Business Context and Reporting Period
Rayonier Inc. filed an unaudited Form 10-Q for the three and nine months ended September 30, 2013. The company operated through Forest Resources, Real Estate and Performance Fibers following the March 2013 sale of its Wood Products business. In April 2013, Rayonier acquired an additional 39% of the New Zealand joint venture, increasing ownership to 65% and commencing full consolidation of the venture.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Sales | $384.8 million | $386.2 million | $1,187.6 million | $1,070.8 million |
| Operating income | $83.6 million | $111.2 million | $309.6 million | $288.1 million |
| Income from continuing operations | $58.4 million | $79.3 million | $249.5 million | $198.0 million |
| Net income attributable to Rayonier | $57.3 million | $80.6 million | $292.2 million | $203.1 million |
| Diluted EPS | $0.44 | $0.62 | $2.23 | $1.58 |
| Operating margin | 21.7% | 28.8% | 26.1% | 26.9% |
| EBITDA | $137 million | $149 million | $509 million | $398 million |
Operating cash flow was $334.2 million for the first nine months, compared with $353.6 million in the prior-year period. Adjusted cash available for distribution declined to $190 million from $238 million, primarily because of a $70 million tax payment related to exchanging the alternative fuel mixture credit for the cellulosic biofuel producer credit, higher capital spending and higher mandatory debt repayments.
Capital expenditures were $122.5 million, including $137.4 million spent on the Jesup cellulose specialties expansion and $11.7 million for timberland purchases. The company also spent $139.9 million to acquire the additional New Zealand joint venture interest. Cash and cash equivalents were $260.7 million at September 30, 2013, compared with $280.6 million at December 31, 2012.
Total debt increased to $1.656 billion from $1.270 billion, and debt-to-capital increased to 50% from 47%. Long-term debt was $1.646 billion, with $10 million classified as current. The $450 million revolving credit facility had $172 million of available borrowing capacity, net of letters of credit. An additional $140 million remained available under the term credit agreement.
Material Changes Versus the Prior Comparable Period
- Forest Resources sales increased to $111 million in the third quarter and $277 million year to date, compared with $60 million and $165 million, respectively. The increase primarily reflected full consolidation of the New Zealand joint venture, stronger timber pricing and improved demand.
- Forest Resources operating income increased to $23 million in the quarter and $57 million year to date, from $11 million and $27 million.
- Performance Fibers sales decreased to $224 million in the quarter and $761 million year to date, from $288 million and $794 million. Operating income declined to $63 million and $233 million, from $101 million and $266 million, due to lower cellulose specialties volumes, the Jesup mill shutdown, higher wood and production costs, and the transition from absorbent materials to commodity viscose.
- The $388 million Jesup cellulose specialties expansion was completed in July 2013. The company began qualifying converted capacity with customers and expects a gradual transition from commodity viscose to cellulose specialties.
- Rayonier sold its Wood Products business for $80 million plus a working capital adjustment and recognized a $42.7 million after-tax gain. The business is reported as discontinued operations for all periods presented.
- The New Zealand joint venture consolidation generated a $16.1 million operating gain, including a deferred gain and a fair-value remeasurement benefit. The venture contributed $98.7 million of sales and $5.0 million of net income from April 4 through September 30, 2013.
- Quarterly earnings were reduced by a $3.0 million loss on the early redemption of $31.5 million of Senior Exchangeable Notes due 2015. An additional $10 million redemption settled on October 3, 2013 and generated a further $1.0 million fourth-quarter loss.
Guidance, Outlook, Risks and Unusual Items
Management expected Forest Resources pricing to remain favorable and fourth-quarter Real Estate sales and earnings to be substantially above third-quarter levels because of the timing of closings and demand for non-strategic properties. Excluding Wood Products results and the related gain, the New Zealand consolidation gain and the Wood Products sale, management continued to expect 2013 operating income to be slightly above 2012 and 2013 EPS to be moderately above 2012.
Performance Fibers faced increased market risk. Management reduced its estimate for incremental 2014 cellulose specialties volume to approximately 25,000–40,000 tons from a prior estimate of 90,000 tons, reflecting weaker European end markets, additional industry capacity, low commodity viscose prices and difficult customer negotiations. A customer representing approximately 75,000 tons of 2013 cellulose specialties volume had not finalized a 2014 agreement. The planned extension of the 2014 maintenance outage was expected to reduce 2014 production by approximately 30,000 tons but support additional cellulose specialties production in 2015.
Key risks include cellulose specialties pricing and customer contract renewals, commodity viscose and energy prices, timber prices and volumes, foreign exchange movements, variable interest rates, execution of the Jesup expansion, and the ability to refinance or repay exchangeable notes. A one-percentage-point change in variable interest rates would affect annual interest expense by approximately $10 million. Environmental liabilities for discontinued operations were $75.6 million, with reasonably possible additional losses estimated at up to $29 million.
The company reported $27.8 million of maximum potential payments under standby letters of credit, guarantees and surety bonds, with $16.2 million of related carrying liabilities. Total contractual cash obligations were approximately $621 million. Rayonier was in compliance with applicable debt covenants at September 30, 2013, and management stated that its disclosure controls were effective.
Facts Investors Should Verify
- Whether 2014 customer agreements and market demand support the revised 25,000–40,000-ton incremental cellulose specialties volume outlook.
- The pace and profitability of the Jesup mill transition from absorbent materials and commodity viscose to cellulose specialties.
- Post-acquisition performance, debt levels, covenant compliance and foreign-exchange exposure of the New Zealand joint venture.
- The sustainability of Forest Resources pricing and Real Estate transaction timing.
- The effect of the $70 million tax payment, higher capital spending, dividends and mandatory debt repayments on future distributable cash flow.
- Potential environmental remediation costs above the $75.6 million recorded liability and the estimated $29 million reasonably possible exposure.
- The redemption, refinancing or potential exchange of the remaining Senior Exchangeable Notes due 2015.