RAYONIER INC quarterly report, Q1 FY2011

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Rayonier Inc. 2011 First-Quarter Form 10-Q Summary

Business context and reporting period

Rayonier is a forest products company operating through Forest Resources, Real Estate, Performance Fibers, Wood Products and Other Operations. The filing covers the three months ended March 31, 2011, compared with the three months ended March 31, 2010. Effective in 2011, the Timber segment was renamed Forest Resources and U.S. timber operations were reorganized into Atlantic, Gulf States and Northern regions.

Financial performance and liquidity

  • Sales: $357.7 million, up 15.3% from $310.2 million.
  • Operating income: $87.6 million, compared with $76.9 million. The 2010 amount included a $12.4 million gain on the sale of part of the New Zealand joint venture interest; operating income before that gain increased from $64.5 million to $87.6 million.
  • Net income: $58.4 million, compared with $57.0 million.
  • Diluted earnings per share: $0.70, compared with $0.71; basic EPS was $0.72 versus $0.71.
  • Margins: Operating margin was approximately 24.5% versus 24.8% reported in 2010; excluding the prior-year joint venture gain, operating margin increased from approximately 20.8% to 24.5%. Net margin was approximately 16.3% versus 18.4%.
  • Cash flow: Operating cash flow was $115.7 million, up from $91.4 million. Investing cash use was $30.8 million, and financing cash use was $117.4 million, primarily reflecting $75.0 million of debt repayment, $43.9 million of dividends and $7.8 million of share repurchases.
  • Adjusted CAD: $88 million, compared with $77 million. EBITDA was $120 million in both periods.
  • Cash and liquidity: Cash and cash equivalents were $317.1 million at March 31, 2011, down from $349.5 million at December 31, 2010. The new revolving facility entered into in April 2011 increased available borrowing capacity from $245 million to $295 million.
  • Debt: Total debt was approximately $695 million, down from $768 million, and the debt-to-capital ratio declined to 35% from 38%. Long-term debt was $602.3 million, with $93.1 million classified as current maturities.
  • Equity and dividends: Shareholders’ equity was $1.274 billion, compared with $1.252 billion. The quarterly dividend was $0.54 per share, and $43.9 million of dividends were paid.

Material changes versus the prior comparable period

  • Performance Fibers sales increased to $251.2 million from $199.8 million, while operating income increased to $75.7 million from $44.9 million. Higher cellulose specialties and absorbent materials prices and higher cellulose specialties volume more than offset increased chemical, energy and transportation costs.
  • Forest Resources operating income increased to $11.1 million from $8.2 million, driven primarily by stronger Northern-region export demand and improved New Zealand joint venture results. Atlantic volumes declined 40% from an unusually strong first quarter of 2010.
  • Real Estate sales fell to $13.5 million from $33.0 million, and operating income fell to $7.4 million from $17.4 million, primarily because non-strategic timberland sales declined to approximately 300 acres from approximately 24,000 acres.
  • Interest expense increased to $13.3 million from $12.5 million, reflecting higher average net debt and a $0.4 million write-off of capitalized loan costs related to the early repayment of debt.
  • The effective tax rate increased to 21.7% from 11.8%, primarily because a greater proportion of earnings came from taxable REIT subsidiaries, particularly Performance Fibers.
  • In March 2011, the Company repaid a $75 million term note due in 2015. In April 2011, it replaced its $250 million revolving facility with a five-year $300 million unsecured facility maturing in April 2016.

Guidance, outlook, risks and unusual items

  • Management raised full-year 2011 guidance to diluted EPS of $2.85–$3.10 from $2.50–$2.70, and CAD of $285–$310 million from $260–$280 million. The increase was attributed to growing log export demand and strong Performance Fibers pricing.
  • 2011 capital expenditures, excluding strategic acquisitions, were forecast at $140–$145 million. Management was evaluating a $250–$300 million, two- to three-year conversion of the Jesup, Georgia absorbent materials line to high-purity cellulose specialties.
  • The Company expects approximately $175 million of 2011 dividend payments, a $93 million note maturity on December 31, 2011, and approximately $11 million of expenditures related to dispositions and discontinued operations.
  • Environmental and discontinued-operation liabilities totaled $90.7 million at March 31, 2011. The Company disclosed reasonably possible additional losses of up to $40 million, although management believes established reserves are sufficient for expected costs over the next 20 years.
  • Outstanding financial commitments included $43.8 million of standby letters of credit, $11.9 million of surety bonds and $2.6 million of guarantees, with total maximum potential payments of $58.2 million.
  • Key risks include timber and cellulose pricing, export demand, housing-market weakness affecting Wood Products, operating costs, foreign exchange, environmental remediation, pension assumptions, debt refinancing and the ability to fund potential strategic capital projects.
  • The Company reported compliance with applicable debt covenants and concluded that disclosure controls were effective as of March 31, 2011. No material changes to internal control over financial reporting were identified.

Important facts for investors to verify

  • Whether strong Performance Fibers pricing and log export demand continued sufficiently to support the raised 2011 EPS and CAD guidance.
  • The timing, approval, financing and expected returns of the potential $250–$300 million Jesup conversion project.
  • The Company’s ability to repay or refinance the $93.1 million note due at the end of 2011 while maintaining dividends and planned capital spending.
  • The magnitude and timing of environmental, discontinued-operation and other contingent liabilities, including the disclosed potential additional exposure of up to $40 million.
  • Whether the sharp decline in non-strategic timberland sales represents a sustained reduction in Real Estate earnings and cash generation.
  • The comparability of year-over-year results, particularly the impact of the $12.4 million 2010 New Zealand joint venture sale gain and the 2011 segment reorganization.