Rayonier Advanced Materials Inc. — Q3 2015 Form 10-Q
Reporting period: Third quarter ended September 26, 2015; year-to-date results cover the nine months ended September 26, 2015. The company manufactures high-value cellulose products, including cellulose specialties and commodity products, at facilities in Georgia and Florida. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $257.6 | $253.7 | $699.8 | $709.7 |
| Gross margin | $70.2; 27.2% | $55.7; 22.0% | $152.1; 21.7% | $162.8; 23.0% |
| Operating income | $58.0 | $41.7 | $90.5 | $91.3 |
| Net income | $32.3 | $19.4 | $42.5 | $54.9 |
| Diluted EPS | $0.76 | $0.46 | $1.00 | $1.30 |
- Q3 sales rose about 1.5%; operating income rose about 39% and net income about 66%. Lower manufacturing costs and higher volumes more than offset lower cellulose specialties prices. Cost savings reflected lower wood, chemical, energy, labor, and maintenance costs.
- Nine-month sales fell about 1.4%, operating income was nearly flat, and net income fell about 23%. Cellulose specialties price declines and lower sales volumes weighed on results; higher commodity volumes and lower costs partly offset the pressure.
- Q3 cellulose specialties sales were $215 million versus $223 million; commodity products and other sales were $42 million versus $31 million. Year-to-date, these categories were $577 million versus $630 million and $123 million versus $80 million, respectively.
- Interest expense was $9.0 million in Q3 versus $9.5 million, but $27.6 million year to date versus $12.7 million, reflecting debt issued in 2014 in connection with the separation. Effective tax rates were 34.2% and 32.6% for Q3 and year to date, respectively.
Cash, debt, and liquidity
- Cash was $100.4 million at September 26, 2015, up from $66.0 million at year-end 2014. Nine-month operating cash flow was $152.0 million versus $127.7 million; capital expenditures were $59.7 million. Company-defined adjusted free cash flow was $92 million versus $68 million.
- Total debt was $892.9 million, down from $944.8 million at year-end, after $52.1 million of principal repayments. Cash less total debt implies net debt of approximately $792.5 million. Debt included $550 million of 5.50% senior notes due 2024 and variable-rate term loans.
- Revolving-credit availability was $236 million, net of letters of credit. The company reported compliance with debt covenants. Stockholders’ deficit was $17.0 million, and the reported debt-to-capital ratio was 102%.
- Dividends declared were $0.07 per share in Q3. A subsequent fourth-quarter dividend of $0.07 per share was declared October 16, payable December 31, 2015.
Material changes, outlook, and risks
- Jesup realignment: The company plans to invest $25 million to convert its approximately 190,000-ton C-line to commodity production and reposition equipment to improve the A-line. The plan reduces cellulose specialties capacity by about 28%, increases annual fluff and viscose capacity by 11% to approximately 245,000 tons, and is expected to generate about $14 million in annual cost savings. Completion depends on engineering and permits. A $28.5 million non-cash impairment charge was recorded in Q2 2015 for abandoned assets.
- Management outlook: For 2015, cellulose specialties sales volumes were expected to be comparable to 2014, with prices 7%–8% below 2014 average prices; estimated EBITDA was approximately $230 million. Planned 2015 capital expenditures were approximately $80 million, including $18 million for the Boiler MACT project. The company expected 2015 effective tax rate of 33%–34% and approximately $15 million of 2016 capex to complete Boiler MACT. These are forward-looking estimates, not results.
- Management cited cellulose specialties oversupply, weak end-market demand, near-term softness in acetate and ethers, and competitors’ currency advantages. A $40 million cost-savings plan was described as positively affecting 2015 results; priorities also include asset optimization and product innovation.
- Eastman litigation: The company and Eastman, its largest customer, filed lawsuits over contract pricing and volume provisions. Eastman represented approximately 31% of 2014 revenue. An outcome that terminates or materially limits the contract could materially harm results, financial position, and cash flow.
- Environmental and other contingencies: Disposed-operations liabilities totaled $152.4 million. The company estimated reasonably possible additional exposure of up to approximately $64 million, while noting other potential liabilities were not currently estimable and reserves may prove insufficient. Outstanding letters of credit and surety bonds totaled $70.4 million. A securities class action was pending; the company said it did not expect it to have a material adverse effect. The Jesup water-discharge lawsuit was concluded after the plaintiff did not appeal a favorable ruling.
- Other risks include failure to achieve the realignment’s expected benefits, customer concentration, market and input-price changes, environmental requirements, and variable-rate debt exposure. A one-percentage-point rate change was estimated to affect annual interest expense by about $3 million.
Most important facts for investors to verify
- Whether the Jesup realignment stays within its planned cost and schedule and delivers the projected $14 million annual savings and production mix.
- Developments in the Eastman contract litigation and any effects on customer purchases, pricing, or contract continuity.
- Actual cellulose specialties prices and volumes, commodity volumes, and progress toward the approximately $230 million 2015 EBITDA estimate.
- Environmental remediation spending and whether disposed-operations reserves adequately cover the disclosed possible additional exposure.
- Debt repayment, revolving-credit availability, cash generation, and delivery of planned capital spending and dividend commitments.