Rayonier Inc. 2017 Q1 Form 10-Q Summary
Business context and reporting period
Rayonier is a timberland real estate investment trust with operations in Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016. At quarter-end, the company owned or leased approximately 2.6 million acres in the United States and New Zealand and held a 77% interest in the New Zealand joint venture.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Sales | $186.5 million | $134.8 million | +38% |
| Operating income | $49.3 million | $23.0 million | +114% |
| Operating margin | 26.4% | 17.1% | Improved |
| Net income | $35.1 million | $15.1 million | +133% |
| Net income attributable to Rayonier | $33.8 million | $14.5 million | +134% |
| Diluted EPS | $0.27 | $0.12 | +125% |
| Adjusted EBITDA | $57.1 million | $55.6 million | +3% |
| Cash provided by operating activities | $33.9 million | $31.0 million | +9% |
| Cash available for distribution | $38.8 million | $36.4 million | +7% |
Net income attributable to Rayonier represented an 18.1% margin versus 10.7% in the prior-year quarter. The reported improvement in operating income and net income was substantially affected by a $42.0 million Real Estate large disposition that generated a $28.2 million gain. Excluding large dispositions, Adjusted EBITDA was $57.1 million compared with $55.6 million in the prior-year period.
- Southern Timber sales declined to $32.7 million from $44.7 million, and Adjusted EBITDA declined to $26.4 million from $32.4 million, primarily because of lower harvest volumes and stumpage prices.
- Pacific Northwest Timber sales increased to $24.8 million from $19.3 million, but the segment recorded a $0.9 million operating loss versus $1.4 million of operating income, largely because of higher depletion rates following the Menasha acquisition.
- New Zealand Timber sales increased to $40.7 million from $36.0 million, while operating income increased to $10.3 million from $4.7 million, supported by stronger log prices, favorable foreign exchange and modestly higher volumes.
- Real Estate sales increased to $54.3 million from $13.4 million, primarily due to the large disposition. Adjusted EBITDA declined to $8.6 million from $9.7 million after excluding the disposition gain.
- Trading sales increased to $34.0 million from $21.4 million, and operating income increased to $1.1 million from $0.4 million, reflecting higher volumes and prices.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $219.4 million at March 31, 2017, compared with $85.9 million at December 31, 2016. Restricted cash was $111.3 million, primarily related to like-kind exchange proceeds and real estate escrow funds.
- Operating cash flow of $33.9 million was substantially offset by $33.6 million of investing cash outflows. Financing activities provided $133.2 million, including $152.3 million of net proceeds from an equity offering.
- Total debt was $1.074 billion, including $42.9 million of current maturities. Debt to total capitalization was 39%, compared with 42% at year-end 2016; net debt to enterprise value was 19%, compared with 23%.
- The company had $154.6 million of available capacity under its revolving credit facility, net of letters of credit. The New Zealand joint venture had NZ$23.8 million of additional working-capital capacity available.
- Debt included $350 million of term borrowings, $325 million of 3.75% senior notes due 2022, $300 million of incremental term borrowings, $40 million of revolving borrowings and other New Zealand and mortgage debt. The company was in compliance with all applicable debt covenants.
- The quarterly dividend was $0.25 per share. Management expected 2017 dividend payments of approximately $127 million, assuming no change in the quarterly dividend rate or material change in shares outstanding.
Material changes, outlook and unusual items
- Rayonier completed a $152.3 million equity offering in March 2017. The proceeds, together with like-kind exchange proceeds, funded timberland acquisitions.
- After quarter-end, the company completed acquisitions totaling approximately 94,400 acres in coastal Florida, Georgia and South Carolina. Including a 700-acre transaction closed in March, aggregate consideration was approximately $214 million.
- Management stated that the company was on track to achieve its full-year Adjusted EBITDA guidance; the filing text provided here does not state the specific guidance amount.
- Management expected 2017 capital expenditures of $64 million to $68 million, excluding the office building and strategic timberland acquisitions; real estate development investments of $15 million to $20 million; and approximately $6 million of 2017 office-building construction costs.
- Management expected stronger performance in New Zealand Timber, modest improvement in Pacific Northwest sawtimber pricing, continued demand for rural real estate and initial 2017 sales from the Wildlight development.
- The company recognized a $73.0 million insurance settlement receivable and a $73.7 million settlement payable related to the securities litigation settlement. The settlement was subject to court approval and class-member exclusion requests; the company also expected to reimburse an insurer approximately $0.7 million for disputed pre-litigation expenses.
- The company early adopted ASU 2016-16, resulting in a $14.4 million cumulative reduction to retained earnings. The filing also discussed pending adoption or evaluation of new guidance on restricted cash, cash-flow classifications, leases, revenue recognition and nonfinancial asset derecognition.
Key risks and contingencies
- Results are exposed to timber prices, harvest volumes, housing and construction demand, pulp and paper markets, export demand, weather, mill outages and operating costs.
- New Zealand operations are exposed to New Zealand dollar fluctuations and demand in China, Korea and India. The company uses foreign exchange contracts, options and interest-rate swaps to mitigate portions of these risks.
- Approximately $1.533 billion of contractual financial obligations were disclosed, including debt, interest, timberland leases, operating leases, derivative commitments and other commitments.
- Outstanding financial commitments included $5.4 million of standby letters of credit, $2.3 million of guarantees and $0.7 million of surety bonds, with an associated liability of $43,000.
- Derivative instruments had $650 million of interest-rate-swap notional value, $61 million of foreign-exchange-contract notional value and $81 million of foreign-exchange-option notional value for hedging purposes.
- Other lawsuits and claims were described as not expected to have a material adverse effect, but derivative shareholder demands and related indemnification and expense-advancement obligations remained subject to an outcome that could not be predicted.
Most important facts for investors to verify
- Verify the specific full-year Adjusted EBITDA guidance amount, which is referenced but not stated in the supplied filing text.
- Separate recurring operating performance from the $28.2 million large-disposition gain and assess the sustainability of reported margins.
- Review the terms, closing status and funding of the approximately $214 million post-quarter-end timberland acquisitions.
- Confirm court approval, insurance funding and final company cash exposure related to the $73 million securities litigation settlement.
- Assess debt maturities, variable-rate exposure, covenant headroom and the effect of the equity offering on per-share results and dividends.
- Monitor Southern Timber volume and pricing, Pacific Northwest depletion costs, New Zealand foreign exchange and export demand, and Wildlight development execution.