Rayonier Advanced Materials Inc. — Q1 2022 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 26, 2022, compared with the three months ended March 27, 2021. The company makes high-purity cellulose products, paperboard and high-yield pulp. Lumber and newsprint operations sold in August 2021 are reported as discontinued operations; comparisons below generally refer to continuing operations. Dollar amounts are in millions unless stated otherwise.
Financial results and liquidity
- Revenue: $351.7, up 10% from $318.7. Higher prices in High Purity Cellulose and Paperboard drove the increase; High-Yield Pulp revenue fell.
- Profitability: Gross margin was $5.9, down from $20.4; gross margin fell to about 1.7% from 6.4%. Operating loss was $15.8 versus $0.5. Continuing-operations net loss was $24.4 versus $16.2. Total net loss improved to $24.9 from $27.0, largely because the prior-year period included a larger discontinued-operations loss. Reported total loss per share was $0.39 versus $0.43.
- Unusual non-operating item: Results included a $8.9 unrealized gain on GreenFirst shares. Excluding this fair-value gain, the reported earnings trend would be weaker; the filing does not provide an adjusted net-income figure.
- Segments: High Purity Cellulose sales rose to $280.9 from $249.8, but operating results swung to an $7.8 loss from $6.4 income as cost inflation and lower volumes outweighed pricing. Paperboard sales increased to $54.2 from $47.8 and operating income remained $5.8. High-Yield Pulp sales decreased to $22.1 from $27.5; operating loss narrowed to $0.4 from $0.5.
- Cash flow: Continuing-operations operating cash flow was a $22.9 outflow versus $22.4 inflow. Capital expenditures were $45.2, including about $9 of strategic spending. Company-defined adjusted free cash flow was negative $59 versus positive $8. Cash and cash equivalents declined to $178.7 from $253.3.
- Debt and liquidity: Total debt carrying value was $925.4; principal payments due were $933.3. Cash plus $100 of net ABL availability and $23 available under a French factoring line supported liquidity. Debt-to-capital was 54%, versus 53% at year-end. The company reported covenant compliance and said expected operating cash flows and available facilities should meet anticipated funding needs.
- Other balance-sheet measures: Total assets were $2,439.3 and stockholders’ equity was $787.2. Current assets were $744.8 and current liabilities $378.2.
Changes, outlook and management commentary
- Revenue growth did not translate into stronger operating performance: management attributed the deterioration primarily to inflation in wood, chemicals, energy and supply-chain costs, as well as supply constraints, lower production and volumes. Continuing-operations EBITDA was $20 versus $32 a year earlier.
- The company announced a $146-per-metric-ton surcharge on cellulose specialties and viscose-grade shipments beginning April 1, 2022, intended to offset exceptional input-cost inflation. It said cellulose specialties pricing had risen double digits in Q1.
- Management expected High Purity Cellulose adjusted EBITDA to increase in Q2 versus Q1 and for full-year 2022 versus 2021. It also expected Q2 adjusted EBITDA improvement in Paperboard and High-Yield Pulp. These are directional expectations; the filing provides no quantified earnings guidance.
- Planned maintenance outages at Jesup and Fernandina had been completed; outages at Temiscaming and Tartas were scheduled for Q2. Management said the work was intended to improve reliability and productivity, while noting that full-year sales volumes depended on supply-chain conditions and production reliability.
- On May 2, 2022, after quarter-end, the company sold its 28.7 million GreenFirst shares for about $43 million. The agreement provides participation in certain future share-price appreciation for 18 months. The company also expected $21 million of tax refunds in 2022.
- Debt refinancing is a key funding consideration: the next significant maturity is the $369.2 million Senior Notes due in 2024. Management said it was monitoring capital markets and would pursue refinancing at an appropriate time.
Risks, contingencies and unusual matters
- Environmental exposure: Recorded environmental liabilities totaled $171.7. The company estimated reasonably possible additional exposure of up to about $86, while noting further amounts may not be estimable and actual costs could exceed the estimate.
- Other contingent obligations: The company disclosed $40 of net standby-letter-of-credit exposure, $89 of surety bonds and a $33 proportional guarantee related to LignoTech Florida financing. These are contingent and generally become payable upon specified events or defaults.
- Softwood-lumber duties: The company retained rights and obligations related to duties through the sale date and recorded a $20 long-term receivable, but timing of recovery depends on ongoing legal and administrative processes.
- GreenFirst sale adjustments: The company paid a net $3 cash outflow for sale-related true-ups during Q1; the closing inventory valuation adjustment remained under discussion.
- Shareholder rights plan: Adopted March 21, 2022, with rights generally triggered by acquisition of 10% or more of common stock without board approval; the plan was set to expire March 20, 2023.
- Other disclosed risks include input-cost and energy volatility, supply-chain and facility disruptions, customer concentration, foreign-exchange exposure, environmental regulation, pension funding needs and substantial debt. The company reported no material change to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- Whether the April surcharge and subsequent price increases offset wood, chemical, energy and logistics inflation, and when that benefit appears in margins.
- Whether production and supply constraints ease after the scheduled maintenance outages, and the resulting segment volumes and cash generation.
- Cash use, capital spending and liquidity trends, including the expected tax refund and proceeds from the GreenFirst share sale.
- Plans and market conditions for refinancing the 2024 Senior Notes, plus covenant headroom and ABL availability.
- Resolution of the GreenFirst closing inventory adjustment and softwood-duty recovery, and developments in environmental exposures and guarantees.