Rayonier Inc. 10-Q Summary
Business context and reporting period
Rayonier is an international forest products company operating through Forest Resources, Real Estate, Performance Fibers and Other Operations. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013.
Rayonier planned to separate its Performance Fibers business into a separately traded company, Rayonier Advanced Materials Inc., through a tax-free spin-off targeted for mid-2014. Completion remained subject to Board approval, an IRS private letter ruling and effectiveness of a Form 10 registration statement.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Sales | $386.7 million | $393.7 million | Down 1.8% |
| Operating income | $65.0 million | $115.4 million | Down 43.6% |
| Operating margin | 16.8% | 29.3% | Down 12.5 percentage points |
| Income from continuing operations | $43.3 million | $103.3 million | Down 58.1% |
| Net income attributable to Rayonier | $43.4 million | $147.7 million | Down 70.6% |
| Diluted EPS | $0.34 | $1.13 | Down $0.79 |
| Cash provided by operating activities | $99.3 million | $89.7 million | Up 10.7% |
| Adjusted CAD | $72 million | $67 million | Up 7.5% |
| EBITDA | $112 million | $219 million | Down 48.9% |
Net income and EPS comparisons were materially affected by the $44.5 million of income from discontinued operations in Q1 2013, including a $42.7 million after-tax gain on the sale of the Wood Products business.
Segment performance and material changes
- Forest Resources: Sales increased to $104.7 million from $57.1 million and operating income increased to $27.5 million from $13.3 million. The increase included $37.8 million of New Zealand sales following consolidation of the New Zealand joint venture and benefited from stronger pricing and volumes in the Atlantic and Northern regions.
- Real Estate: Sales fell to $5.5 million from $24.3 million and operating income fell to $0.7 million from $16.8 million, primarily because Q1 2013 included a 5,400-acre non-strategic timberland sale.
- Performance Fibers: Sales declined to $241.8 million from $284.2 million and operating income declined to $49.0 million from $91.7 million. Results were affected by the planned extended Jesup mill outage, production issues, lower cellulose specialties pricing and higher wood, energy and manufacturing costs. Absorbent materials sales declined as production shifted toward viscose and other commodity grades.
- Corporate and other: Expense increased to $12.4 million from $6.6 million, including $3.3 million of separation costs.
- New Zealand joint venture: Rayonier owned 65% and consolidated the joint venture. Q1 2014 included $37.8 million of sales and a $0.7 million net loss from the joint venture, with noncontrolling interests separately reported.
Cash flow, debt and liquidity
- Cash and cash equivalents were $156.1 million at March 31, 2014, down from $199.6 million at December 31, 2013.
- Total debt was approximately $1.51 billion, compared with $1.57 billion at year-end. Debt-to-capitalization was 46%, compared with 47% at December 31, 2013.
- Rayonier made net repayments of $80 million on its $450 million unsecured revolving credit facility and had $323 million of available borrowings, net of amounts supporting letters of credit.
- Cash used for financing was $142.4 million, including $110.0 million of debt repayments and $62.5 million of dividends. Capital expenditures were $36.8 million and timberland purchases were $10.6 million.
- The 4.50% Senior Exchangeable Notes due 2015 were exchangeable during the second quarter based on the stock price. Management stated that it intended to repay the principal through the revolving facility if holders exercised their exchange rights.
- The Company reported compliance with all applicable debt covenants at March 31, 2014. It had no mandatory pension contribution requirement for 2014.
Guidance, outlook and risks
- Management expected Forest Resources full-year 2014 results to be well above 2013, Real Estate results to be comparable to 2013, and Performance Fibers results to be below 2013 because of lower cellulose specialties prices and higher costs.
- First-half 2014 capital expenditures were forecast at approximately $90 million, excluding strategic timberland acquisitions. Post-separation, Rayonier expected to spend approximately $35 million to $40 million on capital expenditures, while Rayonier Advanced Materials was expected to spend $20 million to $25 million.
- Expected 2014 tax payments were approximately $40 million for Rayonier Advanced Materials and approximately $5 million for Rayonier. Post-separation dividend policies had not been established.
- The Fernandina Beach mill collective bargaining agreement was scheduled to expire April 30, 2014; negotiations were underway.
- Rayonier faced litigation concerning alleged Clean Water Act and Georgia water-quality violations related to discharges from the Jesup mill. The plaintiff sought injunctive relief, damages and fees; the amount of monetary relief was not determinable at filing, and Rayonier intended to defend the matter.
- Environmental liabilities for prior dispositions and discontinued operations totaled $73.9 million, with reasonably possible additional losses of up to $30 million. Management believed recorded liabilities were sufficient for probable costs.
- MOFCOM’s final antidumping duty on certain lower-purity commodity viscose products imported into China was 17.2%, expected to remain in place for five years. Management did not expect a material business impact.
- Market risks included variable-rate debt, foreign exchange exposure, fuel prices and commodity pricing. A one-percentage-point change in U.S. variable interest rates was estimated to change annual interest expense by approximately $6.4 million.
Important facts for investors to verify
- Whether the planned mid-2014 Performance Fibers separation was completed, including the IRS ruling, Form 10 effectiveness, financing arrangements and allocation of debt and costs between the two companies.
- The sustainability of Forest Resources improvements after adjusting for the New Zealand joint venture consolidation and related foreign exchange effects.
- Performance Fibers recovery from the Jesup outage, production issues, higher costs and the shift from absorbent materials to viscose and other products.
- The treatment and refinancing or settlement of the 2015 Senior Exchangeable Notes if exchanged by holders.
- Developments and potential financial exposure in the Jesup mill environmental litigation and other environmental remediation obligations.
- Actual post-separation capital spending, tax payments, dividends and pension contributions compared with management’s estimates.