Rayonier Inc. 2010 Form 10-K Summary
Business context and reporting period
Rayonier is a North Carolina corporation and REIT reporting for the fiscal year ended December 31, 2010. Its principal businesses are timberland management, real estate sales and entitlement, specialty cellulose and fluff pulp, lumber manufacturing, and log trading. The Company owned, leased, or managed approximately 2.4 million acres in the United States and New Zealand and operated four reportable segments: Timber, Real Estate, Performance Fibers, and Wood Products.
The filing is an annual report rather than a quarterly filing, although unaudited quarterly results for 2010 and 2009 are included.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Sales | $1.315 billion | $1.169 billion | Up 12.5% |
| Operating income | $282 million | $410 million | Down 31% |
| Net income | $218 million | $313 million | Down 30% |
| Diluted EPS | $2.68 | $3.91 | Down $1.23 |
| Cash from operating activities | $495 million | $307 million | Up $188 million |
| Adjusted cash available for distribution | $383 million | $110 million | Up $273 million |
| Capital expenditures | $138 million | $92 million | Up $46 million |
| Total debt | $768 million | $700 million | Up $68 million |
| Cash and equivalents | $349 million | $75 million | Up $274 million |
| Shareholders’ equity | $1.252 billion | $1.146 billion | Up $106 million |
Operating margin was approximately 21.4% in 2010, compared with 35.1% in 2009. The reported 2010 effective tax rate was 6.5%, compared with 12.9% in 2009; excluding discrete items, the rate was 18.5% versus 21.6%.
- Timber: Sales increased to $177 million from $159 million and operating income rose to $33 million from $7 million, driven primarily by higher Western U.S. prices and stronger export demand.
- Real Estate: Sales declined to $96 million from $101 million and operating income declined to $53 million from $56 million. Development demand remained weak, while non-strategic timberland sales volumes decreased.
- Performance Fibers: Sales increased to $881 million from $839 million and operating income rose to $214 million from $184 million. Higher pricing and cellulose specialties volume offset higher wood, chemical, and transportation costs.
- Wood Products: Sales rose to $68 million from $51 million and the segment returned to $2 million of operating income from an $11 million loss, although mills continued to operate below capacity because of weak housing demand.
Material changes versus the prior comparable period
- Reported 2009 results included approximately $205 million of income from the alternative fuel mixture credit. This benefit did not recur in 2010.
- 2010 included a $24 million tax benefit from the cellulosic biofuel producer credit and a $12 million gain from selling part of the New Zealand joint venture interest. These items increased reported earnings and are not representative of recurring operations.
- Excluding the 2009 alternative fuel credit and the 2010 New Zealand gain, management stated that 2010 EBITDA was $50 million above 2009, primarily because of improved operating results.
- Operating cash flow benefited from a $189 million IRS refund related to the alternative fuel mixture credit, higher operating earnings, and working-capital timing. Cash flow also reflected $50 million of pension contributions, compared with $10 million in 2009.
- Rayonier reduced its New Zealand joint venture ownership from 40% to 26% after a new investor contributed capital to the venture, which used the proceeds to reduce debt. Rayonier continued to manage the forests.
- The Company completed a July 2010 reorganization creating Rayonier Operating Company LLC to facilitate an UPREIT structure.
Liquidity, debt, outlook, and risks
- Year-end debt-to-capital was 38% and debt-to-EBITDA was 1.8 times. Management reported $245 million of available capacity under its $250 million unsecured revolving credit facility and stated that all debt covenants were satisfied.
- A $93 million note payable matures on December 31, 2011. Management expected to repay it with cash on hand, but retained the option to refinance or incur additional debt.
- Management expected 2011 operating cash flow to cover planned capital expenditures, interest, and dividends. Forecast 2011 capital expenditures were $140 million to $145 million, and expected dividends were approximately $175 million.
- 2011 guidance called for diluted EPS of $2.50 to $2.70 and cash available for distribution of $260 million to $280 million.
- Management expected improved Timber results, substantially lower non-strategic land sales, and another record year in Performance Fibers driven by strong cellulose specialties demand. Absorbent materials prices were expected to decline from 2010 levels.
- Rayonier was evaluating a $250 million to $300 million conversion of the Jesup, Georgia absorbent materials line to high-purity cellulose specialties. If approved, the project could add approximately 190,000 metric tons of specialty capacity, eliminate approximately 260,000 metric tons of absorbent capacity, and begin production in 2013.
- Environmental liabilities for discontinued operations totaled $93 million at year-end. The Company expected approximately $12 million of related expenditures in 2011 and disclosed reasonably possible additional losses of up to $40 million.
- Material risks include cyclical timber, housing, pulp, and real estate markets; weak housing demand; commodity, energy, chemical, and wood-cost volatility; environmental regulation and permitting delays; climate-related regulation; severe weather, fire, pests, and uninsured timber losses; customer concentration; union labor exposure; pension funding; foreign exchange and joint venture risks; and the need to maintain REIT qualification.
- The EPA was negotiating with Southern Wood Piedmont regarding a financial-assurance notice of violation. No specific penalty had been demanded, and management did not expect a material adverse effect, but a formal enforcement action remained possible.
Important facts for investors to verify
- Reconcile reported earnings and cash flow for the nonrecurring 2009 alternative fuel credit, the 2010 cellulosic biofuel credit, the IRS refund, and the New Zealand joint venture gain.
- Verify the timing and financing of the $93 million 2011 debt maturity and the refinancing of the revolving credit facility before its August 2011 expiration.
- Assess whether 2011 EPS and cash-available-for-distribution guidance is supported by operating performance rather than asset sales or tax benefits.
- Monitor cellulose specialties pricing, contract renewals, competitive capacity additions, and the proposed Jesup conversion’s approval, cost, and execution risk.
- Evaluate the sustainability of Timber and Real Estate results given weak housing demand, lower expected non-strategic land sales, and regional concentration.
- Review environmental remediation obligations, the Jesup consent order, the EPA notice of violation, and the disclosed potential losses beyond recorded liabilities.
- Consider customer concentration: two Performance Fibers customers represented approximately 14% and 10% of consolidated 2010 sales.
- Confirm the Company’s continued compliance with REIT income, asset, distribution, and ownership requirements and the limitations associated with taxable REIT subsidiaries.