Business context and reporting period
Rayonier Advanced Materials Inc. (RYAM) filed this unaudited Form 10-Q for the quarter and six months ended June 29, 2019. Its businesses include High Purity Cellulose, Forest Products, Pulp and Paper. Comparisons below are with the corresponding 2018 periods.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $487.8 million | $541.7 million | $970.6 million | $1,063.7 million |
| Gross margin | $25.4 million (5%) | $101.5 million (19%) | $42.6 million (4%) | $181.8 million (17%) |
| Operating income (loss) | $(8.3) million | $66.2 million | $(26.8) million | $112.5 million |
| Net income (loss) | $(14.9) million | $53.4 million | $(37.0) million | $77.8 million |
| Loss per common share, diluted | $(0.37) | $0.83 income | $(0.89) | $1.22 income |
| Adjusted EBITDA (non-GAAP) | $29 million | $106 million | $49 million | $192 million |
For the six months, operating cash flow was $18.3 million, versus $89.2 million; capital expenditures were $59.9 million, versus $63.6 million. Adjusted free cash flow, a non-GAAP measure, was negative $33 million, compared with positive $48 million. Cash declined to $90.1 million from $109.0 million at year-end 2018.
At June 29, 2019, total debt was $1.237 billion, up from $1.188 billion at December 31, 2018; stockholders’ equity was $666.6 million. The debt-to-capital ratio was 65%, versus 63%. Revolver availability was zero (restricted), compared with $217 million at year-end. The company reported current compliance with debt covenants, but warned it expects to fail a 3.0x first-lien secured net leverage test at the end of Q3 2019 unless it amends or refinances its credit facilities.
Material changes and drivers
Q2 sales fell 10% year over year and six-month sales fell 9%, primarily due to lower prices for cellulose specialties, lumber, high-yield pulp and newsprint. Operating results declined by $74 million in Q2 and $139 million for the six-month period, mainly from weaker selling prices and higher costs.
- High Purity Cellulose: Q2 operating income fell to $7 million from $28 million; six-month income fell to $4 million from $49 million. Lower specialty prices and volumes, production reliability issues, and higher wood and maintenance costs weighed on results.
- Forest Products: Q2 operating loss was $16 million, compared with $17 million income; six-month loss was $22 million, compared with $27 million income. Lumber prices fell 33% in Q2; costs included inventory valuation reserves and higher maintenance and depreciation.
- Pulp: Q2 operating income was $10 million, down from $26 million; six-month income was $21 million, down from $49 million, primarily reflecting lower pulp prices and higher transportation and warehousing costs.
- Paper: Q2 operating income was $3 million, versus $7 million; six-month income was $1 million, versus $10 million. Newsprint pricing and volume weakened, including from production reliability issues and an energy curtailment at Kapuskasing.
Outlook, risks and unusual items
- Management forecast 2019 High Purity Cellulose EBITDA of $150–$160 million. It expected cellulose-specialties prices to decline about 1–2% and volumes 4–5%; commodity-product prices were expected to be significantly lower in the second half.
- Management cited continued weak commodity markets, including pressure on pulp, lumber, paperboard and newsprint. It had paid approximately $48 million in lumber duties to date.
- Capital spending guidance for 2019 was reduced to $120 million from $130 million, with further reductions under review. Management said it was reviewing the common-stock dividend policy; future dividends are not assured.
- On August 1, 2019, the company announced an agreement to sell its Matane plant for approximately $175 million, less fees and expenses. Closing was expected in Q4 2019; proceeds were intended for general corporate purposes, including debt reduction. Closing timing could affect Pulp segment results.
- Management was in active lender discussions and expected an amendment in Q3, but gave no assurance. Without an amendment or refinancing, lenders could seek immediate repayment after the Q3 10-Q filing. The company explicitly stated its ability to continue as a going concern depends on obtaining an amendment or refinancing.
- The 8% mandatory convertible preferred stock was expected to convert on August 15, 2019; the conversion rate depends on the applicable common-stock market value. The final preferred dividend was declared for payment on that date.
- Disposed-operations liabilities totaled $160.8 million. The company estimated reasonably possible additional exposure of up to approximately $69 million, excluding currently unestimable liabilities.
- Approximately 250 unionized employees were covered by expired collective bargaining agreements while negotiations continued; a work stoppage could materially affect operations.
Most important facts for investors to verify
- Whether RYAM completed a credit-facility amendment or refinancing before the Q3 covenant test, and the resulting covenant terms, liquidity and going-concern status.
- Whether the Matane sale closed, its net proceeds and use of funds, and any effect on operating results or debt.
- Subsequent operating performance and cash generation against the 2019 High Purity Cellulose EBITDA outlook amid weak commodity prices and production challenges.
- Any decision on common dividends and the actual dilution from the mandatory preferred-stock conversion.
- Potential developments in environmental/remediation exposure and labor negotiations.