Rayonier Inc. Form 10-Q Summary
Business context and reporting period
Rayonier is a REIT and international forest products company engaged in timberland management, real estate sales and entitlement, specialty cellulose and absorbent materials, and wood products. Reported segments are Forest Resources, Real Estate, Performance Fibers, and Wood Products. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared with the same periods in 2011.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $371.9 million | $357.4 million | $727.7 million | $715.1 million |
| Operating income | $98.6 million | $79.1 million | $182.6 million | $166.7 million |
| Net income | $69.1 million | $56.5 million | $122.5 million | $114.9 million |
| Diluted EPS | $0.54 | $0.45 | $0.96 | $0.92 |
| Operating margin | 26.5% | 22.1% | 25.1% | 23.3% |
| Net margin | 18.6% | 15.8% | 16.8% | 16.1% |
| EBITDA | $134 million | $110 million | $249 million | $230 million |
| Cash flow from operations | Not separately provided | Not separately provided | $208.9 million | $194.9 million |
| Adjusted CAD | Not separately provided | Not separately provided | $118 million | $134 million |
At June 30, 2012, cash and cash equivalents were $189.1 million, total debt was $1.018 billion, shareholders’ equity was $1.360 billion, and the debt-to-capital ratio was 43%, compared with 39% at December 31, 2011. The company had $430 million of available borrowing capacity under its revolving credit facility.
Material changes versus the prior comparable period
- Second-quarter sales increased 4% and year-to-date sales increased 2% year over year. Operating income increased 25% in the quarter and 10% year to date.
- Performance Fibers was the primary earnings driver. Segment sales increased to $254.5 million in the quarter and $505.4 million year to date, while operating income increased to $83.7 million and $164.4 million, respectively.
- Cellulose specialties pricing increased 12% in the quarter and 13% year to date, more than offsetting weaker absorbent-materials pricing and higher chemical and labor costs.
- Forest Resources operating income declined to $8.2 million in the quarter and $16.3 million year to date, primarily due to weaker Northern-region demand, lower prices, higher logging costs, and lower New Zealand joint-venture earnings.
- Wood Products improved from a $1.0 million operating loss to $4.1 million of operating income in the quarter and from a $0.5 million loss to $5.1 million of income year to date.
- Operating cash flow increased 7% year to date, but investing cash outflows rose to $164.1 million from $70.8 million, mainly because of the Jesup mill expansion and higher capital expenditures.
- Adjusted CAD declined to $118 million from $134 million because higher operating cash flow was more than offset by higher capital expenditures and $23 million of mandatory debt repayments.
- Interest expense increased to $16.1 million in the quarter and $27.9 million year to date, reflecting higher debt, although borrowing costs were partly offset by lower rates and capitalized interest.
Outlook, commentary, risks, and unusual items
- Management expects full-year 2012 earnings to be comparable with 2011, excluding special items, and forecasts full-year Adjusted CAD of $295 million to $310 million.
- Capital expenditures are forecast at $150 million to $160 million, excluding strategic acquisitions and the cellulose specialties expansion. 2012 expansion spending is expected to be $200 million to $210 million.
- The Jesup, Georgia cellulose specialties expansion is on pace for completion by mid-2013. Management expects the project eventually to increase sales and operating income, but cannot reasonably estimate post-mid-2013 margins because of timing, pricing, raw-material-cost, and customer-qualification uncertainty.
- The company expects another record year in Performance Fibers, driven by strong cellulose specialties markets, and expects Northwest harvest volumes to increase as Asian markets improve.
- Approximately $300 million of Senior Exchangeable Notes became exchangeable in July 2012 and mature in October 2012. Management expects to refinance the notes on a long-term basis.
- Rayonier issued $325 million of 3.75% Senior Notes due 2022 in March 2012; approximately $150 million was used to repay revolving-credit borrowings.
- The company increased its quarterly dividend from $0.40 to $0.44 per share effective with the third-quarter 2012 distribution. Expected full-year 2012 dividend payments were approximately $206 million.
- The second quarter included a $5.7 million net benefit from exchanging alternative fuel mixture credits for cellulosic biofuel producer credits, recorded as a $9.1 million tax benefit and $3.4 million of interest expense. A $2 million favorable insurance settlement also benefited corporate results.
- Collective bargaining agreements covering approximately 700 hourly Jesup mill employees expired June 30, 2012, although the contracts were extended while negotiations continued. A work stoppage could materially affect operations and financial results.
- Environmental and discontinued-operation liabilities totaled $86.4 million. Management estimated reasonably possible additional losses of up to $29 million and believes recorded liabilities are sufficient for probable costs expected over the next 20 years.
- Outstanding guarantees and other financial commitments totaled $29.8 million, including standby letters of credit, guarantees, and surety bonds. Management stated that the company was in compliance with its debt covenants at June 30, 2012.
- The effective tax rate increased to 16.4% for the quarter and 20.8% year to date, from 15.4% and 18.7%, respectively, primarily because of proportionately higher expected earnings from taxable REIT subsidiaries.
Important facts for investors to verify
- Verify the refinancing, repayment, or exchange of the $300 million Senior Exchangeable Notes maturing in October 2012 and the resulting interest expense and leverage.
- Track the Jesup expansion’s completion, capital spending, customer qualifications, production-capacity reduction, and realized specialty-cellulose pricing.
- Assess whether strong cellulose specialties pricing offsets weaker absorbent-materials markets, higher input costs, and potential volume effects.
- Monitor union negotiations at the Jesup mill and any risk of production disruption.
- Reconcile management’s non-GAAP Adjusted CAD guidance with operating cash flow, maintenance capital expenditures, strategic capital, mandatory debt repayments, and dividend obligations.
- Review environmental remediation costs, discontinued-operation liabilities, and the potential additional exposure of up to $29 million.
- Confirm the sustainability of the increased dividend given projected cash taxes of $70 million to $80 million, expected 2012 capital spending, and higher debt service.