Rayonier Inc. 2014 Q3 Form 10-Q Summary
Business Context and Reporting Period
Rayonier filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. Following the June 27, 2014 tax-free spin-off of Performance Fibers into Rayonier Advanced Materials, Rayonier operates primarily through Forest Resources and Real Estate, with approximately 2.6 million acres owned, leased or managed in the United States and New Zealand. Performance Fibers and the previously sold Wood Products business are presented as discontinued operations.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Sales | $149.8 million | $159.3 million | $456.2 million | $421.2 million |
| Operating income | $32.1 million | $20.0 million | $84.1 million | $73.7 million |
| Operating margin | 21.4% | 12.5% | 18.4% | 17.5% |
| Income from continuing operations | $32.1 million | $15.0 million | $46.4 million | $73.7 million |
| Net income attributable to Rayonier | $32.7 million | $57.3 million | $90.5 million | $292.2 million |
| Diluted EPS from continuing operations | $0.25 | $0.11 | $0.36 | $0.55 |
| Diluted EPS | $0.25 | $0.44 | $0.69 | $2.23 |
Q3 sales declined 6% year over year, while operating income increased 61%. The improvement reflected stronger Real Estate results, lower corporate expenses following the spin-off, favorable Southern timber pricing and foreign-currency effects. The 9M sales increase primarily reflects consolidation of the New Zealand joint venture and stronger Forest Resources and Real Estate activity.
- Cash provided by operating activities was $280.7 million for the first nine months, versus $334.2 million in 2013.
- Cash used in investing activities was $152.0 million, including $105.7 million of capital expenditures and $93.2 million of timberland acquisitions.
- Adjusted cash available for distribution was $120 million, versus $63 million in 2013; the prior-year measure included $32 million of mandatory debt repayments.
- Cash and cash equivalents were $182.8 million at September 30, 2014, compared with $199.6 million at December 31, 2013.
- Total debt was $735.6 million, including $130.5 million of current maturities; long-term debt was $605.2 million.
- Debt-to-capitalization declined to 31% from 47% at year-end 2013. Rayonier had $198 million available under its revolving facility and $100 million of additional term-loan capacity.
- Adjusted EBITDA was $69 million in Q3 and $289 million for the first nine months. These are non-GAAP measures.
Material Changes Versus the Prior Comparable Period
- Performance Fibers was spun off on June 27, 2014. Its 2014 nine-month contribution to discontinued operations was $43.1 million, compared with $175.8 million from Performance Fibers in 2013. The 2013 discontinued-operations total also included a $44.5 million after-tax gain from the Wood Products sale.
- Forest Resources Q3 sales decreased to $108 million from $111 million and operating income decreased to $19 million from $23 million, primarily due to lower Northern and New Zealand volumes and pricing pressure in New Zealand. Nine-month Forest Resources sales increased to $314 million from $277 million and operating income increased to $65 million from $57 million.
- Real Estate Q3 sales increased to $27 million from $14 million and operating income increased to $16 million from $8 million. Nine-month sales increased to $66 million from $52 million, driven partly by non-strategic timberland sales and a $6 million bankruptcy-claim settlement.
- Corporate and other operating expense decreased to $6 million in Q3 from $10 million, but nine-month expense increased to $27 million from $15 million excluding the prior-year New Zealand consolidation gain.
- The Company used $906.2 million received from Rayonier Advanced Materials’ debt financing, together with available cash, to repay debt, fund a $63.2 million special dividend, and support the separation.
- The Company recorded an additional $2.6 million third-quarter out-of-period depletion adjustment for immaterial prior-year errors.
Guidance, Outlook, Risks and Unusual Items
- Management expected full-year Forest Resources results to be comparable to 2013, with stronger U.S. South pricing offset by weaker U.S. Pacific Northwest and New Zealand pricing and reduced fourth-quarter Northwest harvest volumes.
- Full-year 2014 Real Estate results were expected to be approximately 15% below 2013 because of the timing of anticipated land-sale closings.
- For 2015, management forecast operating income of $90 million to $100 million and Adjusted EBITDA of approximately $200 million to $215 million. The filing also indicates that 2015 results would be lower than 2014 because of reduced Northwest harvest volumes and lower planned non-strategic timberland sales.
- Management expects Northwest annual harvests to average approximately 140 million board feet from 2015 through 2019 and to decline to approximately 125 million board feet by 2017 while inventory is replenished.
- The Board approved a fourth-quarter dividend of $0.25 per share, a 17% reduction from the prior-quarter $0.30 dividend, citing lower expected harvest levels and reduced reliance on non-strategic timberland sales.
- The Company identified a material weakness in internal control over financial reporting related to merchantable timber inventory, depletion calculations, and certain information-technology general controls. The weakness was not remediated as of September 30, 2014, and prior 2014 quarterly financial statements were restated.
- Rayonier’s 4.50% Senior Exchangeable Notes due 2015 were exchangeable in the fourth quarter based on the stock-price test. The Company stated that any required repayment would be funded with cash on hand or the revolving facility.
- Standard & Poor’s lowered Rayonier’s corporate credit rating to BBB from BBB+ in July 2014; Moody’s rated the Company Baa2 at September 30, 2014.
- Key risks include timber inventory and depletion-estimate errors, lower sustainable harvest volumes, timber and real-estate price cyclicality, weather and fire, environmental and permitting restrictions, foreign-exchange and interest-rate exposure, reduced diversification after the spin-off, debt and covenant requirements, REIT qualification, and potential litigation or regulatory action related to the restatement.
- The filing states that ordinary-course litigation and claims are not expected to have a material adverse effect, but the Company had $20.4 million of maximum potential financial commitments under standby letters of credit, guarantees and surety bonds.
Most Important Facts for Investors to Verify
- Whether the remediation plan fully resolves the material weakness and whether additional restatements or regulatory, litigation or enforcement costs arise.
- The sustainability and timing of reduced Northwest harvest volumes and their effect on revenue, EBITDA, cash flow and dividends.
- Whether the 2015 earnings and Adjusted EBITDA outlook is achieved while planned timberland sales decline.
- The Company’s ability to repay or refinance the $129.2 million carrying amount of exchangeable notes due in 2015 while maintaining liquidity and covenant compliance.
- The effect of New Zealand log demand, China inventory levels, foreign-exchange movements and interest-rate changes on Forest Resources results.
- The timing and profitability of Real Estate closings, including the reliance on rural and non-strategic timberland sales.
- The comparability of 2014 and 2013 results, given the Performance Fibers spin-off, discontinued-operations presentation, New Zealand joint-venture consolidation and prior-period restatements.