Rayonier Inc. — 2011 Third-Quarter Form 10-Q Summary
Business context and reporting period
Rayonier is an international forest products company operating through Forest Resources, Real Estate, Performance Fibers and Wood Products, with additional log-trading activities. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Sales | $385.1 million | $377.5 million | $1,100.2 million | $999.9 million |
| Operating income | $108.3 million | $92.1 million | $275.0 million | $225.3 million |
| Net income | $104.9 million | $62.9 million | $219.8 million | $158.4 million |
| Diluted EPS | $0.84 | $0.51 | $1.75 | $1.30 |
| Cash from operations | Not separately provided | Not separately provided | $326.3 million | $473.2 million |
| EBITDA | $147 million | $131 million | $377 million | $341 million |
| Adjusted CAD | Not separately provided | Not separately provided | $242 million | $400 million |
- Q3 operating margin was approximately 28.1%, versus 24.4% in the prior-year quarter. Nine-month operating margin was approximately 25.0%, versus 22.5%.
- Q3 net margin was approximately 27.2%, versus 16.7%. Nine-month net margin was approximately 20.0%, versus 15.8%.
- Performance Fibers was the primary earnings driver, producing operating income of $74.9 million in Q3 and $221.7 million year to date, compared with $62.3 million and $152.2 million, respectively.
- At September 30, 2011, cash and cash equivalents were $362.3 million, total debt was approximately $774.6 million, and shareholders’ equity was $1.368 billion. Debt represented 36% of total capitalization, versus 38% at December 31, 2010.
- The company had $370 million of availability under its $450 million unsecured revolving credit facility. It was in compliance with its debt covenants.
- Nine-month investing cash outflows were $180.5 million, including $94.2 million for timberland purchases and $14.6 million for the Jesup mill expansion. Financing cash outflows were $133.3 million, including $136.6 million of dividends.
Material changes versus the prior comparable periods
- Q3 sales increased 2.0% and nine-month sales increased 10.0%. The year-to-date increase was led by Performance Fibers, Other Operations and Forest Resources.
- Performance Fibers sales rose to $255.5 million in Q3 and $739.4 million year to date. Cellulose specialties benefited from approximately 15% higher pricing in both periods, while absorbent materials weakened in the third quarter.
- Forest Resources operating income improved to $10.8 million in Q3 and $33.7 million year to date, although fire losses, weaker Southern volumes and higher logging and transportation costs affected results.
- Real Estate operating income declined to $28.1 million in Q3 and $40.5 million year to date, versus $30.8 million and $52.3 million. Lower acreage sold outweighed improved pricing and included a $6 million property-tax settlement benefit.
- Wood Products remained weak, with an operating loss of $0.7 million in Q3 and $1.3 million year to date, compared with a $2.9 million year-to-date profit in 2010.
- Operating cash flow declined primarily because 2010 included a $189 million alternative fuel mixture credit cash refund. Excluding that refund, management stated that 2011 operating cash flow increased by approximately $42 million.
- Net income benefited from an $16 million tax benefit from reversing a reserve related to the alternative fuel mixture credit, a $6.1 million year-to-date cellulosic biofuel producer credit benefit, and a $9.3 million benefit from transferring higher-and-better-use properties to a taxable REIT subsidiary.
- The nine-month 2010 results included a $12.4 million gain from selling part of Rayonier’s New Zealand joint-venture interest; no comparable gain occurred in 2011.
- The company completed a three-for-two stock split in August 2011 and increased the quarterly dividend from $0.36 to $0.40 per post-split share.
Guidance, outlook, risks and unusual items
- Management increased 2011 adjusted earnings guidance to $2.07-$2.15 per share from $1.90-$2.07, primarily due to the property-tax settlement and income-tax reductions.
- Guidance includes a potential fourth-quarter asset write-off of approximately $6 million related to modifications to the 2008 Jesup mill consent order.
- Management expects a $330 million timberland acquisition to close in the fourth quarter, with total 2011 strategic timberland acquisitions expected to reach $430-$435 million. The transaction is expected to be funded with cash, the revolving facility and assumed seller debt.
- The Jesup cellulose-specialties conversion is estimated to cost approximately $300 million over two to three years, with $45-$50 million expected to be spent in 2011.
- A $93 million note matures on December 31, 2011; management expected to repay it with cash on hand but may issue new debt.
- Environmental and discontinued-operation liabilities totaled $86.3 million at September 30, 2011. The company identified reasonably possible additional losses of up to $40 million, although it believes existing reserves are adequate for expected costs over the next 20 years.
- Outstanding guarantees and financial commitments totaled $58.8 million, including standby letters of credit, guarantees and surety bonds.
- Key operating risks include forest fires, timber and cellulose pricing, demand volatility, input and transportation costs, real-estate sales volumes, foreign-exchange movements, environmental remediation, execution of major acquisitions and expansion projects, and access to financing.
Most important facts for investors to verify
- Whether the anticipated $330 million timberland acquisition closed as planned and its effect on leverage, cash and debt.
- Actual fourth-quarter and full-year results versus the increased $2.07-$2.15 adjusted EPS guidance, including the potential $6 million Jesup-related write-off.
- The sustainability of Performance Fibers pricing and margins, especially amid weaker third-quarter absorbent-materials markets.
- The amount and timing of spending for the Jesup conversion and whether additional debt financing is required.
- Repayment or refinancing of the $93 million note due December 31, 2011.
- The impact of tax benefits and other unusual items on recurring earnings and cash generation.
- Progress on environmental remediation and whether potential losses could exceed the recorded $86.3 million liability.