Rayonier Inc. 2016 Q1 Form 10-Q Summary
Business Context and Reporting Period
Rayonier Inc. is a timberland real estate investment trust with operations in the U.S. South, Pacific Northwest, and New Zealand, plus Real Estate and Trading segments. At March 31, 2016, the company owned or leased approximately 2.7 million legal acres, including a 77% interest in Matariki Forestry Group, its New Zealand joint venture. The filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. The financial statements are unaudited.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Sales | $134.8 million | $140.3 million | Down 3.9% |
| Operating income | $23.0 million | $27.7 million | Down 17.1% |
| Income before taxes | $14.3 million | $17.7 million | Down 19.4% |
| Net income | $15.1 million | $18.2 million | Down 17.2% |
| Net income attributable to Rayonier | $14.5 million | $17.7 million | Down 18.5% |
| Diluted EPS | $0.12 | $0.14 | Down $0.02 |
| Adjusted EBITDA | $55.6 million | $61.5 million | Down 9.6% |
| Cash provided by operating activities | $31.0 million | $53.4 million | Down 41.9% |
| Adjusted CAD | $36.4 million | $43.2 million | Down 15.7% |
| Dividends declared per share | $0.25 | $0.25 | Unchanged |
Operating margin was approximately 17.0% in Q1 2016 versus 19.8% in Q1 2015. Net margin attributable to Rayonier was approximately 10.7% versus 12.6%.
- Southern Timber sales increased 26% to $44.7 million and operating income increased to $15.8 million, driven primarily by a 28% increase in harvest volume.
- Pacific Northwest Timber sales were broadly unchanged at $19.3 million, while operating income declined to $1.4 million because of lower sawtimber prices and higher depletion.
- New Zealand Timber sales declined 13% to $36.0 million and operating income declined to $4.7 million, reflecting lower volumes, land sales, and U.S.-dollar-denominated prices.
- Real Estate sales fell to $13.4 million from $23.8 million and operating income fell to $4.2 million from $12.6 million, primarily because of lower average prices per acre.
- Trading sales increased to $21.4 million, with operating income of $0.4 million, compared with $0.3 million in the prior-year period.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $76.2 million at March 31, 2016, compared with $51.8 million at December 31, 2015.
- Total assets were $2.33 billion and shareholders’ equity was $1.34 billion.
- Debt totaled approximately $872.8 million before deferred financing costs, including $350 million under the term credit agreement and $105 million drawn on the revolving credit facility. The carrying amount of long-term debt, net of deferred financing costs, was $857.4 million.
- The company had $93.3 million of available capacity under its $200 million revolving credit facility, net of letters of credit.
- The debt-to-capital ratio was 39%, compared with 38% at December 31, 2015. The company was in compliance with applicable debt covenants.
- Operating cash flow declined primarily because of the $9.3 million settlement of New Zealand joint venture interest-rate swaps, higher receivables, and higher log inventory.
- Investing cash outflows were $20.3 million, including $13.3 million of capital expenditures, $14.3 million for timberland acquisitions, and $1.7 million for real estate development investments.
- Financing activities generated $13.4 million, reflecting $285.6 million of debt issuance, $240.8 million of debt repayment, and $30.7 million of dividends paid.
Material Changes Versus the Prior Comparable Period
- Consolidated sales and profit declined, despite stronger Southern Timber performance, because of weaker Real Estate and New Zealand Timber results.
- Southern Timber harvest volumes were accelerated because of extreme wet weather conditions in certain markets; management nevertheless maintained its full-year harvest-volume expectation.
- New Zealand Timber results were affected by weaker Chinese demand, lower U.S.-dollar pricing, a weaker New Zealand dollar, and lower harvest volumes.
- The company completed a recapitalization of the New Zealand joint venture on March 3, 2016. Rayonier’s ownership increased from 65% to 77%, and the transaction is expected to reduce consolidated annual interest expense by approximately $5 million.
- The New Zealand joint venture repaid approximately $155 million of tranche A debt, while Rayonier settled associated interest-rate swaps for approximately $9.3 million.
- Adjusted other comprehensive loss included a $13.8 million after-tax loss on cash-flow hedges, contributing to accumulated other comprehensive loss of $43.6 million at March 31, 2016.
- The company repurchased $0.7 million of common shares during the quarter and had $99.3 million remaining under its $100 million repurchase authorization.
Guidance, Outlook, Risks, and Unusual Items
- Management raised full-year 2016 Adjusted EBITDA guidance to $195 million to $215 million, citing the strong start to the year and the anticipated contribution from the Pacific Northwest portfolio repositioning.
- Expected 2016 capital expenditures are approximately $63 million, excluding the planned office building and strategic timberland acquisitions. Real estate development investments are expected to be $10 million to $15 million, and dividend payments are expected to be approximately $123 million assuming an unchanged quarterly dividend.
- Management expects approximately 5.8 million to 6.0 million tons of Southern Timber harvests and roughly 1.3 million tons of Pacific Northwest harvests for the full year.
- Key operating risks include timber prices, U.S. housing and lumber demand, pulp and paper markets, Chinese and other export demand, foreign exchange rates, interest rates, weather, real estate transaction timing, and the availability of financing.
- At March 31, 2016, derivative liabilities exceeded derivative assets by approximately $25.8 million. A hypothetical one-percentage-point change in interest rates would affect annual interest expense by approximately $1.2 million on exposed variable-rate debt.
- The company disclosed securities litigation, shareholder derivative demands, and an SEC investigation related to its November 2014 announcement and restated interim financial statements. The company could not estimate the likelihood or amount of any material loss; it did not expect the SEC investigation to have a material financial impact but could not predict its outcome.
- Subsequent to quarter-end, Rayonier completed the Menasha acquisition with Forest Investment Associates. Rayonier expects to own approximately 61,000 acres for a final purchase price of approximately $263 million. It also completed the sale of approximately 55,000 Washington acres for approximately $130 million and entered into a new $300 million incremental term loan.
Important Facts for Investors to Verify
- Whether the $195 million to $215 million Adjusted EBITDA guidance is achieved, including the contribution from the Menasha properties.
- The sustainability of Southern Timber’s unusually high first-quarter harvest volume and the effect of subsequent volume normalization.
- Recovery in Pacific Northwest sawtimber pricing and export demand, particularly in China.
- New Zealand Timber pricing, harvest volumes, exchange rates, and the financial benefits of the joint venture recapitalization.
- The timing and profitability of Real Estate transactions, including larger transactions in the sales pipeline.
- Leverage, liquidity, interest-rate exposure, and the funding impact of the Menasha acquisition and incremental term loan.
- The ultimate outcome and potential cost of the securities litigation, derivative claims, and SEC investigation.
- Reconciliations and comparability of non-GAAP Adjusted EBITDA and Adjusted CAD with GAAP results.