Rayonier Inc. 2018 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 in the U.S. South, U.S. Pacific Northwest and New Zealand. Its segments are Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Sales | $245.9 million, up 22% | $449.1 million, up 14% |
| Operating income | $51.6 million, up 10% | $108.7 million, up 13% |
| Net income | $39.3 million, up 28% | $82.0 million, up 25% |
| Net income attributable to Rayonier | $36.3 million; diluted EPS $0.28 | $76.8 million; diluted EPS $0.59 |
| Adjusted EBITDA | $111.3 million, up 28% | $204.6 million, up 42% |
| Dividends declared per share | $0.27 | $0.52 |
Operating margin was approximately 21.0% in the second quarter and 24.2% for the first six months, compared with approximately 23.3% and 24.3%, respectively, in the prior-year periods. Net income attributable to Rayonier margins were approximately 14.7% and 17.1%, versus 13.0% and 15.2% in 2017.
Cash provided by operating activities was $181.6 million in the first six months, compared with $128.3 million in 2017. Cash used in investing activities was $61.5 million, versus $235.2 million, primarily because 2017 included substantially larger timberland acquisitions. Cash used in financing activities was $115.6 million, compared with $95.7 million of financing cash provided in 2017. Adjusted cash available for distribution was $163.5 million, or $160.6 million after mandatory pension requirements.
At June 30, 2018, cash and cash equivalents were $106.6 million and restricted cash was $69.6 million. Total debt was $975.0 million, or $972.3 million net of deferred financing costs. Debt to capital was 36%, compared with 38% at year-end 2017. The company had $189.6 million of available 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 35% in the second quarter and 23% year to date, driven by higher harvest volumes, acquisitions and stronger demand. Operating income increased to $15.7 million in the quarter and $27.9 million year to date.
- Pacific Northwest Timber returned to profitability, with second-quarter operating income of $5.6 million versus a $1.5 million loss in 2017. Higher delivered log prices and volumes were the principal drivers.
- New Zealand Timber sales declined 10% in the second quarter because the 2017 period included $24.3 million of timberland sales. Excluding those sales, second-quarter revenue increased 31%. Operating income declined to $17.8 million from $26.8 million, primarily because of the prior-year timberland sale.
- Real Estate sales increased to $49.9 million from $25.6 million in the second quarter, driven by higher acreage sold. First-half sales were $85.9 million versus $79.9 million; the 2017 period included $42.0 million of Large Dispositions.
- Trading sales increased, but operating income declined because of lower margins, port congestion, vessel timing and higher log-yard costs.
- Foreign currency translation produced a $29.8 million other comprehensive loss in the second quarter, compared with a $21.5 million gain in 2017, primarily reflecting movements in the New Zealand dollar.
- The company repaid $50.0 million on its revolving credit facility and paid $67.1 million in dividends during the first six months. No open-market repurchases occurred during the second quarter; employee tax-withholding share purchases totaled 80,172 shares.
Guidance, Outlook, Risks and Unusual Items
Management anticipates full-year 2018 net income attributable to Rayonier of $82 million to $89 million, diluted EPS of $0.63 to $0.68 and Adjusted EBITDA of $300 million to $315 million. The company expects to meet prior volume guidance in its three timber segments, but anticipates lower second-half volumes after elevated first-half harvesting.
- Southern Timber pricing is expected to be generally flat.
- Pacific Northwest pricing is expected to remain relatively stable, with a modest decline in weighted-average prices from product mix.
- New Zealand export prices may soften because of uncertainty related to U.S.-China trade tensions.
- Real Estate activity is expected to be light in the third and fourth quarters because closings were heavily weighted toward the first half.
- Expected 2018 capital expenditures are $65 million to $69 million, excluding strategic timberland acquisitions. Real estate development investments are expected to be $10 million to $12 million, and dividends are expected to total approximately $137 million assuming a quarterly dividend of $0.27 per share.
Material unusual items include the absence of the $42.0 million 2017 Large Disposition, a $1.995 million proposed derivative-settlement payment funded by directors’ and officers’ insurance carriers, and non-operating foreign-currency derivative gains. The proposed shareholder derivative settlement remains subject to court approval and includes governance reforms. The company also has approximately $212.0 million of remaining operating lease and other commitments disclosed in the notes, including significant long-term timberland lease obligations.
Principal risks include timber prices and demand, housing and construction markets, export demand and China-related trade conditions, New Zealand dollar volatility, interest rates, wildfire and other operating risks, real estate closing timing, port congestion, and the execution and funding of Wildlight development. The company uses interest-rate and foreign-currency derivatives to mitigate portions of these exposures. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Investor Verification Checklist
- Verify the full-year guidance ranges and whether the reported “now anticipate” outlook represents a change from prior guidance.
- Assess the sustainability of first-half timber volumes and pricing, particularly after management’s expectation of lower second-half harvest volumes.
- Monitor U.S.-China trade tensions, New Zealand export pricing, foreign exchange effects and port congestion.
- Reconcile Adjusted EBITDA and adjusted cash available for distribution to GAAP results; both are non-GAAP measures.
- Review debt maturities, variable-rate exposure, interest-rate swaps and the $189.6 million revolving-credit availability.
- Evaluate the timing and profitability of Real Estate sales, including the expected second-half slowdown and Wildlight development commitments.
- Confirm court approval and funding arrangements for the proposed shareholder derivative settlement.