Rayonier Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2013; unaudited results compared with the three months ended March 31, 2012. Rayonier operates in Forest Resources, Real Estate and Performance Fibers. The Wood Products business was sold on March 1, 2013 and is presented as discontinued operations.
Financial performance and condition
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Sales | $393.7 million | $336.6 million | 17.0% increase |
| Operating income | $115.4 million | $82.8 million | 39.6% increase |
| Operating margin | 29.3% | 24.6% | Improved |
| Income from continuing operations | $103.3 million | $52.6 million | 96.3% increase |
| Net income | $147.7 million | $53.4 million | 176.5% increase |
| Diluted EPS | $1.13 | $0.42 | Increase |
| Cash provided by operations | $89.7 million | $111.4 million | Decrease |
| Adjusted CAD | $67 million | $87 million | Decrease |
Net income included $44.5 million from discontinued operations, including a $42.7 million after-tax gain on the Wood Products sale. Excluding that gain and related discontinued operations, continuing operations generated $103.3 million. The reported net margin was 37.5%, compared with 15.9% in the prior-year quarter, but the comparison is materially affected by the divestiture gain.
- Segment sales and operating income: Forest Resources sales were $57.1 million and operating income was $13.3 million; Real Estate sales were $24.3 million and operating income was $16.8 million; Performance Fibers sales were $284.2 million and operating income was $91.7 million.
- Cash and liquidity: Cash and cash equivalents were $266.0 million at March 31, 2013, versus $280.6 million at year-end 2012. The company had $242 million of available capacity under its $450 million unsecured revolving credit facility.
- Debt: Total debt was approximately $1.20 billion, down from $1.27 billion at December 31, 2012. Debt-to-capitalization improved to 44% from 47%. The company made net debt repayments of $70 million during the quarter.
- Capital spending: Cash capital expenditures were $32.7 million, with $36.7 million spent on the Jesup cellulose specialties expansion and $1.6 million on timberland purchases.
- Dividends and equity: The quarterly dividend was $0.44 per share; dividends paid were $57.7 million. The company repurchased 209,743 shares for tax withholding related to equity awards.
Material changes versus the prior comparable period
- Sales increased primarily from higher Performance Fibers cellulose specialties volumes and prices, stronger Forest Resources pricing and volumes, higher Real Estate sales, and increased New Zealand log trading activity.
- Performance Fibers operating income increased 14% to $91.7 million. Cellulose specialties volumes increased 12% and pricing increased 4%; absorbent materials pricing declined 12%, partly offset by a 9% volume increase.
- Forest Resources operating income increased to $13.3 million from $8.0 million, reflecting improved sawtimber demand, pricing and export conditions.
- Real Estate operating income increased to $16.8 million from $6.5 million, primarily from non-strategic timberland sales, including a 5,400-acre sale at $3,673 per acre.
- Interest expense declined to $7.7 million from $11.8 million because of lower borrowing rates and higher capitalized interest.
- The effective tax rate from continuing operations was 4.1%, versus 25.8% in the prior-year quarter. The current period benefited from a $19 million discrete tax benefit related to exchanging approximately 120 million gallons of black liquor credits.
- Operating cash flow declined because Rayonier paid $70 million to exchange the Alternative Fuel Mixture Credit for the Cellulosic Biofuel Producer Credit. Management stated that, excluding this payment, operating cash inflows increased by approximately $49 million.
Outlook, commentary, risks and unusual items
- Management expects 2013 earnings from continuing operations to be weighted toward the first half because of first-quarter tax benefits and the expected second-half impact of the cellulose specialties expansion phase-in.
- Excluding Wood Products and the gain on sale, management continued to expect 2013 operating income and EPS to be slightly above 2012. No specific full-year EPS figure was provided in the filing.
- The Jesup expansion remained on schedule for completion in mid-2013, with total project cost expected at $375 million to $390 million. Planned 2013 spending was $130 million to $145 million. New capacity is expected to phase in from 5,000 to 20,000 tons in 2013, approximately 100,000 tons in 2014 and the full 190,000-ton rate in late 2015.
- Management expects 2013 capital expenditures of $150 million to $160 million, excluding strategic timberland acquisitions and the expansion; dividends were expected to total approximately $224 million assuming the $0.44 quarterly rate continues.
- In April 2013, Rayonier acquired an additional 39% of the New Zealand Matariki joint venture for approximately $140 million, increasing ownership to 65%. Beginning in the second quarter, Rayonier expects to consolidate the joint venture and record the other partner’s 35% noncontrolling interest.
- The $172.5 million 4.50% Senior Exchangeable Notes due 2015 were exchangeable during the second quarter based on the company’s share price. Management indicated it would use the revolving credit facility to repay principal if holders exercised the option before June 30, 2013.
- China’s Ministry of Commerce initiated an anti-dumping investigation covering pulp imports, including Rayonier’s high-purity cellulose specialties pulp. Rayonier shipped approximately 124,000 tons to China in 2012. The company is cooperating and did not expect a material adverse effect, although the outcome remains uncertain.
- Environmental liabilities for dispositions and discontinued operations totaled $80.2 million, with reasonably possible additional losses of up to $29 million. The company expects approximately $8 million of environmental expenditures in 2013.
- Approximately 700 Jesup mill employees ratified a new collective bargaining agreement on April 12, 2013, effective through June 30, 2017.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Investor verification points
- Separate recurring operating performance from the $42.7 million after-tax Wood Products divestiture gain and other discontinued-operation results.
- Assess the sustainability of earnings and cash flow as the Jesup expansion transitions from construction to qualification and production, including expected start-up, conversion and depreciation costs.
- Verify the effect of the $140 million Matariki acquisition on second-quarter consolidation, debt, noncontrolling interests and reported segment results.
- Monitor the 2015 exchangeable notes, potential refinancing through the revolver, covenant compliance and remaining liquidity.
- Evaluate exposure to Chinese anti-dumping duties and the effect on high-purity cellulose specialties exports.
- Review environmental remediation obligations and the disclosed potential additional losses of up to $29 million.