Rayonier Inc. 10-Q Summary
Business context and reporting period
Rayonier is a timberland real estate investment trust with operations in Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. As of September 30, 2018, it owned or leased approximately 2.6 million acres in the United States and New Zealand, including a 77% interest in a New Zealand joint venture. This unaudited filing covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Sales | $200.9 million | $184.4 million | $650.0 million | $579.9 million |
| Operating income | $46.4 million | $39.3 million | $155.1 million | $135.4 million |
| Net income | $30.6 million | $28.8 million | $112.7 million | $94.7 million |
| Net income attributable to Rayonier | $23.4 million | $24.7 million | $100.2 million | $84.7 million |
| Diluted EPS | $0.18 | $0.19 | $0.77 | $0.67 |
| Adjusted EBITDA | $83.3 million | $69.3 million | $287.9 million | $213.1 million |
Q3 operating margin was approximately 23.1%, versus 21.3% in the prior-year quarter. Nine-month operating margin was approximately 23.9%, versus 23.4%. Net income attributable to Rayonier declined in Q3 despite higher consolidated net income, primarily because income attributable to the 23% New Zealand joint-venture noncontrolling interest increased.
- Cash provided by operating activities was $261.1 million for the first nine months, up from $186.9 million.
- Investing cash outflow was $87.9 million, compared with $260.1 million, reflecting substantially lower timberland acquisitions.
- Financing cash outflow was $152.5 million, compared with $29.2 million of inflow, due primarily to lower equity issuance, debt repayment and higher dividends.
- Cash and cash equivalents were $146.3 million; cash, cash equivalents and restricted cash totaled $191.7 million at September 30, 2018.
- Total debt was $975.0 million gross, or $972.4 million net of deferred financing costs. Debt to capitalization was 36%, versus 38% at December 31, 2017.
- The company had $189.8 million of availability under its revolving credit facility, net of letters of credit, and remained in compliance with debt covenants.
- Dividends declared were $0.27 per share in Q3 and $0.79 per share for the first nine months, versus $0.25 and $0.75, respectively, in 2017.
Material changes versus the prior comparable period
- Sales increased 9% in Q3 and 12% for the first nine months. The nine-month increase was led by stronger timber prices and volumes, particularly in the Pacific Northwest and New Zealand.
- Pacific Northwest Timber sales increased 46% in Q3 and 40% year to date; the segment moved from a $1.3 million operating loss to $12.2 million of operating income for the first nine months.
- New Zealand Timber Q3 sales declined 5% and operating income declined 15% due to lower volumes, foreign exchange effects and weaker domestic pricing in U.S. dollar terms. Nine-month sales and operating income nevertheless increased 15% and 21%, respectively.
- Real Estate Q3 sales increased to $36.2 million from $17.3 million, driven by a $28.1 million New Zealand timberland sale. Nine-month sales were broadly unchanged because 2017 included a $42.0 million large disposition; 2018 benefited from higher average pricing and the New Zealand sale.
- Trading Q3 sales declined 24% and operating income declined to $0.3 million due to lower volumes and weaker margins. Nine-month operating income declined to $0.7 million.
- Southern Timber Q3 operating income declined 21% because of wet-ground conditions, lower prices, lower non-timber income and higher depletion rates, although nine-month operating income increased 6%.
- Income tax expense rose to $8.4 million in Q3 and $22.4 million year to date, compared with $3.0 million and $16.8 million, respectively. The New Zealand joint venture was the primary driver.
Guidance, outlook, risks and unusual items
Management stated that full-year Adjusted EBITDA should be above prior guidance. Southern Timber harvest volume is expected at 5.6 to 5.7 million tons, with Adjusted EBITDA modestly below prior guidance due partly to Hurricane Michael impacts. Pacific Northwest harvest volume is expected at approximately 1.3 million tons, with Adjusted EBITDA toward the lower end of prior guidance because tariffs on log exports to China have softened prices. New Zealand harvest volume is expected at 2.6 to 2.7 million tons, with Adjusted EBITDA modestly above prior guidance. Real Estate Adjusted EBITDA is expected to be well above prior guidance because of the New Zealand timberland sale, which contributed $27.7 million of Adjusted EBITDA and $12.8 million of Rayonier-attributable net income; fourth-quarter closings are expected to be relatively light.
- Key market exposures include U.S. housing and lumber demand, pulp and paper markets, Chinese and other Pacific Rim demand, log prices, tariffs, foreign exchange and logging and transportation costs.
- The New Zealand operations are exposed to NZ$/U.S. dollar fluctuations and export demand. The company uses foreign exchange contracts, options and interest-rate swaps; approximately $2.6 million of net-of-tax AOCI losses were expected to be reclassified into earnings over the following 12 months.
- All $650 million of variable-rate U.S. debt was covered by interest-rate swaps at September 30, 2018. Contractual cash obligations totaled $1.39 billion, including $975 million of debt principal and $216.3 million of projected interest.
- The company expects 2018 capital expenditures of $63 million to $67 million, real estate development investments of $10 million to $12 million, dividends of approximately $137 million and cash taxes of approximately $1.5 million.
- A shareholder derivative settlement involving governance reforms and insurance-funded payments of $1.995 million was reflected in the September 30 financial statements. The court granted final approval and dismissed the case with prejudice on November 2, 2018.
- Outstanding guarantees and similar commitments had maximum potential payments of $13.7 million, with an associated liability of $43,000. Other lawsuits and claims were not expected to have a material adverse effect.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2018, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm whether the projected full-year Adjusted EBITDA upside, including the New Zealand timberland sale, translated into reported results and cash available for distribution.
- Assess the sustainability of real estate earnings, given the timing-driven nature of the 2018 New Zealand sale and the expected light fourth quarter.
- Monitor China-related tariffs, export demand, log prices and foreign exchange effects on Pacific Northwest and New Zealand results.
- Reconcile non-GAAP Adjusted EBITDA and CAD to GAAP results and evaluate whether CAD adequately covers dividends, development spending and debt obligations.
- Review debt maturities, including the $325 million of senior notes due in 2022 and $650 million of term debt due thereafter, as well as covenant compliance and revolver availability.
- Verify the final accounting and cash impact of the shareholder derivative settlement and other contingencies.