Rayonier Inc. 2015 Q3 Form 10-Q Summary
Business context and reporting period
Rayonier is a timberland real estate investment trust with Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading segments. It owned or leased approximately 2.7 million acres at September 30, 2015, including approximately 2.3 million U.S. acres and a 65% interest in a New Zealand joint venture. The filing covers the three and nine months ended September 30, 2015. The 2014 comparable periods reflect the June 2014 spin-off of the Performance Fibers business as discontinued operations.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Sales | $151.7 million | $149.8 million | $407.8 million | $456.2 million |
| Operating income | $27.8 million | $32.1 million | $62.1 million | $84.1 million |
| Income from continuing operations | $19.2 million | $32.1 million | $34.5 million | $46.4 million |
| Net income attributable to Rayonier | $19.7 million | $32.7 million | $35.9 million | $90.5 million |
| Diluted EPS from continuing operations | $0.16 | $0.25 | $0.28 | $0.36 |
| Adjusted EBITDA | $65.8 million | $70.3 million | $160.4 million | $184.0 million |
| Cash provided by operations | Not separately provided | Not separately provided | $143.4 million | $284.1 million |
Operating margin was approximately 18.3% in Q3 and 15.2% for the first nine months, compared with approximately 21.4% and 18.4% in the prior-year periods. Net income attributable to Rayonier margin was approximately 13.0% in Q3 and 8.8% year to date, compared with approximately 21.8% and 19.8%, respectively, in 2014.
- Cash and cash equivalents were $65.8 million at September 30, 2015, down from $161.6 million at December 31, 2014.
- Total debt was $791.2 million, compared with $751.5 million at year-end 2014. Debt-to-capital was 37%, versus 32% at year-end.
- The company had $131.2 million of available borrowing capacity under its revolving credit facility and an additional $180.0 million available under the term credit agreement.
- Adjusted CAD was negative $33.1 million for the first nine months, primarily because of the $131.0 million repayment of senior exchangeable notes. Excluding that repayment, Adjusted CAD increased versus 2014.
- Capital expenditures were $38.5 million, timberland acquisitions were $88.5 million, and dividends paid were $94.3 million during the first nine months.
Material changes versus the prior comparable period
- Third-quarter sales increased modestly, but nine-month sales declined 11% because 2014 included Performance Fibers results before the spin-off and because of weaker timber and trading prices.
- Operating income and Adjusted EBITDA declined in both periods. Year-to-date Adjusted EBITDA fell 13% to $160.4 million.
- Pacific Northwest Timber was the largest operating deterioration: nine-month sales fell to $57.8 million from $80.1 million and operating income fell to $7.4 million from $25.9 million, due to planned volume reductions, weaker sawtimber prices and weak Chinese demand.
- New Zealand Timber nine-month sales fell to $121.5 million from $130.8 million and operating income declined to $3.8 million from $6.6 million, primarily due to lower prices, foreign exchange effects and weaker China demand.
- Southern Timber operating income increased to $34.7 million from $32.2 million year to date, supported by higher harvest volumes, pricing and non-timber income.
- Real Estate third-quarter operating income rose to $20.0 million from $16.4 million. Year-to-date operating income declined to $34.0 million from $44.9 million because of lower acreage sold and the absence of a $5.8 million prior-year bankruptcy settlement.
- The company repurchased approximately $75.9 million of stock under its $100 million authorization, representing approximately 3.2 million shares; $24.1 million remained authorized at September 30.
- Other comprehensive loss was $68.7 million year to date, driven primarily by foreign currency translation losses and cash flow hedge losses.
Guidance, outlook, risks and unusual items
- Management maintained full-year Adjusted EBITDA guidance despite reducing expected Pacific Northwest harvest volumes. Updated expected 2015 harvest volumes were approximately 5.4 million tons in the South, 1.2 million tons in the Pacific Northwest and 2.4 million tons in New Zealand.
- Management cited sluggish U.S. housing recovery, weak China export demand, timber price pressure, foreign exchange volatility and mill shutdowns as key operating challenges.
- Management expected stronger fourth-quarter China export demand and pricing in New Zealand, continued pulpwood demand in the South, and steady demand for rural and conservation real estate.
- Expected 2015 capital expenditures were approximately $61 million, excluding timberland acquisitions, with approximately $5 million for real estate entitlements and infrastructure. Expected 2015 dividend payments were approximately $126 million based on a quarterly dividend of $0.25 per share.
- The New Zealand joint venture had approximately $150 million of debt maturing in September 2016. Rayonier intended to use term-loan proceeds to fund a joint-venture capital infusion and repay that facility. The company stated it was in compliance with all applicable debt covenants.
- Derivative liabilities exceeded derivative assets at September 30, 2015, and approximately $4.9 million of after-tax accumulated other comprehensive loss was expected to be reclassified into earnings over the following 12 months.
- Shareholder securities litigation, derivative demands and an SEC investigation remain outstanding. The company stated that the likelihood and amount of any material litigation loss could not yet be estimated.
- Financial guarantees and commitments included $19.7 million of maximum potential guarantee payments, $209.5 million of disclosed lease and purchase obligations, and approximately $1.1 billion of total contractual cash obligations.
- The filing states that disclosure controls and procedures were effective as of September 30, 2015, with no material changes to internal control over financial reporting during the quarter.
Most important facts for an investor to verify
- Whether the company ultimately achieves maintained Adjusted EBITDA guidance despite lower Pacific Northwest harvest volumes and continuing timber-price pressure.
- The refinancing or repayment plan for the New Zealand joint venture’s approximately $150 million September 2016 maturity.
- Cash generation after dividends, capital expenditures, timberland acquisitions, share repurchases and debt service, particularly the negative year-to-date Adjusted CAD.
- Exposure to China demand, U.S. housing activity, New Zealand dollar movements and timber-price volatility.
- The potential financial and governance impact of the shareholder litigation, derivative demands and SEC investigation.
- The reconciliation and comparability of 2014 results, given the Performance Fibers spin-off and discontinued-operations presentation.