Rayonier Advanced Materials Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. Although the request references Q4, this is an annual filing; selected fourth-quarter results are included below. The company separated from Rayonier on June 27, 2014. 2014 results combine the performance-fibers business before the separation with the independent company afterward; prior years reflect the business as part of Rayonier, so comparisons are not fully like-for-like.
Business context
The company is a global producer of cellulose specialties, alongside commodity viscose and absorbent fibers. Its two U.S. plants have annual cellulose-specialties capacity of approximately 675,000 metric tons; about 70% of capacity was being used for cellulose specialties. Products are sold globally, with 56% of 2014 revenue from exports. The ten largest customers accounted for about 75% of sales.
Financial results and liquidity
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Net sales | $957.7 million | $1,046.6 million | Down 8.5% |
| Gross margin | $223.7 million; 23.4% | $332.6 million; 31.8% | Down $108.8 million; margin down 8.4 percentage points |
| Operating income | $63.0 million; 6.6% | $288.6 million; 27.6% | Down $225.7 million |
| Net income | $31.7 million | $219.8 million | Diluted EPS $0.75 versus $5.21 |
| Operating cash flow | $187.8 million | $258.0 million | Down $70.3 million |
| Capital expenditures | $74.8 million | $96.0 million | Excludes strategic purchases and expansion-project spending |
| Cash / revolver availability | $66.0 million / $222.1 million | Not reported as comparable | Revolver availability net of letters of credit |
| Total debt | $944.8 million | None reported | Debt-to-capital ratio 107%; year-end equity was a $62.4 million deficit |
Cellulose-specialties sales were $843.5 million, versus $929.9 million in 2013. The average selling price fell to $1,762 per metric ton from $1,913; volume declined to 479,000 metric tons from 486,000. Commodity-products and other sales were $114.2 million, versus $116.7 million.
Fourth-quarter 2014 sales were $248.0 million, operating loss was $28.3 million, and net loss was $23.3 million. The filing attributes the quarter’s result largely to environmental reserve and impairment items.
Interest expense was $22.4 million in 2014, compared with none allocated in 2013. The company had $550 million of 5.50% senior notes due 2024 and approximately $386 million of variable-rate term debt. It reported compliance with debt covenants at year-end. Adjusted free cash flow, a non-GAAP measure, was $113 million, down from $143 million.
Material changes and unusual items
- Revenue declined mainly because cellulose-specialties pricing fell about 8%; management also cited lower recognized volume due to customer-receipt timing.
- Other operating expense rose to $120.8 million from $8.2 million. It included a $70.1 million environmental reserve adjustment, $25.7 million of separation and legal costs, $18.4 million of financial-assurance costs, and a $7.2 million impairment charge, partly offset by a $2.9 million insurance settlement.
- Environmental liabilities for disposed operations were $156.7 million at year-end, including a substantial fourth-quarter estimate increase. The company estimated reasonably possible additional exposure of up to approximately $64 million, while noting the amount could be exceeded and some exposures were not estimable.
- The company incurred approximately $950 million of new debt in connection with the separation and distributed approximately $906 million of borrowings to Rayonier. The separation also transferred pension and environmental liabilities to the new company.
- 2014 tax expense benefited from a reversal of a $4.8 million uncertain-tax-position reserve and other tax items; the effective tax rate was 21.8%, versus 23.9%.
Outlook, risks and contingencies
Management forecast 2015 cellulose-specialties volumes broadly comparable to recent years, but prices 7%–8% below 2014, citing industry oversupply and weaker end-market demand. It expected 2015 EBITDA of $200 million–$220 million, an effective tax rate of 33%–34%, and capital expenditures of $75 million–$80 million. Management expected to maintain or increase cellulose-specialties share at its ten largest customers.
- Customer and end-market concentration: Eastman represented 31% of 2014 sales, Nantong 18%, and Daicel 15%. Approximately 60% of sales volume over the prior three years related to acetate tow used in cigarette filters.
- Pricing, competition and trade: Additional capacity and weaker demand could pressure prices and margins. China imposed a 17.2% duty on certain commodity-viscose imports; 2014 sales of that product into China were $22 million.
- Environmental matters: The company faces long-term remediation obligations and a pending Altamaha Riverkeeper lawsuit concerning permitted wastewater discharges from the Jesup plant. The plaintiff seeks injunctive relief and monetary damages; the amount was not determinable. The company disputes the allegations.
- Compliance investment: Estimated remaining Boiler MACT compliance costs were $30 million–$35 million over the following two years; management also expected substantial environmental spending over the next decade.
- Pensions and operating inputs: Pension plans were underfunded by $118 million at year-end. Lower interest rates, investment returns, wood and chemical costs, energy prices, weather, labor disruptions, and plant outages could affect results and cash flow.
- Separation-related risks: Standalone costs, indemnification duties, and tax-free separation conditions could affect profitability or restrict certain corporate transactions. Historical allocated costs may not represent standalone costs.
Key facts investors should verify
- Whether 2015 pricing, volumes, EBITDA, tax-rate and capital-spending expectations were achieved.
- How customer concentration and exposure to cigarette-filter demand affect contract pricing, sales and cash flow.
- Updates to the $156.7 million environmental reserve, the potential additional exposure, and the Port Angeles remediation plan.
- Debt reduction, revolver availability, covenant headroom and interest-rate sensitivity; a one-percentage-point rate change was estimated to affect annual interest expense by about $4 million.
- Progress on environmental compliance spending and the outcome or financial impact of the Jesup wastewater litigation.