Rayonier Inc. — Form 10-Q Summary
Business Context and Reporting Period
Rayonier is an international forest products company with four reportable segments: Forest Resources, Real Estate, Performance Fibers and Wood Products. The filing covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods. Financial statements are unaudited.
Financial Performance and Position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales | $357.4 million | $312.2 million | $715.1 million | $622.4 million |
| Operating income | $79.1 million | $56.3 million | $166.7 million | $133.2 million |
| Net income | $56.5 million | $38.6 million | $114.9 million | $95.5 million |
| Diluted EPS | $0.67 | $0.48 | $1.38 | $1.18 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $194.9 million | $355.8 million |
| EBITDA | $110 million | $89 million | $230 million | $210 million |
Q2 operating margin was approximately 22.1%, versus 18.0% in Q2 2010; six-month operating margin was approximately 23.3%, versus 21.4%. Net margin was approximately 15.8% in Q2 and 16.1% year to date, compared with 12.4% and 15.3%, respectively, in the prior-year periods.
- Performance Fibers was the primary earnings driver. Q2 sales increased to $232.8 million from $201.9 million and operating income increased to $71.1 million from $45.0 million. Year-to-date operating income was $146.8 million versus $89.8 million.
- Forest Resources Q2 operating income increased to $11.8 million from $8.7 million, supported by stronger Northern-region export demand, but was partly offset by lower Atlantic and Gulf States volumes and approximately $3 million of forest-fire losses.
- Real Estate Q2 operating income increased to $5.0 million from $4.2 million; year-to-date operating income declined to $12.4 million from $21.5 million because of substantially lower non-strategic timberland sales.
- Wood Products reported a Q2 operating loss of $1.0 million versus income of $4.3 million, reflecting lower lumber prices.
At June 30, 2011, cash and cash equivalents were $314.2 million, total debt was approximately $697.5 million, shareholders’ equity was $1.303 billion and the debt-to-capital ratio was 35%, compared with 38% at December 31, 2010. The company had $295 million of availability under its $300 million unsecured revolving credit facility, which expires in April 2016.
Cash Flow, Capital Allocation and Debt
- Operating cash flow declined year over year primarily because the company received a $189 million alternative fuel mixture credit refund in April 2010. Excluding that item, management stated that 2011 operating cash flow increased by approximately $28 million.
- Investing cash outflows were $70.8 million, including $65.2 million of capital expenditures and $13.0 million for timberland purchases.
- Financing cash outflows were $159.6 million, including $145.0 million of debt repayments and $87.9 million of dividends paid.
- Rayonier repaid a $75 million term loan in March 2011 and has a $93 million note maturing December 31, 2011, which management expects to repay with cash on hand or refinance.
- Adjusted cash available for distribution was $134 million, compared with $303 million in the prior-year period; excluding the 2010 tax-credit refund, management stated that 2011 Adjusted CAD was approximately $20 million higher.
Material Changes and Unusual Items
- Q2 2011 included a net $4.1 million tax benefit from exchanging approximately 30 million gallons of previously claimed alternative fuel mixture credit for the cellulosic biofuel producer credit.
- In July 2011, the IRS issued a final examination report that will allow Rayonier to reverse a $16 million uncertain tax liability in Q3 2011 and recognize a corresponding tax benefit.
- The six months ended June 30, 2010 included a $12.4 million gain from selling part of Rayonier’s New Zealand joint-venture interest. The absence of that gain reduced the year-over-year comparison, although 2011 operating results improved before the item.
- The Board approved a three-for-two stock split, effective August 24, 2011 for shareholders of record August 10, 2011. The quarterly dividend was increased from $0.54 to $0.60 per pre-split share, equivalent to $0.40 post-split, beginning with the third-quarter dividend.
- Rayonier approved conversion of its Jesup, Georgia absorbent-materials line to produce an additional 190,000 tons of cellulose specialties. The project is expected to cost approximately $300 million over two to three years, with $45 million to $50 million expected in 2011.
Guidance, Outlook and Risks
Management reaffirmed 2011 earnings guidance of $2.85 to $3.10 per share, excluding special items, and Adjusted CAD guidance of $285 million to $310 million. Timberland expansion remains the company’s top strategic capital priority. Management expected approximately $110 million of strategic timberland acquisitions through the third quarter, $140 million to $145 million of other 2011 capital expenditures, and approximately $185 million of 2011 dividend payments.
- Key operating sensitivities include cellulose specialties pricing and demand, input and transportation costs, lumber prices, timber harvest volumes, export demand, real estate sales timing and foreign exchange.
- Forest Resources results were affected by soft sawlog and grade markets, volume reductions and forest fires.
- Environmental and discontinued-operation liabilities totaled $88.6 million. The company disclosed reasonably possible additional losses of up to $40 million over several sites.
- Outstanding guarantees and financial commitments totaled $58.9 million, including standby letters of credit, guarantees and surety bonds.
- There were no material changes in market-risk exposures from December 31, 2010. Management concluded that disclosure controls were effective as of June 30, 2011.
Important Facts for Investors to Verify
- Reconcile reported EPS and dividends with the subsequent three-for-two stock split and use the appropriate post-split basis.
- Assess the sustainability of Performance Fibers’ pricing gains and the economics, funding needs and execution risks of the Jesup conversion.
- Verify repayment or refinancing plans for the $93 million note due December 31, 2011.
- Separate recurring earnings and cash flow from the $4.1 million Q2 tax benefit, anticipated $16 million Q3 tax benefit and the absent 2010 joint-venture gain.
- Monitor real estate sales volumes, forest-fire exposure, environmental remediation obligations and the disclosed potential additional losses of up to $40 million.
- Review management’s non-GAAP Adjusted CAD definition and reconcile the $285 million to $310 million guidance with GAAP cash flow and planned capital expenditures.