Rayonier Inc. 10-Q Summary
Business Context and Reporting Period
Rayonier is a real estate investment trust and international forest products company engaged in timberland management, real estate sales and entitlement, specialty cellulose and absorbent materials, and lumber operations. Reported segments are Forest Resources, Real Estate, Performance Fibers, and Wood Products. This unaudited Form 10-Q covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Sales | $355.8 million | $357.7 million | Down 0.5% |
| Operating income | $84.0 million | $87.6 million | Down 4.1% |
| Operating margin | 23.6% | 24.5% | Down 0.9 percentage points |
| Net income | $53.4 million | $58.4 million | Down 8.5% |
| Net margin | 15.0% | 16.3% | Down 1.3 percentage points |
| Diluted EPS | $0.42 | $0.47 | Down 10.6% |
| Cash provided by operations | $111.4 million | $115.7 million | Down 3.8% |
| Adjusted CAD | $87 million | $88 million | Essentially flat |
| EBITDA | $115 million | $120 million | Down 4.2% |
Dividends were $0.40 per share, compared with $0.36 per share in the prior-year quarter. Cash and cash equivalents were $236.6 million at March 31, 2012, versus $78.6 million at December 31, 2011. Total debt was approximately $1.024 billion, up from $847 million, and debt-to-capitalization increased to 43% from 39%. The company had $445 million of availability under its revolving credit facility.
Investing cash outflows were $73.7 million, including $42.1 million of capital expenditures, $8.7 million for timberland purchases, and $26.0 million for the Jesup mill cellulose specialties expansion. Financing activities provided $120.4 million, principally reflecting $340 million of debt issuance offset by $165 million of repayments, dividends of $49.2 million, and debt issuance costs of $3.6 million.
Material Changes Versus the Prior Comparable Period
- Performance Fibers operating income increased to $80.6 million from $75.7 million. Cellulose specialties pricing increased 14%, while absorbent-materials pricing and volumes declined.
- Forest Resources operating income fell to $8.0 million from $11.1 million because of higher fuel and logging costs, weaker export demand, and lower New Zealand joint-venture earnings. Total timber volumes increased, supported by Atlantic and Gulf States activity.
- Real Estate operating income declined to $6.5 million from $7.4 million, primarily due to slightly unfavorable pricing and geographic mix.
- Wood Products operating income improved to $0.9 million from $0.5 million on higher volumes and lower wood costs.
- Corporate and other expense increased to $11.1 million from $7.8 million, primarily because of stock-based compensation associated with an executive retirement.
- The effective tax rate increased to 25.9% from 21.7%, reflecting proportionately higher expected earnings from taxable REIT subsidiaries.
- In March 2012, Rayonier issued $325 million of 3.75% senior notes due 2022. Approximately $150 million was used to repay revolving-credit borrowings, contributing to the increase in cash and total debt.
Guidance, Outlook, Risks, and Unusual Items
- Management expects full-year 2012 earnings to be comparable to 2011, excluding special items, and forecasts adjusted cash available for distribution of $285 million to $310 million.
- Management expects another strong year in Performance Fibers, driven by cellulose specialties markets. The Jesup cellulose specialties expansion remained on schedule for completion by mid-2013; the company expects to exit the more commodity-like absorbent-materials business after completion.
- Expected 2012 capital expenditures were $150 million to $155 million, excluding strategic acquisitions and the expansion project. Total 2012 expenditures, including the expansion, were expected to be $200 million to $210 million.
- The company expected 2012 dividend payments of approximately $197 million, assuming the quarterly dividend remained $0.40 per share.
- A $23 million note payable was due in June 2012, and $300 million of senior exchangeable notes were due in October 2012. Management expected to repay the note payable with cash and refinance the exchangeable notes.
- The $172.5 million of 4.50% senior exchangeable notes due 2015 became exchangeable at the holders’ option for the quarter ending June 30, 2012, subject to stock-price conditions.
- During April 2012, an asset-sales covenant triggered an offer to repay $59.9 million of the Rayonier Forest Resources installment note. The offer was outstanding through May 15, 2012.
- Established liabilities for dispositions and discontinued operations totaled $89.1 million. The company estimated reasonably possible additional losses of up to $29 million related primarily to environmental remediation uncertainties.
- Outstanding financial commitments included $43.5 million of standby letters of credit, $6.1 million of surety bonds, and $2.6 million of guaranteed obligations. The filing states that other litigation and claims were not expected to have a material adverse effect.
- Management stated that the company was in compliance with applicable debt covenants as of March 31, 2012. Market-risk exposures were not materially changed from December 31, 2011.
Most Important Facts for Investors to Verify
- Verify refinancing and repayment of the $300 million exchangeable notes due October 2012 and the $23 million note due June 2012.
- Monitor leverage, interest expense, and covenant compliance following the $325 million senior-notes issuance.
- Assess whether cellulose specialties pricing and demand offset weaker absorbent-materials markets and the planned business transition.
- Track completion costs, timing, and expected returns from the Jesup mill expansion.
- Review the $59.9 million installment-note repayment offer and its effect on liquidity and timberland reinvestment plans.
- Evaluate environmental remediation exposure, including the disclosed potential additional losses of up to $29 million.
- Reconcile adjusted CAD and EBITDA with GAAP cash flow and earnings, because these are non-GAAP measures and may not be comparable with similarly titled measures used by other companies.