Rayonier Advanced Materials Inc. reported full year net income of $55 million, or $1.30 diluted earnings per share. Full year pro forma net income was $73 million or $1.74 per share, compared to $106 million, or $2.51 per share, in 2014.
For the fourth quarter 2015, the Company reported net income of $13 million, or $0.30 diluted earnings per share. Fourth quarter pro forma net income was $14 million, or $0.32 per share, compared to $26 million or $0.61 per share for the prior year period.
“Our focused effort to improve costs coupled with favorable raw material prices led to solid results that exceeded our 2015 guidance,” said Paul Boynton, Chairman, President and Chief Executive Officer. “During our first full year as a public company, we achieved many important milestones including the successful implementation of our $40 million cost savings initiative and free cash flow generation of $124 million, the entry into key customer contracts extending through 2019, the reinvigoration of our innovation platform and the repositioning of our manufacturing assets to better align us with market conditions.”
Full Year and Fourth Quarter Results
For the full year 2015, net sales were $941 million, a decline of $17 million, or 2 percent, from $958 million for the full year 2014. Fourth quarter 2015 net sales were $242 million, a decline of $6 million, or 2 percent, from $248 million in the prior year comparable quarter.
The sales decrease was driven primarily by lower cellulose specialties prices. Additionally, cellulose specialties volumes declined approximately 12 thousand tons, or 2 percent, as we worked with our customers during the fourth quarter to assist them in balancing their inventories to address lower demand as a result of acetate supply chain de-stocking. Partially offsetting the decline were higher commodity sales volumes, driven by improved operational run rates and reduced inventory levels.
Full year 2015 pro forma operating income was $149 million compared to $181 million for 2014. The decrease was largely due to lower cellulose specialties sales prices and volumes. Higher selling, general and administrative expenses, primarily associated with being a stand-alone public company, also contributed to the decline. The decreases were partially offset by lower costs as a result of cost reduction initiatives and benefits from lower raw material input costs as well as higher commodity sales volumes.
For the fourth quarter of 2015, pro forma operating income was $30 million, $17 million below fourth quarter 2014 pro forma results of $47 million. The decrease was largely due to lower cellulose specialties sales prices and volumes along with higher environmental expenses. These were partially offset by higher commodity sales volumes and lower costs as a result of cost reduction initiatives.
Interest Expense, Net
Interest expense, net of interest income, was $37 million for full year and $9 million for fourth quarter 2015 reflecting the debt issued to effect the separation.
Income Tax Expense
The full year 2015 effective tax rate was 33 percent, compared to 22 percent for the prior year. The prior year period reflects the impact of the domestic manufacturing deduction as a result of lower pre-tax income driven by large, one-time environmental reserve adjustments, which are not currently deductible for tax purposes.
The 2015 effective tax rate was below the federal rate of 35 percent, primarily due to the benefit of the domestic manufacturing tax deduction and state tax credits, partially offset by an adjustment to the state deferred tax rate.
Cash Flow and Liquidity
The Company generated $124 million of adjusted free cash flow and reduced net debt by $112 million since December 31, 2014. The Company ended the year with $337 million of liquidity including $236 million available under its revolving credit facility after taking into account outstanding letters of credit.
Industry oversupply and weak end-market demand continue to put near-term pricing pressure on the Company’s cellulose specialties business. Pressure on acetate products, key to the Company’s profitability, persists as overproduction by customers coupled with modest declines in cigarette demand led to a buildup of acetate product inventories in the supply chain. In other markets, demand is increasing driven by growth in high-strength viscose, casings, tire cord and certain ether end-markets. As a combined result of these market conditions and customer negotiations, the Company expects 2016 cellulose specialties prices and sales volumes to be down compared to 2015 6 to 7 percent and 4 to 5 percent, respectively. The Company anticipates generating pro forma EBITDA between $175 million and $190 million in 2016 and $75 to $85 million of adjusted free cash flow. Based on contractual commitments for the majority of the Company’s acetate volume, 2017 acetate pricing is expected to be approximately 2 percent below 2016.
“We are responding to these challenging market conditions by improving our cost position, enhancing cash flows and driving our overall competitiveness,” said Boynton.
In 2016, the Company is embarking on a three-year transformation initiative to significantly improve its cost structure and enhance cash flows. This initiative is being led by a cross-functional team reporting directly to the CEO. The team’s focus is to increase the overall efficiency of the business to meet the near-term market challenges. The transformation initiative targets three-year cost savings of $75 to $90 million. The 2016 guidance reflects the expected impact of the first year of the transformation initiative.
“Our management team has the expertise to deliver on these aggressive goals. Doing so will position us to perform well in any market condition, allow us to enhance financial flexibility and drive shareholder value,” stated Boynton.