Rayonier Advanced Materials Inc. reported a net loss for the fourth quarter ended December 31, 2014 of $23 million, or $(0.55) per share. Excluding environmental, separation and legal costs, fourth quarter pro forma net income was $26 million, or $0.61 per share, compared to $53 million, or $1.25 per share, in the prior year period (see Environmental Reserves Adjustment section below).
For the full year, the Company reported net income of $32 million, or $0.75 per share. Excluding environmental, separation and legal costs, full year pro forma net income was $106 million, or $2.51 per share, compared to $205 million, or $4.86 per share, in 2013.
“As expected, market conditions remained challenging in the fourth quarter of 2014,” said Paul Boynton, Chairman, President and Chief Executive Officer. “Throughout the year, cellulose specialties markets were oversupplied and global demand decelerated. To offset some of the impact from the resulting lower prices, we focused our efforts on reducing costs and improving our operating efficiencies. Consequently, in spite of experiencing higher than anticipated costs in the second half of the year, we were able to achieve the full year guidance provided in July.”
Fourth Quarter and Full Year Results
In the fourth quarter of 2014, sales were $248 million compared to $282 million in the prior year period. The $34 million decline was primarily due to lower cellulose specialties sales prices.
The Company incurred an operating loss of $28 million for the fourth quarter. Excluding environmental, separation and legal costs, pro forma operating income was $47 million, $26 million below fourth quarter 2013 pro forma results of $73 million, largely due to lower cellulose specialties prices.
For the full year, sales were $958 million in 2014 and $1,047 million in 2013. The $89 million decrease is primarily due to an 8 percent decline in cellulose specialties prices. Cellulose specialties volumes of 479,000 tons were comparable to 2013 volumes of 486,000 with the difference due to the timing of customer receipt of shipments.
Full year operating income was $63 million and $289 million for 2014 and 2013, respectively. Excluding environmental, separation and legal costs, pro forma operating income was $181 million and $295 million for 2014 and 2013, respectively. The decline was primarily due to lower cellulose specialties prices and higher input costs.
Interest Expense, Net
Interest expense, net of interest income, was $10 million for fourth quarter and $22 million for full year 2014 reflecting the debt issued to effect the separation.
Income Tax Expense
The fourth quarter tax benefit reflects the Company’s loss before income taxes which is primarily due to the environmental reserves adjustment. The full year effective tax rate was 21.8 percent. It was below the federal rate of 35 percent primarily due to the benefit of domestic manufacturing tax deductions and the reversal of a tax reserve related to the cellulosic biofuel producer credit.
Cash Flow and Liquidity
Since the separation, the Company generated $61 million of adjusted free cash flow and reduced net debt by $50 million. The Company ended the year with $288 million of liquidity including $222 million available under its revolving credit facility after taking into account outstanding letters of credit.
The Company expects the 2015 cellulose specialties market to face a combination of industry oversupply and weaker end-market demand. The Company’s cellulose specialties volumes in 2015 are forecasted to be comparable to the last couple years with prices 7 to 8 percent below 2014. Despite the difficult environment and aggressive pricing offered by competitors, the Company maintained its volume and increased its share of customers’ requirements. This success is largely due to the Company’s differentiated, high-quality product and long-term customer relationships. The Company expects to generate pro forma EBITDA between $200 million and $220 million in 2015.
“We are actively responding to unfavorable market conditions by implementing actions that will lower our cost position, enhance cash flows and improve overall competitiveness,” said Boynton. “These actions include $40 million in cost savings initiatives, a $15 million improvement to working capital, accelerating continuous improvement initiatives and leveraging manufacturing productivity programs. In addition, we will focus on maintaining ample financial flexibility to capitalize on internal growth and productivity opportunities.
“We have set forth aggressive initiatives and have put in place a management team with the energy and expertise required to achieve the necessary results. And when the markets do improve, we will not only be the leader, but the clear winner, in the cellulose specialties arena,” said Boynton.
Environmental Reserves Adjustment
The Company maintains reserves for environmental liabilities associated with its disposed operations relating to former dissolving wood pulp mills and wood treating sites. The reserves are largely based on internal and third-party information relating to the nature and severity of the conditions, the interpretation of applicable laws and regulations, projected outcomes of negotiations to determine appropriate remedial actions and the associated estimated costs.
In the fourth quarter of 2014, the Company’s environmental reserves for the assessment, remediation and long-term monitoring and maintenance of its disposed operations were increased by $69 million, and the related property values were reduced by $7 million. This reflects an increase to the Company’s estimates of required spending over the next 20 years for these sites.
Nearly 80 percent of the increase is related to four sites for which, in the fourth quarter, remediation plans were legally required or whose previous plans changed meaningfully due to commercial and/or legal reasons. The remaining change to the reserve was spread over an additional 13 sites based upon the Company’s update of estimated costs for ongoing remediation, monitoring and maintenance over the next 20 years on an undiscounted basis. To put this in perspective, the changes represent an average increase in costs of approximately $50,000 per site per year.
The site of its former pulp mill in Port Angeles, WA required the largest adjustment, accounting for $33 million, or 48 percent, of the increase to the reserves. In February of 2015, the Company is required to submit a feasibility study for remediation of this site, the only such study of its kind required to be submitted since the facility closed in 1996. In preparing for submission of this study, it was determined that the previous preferred industrial reuse strategy was no longer viable and therefore, the remediation plan had to be revised and expanded, meaningfully increasing the estimated costs for the project.
The Company believes that its reserves represent the best estimate at this time of the costs required to clean up the identified sites. Although the adjustment to the reserves is significant, the associated spend will be spread over 20 years. These changes are not anticipated to have a material impact on the Company’s cash flows in 2015. (Please refer to the 2014 Form 10-K for further disclosure relating to environmental liabilities.)
In the picture: Paul Boynton, Chairman, President and Chief Executive Officer of Rayonier.