 million income. Cellulose-specialties prices fell about 7%; production reliability issues at Jesup and Temiscaming, higher wood and maintenance costs, and reduced by-product sales weighed on results. Commodity-product volumes increased, partly offsetting weakness.
- Forest Products: sales declined to $75 million from $99 million and the segment reported a $5 million operating loss versus $10 million income. Lumber prices fell 19% and volumes fell 10%, reflecting weaker markets, weather and logistics.
- Pulp: sales declined to $70 million from $85 million and operating income fell to $10 million from $23 million, primarily due to lower prices and volumes, including downtime at Temiscaming.
- Paper: sales were $70 million versus $76 million; the segment recorded a $1 million operating loss versus $3 million income. Lower newsprint volumes, plant reliability and logistics issues, and higher input costs contributed.
- Cash declined by $41.0 million from year-end. Working-capital needs, including seasonal inventory buildup and payment timing, contributed to negative operating cash flow; the company borrowed a net $35 million on its revolver during the quarter.
Outlook, commentary and risks
- Management withdrew its prior High Purity Cellulose guidance, citing first-quarter operational issues. It expects performance to improve sequentially as Temiscaming boiler and hardwood-supply issues are addressed, with EBITDA margins returning to the high teens in the second half of 2019, subject to commodity-price changes.
- For 2019, management expects cellulose-specialties prices and volumes each to be approximately 1%–2% below 2018, excluding any impact of Chinese duties. Commodity-product volume growth is expected to be lower than the original forecast of a 75,000-metric-ton increase over 2018.
- Lumber prices were expected to remain low in Q2, with possible recovery later in the quarter; softwood lumber duties of approximately 20% on U.S. sales were expected to continue through 2019. High-yield pulp prices were expected to remain solid but below 2018 levels. Paperboard pricing may face competition, while newsprint prices were expected to decline.
- Planned 2019 spending was approximately $100 million in maintenance capital and $30 million in strategic projects. Management said it expected to direct a greater share of cash flow to debt repayment and targets net leverage of 2.5 times EBITDA; dividends and opportunistic share repurchases remain part of its capital-allocation plan.
- Risks include cyclical commodity markets, customer concentration, mill disruptions, raw-material and energy costs, currency and interest-rate exposure, tariffs and trade actions, labor negotiations, and substantial debt. A 1-percentage-point rate change on $638 million of variable-rate debt would change annual interest expense by approximately $6 million.
- Disposed-operation liabilities totaled $160.8 million. The company estimated reasonably possible additional exposure of up to approximately $69 million, with some potential liabilities not currently estimable. It also disclosed $37 million of net standby-letter-of-credit exposure, $84 million of surety bonds, and a $36 million remaining guarantee related to the LignoTech Florida venture.
- The Fernandina mill labor agreement was in negotiation; a work stoppage could materially affect operations. The Jesup wastewater-permit matter remained subject to legal proceedings, though the company and regulator had agreed the mill could continue operating under the permit. A stockholder class action was dismissed with prejudice on March 29, 2019, and no appeal was pursued.
- The company adopted the new lease standard in January 2019, recording $10 million of right-of-use assets and $11 million of lease liabilities at adoption. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and costs associated with the Temiscaming boiler, hardwood supply, and reliability issues at other facilities, and whether the anticipated second-half margin recovery occurs.
- Working-capital and cash-flow trends, revolver usage and availability, debt maturities, covenant headroom, and progress toward the 2.5-times net-leverage target.
- Actual 2019 capital spending and the sustainability of dividends while operating cash flow and adjusted free cash flow are negative.
- Exposure to environmental and disposed-operation liabilities, including the estimated additional exposure of up to $69 million, and developments in the Jesup permit matter and labor negotiations.
- The mandatory conversion of 1.725 million preferred shares, expected August 15, 2019, and related potential common-share dilution. The board declared a $2-per-share preferred dividend for Q2, payable May 15, 2019.
- Reported quarter share purchases included 420,847 shares withheld or repurchased for incentive-award tax obligations; the company stated it made no purchases under its public buyback program.