Rayonier Inc. 2016 Third-Quarter 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. As of September 30, 2016, the company owned or leased approximately 2.7 million acres in the United States and New Zealand and held a 77% interest in the New Zealand joint venture. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Financial Results and Key Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Sales | $171.4 million | $151.7 million | $567.8 million | $407.8 million |
| Operating income | $49.7 million | $27.8 million | $194.3 million | $62.1 million |
| Net income | $40.6 million | $19.2 million | $167.3 million | $34.5 million |
| Net income attributable to Rayonier | $39.4 million | $19.7 million | $163.6 million | $35.9 million |
| Diluted EPS | $0.32 | $0.16 | $1.33 | $0.28 |
| Adjusted EBITDA | $87.2 million | $65.8 million | $187.8 million | $160.4 million |
| Dividends declared per share | $0.25 | $0.25 | $0.75 | $0.75 |
Approximate operating margins were 29.0% in the third quarter and 34.2% for the first nine months, compared with 18.3% and 15.2%, respectively, in the prior-year periods. Net income attributable to Rayonier margins were approximately 23.0% and 28.8%, compared with 13.0% and 8.8%.
- Cash provided by operating activities was $163.9 million for the first nine months, compared with $143.4 million in 2015.
- Cash used in investing activities was $254.1 million, including $353.8 million of timberland acquisitions, $40.2 million of capital expenditures and $127.0 million of net proceeds from a large timberland disposition.
- Cash provided by financing activities was $146.8 million, primarily reflecting net debt issuance, compared with cash used of $90.1 million in 2015.
- Cash and cash equivalents increased to $110.0 million from $51.8 million at December 31, 2015.
- Cash available for distribution was $123.5 million, compared with $100.9 million in the prior-year period. After mandatory debt repayments, 2015 CAD was negative $30.1 million; no mandatory debt repayments were reported for the 2016 period.
- Total assets were $2.67 billion and shareholders’ equity was $1.45 billion at September 30, 2016.
- The filing reports total debt of $1.069 billion, including $31.8 million of current maturities. The MD&A liquidity table reports debt of $1.065 billion for capitalization purposes. The debt-to-capital ratio was reported at 42%, compared with 38% at year-end 2015.
- The company had $169.5 million of available borrowing capacity under its $200 million revolving credit facility, net of letters of credit.
Material Changes Versus the Prior Comparable Period
- Sales increased 13% in the third quarter and 39% year to date, primarily because of stronger Real Estate and Trading activity and higher New Zealand Timber pricing.
- Operating income increased 79% in the third quarter and more than tripled year to date. The year-to-date comparison benefited materially from the $129.5 million sale of approximately 55,000 Washington acres, which generated a $101.3 million gain, and a $4.0 million deferred payment related to a prior land sale.
- Real Estate sales increased to $211.3 million from $66.0 million for the first nine months, including the Washington disposition. Real Estate operating income increased to $153.0 million from $34.0 million.
- New Zealand Timber operating income increased to $21.4 million from $3.8 million year to date, supported by higher export and domestic sawtimber prices and favorable demand, particularly from China.
- Southern Timber operating income was broadly stable year to date at $35.0 million, although third-quarter results declined because wet weather and weaker market conditions reduced harvest volumes.
- Pacific Northwest Timber shifted to an operating loss of $0.9 million year to date from income of $7.4 million, reflecting lower volumes, weaker export markets, lower prices and higher depletion rates following the Oregon acquisition.
- On May 10, 2016, Rayonier acquired approximately 61,000 acres from the Menasha portfolio for approximately $263 million. The purchase accounting remained preliminary at the filing date.
- Rayonier’s New Zealand joint venture refinancing increased the company’s ownership interest from 65% to 77%.
Guidance, Outlook, Risks and Unusual Items
- Management raised full-year 2016 Adjusted EBITDA guidance to $228 million-$235 million from $195 million-$215 million.
- Management expected relatively flat Southern Timber and Pacific Northwest Timber prices for the remainder of 2016, continued strong New Zealand Timber performance, and relatively light Real Estate closings in the fourth quarter after a strong third quarter.
- Expected 2016 capital expenditures were $60 million-$65 million, excluding the office building and strategic timberland acquisitions; real estate development investments were expected to be approximately $10 million. Dividend payments were expected to be approximately $123 million assuming a quarterly dividend of $0.25 per share.
- Key operating risks include timber prices and volumes, housing and wood-product demand, weather-related harvesting disruptions, export demand from China and other Pacific Rim markets, New Zealand dollar fluctuations, interest rates, and the ability to meet debt covenants.
- The company used interest-rate swaps with a $650 million notional amount and foreign-exchange contracts and options with notional amounts of approximately $25 million and $71 million, respectively. At the reported borrowing level, a one-percentage-point interest-rate change was estimated to affect annual interest expense by approximately $0.4 million.
- The company was in compliance with applicable debt covenants at September 30, 2016. Contractual cash obligations totaled approximately $1.56 billion, including debt, interest, timberland leases, derivatives and other commitments.
- A consolidated securities class action related to the company’s 2014 restatement remained in discovery. Rayonier stated that it could not determine whether a material loss was reasonably likely or estimate a loss range. The company also had obligations relating to shareholder derivative demands and potential officer and director indemnification.
- After quarter-end, on October 21, 2016, the company completed sales of 37,000 acres in Alabama and Mississippi for $77.8 million. Separately, three contracts covering 62,100 acres had been entered into during the third quarter for total proceeds of $119.7 million, with one transaction expected to close in January 2017.
Important Facts for Investors to Verify
- Reconcile reported earnings and Adjusted EBITDA with and without the $101.3 million Washington disposition gain and other unusual Real Estate items.
- Confirm the final purchase accounting for the Menasha acquisition and its effect on timberland values, depletion and future earnings.
- Monitor fourth-quarter Real Estate closings and the company’s ability to sustain the raised $228 million-$235 million Adjusted EBITDA guidance.
- Assess Pacific Northwest operating performance, export-market demand, harvest volumes and depletion rates.
- Review leverage, debt maturities, variable-rate exposure, swap fair values and covenant compliance.
- Track the securities litigation, derivative demands, indemnification obligations and related legal costs, for which the filing provides no estimable material loss range.
- Evaluate weather, timber pricing, foreign-exchange movements and China-related demand, which materially affect operating results.