Rayonier Advanced Materials Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 28, 2019; unaudited. The company makes cellulose-based products and also operates forest products, pulp and paper businesses. Matane pulp operations are reported as discontinued operations.
Key financial results
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Net sales | $416.1 million | $501.3 million | $1,307.4 million | $1,475.6 million |
| Gross margin | $16.6 million (4%) | $82.3 million (16%) | $42.2 million (3%) | $238.9 million (16%) |
| Operating income (loss) | $(8.6) million | $42.9 million | $(51.5) million | $131.0 million |
| Continuing-operations income (loss) | $(14.4) million | $30.0 million | $(61.6) million | $92.4 million |
| Net income (loss) available to common stockholders | $(16.0) million | $34.5 million | $(59.8) million | $105.5 million |
| Basic EPS | $(0.29) | $0.68 | $(1.16) | $2.07 |
Q3 operating margin was negative 2%, versus 9% a year earlier; the nine-month operating margin was negative 4%, versus 9%. Results reflect lower selling prices and weaker demand across several product lines, alongside higher costs.
Cash flow, debt and liquidity
- Nine-month cash from operations was $24.1 million, down from $160.4 million; continuing operations generated $4.6 million, compared with $141.0 million. Capital expenditures were $80.8 million.
- Management’s non-GAAP adjusted free cash flow was negative $58 million for the first nine months, versus positive $83 million in 2018.
- At September 28, total debt was $1.234 billion, cash was $62.8 million, and revolving-credit availability was $167 million. Debt-to-capital was 66%, compared with 63% at year-end 2018.
- On September 30, the company amended its senior secured credit agreement, easing leverage and interest-coverage covenant tests through December 31, 2021. The amendment also allows for higher interest margins, additional collateral requirements and minimum revolver availability. Management said the company was compliant as of September 28 and that it no longer believed substantial doubt existed about its ability to continue as a going concern.
Material changes and business developments
- Q3 sales fell 17% and nine-month sales fell 11% year over year. High Purity Cellulose sales declined 13% in Q3; Forest Products declined 24%; Pulp declined 44%; and Paper declined 6%.
- Cellulose specialties volumes were down 16% in Q3, reflecting weakness in acetate and automotive markets. Lumber prices fell 25% in Q3, and high-yield pulp prices fell 32%. Newsprint faced continuing demand and pricing pressure.
- On November 4, 2019, after quarter-end, the company completed the Matane sale for approximately $175 million gross and received approximately $150 million net of fees, expenses and adjustments. Approximately $100 million is required to repay debt; the remainder is intended for general corporate purposes, including liquidity. The sale removes about $117 million of previously disclosed purchase obligations.
- The Series A mandatory convertible preferred stock converted into approximately 13.4 million common shares on August 15, 2019. The company suspended its common dividend in September; it had paid $0.07 per share for each of the first two quarters of 2019.
Outlook, risks and unusual items
- For full-year 2019, management expected High Purity Cellulose EBITDA of approximately $140 million. Cellulose specialties prices were expected to decline 1%–2% and volumes about 6% versus 2018; commodity-product prices were expected to be significantly lower in Q4. These are management expectations, not guarantees.
- Full-year 2019 capital spending was expected to be approximately $120 million, down from the original $130 million estimate, with further reductions under evaluation.
- Management cited weak commodity markets, trade issues and tariffs, customer inventory management, and demand weakness. Other significant risks include cyclical pricing, manufacturing interruptions, raw-material and energy costs, foreign exchange, customer concentration, environmental regulation, pension funding, substantial debt and the possibility of failing to meet amended covenants before relief expires.
- Environmental liabilities totaled $159.5 million. The company estimated reasonably possible additional exposure of up to approximately $69 million, excluding amounts not currently estimable.
- An October 2019 pension-liability settlement was expected to produce a non-cash loss of approximately $15–$20 million in Q4. The filing also reports $36 million of net standby-letter-of-credit exposure, $86 million of surety bonds and a $33 million remaining guarantee related to the LignoTech Florida venture.
- Management’s EBITDA, adjusted EBITDA and adjusted free cash flow are non-GAAP measures; the filing cautions they should not be viewed as substitutes for GAAP results.
Important facts for investors to verify
- Whether operating results and cash generation recover from the sharp year-over-year declines, including performance against the $140 million High Purity Cellulose EBITDA outlook.
- Compliance with amended credit covenants, borrowing costs and liquidity needs through the end of covenant relief in 2021.
- How Matane sale proceeds are ultimately applied and the resulting debt and interest expense.
- Whether market prices, duties, customer demand and operating reliability improve across cellulose specialties, lumber, pulp and paper.
- The timing and amount of environmental, pension and other contingent cash costs, including the expected Q4 pension settlement loss.