Rayonier Inc. 2017 Q3 Form 10-Q Summary
Business context and reporting period
Rayonier is a timberland real estate investment trust with operations in the U.S. South, Pacific Northwest and New Zealand, plus real estate development and log trading businesses. The filing covers the unaudited quarter and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The company owned or leased approximately 2.7 million timberland acres, including a 77% interest in the New Zealand joint venture.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Sales | $177.9 million | $171.4 million | $559.2 million | $567.8 million |
| Operating income | $39.3 million | $49.7 million | $135.4 million | $194.3 million |
| Net income | $28.8 million | $40.6 million | $94.7 million | $167.3 million |
| Net income attributable to Rayonier | $24.7 million | $39.4 million | $84.7 million | $163.6 million |
| Diluted EPS | $0.19 | $0.32 | $0.67 | $1.33 |
| Adjusted EBITDA | $69.9 million | $87.2 million | $213.4 million | $187.8 million |
| Cash provided by operating activities | Not separately presented | Not separately presented | $186.9 million | $163.9 million |
Q3 operating margin was approximately 22.1%, versus 29.0% in the prior-year quarter; nine-month operating margin was approximately 24.2%, versus 34.2%. Attributable net margin was approximately 13.9% in Q3 and 15.1% year to date, compared with 23.0% and 28.8%, respectively, in the prior-year periods.
- Q3 sales increased 4%, led by New Zealand Timber, Trading and Pacific Northwest Timber, while Real Estate sales declined sharply.
- Q3 operating income declined 21% and attributable net income declined 37%. Year-to-date operating income declined 30% and attributable net income declined 48%, primarily because 2016 included substantially larger real estate and timberland disposition gains.
- Adjusted EBITDA increased 30% year to date, but declined 20% in Q3. The year-to-date measure excludes large disposition gains, non-cash land costs and shareholder litigation costs.
- Operating cash flow increased $23.0 million year to date. Cash used in investing activities was $199.1 million, including $239.1 million of timberland purchases, $45.7 million of capital expenditures and $11.8 million of real estate development investments.
- Cash and cash equivalents were $104.1 million at September 30, 2017, compared with $85.9 million at December 31, 2016. Restricted cash was $10.6 million, down from $71.7 million.
- Total debt was $1.033 billion, versus $1.066 billion at year-end 2016. Debt-to-capitalization was 38%, versus 42%, and net debt to enterprise value was 20%, versus 23%.
- The company had $139.6 million of available borrowing capacity under its revolving credit facility, net of outstanding letters of credit, and remained in compliance with debt covenants.
- Cash available for distribution, a non-GAAP measure, was $143.7 million for the first nine months, compared with $123.5 million in 2016. The quarterly dividend remained $0.25 per share; $0.75 per share had been declared year to date.
Material changes versus the prior comparable period
- New Zealand Timber: Q3 sales increased 66% to $69.9 million and operating income increased to $19.3 million from $6.6 million, supported by higher export and domestic prices, increased volumes and favorable foreign exchange. Nine-month operating income increased to $56.3 million from $21.4 million.
- Pacific Northwest Timber: Q3 operating income improved to $1.1 million from a $3.3 million loss, reflecting stronger sawtimber prices and lower depletion and overhead costs. The segment remained at a $1.3 million operating loss year to date.
- Southern Timber: Q3 operating income rose to $11.5 million from $8.2 million on higher harvest volumes and non-timber income, but year-to-date sales declined 7% because of lower stumpage pricing.
- Real Estate: Q3 sales fell to $17.3 million from $60.6 million and operating income fell to $11.4 million from $43.1 million. Year-to-date results included a $42.0 million large disposition in 2017 versus a $129.5 million disposition in 2016, materially affecting comparability.
- Trading: Q3 sales increased 63% to $40.2 million and nine-month sales increased 52% to $115.9 million, driven by higher volumes and prices, particularly from stronger China export demand.
- The company issued 5.75 million common shares in an equity offering, generating $152.4 million net proceeds. No shares were repurchased during Q3.
- The company early adopted ASU 2016-16, resulting in a $14.4 million cumulative reduction to retained earnings related to intra-entity tax accounting.
Guidance, outlook, risks and unusual items
- Management expected full-year Adjusted EBITDA near the higher end of prior guidance, citing strong New Zealand markets and a pipeline of fourth-quarter real estate closings. The filing does not provide a specific numerical guidance range.
- Management expected slightly lower Southern Timber volumes and modestly lower product pricing in Q4, higher Pacific Northwest volumes after the lifting of fire restrictions, modestly lower New Zealand volumes with continued strong pricing, and additional Wildlight development closings.
- 2017 expected capital expenditures were $66 million to $68 million, excluding the office building and strategic timberland acquisitions; real estate development investments were expected at $15 million to $18 million; office construction costs were expected at approximately $6 million; and dividend payments were expected at approximately $127 million.
- Key operating risks include timber prices and volumes, housing and wood-product demand, export demand from China and other Pacific Rim markets, foreign exchange exposure in New Zealand, weather and fire conditions, harvest and transportation costs, and real estate development execution.
- The securities litigation settlement was funded by insurance carriers for $73 million and recorded as an insurance settlement receivable and payable. The court approved the settlement on October 5, 2017; the filing states that the case was dismissed with prejudice.
- Derivative claims against former officers and directors remained pending. The company could not predict the outcome or estimate potential expenses, although ordinary-course lawsuits and claims were not expected to materially affect results.
- The company had $1.48 billion of contractual cash obligations, including $1.033 billion of debt, projected debt interest, timberland leases, derivative commitments and other commitments.
- Interest-rate swaps covered $650 million of variable-rate debt. Foreign currency contracts and options were used to hedge portions of New Zealand export sales, purchases and shareholder distributions.
Important facts for investors to verify
- Reconcile reported earnings and margins against the unusually large 2016 real estate and timberland disposition gains.
- Assess the sustainability of the 2017 improvement in New Zealand Timber and Trading, including dependence on China demand, export pricing and foreign exchange.
- Review fourth-quarter Wildlight closings and the company’s stated expectation for Adjusted EBITDA near the higher end of prior guidance.
- Evaluate leverage, debt maturities, interest-rate exposure, available revolver capacity and covenant compliance.
- Confirm the accounting and cash-flow effects of the $73 million insured securities litigation settlement and the status of remaining derivative claims.
- Review non-GAAP Adjusted EBITDA and cash available for distribution reconciliations rather than relying solely on those measures.