Rayonier Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2015. Rayonier is a timberland REIT with Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading segments. At June 30, 2015, it owned or leased approximately 2.3 million U.S. timberland acres and held a 65% interest in a New Zealand joint venture with approximately 444,000 acres. Performance Fibers was spun off on June 27, 2014 and is presented as discontinued operations in the prior-year income statement.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $115.8 million | $163.1 million | $256.1 million | $306.3 million |
| Operating income | $6.5 million | $37.6 million | $34.3 million | $52.0 million |
| Income from continuing operations | $(2.9) million | $4.0 million | $15.3 million | $14.4 million |
| Net income attributable to Rayonier | $(1.5) million | $16.4 million | $16.2 million | $57.8 million |
| Diluted EPS | $(0.01) | $0.12 | $0.13 | $0.44 |
| Adjusted EBITDA | $33.1 million | $70.2 million | $94.6 million | $113.7 million |
| Cash provided by operating activities | Not separately provided | Not separately provided | $85.9 million | $229.1 million |
| Adjusted CAD | Not separately provided | Not separately provided | $52.3 million | $40.1 million |
Q2 operating margin was approximately 5.6%, compared with approximately 23.0% in the prior-year quarter. Six-month operating margin was approximately 13.4%, compared with approximately 17.0% in the prior-year period. The filing does not present a consolidated gross margin.
At June 30, 2015, cash and cash equivalents were $91.6 million, total debt was $752.4 million, shareholders’ equity was $1.48 billion, and the debt-to-capital ratio was 34%. Available borrowing capacity included $153.2 million under the revolving credit facility and $100 million under the term credit agreement. The Company was in compliance with applicable financial covenants.
Material changes versus the prior comparable period
- Sales declined 29% in the quarter and 16% year to date, primarily because 2014 included substantial Real Estate activity and the current period reflects the post-spin-off business mix.
- Q2 net income attributable to Rayonier declined to a $1.5 million loss from $16.4 million of income. Prior-year results included $12.1 million of net income from discontinued Performance Fibers operations; no discontinued-operation income was reported in 2015.
- Southern Timber improved: Q2 sales increased to $32.7 million and operating income to $11.8 million, supported by higher harvest volumes, pricing and non-timber income.
- Pacific Northwest Timber weakened: Q2 sales fell to $17.1 million and operating income to $1.7 million due to planned lower harvest volumes and weaker sawtimber prices.
- New Zealand Timber reported a Q2 operating loss of $0.9 million versus income of $2.2 million, primarily because of lower prices, weaker China demand and foreign-exchange losses.
- Real Estate sales fell to $6.9 million from $34.0 million, and operating income fell to $1.4 million from $27.8 million, mainly because acreage sold declined to 2,337 acres from 25,283 acres. The prior-year period also included a $5.8 million bankruptcy settlement.
- Operating cash flow decreased substantially because the prior-year period included Performance Fibers cash flows before the spin-off. Lower cash flow was partly offset by lower dividends and lower continuing-operation capital expenditures.
- Other comprehensive loss was $27.6 million in Q2 and $42.1 million year to date, largely reflecting foreign-currency translation losses and New Zealand joint-venture hedge losses.
Outlook, risks, contingencies and unusual items
- Management expected continued strong Southern pulpwood demand and prices, but limited near-term upside in Southern sawtimber prices.
- Management expected near-term weakness in Pacific Northwest and New Zealand prices from weak China export demand, with improvement potentially slower than previously expected.
- Management reported steady rural real estate demand and increasing interest in selected development properties.
- Expected 2015 expenditures included approximately $65 million of capital expenditures, approximately $7 million for real estate entitlements and infrastructure, and approximately $127 million of dividends assuming a quarterly dividend of $0.25 per share.
- On August 5, 2015, after quarter-end, Rayonier announced a $350 million nine-year term loan and a $200 million five-year revolving facility. Proceeds were intended to refinance the August 2015 exchangeable notes, repay existing revolver borrowings and support a planned capital infusion into the New Zealand joint venture.
- The Company incurred $1.5 million in Q2 and $1.6 million year to date for shareholder litigation, derivative demands and the SEC investigation related to the November 2014 restatement announcement.
- Five shareholder securities actions were consolidated; defendants filed motions to dismiss, and the Company stated that neither the likelihood nor amount of any material loss could be estimated. The SEC investigation remained outstanding, although the Company did not then expect a material financial impact.
- New Zealand operations remain exposed to timber prices, China demand, foreign exchange and interest rates. Derivatives hedged portions of foreign-currency exposure and 81% of New Zealand joint-venture variable-rate debt.
Most important facts for investors to verify
- Execution and terms of the post-quarter-end debt refinancing, including the planned New Zealand joint-venture recapitalization and repayment of the exchangeable notes.
- Whether China demand and export pricing recover in the Pacific Northwest and New Zealand segments.
- Southern Timber harvest volumes, stumpage prices and sustainability of the recent operating improvement.
- Timing and profitability of future Real Estate sales, given the substantial year-over-year decline in acreage sold.
- Progress and potential financial exposure from the shareholder litigation, derivative demands and SEC investigation.
- Ability to fund the dividend, planned capital expenditures, timberland acquisitions and share repurchases from operating cash flow and available credit.
- Reconciliation and comparability of non-GAAP Adjusted EBITDA and Adjusted CAD, particularly because prior-year measures include discontinued-operation and spin-off adjustments.