Rayonier Inc. 2012 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rayonier is a forest products company operating in Forest Resources, Real Estate, Performance Fibers, and Wood Products. The filing covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. The company operates as a real estate investment trust, with taxable REIT subsidiaries conducting non-REIT-qualified activities.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Sales | $409.0 million | $385.1 million | $1,136.7 million | $1,100.2 million |
| Operating income | $113.2 million | $108.3 million | $295.8 million | $275.0 million |
| Net income | $80.6 million | $104.9 million | $203.1 million | $219.8 million |
| Diluted EPS | $0.62 | $0.84 | $1.58 | $1.75 |
| Operating margin | 27.7% | 28.1% | 26.0% | 25.0% |
| Net margin | 19.7% | 27.2% | 17.9% | 20.0% |
| Dividends per share | $0.44 | $0.40 | $1.24 | $1.12 |
Cash provided by operating activities was $353.6 million for the first nine months, versus $326.3 million in 2011. Investing cash outflows were $236.9 million, including $112.0 million of capital expenditures, $11.6 million of timberland purchases, and $104.8 million for the Jesup mill cellulose specialties expansion. Financing activities provided $20.3 million, after $152.4 million of dividends and $198.7 million of debt repayments.
At September 30, 2012, cash and cash equivalents were $215.5 million, total debt was approximately $1.009 billion, shareholders’ equity was $1.418 billion, and debt to total capitalization was 42%, compared with 39% at December 31, 2011. The revolving credit facility had $431 million of available capacity at quarter-end. Fair value of total debt was approximately $1.237 billion versus carrying value of $1.009 billion.
Adjusted cash available for distribution was $238 million for the first nine months, compared with $242 million in 2011. EBITDA was $149 million for the quarter and $398 million year to date, compared with $147 million and $377 million, respectively.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 6%, while nine-month sales increased 3%.
- Third-quarter operating income increased 5%; nine-month operating income increased 8%.
- Net income and diluted EPS declined because 2011 included significant non-routine tax benefits, including a $16 million reversal of an AFMC tax reserve and a $9.3 million tax benefit from a property transfer. The 2012 effective tax rates were 23.4% for the quarter and 21.9% year to date, versus a 9.0% benefit and 7.5% expense, respectively, in 2011.
- Performance Fibers was the primary earnings driver. Segment sales increased to $288 million from $255 million in the quarter and to $794 million from $739 million year to date; operating income increased to $101 million and $266 million, respectively.
- Cellulose specialties benefited from strong demand and pricing, while absorbent materials experienced weaker pricing and lower volumes. The Jesup conversion project shifted capacity toward cellulose specialties and is expected to be completed by mid-2013.
- Real Estate operating income declined to $8 million from $28 million in the quarter and to $21 million from $40 million year to date, primarily because 2011 included a large non-strategic timberland sale and a $6 million property tax settlement.
- Wood Products improved to $2 million of quarterly operating income and $7 million year to date, compared with a $1 million loss in each 2011 period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected 2012 operating income to increase 10% to 12% over 2011, while full-year earnings were expected to be comparable to 2011 excluding special items. Full-year adjusted CAD guidance was $295 million to $310 million.
- Management expected 2012 capital expenditures of $150 million to $160 million, excluding strategic acquisitions and the Jesup expansion, with approximately $200 million of 2012 Jesup expansion spending. Expected dividend payments were approximately $207 million, and cash taxes were expected to be $70 million to $80 million.
- In October 2012, the company amended its revolving credit facility, reducing pricing and increasing flexibility in leverage and asset-transfer provisions. The $300 million of 3.75% Senior Exchangeable Notes due 2012 matured in October and were repaid with revolver borrowings. Available revolver capacity after repayment was $131 million, and management expected to refinance the borrowing on a long-term basis before year-end.
- The 2015 Senior Exchangeable Notes became exchangeable at the holders’ option for the quarter ending December 31, 2012. Warrants related to the matured 2012 notes remained outstanding and were expected to be settled in shares in the first quarter of 2013.
- Collective bargaining agreements covering approximately 700 Jesup mill employees expired June 30, 2012. A proposed contract was rejected in October, although the existing contracts were extended while negotiations continued. A work stoppage could materially affect operations and financial results.
- Dispositions and discontinued-operations liabilities totaled $84.5 million. Management estimated reasonably possible additional environmental losses of up to $29 million beyond recorded liabilities, although recorded liabilities were considered sufficient for probable costs.
- Outstanding guarantees and similar financial commitments totaled $28.4 million, including standby letters of credit, guarantees, and surety bonds. The filing states that other legal claims were not expected to have a material adverse effect.
- The company reported no mandatory pension contributions for 2012 and did not expect discretionary contributions. Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Completion timing, total cost, capacity reduction, customer qualification requirements, and realized pricing benefits from the Jesup cellulose specialties expansion.
- Refinancing terms and covenant capacity following the October repayment of the $300 million exchangeable notes.
- Potential dilution or cash obligations from the outstanding warrants and the 2015 exchangeable notes.
- Status of Jesup labor negotiations and the potential operational impact of a work stoppage.
- Whether the $295 million to $310 million adjusted CAD outlook and 10% to 12% operating-income growth target were achieved.
- Exposure to weaker absorbent-materials markets, Asian timber demand, commodity prices, foreign exchange, wood and benefit costs, and environmental remediation claims.