Rayonier Inc. 2013 Q2 Form 10-Q Summary
Business context and reporting period
Rayonier is a forest products company operating through Forest Resources, Real Estate and Performance Fibers. The unaudited report covers the three and six months ended June 30, 2013, with comparisons to 2012. The Wood Products business was sold on March 1, 2013 and is presented as discontinued operations.
On April 4, 2013, Rayonier acquired an additional 39% of Matariki Forestry Group, increasing ownership to 65% and resulting in consolidation of the New Zealand timberland joint venture.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $409.1 million | $348.1 million | $802.8 million | $684.7 million |
| Operating income | $110.6 million | $94.1 million | $225.9 million | $176.8 million |
| Operating margin | 27.0% | 27.0% | 28.1% | 25.8% |
| Income from continuing operations | $87.9 million | $66.1 million | $191.1 million | $118.7 million |
| Net income attributable to Rayonier | $87.2 million | $69.1 million | $234.9 million | $122.5 million |
| Diluted EPS from continuing operations | $0.67 | $0.52 | $1.46 | $0.93 |
| Diluted EPS, total | $0.67 | $0.54 | $1.80 | $0.96 |
| EBITDA | $155 million | $134 million | $374 million | $249 million |
Six-month cash provided by operating activities was $235.7 million, compared with $208.9 million in 2012. Investing activities used $244.0 million, including $139.9 million for the New Zealand JV interest, $100.2 million for the Jesup cellulose specialties expansion and $94.1 million of capital expenditures. Financing activities provided $71.5 million. Cash and equivalents ended at $343.6 million.
At June 30, 2013, total debt was approximately $1.67 billion, up from $1.27 billion at December 31, 2012. Total capitalization was $3.32 billion and the debt-to-capital ratio was 50%, compared with 47% at year-end. The company reported $187 million of available capacity under its $450 million unsecured revolving credit facility and stated that it was in compliance with all debt covenants.
Adjusted cash available for distribution was $170 million for the first six months, compared with $118 million in 2012. The quarterly dividend was increased from $0.44 to $0.49 per share effective with the third-quarter 2013 distribution.
Material changes versus the prior comparable period
- Sales increased 17.5% in the second quarter and 17.2% for the six-month period, primarily reflecting consolidation of the New Zealand JV, stronger Forest Resources results and higher cellulose specialties volumes.
- Forest Resources operating income increased to $20.9 million from $8.2 million in Q2 and to $34.1 million from $16.3 million year to date. New Zealand contributed significantly after consolidation.
- Performance Fibers operating income declined to $79.1 million from $83.7 million in Q2, but increased to $170.8 million from $164.4 million for the six-month period. Cellulose specialties improved, while absorbent materials weakened.
- Q2 continuing-operations income increased 33%, while six-month continuing-operations income increased 61%. Lower interest expense and lower effective tax rates contributed to the improvement.
- Six-month results included a $42.7 million after-tax gain from the Wood Products sale and a $16.1 million gain from consolidating the New Zealand JV. These items materially increased reported net income and EBITDA.
- Other comprehensive income was a loss of $24.3 million in Q2 and $17.8 million for the six-month period, primarily due to foreign currency translation losses.
Guidance, outlook, risks and unusual items
Management expected 2013 operating income, excluding Wood Products and the New Zealand consolidation gain, to be slightly above 2012 and full-year EPS to be moderately above 2012, supported by lower interest expense and taxes. Earnings were expected to be weighted toward the first half because of tax credits and the CSE project phase-in.
The Jesup cellulose specialties expansion started on time. Total project cost was expected to be $375 million to $390 million. Management expected 5,000 to 20,000 tons of phased-in 2013 production, 90,000 to 100,000 tons in 2014 and full additional capacity of 190,000 tons in 2016. The company planned to exit the commodity absorbent materials business, creating transition, startup, conversion-cost and execution risks.
Management forecast 2013 capital expenditures of $155 million to $165 million, excluding strategic timberland acquisitions, the CSE project and the New Zealand acquisition. CSE spending was expected to total $130 million to $145 million for the year. Expected 2013 dividends were approximately $237 million.
Principal risks include housing and timber demand, Asian log demand, cellulose specialties pricing and customer qualification, commodity absorbent-material weakness, foreign exchange exposure, variable interest rates, environmental remediation, pension assumptions, and the ability to refinance or manage debt maturities. Environmental liabilities for discontinued operations were $78.1 million, with reasonably possible additional losses estimated at up to $29 million.
The New Zealand JV had approximately $211.4 million of debt at June 30, 2013 and was subject to leverage and interest-coverage covenants. On July 5, 2013, its credit agreement was amended to extend certain maturities and modify pricing and covenant terms. The filing states that the company’s disclosure controls were effective as of June 30, 2013, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Separate recurring operating performance from the $42.7 million Wood Products sale gain and $16.1 million New Zealand JV consolidation gain.
- Track CSE project spending, production ramp-up, customer qualifications, costs and the planned exit from absorbent materials.
- Reconcile the increase in debt and the 50% debt-to-capital ratio with available revolver capacity, maturities and covenant requirements.
- Assess the sustainability of cash available for distribution after capital spending, strategic investments and the higher dividend.
- Monitor New Zealand dollar exposure, timber and log prices, interest rates, and the impact of foreign currency translation losses.
- Review environmental remediation obligations, guarantees and the potential for additional losses beyond recorded liabilities.