Rayonier Inc. 2015 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rayonier is a timberland real estate investment trust with approximately 2.3 million U.S. timberland acres and a 65% interest in the New Zealand JV, which owns or leases approximately 445,000 acres. Continuing operations comprise Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. The filing covers the three months ended March 31, 2015; results are compared with the three months ended March 31, 2014.
The Performance Fibers business was spun off on June 27, 2014 as Rayonier Advanced Materials. Its 2014 results are presented as discontinued operations, while the 2014 cash-flow statement was not restated to exclude its cash flows.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Sales | $140.3 million | $143.2 million | Down 2.0% |
| Operating income | $27.7 million | $14.4 million | Up 92% |
| Operating margin | 19.8% | 10.1% | Up 9.7 percentage points |
| Income from continuing operations | $18.2 million | $10.3 million | Up 76% |
| Net income attributable to Rayonier | $17.7 million | $41.4 million | Down 57% |
| Diluted EPS | $0.14 | $0.32 | Down $0.18 |
| Adjusted EBITDA | $61.4 million | $43.5 million | Up 41% |
| Adjusted CAD | $42.7 million | $10.8 million | Up $31.9 million |
| Cash provided by operating activities | $53.4 million | $100.1 million | Down $46.7 million |
| Capital expenditures | $13.3 million | $34.6 million | Down $21.3 million |
Net income in the prior-year period included $31.0 million of after-tax income from discontinued operations. The 2015 continuing-operations improvement reflected higher operating income, lower interest expense and lower corporate costs following the spin-off. The 2015 income tax benefit was $0.5 million versus $7.6 million in 2014 and was principally related to the New Zealand JV.
Adjusted EBITDA was approximately 43.7% of sales versus 30.4% in the prior-year period. Adjusted CAD is a non-GAAP measure and should not be viewed as equivalent to GAAP cash flow.
Segment Performance and Material Changes
- Southern Timber: Sales increased to $35.5 million from $33.9 million, operating income rose to $12.4 million from $10.5 million, and Adjusted EBITDA increased to $26.7 million from $22.5 million. Harvest volume increased 8% to 1.37 million tons and weighted-average stumpage pricing increased 5%.
- Pacific Northwest Timber: Sales declined to $19.2 million from $33.0 million and operating income fell to $2.6 million from $12.6 million. Harvest volume declined 40%, and weaker China demand reduced export mix and sawtimber pricing.
- New Zealand Timber: Sales increased to $41.2 million from $37.8 million and operating income increased to $5.7 million from $2.4 million. Volume increased 17%, while domestic and export sawtimber prices declined, partly due to weaker China demand and currency effects.
- Real Estate: Sales increased to $23.8 million from $5.5 million and operating income increased to $12.6 million from $0.7 million. Acres sold increased to 7,397 from 2,122, including 4,018 acres of conservation land in Washington.
- Trading: Sales decreased to $20.6 million from $35.7 million because of lower volumes and prices in China and Korea. Operating income improved to $0.3 million from a $0.4 million loss, primarily due to lower costs and favorable foreign-exchange gains.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $139.0 million at March 31, 2015, down from $161.6 million at December 31, 2014.
- Total debt was $743.0 million, consisting of $130.2 million of current maturities and $612.8 million of long-term debt. Debt-to-capital was 32%, compared with 32% at year-end.
- Investing cash outflows were $43.7 million, including $23.1 million for timberland purchases, $13.3 million of capital expenditures and a $7.1 million increase in restricted cash.
- Financing cash outflows were $30.6 million, including $31.7 million of dividends. The quarterly dividend was $0.25 per share, compared with $0.49 in the prior-year period following the Performance Fibers spin-off.
- The company had $180 million of available borrowing capacity under its revolving credit facility, net of amounts supporting letters of credit, plus $100 million of additional term-credit capacity. The New Zealand JV had $176 million of variable-rate debt maturing in September 2016, with interest-rate swaps covering 81% of that debt.
- The company was in compliance with all applicable financial covenants at March 31, 2015.
Guidance, Outlook, Risks and Unusual Items
- Full-year harvest volume is expected to be 9.0 million to 9.5 million tons.
- 2015 capital expenditures are forecast at $65 million to $70 million, excluding strategic timberland acquisitions; approximately $7 million is expected for real estate entitlements and infrastructure.
- Expected 2015 dividend payments are approximately $127 million, assuming a quarterly dividend of $0.25 per share. No mandatory pension contribution is required in 2015.
- Management expects strong Southern pulpwood demand, gradual improvement in U.S. housing and sawtimber markets, continued near-term weakness in Pacific Northwest and New Zealand export markets, and improved results in the second half of the year. Management specifically anticipates much weaker second-quarter results because of lower Pacific Northwest Timber and Real Estate sales volumes.
- Key operating risks include China export demand, timber and real estate prices, harvest volumes, foreign-exchange movements, interest rates, weather and the timing of large real estate transactions.
- Shareholder securities litigation related to the November 2014 financial-statement announcement was consolidated. The company cannot determine whether a loss is reasonably possible or estimate a potential loss. Shareholder derivative demands and an SEC subpoena concerning amended reports remain outstanding; the company is cooperating with the SEC and cannot predict the investigation’s timing or outcome.
- Outstanding guarantees and similar commitments had maximum potential payments of $19.6 million, including $16.7 million of standby letters of credit.
- Other comprehensive loss was $14.5 million, principally reflecting foreign-currency translation losses. The company also reduced its pension-plan return-on-assets assumption from 8.5% to 7.7% for 2015.
Important Facts for Investors to Verify
- Whether the Performance Fibers spin-off and discontinued-operations presentation make year-over-year revenue, cash flow and EPS comparisons economically comparable.
- The refinancing or repayment plan for the approximately $130.2 million of current debt maturities, including the Senior Exchangeable Notes due August 2015.
- The sustainability of the $0.25 quarterly dividend relative to Adjusted CAD, operating cash flow and required timberland investment.
- The timing and magnitude of Pacific Northwest and Real Estate activity, particularly management’s warning of weaker second-quarter results.
- Developments in the securities litigation, derivative demands and SEC investigation arising from the November 2014 announcement.
- Exposure to China demand, New Zealand currency movements, variable interest rates and the effectiveness and future cost of hedging arrangements.