Rayonier Advanced Materials Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The company produces cellulose specialties and commodity cellulose products from facilities in Georgia and Florida. Cellulose specialties are its primary profit driver. Comparisons with 2014 require care: 2014 includes the business before and after its June 2014 separation from Rayonier, with pre-separation figures presented on a combined-business basis.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $941.4 million | $957.7 million |
| Gross margin | $202.5 million; 21.5% | $223.7 million; 23.4% |
| Operating income | $119.5 million; 12.8% | $63.0 million; 6.6% |
| Net income | $55.3 million | $31.7 million |
| Diluted EPS | $1.30 | $0.75 |
| Cash from operations | $201.7 million | $187.8 million |
| Capital expenditures | $77.4 million | $74.8 million |
| EBITDA / pro forma EBITDA | $209 million / $238 million | $149 million / $267 million |
Sales fell about 2%, principally because cellulose specialties prices declined. Cellulose specialties sales were $766.9 million, down from $843.5 million; average price fell to $1,641 per metric ton from $1,762, and volume declined to 467,000 metric tons from 479,000. Commodity product sales rose to $174.4 million from $114.2 million, with volume increasing to 247,000 metric tons from 148,000.
Operating income improved by $56.6 million, despite weaker sales and gross margin. The main offset was lower other operating expense, particularly because 2014 included substantial environmental liability adjustments and separation costs. 2015 included a $28.5 million non-cash impairment charge related to the Jesup plant repositioning. Net income and operating income are GAAP measures; EBITDA, pro forma EBITDA and adjusted free cash flow are company-defined non-GAAP measures.
Adjusted free cash flow was $124 million, compared with $113 million. Cash and cash equivalents were $101.3 million at year-end, with $235.8 million available under the revolving facility. Total debt was $867.9 million, down from $944.8 million; debt to capitalization was reported at 102%, reflecting stockholders’ deficit of $17.1 million. The company reported compliance with debt covenants.
Dividends declared were $0.28 per share for 2015. The board declared a $0.07-per-share first-quarter 2016 dividend.
Fourth-quarter snapshot
For the quarter ended December 31, 2015, sales were $241.6 million, operating income $29.0 million, net income $12.8 million and diluted EPS $0.30. In fourth-quarter 2014, sales were $248.0 million, operating loss $28.3 million, net loss $23.3 million and diluted loss per share $0.55. The filing attributes the prior-year quarterly loss in part to significant environmental and other operating charges.
Outlook, strategy and material developments
- Management expected 2016 cellulose specialties prices to decline 6%–7% and sales volumes to decline 4%–5% from 2015, amid industry oversupply, weaker end-market demand and customer inventory adjustments. It forecast 2016 pro forma EBITDA of $175–$190 million, adjusted free cash flow of $75–$85 million, capital expenditures of about $90 million and an effective tax rate of about 35%. These are forecasts, not results.
- Management expected 2017 acetate pricing to be about 2% below 2016, based on contractual commitments for most acetate volume.
- A three-year transformation initiative launched in 2016 targets $75–$90 million of cost savings. A Jesup asset repositioning is intended to improve efficiency and increase commodity production; timing depends on engineering and permits.
- The company signed definitive agreements with Borregaard for a proposed lignin-products joint venture: Rayonier Advanced Materials would own 45%. The project is expected to require about $110 million of aggregate investment over two phases and reach 150,000 metric tons of annual capacity; the first phase was scheduled to begin commercial operations in 2018. The project remained subject to approvals, final engineering, permits and incentives.
Risks, contingencies and unusual items
- Market and concentration risk: Cellulose specialties prices had declined about 14% over two years. The ten largest cellulose specialties customers represented about 75% of 2015 sales; four named customers each accounted for more than 10%. Approximately 60% of sales over the prior three years related to acetate tow used in cigarette filters. International customers accounted for about 58% of 2015 revenue.
- Environmental liabilities: Accrued liabilities for disposed operations were $157.4 million at year-end, generally estimated over a 20-year period. The company estimated reasonably possible additional exposure of up to approximately $65 million, while noting that some potential liabilities were not estimable and actual costs could exceed recorded amounts.
- Environmental compliance and litigation: Boiler emissions compliance was expected to require about $50 million of capital by the end of 2016; about $15 million remained estimated for 2016. A Georgia administrative challenge to the renewed Jesup wastewater permit was pending; the plant continued operating under its existing permit during the proceeding. A stockholder securities class action alleging inadequate environmental accruals was also pending, with discovery stayed while a motion to dismiss was considered.
- Other exposure: Wood, chemicals and energy costs can be volatile, and annual or contractual cellulose specialties pricing limits the ability to pass through cost increases. The company also cited labor, operating interruption, foreign-market, currency, tobacco-demand, financing and pension-funding risks. Pension plans were underfunded by about $139 million; no 2016 contribution was expected.
- Debt and subsequent event: Debt included $550 million of 5.50% senior notes due 2024 and variable-rate term loans. After year-end, the company bought and retired approximately $18.6 million principal of the notes for $13.7 million plus accrued interest, expecting to record a $4.6 million gain before tax in first-quarter 2016.
- Contract development: The Eastman contract dispute was settled in November 2015. A replacement purchase and sale agreement took effect January 1, 2016 and runs through December 31, 2019.
Most important facts for investors to verify
- Whether 2016 price and volume declines, EBITDA and free-cash-flow guidance, and transformation savings targets were achieved.
- Whether customer concentration, tobacco-related demand and the cellulose specialties supply imbalance affected realized prices and volumes as expected.
- Progress and actual costs for the Jesup repositioning, Boiler MACT compliance and the proposed lignin joint venture.
- Changes in the $157.4 million environmental accrual and the potential additional exposure, including outcomes of the Jesup permit and stockholder litigation.
- Debt repayment, interest costs, covenant headroom, liquidity and the company’s ability to fund capital needs and dividends.