Rayonier Advanced Materials Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 26, 2021; comparisons are with periods ended June 27, 2020. Financial statements are unaudited. Unless noted, amounts are U.S. dollars. Lumber and newsprint results are classified as discontinued operations following the announced sale; continuing operations comprise High Purity Cellulose, Paperboard, High-Yield Pulp and Corporate.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales, continuing operations | $341.0 million | $324.2 million | $659.7 million | $648.6 million |
| Gross margin | $22.3 million | $22.5 million | $42.7 million | $30.8 million |
| Operating income (loss) | $1.4 million | $(6.2) million | $0.9 million | $(12.3) million |
| Income (loss) from continuing operations | $8.3 million | $(3.5) million | $(7.9) million | $(21.5) million |
| Net income (loss), including discontinued operations | $122.2 million | $(12.9) million | $95.2 million | $(37.0) million |
| Diluted EPS | $1.89 | $(0.20) | $1.50 | $(0.59) |
Q2 gross margin was about 6.5% of sales (reported rounded to 7%); operating margin was about 0.4%. First-half gross margin was about 6.5%, with operating margin about 0.1%. Q2 and first-half net income were substantially driven by discontinued operations, which contributed $113.9 million and $103.1 million, respectively, after tax. Continuing operations remained loss-making in the first half.
Segment trends: Q2 High Purity Cellulose sales were essentially flat at $254.6 million, while operating income rose to $10.6 million from $6.7 million, primarily on higher commodity pricing. Paperboard sales increased to $56.8 million from $43.1 million, but operating income fell to $2.4 million from $6.3 million as input and operating costs rose. High-Yield Pulp sales increased to $36.8 million from $31.8 million, with operating income near $1.1 million.
Cash flow, debt and liquidity
- First-half cash from continuing operations was $45.8 million, versus $22.6 million; total operating cash flow, including discontinued operations, was $186.4 million versus $11.1 million.
- First-half capital expenditures, net, were $47.0 million. Company-defined adjusted free cash flow from continuing operations was $3 million, down from $8 million, primarily reflecting higher capital expenditures.
- Cash and equivalents were $214.7 million at June 26, 2021, compared with $93.7 million at year-end 2020. Total debt was approximately $1.081 billion, versus $1.084 billion; the debt-to-capital ratio declined to 58% from 61%.
- Net availability under the ABL facility was $124 million after letters of credit. The company also reported $20 million available under a French receivables factoring line. It was in compliance with financial and customary covenants.
- Interest expense increased to $16.5 million for Q2 and $31.8 million for the first half, attributed primarily to higher rates and debt-issuance-cost amortization following a December 2020 refinancing. The quarterly dividend remains suspended; no near-term use of the remaining share-repurchase authorization was expected.
Material changes, outlook and notable items
- Planned asset sale: On April 12, the company announced the sale of its Ontario and Quebec lumber and newsprint assets to GreenFirst for approximately $214 million, including an assumed $74 million inventory value subject to adjustment. Consideration is 85% cash and 15% GreenFirst shares, with the shares held for at least six months. Closing was expected August 28, 2021, subject to customary conditions. The company reported $232 million of carrying value for net assets included in the transaction at quarter-end. The sale had not closed by the reporting date.
- Management outlook: High Purity Cellulose commodity pricing was expected to strengthen into Q3; cellulose-specialties volumes were expected above prior year, while total segment volumes were expected to decline slightly for the year because of extended maintenance outages. Management expected second-half volumes to rise substantially from first-half levels and believed strong specialty demand and elevated commodity pricing could support maintaining or improving specialty margins in 2022. It also cited inflation in energy, wood, chemicals and logistics, plus shipping constraints. Paperboard prices were expected to rise further on demand and industry supply disruptions. High-Yield Pulp price increases were expected to be reflected in Q3, with prices forecast to fall later in the year. The filing provides no consolidated earnings or EPS guidance.
- Portfolio and investment plans: After the sale, management intends to focus on high-purity cellulose and sustainable products. The Tartas green-energy project became fully operational in Q2; the company anticipates $10 million of annualized benefits. It also invested $4 million in Anomera during the first half.
- Unusual earnings and tax items: The 2021 continuing-operations tax benefit rate was 153% for Q2 and 77% for the first half, mainly due to remeasurement of Canadian deferred tax assets after anticipated provincial income allocation changes following the asset sale. Discontinued-operations results benefited from sharply higher lumber prices; the filing cites Q2 lumber price increases of 213% and first-half increases of 166% year over year. GILTI tax effects partly offset those gains.
- Contingencies and operational risks: A settlement with Ontario’s IESO requires CAD $12 million over five years, including CAD $4.5 million upfront; a further CAD $10.4 million is contingent on specified uncured breaches or defaults. Environmental liabilities totaled $171.1 million, with reasonably possible additional exposure estimated up to approximately $78 million, excluding amounts not currently estimable. The company also had a $21 million receivable related to revised softwood-lumber duty rates, but repayment timing depends on ongoing legal and administrative proceedings.
- Collective bargaining agreements covering about 400 employees in the Canadian lumber and newsprint businesses had expired, with employees working under prior terms while negotiations continued; a work stoppage could harm those operations. The company cited ongoing COVID-19 uncertainty, rising input and logistics costs, and the risk that the GreenFirst transaction may not close or that the value of its share consideration may fluctuate.
Key facts for investors to verify
- Whether the GreenFirst sale closed on expected terms and timing, and the final cash, share and inventory consideration.
- How much of reported earnings and cash generation is attributable to discontinued operations versus continuing businesses, and the sustainability of continuing-operations profitability.
- Whether pricing gains offset inflation, maintenance outages and logistics constraints in the second half of 2021 and beyond.
- The realization and timing of the anticipated $10 million annualized Tartas project benefits and other core-business investments.
- Potential cash impacts from environmental exposures, the IESO settlement, softwood-lumber duties and CEWS claims, which remain subject to audit or other conditions.