Rayonier Inc. 2019 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rayonier is a timberland real estate investment trust with approximately 2.6 million acres owned or leased across the U.S. South, the Pacific Northwest and New Zealand. Its operating segments are Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The financial statements are unaudited.
Financial Performance and Key Metrics
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Sales | $184.8 million | $245.9 million | $376.3 million | $449.1 million |
| Operating income | $31.4 million | $51.6 million | $69.9 million | $108.7 million |
| Net income | $20.9 million | $39.3 million | $48.7 million | $82.0 million |
| Net income attributable to Rayonier | $18.8 million | $36.3 million | $43.5 million | $76.8 million |
| Diluted EPS | $0.14 | $0.28 | $0.34 | $0.59 |
| Adjusted EBITDA | $60.6 million | $111.3 million | $139.7 million | $204.6 million |
| Cash provided by operating activities | Not separately presented | Not separately presented | $117.0 million | $181.6 million |
Q2 operating margin was approximately 17.0%, compared with 21.0% in the prior-year quarter. Net income attributable to Rayonier represented approximately 10.1% of sales, compared with 14.7% in Q2 2018. Six-month operating margin was approximately 18.6%, compared with 24.2% in the prior-year period.
- Cash used for investing activities was $60.8 million in the first six months, including $29.5 million of capital expenditures, $26.4 million of timberland purchases and $1.0 million of real estate development investments.
- Cash used for financing activities was $78.0 million, including $71.1 million of dividends, $4.2 million of share repurchases and a $3.6 million distribution to the New Zealand minority shareholder.
- Cash, cash equivalents and restricted cash declined to $134.7 million at June 30, 2019, from $156.5 million at December 31, 2018; cash and cash equivalents alone were $131.0 million.
- Total debt was $975.0 million gross, or $972.8 million net of deferred financing costs. The debt consisted of $350.0 million of term borrowings, $325.0 million of senior notes and $300.0 million of incremental term borrowings.
- Debt-to-capital was 38%, compared with 37% at year-end 2018. The company had $198.4 million of available borrowings under its revolving credit facility, net of letters of credit, and remained in compliance with debt covenants.
- Shareholders’ equity was $1.60 billion at June 30, 2019, compared with $1.65 billion at December 31, 2018.
Material Changes Versus the Prior Comparable Period
- Sales declined 25% in Q2 and 16% for the first six months. The decrease was driven primarily by lower real estate sales, weaker Pacific Northwest Timber results, lower New Zealand Timber pricing and reduced Trading activity.
- Southern Timber Q2 sales declined 4% to $46.2 million, while operating income declined to $14.7 million. Year-to-date sales increased 17% to $107.0 million and operating income increased to $36.3 million, supported by higher volumes, pricing and non-timber income.
- Pacific Northwest Timber Q2 sales declined 42% to $18.6 million and reported a $3.8 million operating loss versus $5.6 million of operating income in Q2 2018. Management deferred harvests because of soft market conditions, while export-market uncertainty, the U.S.-China trade dispute and weaker U.S. lumber markets reduced prices.
- New Zealand Timber Q2 sales declined 11% to $62.1 million and operating income declined to $12.8 million. Lower export and domestic sawtimber prices, lower volumes and unfavorable foreign exchange effects weighed on results.
- Real Estate Q2 sales declined 55% to $22.5 million because the prior-year period included a 14,447-acre non-strategic timberland sale. Q2 2019 included 3,265 acres sold, including a 784-acre unimproved development sale. Six-month real estate sales declined 49% to $43.5 million.
- Adjusted EBITDA declined 46% in Q2 and 32% for the first six months. The largest reductions were in Real Estate and Pacific Northwest Timber.
- The company adopted ASC 842 lease accounting on January 1, 2019. The June 30, 2019 balance sheet included $104.0 million of right-of-use assets and $93.7 million of long-term lease liabilities; prior periods were not restated.
- Accumulated other comprehensive loss increased to $29.5 million from $0.2 million at year-end 2018, primarily because of losses on cash flow hedges, including interest-rate swaps.
Guidance, Outlook, Risks and Unusual Items
- Management reduced full-year 2019 guidance to net income attributable to Rayonier of $54 million to $63 million, diluted EPS of $0.42 to $0.49 and Adjusted EBITDA of $245 million to $265 million.
- Southern Timber volume guidance remained 6.2 million to 6.3 million tons, with higher Adjusted EBITDA expected primarily from strong non-timber income.
- Pacific Northwest Timber harvest guidance was reduced to approximately 1.2 million tons because of weak market conditions. Management expected limited price recovery while the U.S.-China trade dispute continued.
- New Zealand Timber volume guidance remained 2.7 million to 2.8 million tons, but management expected near-term China export weakness and competition from alternative supply sources to pressure second-half pricing.
- Real Estate was expected to achieve full-year Adjusted EBITDA generally in line with prior guidance, although second-half activity was expected to be concentrated in the fourth quarter.
- Expected 2019 capital expenditures were $66 million to $69 million, excluding strategic timberland acquisitions. Real estate development investments were expected to be $7 million to $9 million, net of reimbursements.
- Expected 2019 dividend payments were approximately $140 million, assuming a quarterly dividend of $0.27 per share. The company had paid $0.4 million of approximately $1.3 million in mandatory pension contributions as of June 30.
- Key risks include timber and lumber price volatility, the U.S.-China trade dispute, China log inventories, foreign exchange exposure in New Zealand, interest-rate exposure, harvest timing, real estate transaction timing and market demand for pulp, paper, packaging and housing-related products.
- Corporate and other expenses increased because of elevated legal expenses. Pending lawsuits and claims were not expected to have a material adverse effect, according to management.
- Outstanding financial guarantees totaled $5.0 million, consisting of $1.6 million of standby letters of credit and $3.4 million of surety bonds.
- The company used interest-rate swaps with a $650 million notional amount to hedge variable-rate debt and foreign currency contracts and options to hedge portions of New Zealand export and freight exposures.
Most Important Facts for Investors to Verify
- Whether Pacific Northwest and New Zealand pricing and volumes recover as the U.S.-China trade dispute and China market weakness evolve.
- Whether management achieves the revised full-year guidance of $54 million to $63 million of attributable net income and $245 million to $265 million of Adjusted EBITDA.
- The timing and magnitude of second-half Real Estate transactions, particularly the anticipated concentration of activity in the fourth quarter.
- Cash generation relative to approximately $140 million of expected annual dividends, planned capital expenditures and potential timberland acquisitions.
- Debt maturity and refinancing exposure, including the $325 million of senior notes due in 2022 and $650 million of term debt due thereafter.
- The impact of foreign exchange movements, hedge valuations and accumulated other comprehensive losses on reported earnings and equity.
- The comparability of Adjusted EBITDA and other non-GAAP measures with GAAP results and with measures used by other timberland REITs.