Rayonier Inc. 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2014. Rayonier completed the tax-free spin-off of its Performance Fibers business into Rayonier Advanced Materials on June 27, 2014. The continuing company is an international timberland REIT operating primarily through Forest Resources and Real Estate, with smaller Other Operations. Performance Fibers and the previously sold Wood Products business are presented as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 | ||
|---|---|---|---|---|
| 2014 | 2013 | 2014 | 2013 | |
| Sales | $163.1 million | $154.9 million | $306.3 million | $261.9 million |
| Operating income | $39.6 million | $32.4 million | $56.0 million | $53.8 million |
| Income from continuing operations | $6.1 million | $39.6 million | $18.3 million | $58.7 million |
| Net income attributable to Rayonier | $18.4 million | $87.2 million | $61.8 million | $234.9 million |
| Diluted EPS | $0.14 | $0.67 | $0.47 | $1.80 |
| Cash from operating activities | Not separately presented | Not separately presented | $226.4 million | $235.7 million |
| Adjusted CAD | Not separately presented | Not separately presented | $90 million | $92 million |
Quarterly operating margin was approximately 24.2%, compared with 20.9% in the prior-year quarter. Six-month operating margin was approximately 18.3%, compared with 20.5%. The 2014 continuing-operations results include a $15.6 million valuation allowance for the cellulosic biofuel producer credit and other separation-related effects.
- Forest Resources sales were $101.1 million in the quarter and $205.8 million year to date; operating income was $21.6 million and $49.1 million, respectively.
- Real Estate sales were $34.0 million in the quarter and $39.5 million year to date; operating income was $28.1 million and $28.8 million, respectively.
- Cash and cash equivalents were $222.1 million at June 30, 2014, including $75.0 million of restricted cash reserved for dividends or share repurchases.
- Total debt was $770.1 million, versus $1.574 billion at December 31, 2013. Debt-to-capitalization declined to 31% from 47%.
- Shareholders’ equity was $1.720 billion at June 30, 2014, compared with $1.755 billion at year-end 2013.
Material Changes Versus the Prior Comparable Period
- Sales increased 5% in the second quarter and 17% year to date, primarily from stronger Forest Resources pricing, New Zealand consolidation effects in the year-to-date comparison, and higher non-strategic timberland sales.
- Operating income increased 22% in the quarter but increased only 4% year to date. Real Estate operating income benefited from a 19,500-acre Florida timberland sale and a $5.8 million bankruptcy claim settlement.
- Continuing-operations income declined sharply because the prior-year quarter included a $16.1 million gain related to consolidation of the New Zealand joint venture, while 2014 included higher interest expense, separation costs, a $4.0 million asset write-off and the CBPC valuation allowance.
- Total net income and EPS declined substantially because 2013 included significant Performance Fibers earnings and a $42.7 million after-tax gain on the Wood Products sale. Performance Fibers contributed $12.1 million of after-tax income in the 2014 quarter and $43.1 million year to date, compared with $48.3 million and $132.5 million, respectively, in 2013; Wood Products contributed $44.5 million in the 2013 year-to-date period.
- Six-month operating cash flow decreased modestly to $226.4 million from $235.7 million. Adjusted CAD decreased to $90 million from $92 million.
- The spin-off transferred approximately $1.2 billion of net assets and related liabilities and equity to Rayonier Advanced Materials. It also transferred $103 million of net pension and postretirement obligations after revaluation.
Outlook, Liquidity, Risks and Unusual Items
- Management expects U.S. Southern timberland results to be well above 2013 as demand improves, while higher Chinese log inventories are expected to pressure Pacific Northwest and New Zealand prices in the second half of 2014. Forest Resources full-year results were expected to be modestly below prior guidance but well above 2013; Real Estate results were expected to be comparable with 2013.
- Management expects approximately $35 million to $40 million of capital expenditures during the remainder of 2014, excluding strategic timberland acquisitions. A further $18 million timberland acquisition was under contract.
- Second-half 2014 dividend payments were expected to total approximately $139 million, including a $0.50-per-share special dividend and the regular $0.30-per-share quarterly dividend. The regular third-quarter dividend and special dividend were approved after quarter-end.
- At June 30, 2014, the company reported $448 million of available borrowings under its revolving facility and $640 million of additional term-loan capacity. Effective July 7, 2014, these capacities were reduced to $200 million and $100 million, respectively.
- The 4.50% Senior Exchangeable Notes due 2015 were exchangeable during the third quarter. Management stated that, if exercised before September 30, 2014, it intended to repay principal using the revolving credit facility.
- Rayonier was in compliance with applicable debt covenants at June 30, 2014. Standard & Poor’s subsequently lowered the company’s rating to BBB from BBB+, with a Stable outlook.
- Key risks include timber and real estate pricing, harvest volumes and weather, Chinese log demand, foreign exchange and interest rates, debt refinancing, REIT qualification, pension estimates, and obligations associated with the separation agreements.
- Outstanding guarantees and financial commitments had a maximum potential payment of $21.5 million, including $17.4 million of standby letters of credit. Contractual cash obligations totaled approximately $1.1 billion, including debt, interest and long-term timberland leases.
- The company disclosed litigation related to the former Jesup mill’s environmental discharges; Rayonier Advanced Materials assumed and agreed to indemnify Rayonier for the matter. The filing states that ordinary-course legal claims are not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Reconcile continuing-operations performance with reported net income because the 2014 and 2013 periods contain materially different discontinued-operations, spin-off and disposal items.
- Confirm the post-spin-off debt structure, reduced borrowing capacity, 2015 exchangeable-note obligations and compliance with financial covenants.
- Assess whether the $75 million restricted cash balance and expected special dividend affect near-term liquidity and capital allocation.
- Evaluate the sustainability of Forest Resources pricing, Chinese log demand, weather-normalized harvest volumes and Real Estate transaction activity.
- Review the tax effects of the $15.6 million CBPC valuation allowance and the company’s remaining ability to use tax attributes.
- Consider the comparability and limitations of EBITDA and Adjusted CAD, which are non-GAAP measures and include discontinued-operations adjustments.