Rayonier Inc. 2012 Form 10-K Summary
Business Context and Reporting Period
Rayonier filed its annual report for the fiscal year ended December 31, 2012, covering the consolidated company and subsidiaries. Rayonier is a REIT with approximately 2.7 million acres of timberland and real estate in the United States and New Zealand. Its principal businesses were Forest Resources, Real Estate, Performance Fibers, Wood Products and log trading.
The filing includes fourth-quarter results, but the primary reporting period is the full year 2012. Rayonier remained in compliance with applicable REIT tests as of December 31, 2012.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Sales | $1.571 billion | $1.489 billion | Up 5.5% |
| Operating income | $411.5 million | $356.3 million | Up 15.5% |
| Net income | $278.7 million | $276.0 million | Up 1.0% |
| Diluted EPS | $2.17 | $2.20 | Down $0.03 |
| Operating margin | 26.2% | 23.9% | Improved |
| EBITDA | $560 million | $492 million | Up 13.8% |
| Cash from operations | $445.9 million | $432.3 million | Up 3.2% |
| Capital expenditures | $157.6 million | $144.5 million | Up 9.0% |
| Total debt | $1.270 billion | $847.3 million | Up $422.7 million |
| Cash and equivalents | $280.6 million | $78.6 million | Up $202.0 million |
| Debt to capital | 47% | 39% | Higher leverage |
Cash used for investing activities was $472.9 million, including $201.4 million for the Jesup cellulose specialties expansion and $106.5 million for timberland acquisitions. Cash provided by financing activities was $229.0 million. Dividends paid totaled $206.6 million, or $1.68 per share, compared with $1.52 per share in 2011.
Segment Performance and Changes Versus 2011
- Forest Resources: Sales increased to $230 million from $215 million, while operating income declined slightly to $46 million from $47 million. Gulf States volumes benefited from prior timberland acquisitions, while Northern pricing weakened because of softer Asian demand and higher logging and transportation costs.
- Real Estate: Sales declined to $57 million from $71 million and operating income fell to $32 million from $47 million. The prior year benefited from a large non-strategic timberland sale and a $6 million property-tax settlement.
- Performance Fibers: Sales rose to $1.093 billion from $1.020 billion and operating income increased to $359 million from $298 million. Cellulose specialties sales increased to $935 million, supported by a 14% price increase, while absorbent materials sales fell to $158 million as prices and volumes declined.
- Wood Products: Sales increased to $88 million from $68 million and operating income improved to $10 million from a $2 million loss, primarily due to higher lumber prices.
- Other operations: Sales declined to $105 million from $122 million because of weaker export demand and lower log trading volumes and prices.
Liquidity, Debt and Financing
Rayonier reported $1.270 billion of total debt and $1.438 billion of shareholders’ equity at year-end. Debt to EBITDA was 2.3 times and net debt to EBITDA was 1.8 times. The company stated that existing cash, operating cash flow and credit facilities were expected to cover ongoing requirements.
- Rayonier issued $325 million of 3.75% senior notes due 2022.
- The $300 million of 3.75% senior exchangeable notes due 2012 matured and was repaid with cash funded by revolving-credit borrowings.
- A $640 million senior unsecured term credit agreement was established in December 2012; $300 million was drawn at closing, leaving $340 million of delayed-draw capacity.
- Available borrowing capacity under the amended revolving facility was $171 million at December 31, 2012.
- Principal debt payments scheduled for 2013 totaled $150 million, primarily related to revolving credit borrowings the company intended to repay in January 2013.
Guidance, Outlook, Risks and Unusual Items
Management expected 2013 operating income and EPS to be slightly above 2012, excluding the Wood Products sale, and expected cash available for distribution to increase by 5% to 10%. The company projected $140 million to $145 million of non-strategic capital expenditures and $130 million to $145 million of additional spending to complete the Jesup expansion.
- The Jesup cellulose specialties expansion remained scheduled for completion in mid-2013. Total project cost was estimated at $375 million to $390 million, above the initial $300 million estimate. Management expected 2013 Performance Fibers operating income to decline 5% to 10% during the transition and customer-qualification period.
- Rayonier agreed to sell its Wood Products business for $80 million, with closing expected in the first quarter of 2013 and an estimated after-tax gain of approximately $40 million.
- China’s Ministry of Commerce initiated an anti-dumping investigation covering dissolving pulp imports, including Rayonier’s high-purity cellulose specialties products. Rayonier shipped approximately 124,000 tons of pulp to China in 2012, including approximately 114,500 tons of high-alpha and other high-purity pulp. Management did not expect a material adverse effect, but the outcome was uncertain.
- Environmental compliance remains a material risk. The company estimated $24 million to $60 million of potential costs to comply with tighter industrial-boiler emissions requirements, in addition to ongoing mill and remediation spending.
- Environmental liabilities for dispositions and discontinued operations totaled $81.7 million, with reasonably possible additional losses estimated at up to $29 million.
- Collective bargaining agreements covering approximately 700 Jesup employees had expired and negotiations continued. A work stoppage could materially affect operations.
- The company’s pension plans were underfunded by approximately $134 million. No mandatory pension contribution was required in 2013, although discretionary contributions remained possible.
- Four Performance Fibers customers represented approximately 15%, 12%, 10% and 10% of consolidated sales, creating meaningful customer concentration risk.
Reported 2012 income tax expense was $88.4 million, producing a 24.1% effective tax rate versus 9.9% in 2011. Excluding non-routine items, the effective tax rate was 27.9% versus 24.6% in 2011. The change primarily reflected a greater proportion of earnings from taxable REIT subsidiaries.
Most Important Facts to Verify
- Completion timing, final cost and operating ramp-up of the Jesup cellulose specialties expansion.
- Actual proceeds, tax impact and use of proceeds from the Wood Products sale.
- Refinancing or repayment of the $150 million 2013 debt maturity and remaining credit-facility capacity.
- Developments and potential duties arising from China’s anti-dumping investigation.
- Environmental compliance costs, remediation liabilities and the potential for losses above recorded reserves.
- Progress on Jesup labor negotiations and the risk of a work stoppage.
- Sustainability of the dividend and projected 2013 cash available for distribution given higher leverage and capital spending.
- Continued REIT qualification as Performance Fibers and other taxable REIT subsidiary activities expand.