Business Context and Reporting Period
Company: Rayonier Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Rayonier is an international forest products company operating in four segments: Timber, Real Estate, Performance Fibers, and Wood Products. The company manages timberlands, sells real estate, and produces specialty cellulose fibers and lumber.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Sales | $278.7 million | $558.1 million |
| Net Income | $107.8 million | $133.7 million |
| Diluted EPS | $1.35 | $1.68 |
| Operating Income | $134.2 million | $177.4 million |
| Cash from Operating Activities | $62.4 million (Q2 only) | $127.2 million (YTD) |
| Total Debt | $750.0 million | $750.0 million |
| Cash and Equivalents | $59.9 million | $59.9 million |
| Shareholders' Equity | $1,014.4 million | $1,014.4 million |
Material Changes vs. Prior Period
- Significant Income Increase: Net income for the six months ended June 30, 2009, increased to $133.7 million from $76.3 million in the prior year period. This surge is primarily driven by a one-time Alternative Fuel Mixture Credit of approximately $92 million recognized in "Other operating income, net" following IRS approval in April 2009.
- Segment Performance:
- Real Estate: Sales increased significantly ($68.0 million YTD vs. $52.8 million prior year) due to higher volumes of non-strategic timberland sales, including a 29,933-acre sale in Georgia.
- Timber: Sales and operating income declined due to lower sawtimber prices and volumes, particularly in the Western region, though Eastern region volumes rose.
- Performance Fibers: Sales increased slightly ($380.7 million YTD vs. $362.0 million prior year) driven by higher cellulose specialty prices, despite volume declines due to customer destocking.
- Wood Products: Sales and operating income declined due to the weak housing market and planned production curtailments.
- Accounting Changes: The company adopted FSP APB 14-1 regarding convertible debt, resulting in a $23.7 million debt discount and a $15.0 million increase to shareholders' equity as of December 31, 2008.
- Discontinued Operations Reversal: The company discontinued the sale process for its New Zealand joint venture due to stressed capital markets. Consequently, results previously classified as discontinued operations are now included in continuing operations.
Guidance, Outlook, and Risks
- Outlook: Management expects Adjusted Cash Available for Distribution (CAD) to be comparable to 2008 levels. EBITDA is anticipated to be 5% to 10% below 2008, and EPS is expected to be 15% to 20% lower than 2008.
- Capital Allocation: The company expects to generate strong cash flows well above its $2.00 per share dividend. Capital expenditures for 2009 are forecasted between $87 million and $90 million.
- Liquidity: The company has $122 million in installment notes due December 31, 2009, which it plans to refinance. It maintains a $250 million revolving credit facility with $145 million available as of June 30, 2009.
- Risks and Contingencies:
- Alternative Fuel Credit: The credit is scheduled to expire December 31, 2009. There is a risk that changes in law or IRS challenges could limit or terminate eligibility.
- Environmental: The company faces an administrative order from the Georgia EPD regarding its East Point site, requiring a new site-wide investigation and remediation. The company has appealed the order.
- Market Conditions: Continued weakness in the housing market and global economic conditions impact timber and wood products demand.
Investor Verification Checklist
- Alternative Fuel Credit Sustainability: Verify the likelihood of the $92 million credit being extended beyond December 31, 2009, and the potential impact of legislative changes on future earnings.
- Real Estate Sales Pace: Assess whether the high volume of non-strategic timberland sales in Q2 2009 is sustainable or a one-time event.
- Debt Refinancing: Monitor the company's ability to refinance the $122 million in notes due at year-end 2009 given current market conditions.
- Environmental Liabilities: Review the status of the East Point, Georgia, administrative order and potential remediation costs.
- Non-GAAP Measures: Reconcile the reported EBITDA and Adjusted CAD figures to GAAP net income to understand the impact of the fuel credit and non-cash real estate costs.