Rayonier Inc. 2018 Q1 Form 10-Q Summary
Business context and reporting period
Rayonier is a timberland real estate investment trust with operations in Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. The filing covers the unaudited three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company owned or leased approximately 2.6 million timberland acres in the U.S. and New Zealand and held a 77% interest in the New Zealand joint venture.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Sales | $203.2 million | $194.5 million | +4.5% |
| Operating income | $57.1 million | $49.3 million | +15.9% |
| Operating margin | 28.1% | 25.3% | +2.8 percentage points |
| Net income | $42.7 million | $35.1 million | +21.7% |
| Net income attributable to Rayonier | $40.5 million | $33.8 million | +19.8% |
| Net margin attributable to Rayonier | 20.0% | 17.4% | +2.6 percentage points |
| Diluted EPS | $0.31 | $0.27 | +14.8% |
| Adjusted EBITDA | $93.4 million | $57.1 million | +63.6% |
| Cash provided by operating activities | $78.2 million | $33.9 million | +$44.3 million |
| Cash available for distribution | $77.4 million | $38.8 million | +$38.6 million |
Revenue growth was led by higher timber prices and volumes, particularly in the Pacific Northwest and New Zealand, and increased Trading revenue. Real Estate sales declined because Q1 2017 included a $42.0 million large timberland disposition, but Q1 2018 benefited from higher-value development and non-strategic land sales.
At March 31, 2018, cash and cash equivalents were $92.8 million, restricted cash was $84.9 million, and total cash, cash equivalents and restricted cash were $177.7 million. Gross debt was $999.0 million, compared with $1,028.4 million at December 31, 2017. Net debt represented 17% of enterprise value and debt represented 37% of total capitalization. The company had $165.6 million of available borrowing capacity under its revolving credit facility, net of letters of credit, and was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Southern Timber sales increased 11% to $43.6 million as harvest volume rose 14%; operating income fell to $12.2 million because of higher depletion, lower non-timber income and other costs.
- Pacific Northwest Timber sales increased 21% to $31.4 million, and operating income improved to $4.7 million from a $0.9 million loss, primarily due to materially higher sawtimber and pulpwood prices.
- New Zealand Timber sales increased 30% to $53.0 million; operating income rose 56% to $16.0 million on higher volumes, stronger export and domestic pricing, and $2.3 million of carbon credit sales.
- Real Estate sales declined 34% to $36.1 million because Q1 2017 included the $42.0 million large disposition. Q1 2018 included $25.8 million of non-strategic/timberland sales and $8.5 million of development and rural sales.
- Trading sales increased 14% to $39.2 million, but operating income declined to $0.1 million because of lower margins, log supply competition, port congestion and higher costs.
- Operating cash flow increased substantially, while investing cash flow shifted to a $17.6 million use from $6.0 million provided in the prior year, primarily because Q1 2017 included large-disposition proceeds.
- The company adopted ASC 606, the new revenue standard, and new presentation guidance for pension costs and restricted cash. Management reported no material adoption impact from ASC 606.
Guidance, outlook, risks and unusual items
- Management stated that the company was on track to achieve full-year Adjusted EBITDA and segment volume guidance.
- Southern Timber and Pacific Northwest Timber were expected to have lower quarterly harvest volumes for the remainder of 2018 after above-average Q1 removals, while Southern pricing was expected to remain relatively flat and Pacific Northwest sawtimber pricing was expected to remain strong.
- New Zealand Timber was expected to benefit from seasonal volume increases and continued domestic and export demand.
- Real Estate was expected to produce strong Q2 results based on anticipated closings, followed by lighter activity in the second half of the year. Wildlight development was progressing, with additional commercial and residential closings expected.
- Expected 2018 capital expenditures were $66 million to $69 million, real estate development investments were $8 million to $11 million, dividend payments were approximately $129 million assuming a quarterly dividend of $0.25 per share, and mandatory pension contributions were approximately $2.9 million.
- The company reported a proposed settlement of derivative litigation, subject to court approval, involving governance reforms and $1.995 million of attorneys’ fees, expenses and incentive awards funded by directors’ and officers’ liability insurers. The related amounts were reflected in the March 31, 2018 financial statements.
- Key operating exposures include timber prices and volumes, housing and pulp and paper demand, Chinese and other export markets, foreign exchange rates, interest rates, weather and wildfire risk, port congestion, development execution and real estate market conditions.
- Contractual obligations included $999.0 million of debt, $200.9 million of timberland lease obligations, $210.3 million of projected debt interest payments and $225.7 million of operating leases and other commitments disclosed in the notes.
- Foreign exchange and interest-rate derivatives materially affected other comprehensive income; the company held $650 million of interest-rate swap notional exposure and estimated that approximately $3.0 million of net gains in accumulated other comprehensive income would be reclassified into earnings over the following 12 months.
Important facts for investors to verify
- Reconcile the substantial increase in Adjusted EBITDA and cash available for distribution, both non-GAAP measures, to GAAP results and assess the effect of working-capital changes and unusual items.
- Evaluate whether Q1 timber volume and pricing strength, especially in the Pacific Northwest and New Zealand, is sustainable after management’s expected harvest-volume moderation.
- Monitor the timing and profitability of Wildlight and other Real Estate closings, including the expected concentration of activity in Q2.
- Assess debt maturities, variable-rate exposure, available revolver capacity and compliance with leverage and interest-coverage covenants.
- Confirm the final court approval and funding of the proposed derivative litigation settlement and any resulting governance obligations.
- Review the effect of foreign exchange movements, China and other export demand, port congestion, wildfire and weather conditions on timber earnings.
- Verify the company’s full-year EBITDA, volume, capital expenditure and dividend assumptions against subsequent filings and results.