Rayonier Inc. 2016 Second-Quarter Form 10-Q Summary
Business context and reporting period
Rayonier Inc. is a timberland real estate investment trust with Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading segments. The unaudited filing covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. At June 30, 2016, the company owned or leased approximately 2.7 million acres, including a 77% interest in the New Zealand joint venture.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Sales | $261.6 million | $115.8 million | $396.4 million | $256.1 million |
| Operating income | $121.6 million | $6.5 million | $144.6 million | $34.3 million |
| Net income | $111.6 million | $(2.9) million | $126.6 million | $15.3 million |
| Net income attributable to Rayonier | $109.8 million | $(1.5) million | $124.3 million | $16.2 million |
| Diluted earnings per share | $0.89 | $(0.01) | $1.01 | $0.13 |
| Adjusted EBITDA | $45.0 million | $33.1 million | $100.6 million | $94.6 million |
| Cash provided by operating activities | Not presented for the quarter | Not presented for the quarter | $77.0 million | $85.9 million |
| Cash available for distribution | Not presented for the quarter | Not presented for the quarter | $57.2 million | $53.7 million |
Operating margin was approximately 46.5% in the second quarter and 36.5% for the first six months, compared with approximately 5.6% and 13.4%, respectively, in the prior-year periods. The improvement was largely driven by a $101.3 million gain on the Washington timberland disposition.
At June 30, 2016, cash and cash equivalents were $129.7 million, compared with $51.8 million at December 31, 2015. Long-term debt, net of deferred financing costs, was $1.052 billion, compared with $830.6 million at year-end. Total debt was $1.056 billion, shareholders’ equity was $1.421 billion, and the debt-to-capital ratio was 43%, compared with 38% at December 31, 2015. The company had $194.5 million of available capacity under its $200 million revolving credit facility, net of letters of credit.
Six-month investing cash outflows were $165.2 million, including $276.6 million for timberland purchases and $26.2 million of capital expenditures, partially offset by $127.0 million of net proceeds from the Washington disposition. Financing cash inflows were $165.2 million, primarily reflecting $653.8 million of debt issuance offset by $426.2 million of debt repayment and $61.4 million of dividends paid.
Material changes versus the prior comparable period
- Sales increased 126% in the second quarter and 55% for the first six months. The primary driver was the Real Estate segment, which included the $129.5 million sale of approximately 55,000 Washington acres.
- The Washington transaction produced a reported gain of approximately $101.3 million and was excluded from Adjusted EBITDA.
- Real Estate operating income increased to $105.7 million in the quarter and $109.9 million year to date, compared with $1.4 million and $14.0 million, respectively, in the prior-year periods. Excluding large dispositions, Real Estate Adjusted EBITDA declined year to date to $17.4 million from $23.8 million.
- New Zealand Timber operating income rose to $10.0 million in the quarter and $14.8 million year to date, supported by stronger export and domestic sawtimber pricing, higher volumes and demand from China.
- Southern Timber second-quarter operating income declined to $11.1 million from $11.8 million because of lower harvest volumes and prices. Year-to-date operating income increased to $26.8 million from $24.2 million due primarily to higher volumes and lower depletion rates.
- Pacific Northwest Timber operating income declined to $1.1 million in the quarter and $2.4 million year to date, reflecting lower sawtimber prices, higher depletion rates and weaker export demand.
- The company acquired approximately 61,000 acres from Menasha Forest Products for approximately $263 million and completed the Washington disposition for approximately $130 million. Purchase accounting remained preliminary at the filing date.
- Rayonier’s ownership interest in the New Zealand joint venture increased from 65% to 77% following a capital contribution and refinancing transaction.
- Adjusted EBITDA increased 36% in the second quarter and 6% for the first six months. Cash provided by operating activities declined by $8.9 million year to date, while CAD increased by $3.5 million because of favorable working-capital changes.
Guidance, outlook, risks and unusual items
Management reaffirmed its prior full-year Adjusted EBITDA guidance based on solid first-half results, expected strength in New Zealand markets and a strong Real Estate closing pipeline. Management expected relatively flat pricing through the remainder of 2016 in Southern Timber and Pacific Northwest Timber, while New Zealand Timber was tracking ahead of prior segment guidance. Management also cited continued interest in the Wildlight development project and other higher-and-better-use opportunities.
Expected 2016 capital expenditures were $60 million to $65 million, excluding strategic timberland acquisitions and the office building. Real estate development investments were expected to be $10 million to $12 million. Expected 2016 dividend payments were approximately $123 million, assuming the quarterly dividend remained $0.25 per share. The company reported no mandatory pension contribution requirement for 2016.
Key risks include timber prices and harvest volumes, housing and construction demand, pulp and paper markets, export demand from China and other Pacific Rim markets, New Zealand dollar exchange rates, interest rates, wildfire and weather conditions, real estate market conditions, and the company’s substantial acquisition and debt-financing activity. A one-percentage-point change in interest rates was estimated to affect annual interest expense by approximately $1.2 million on variable-rate debt after considering hedges.
The company was defending a consolidated securities class action related to its 2014 restatement disclosures. The case entered discovery after motions to dismiss were denied, but management could not estimate the likelihood or amount of any material loss. The SEC notified the company on July 22, 2016 that it had concluded its investigation and did not intend to recommend an enforcement action against the company.
Unusual items included the Washington disposition gain, a $4.0 million deferred payment from a prior land sale, $1.2 million of Menasha acquisition costs, foreign-exchange and hedge impacts, and shareholder-litigation-related costs. On July 7, 2016, the company entered into a $100 million interest-rate swap through May 2026, fixing the LIBOR component at an average rate of 1.26% and producing an estimated all-in rate of 3.16% before patronage payments.
Most important facts for investors to verify
- Whether full-year Adjusted EBITDA guidance was ultimately achieved and how much depended on nonrecurring Real Estate gains and dispositions.
- The final purchase accounting for the Menasha acquisition and the operating contribution from the acquired timberlands.
- Debt maturity, covenant compliance and refinancing exposure, particularly the $42 million of mortgage notes due in 2017 and the largely long-dated variable-rate debt.
- The sustainability of the $0.25 quarterly dividend relative to CAD, operating cash flow and planned capital expenditures.
- Trends in New Zealand export prices, China demand and New Zealand dollar exchange rates.
- Southern and Pacific Northwest harvest volumes, timber prices and the impact of weather and export-market weakness.
- The outcome and potential cost of the securities litigation and related indemnification obligations, which were not estimable in the filing.
- The effect of adopting upcoming accounting standards, including revenue recognition, leases and stock-compensation guidance.