Rayonier Inc. 2017 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rayonier Inc. is a timberland real estate investment trust with approximately 2.7 million acres in the U.S. South, U.S. Pacific Northwest and New Zealand. Its segments are Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. This unaudited filing covers the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Financial Performance and Position
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Sales | $194.7 million | $261.6 million | $381.2 million | $396.4 million |
| Operating income | $46.9 million | $121.6 million | $96.2 million | $144.6 million |
| Net income | $30.8 million | $111.6 million | $65.9 million | $126.6 million |
| Net income attributable to Rayonier | $26.2 million | $109.8 million | $60.0 million | $124.3 million |
| Diluted EPS | $0.20 | $0.89 | $0.47 | $1.01 |
| Adjusted EBITDA | $86.4 million | $45.0 million | $143.7 million | $100.6 million |
| Cash provided by operating activities | Not separately reported | Not separately reported | $128.3 million | $77.0 million |
| Cash available for distribution | Not separately reported | Not separately reported | $97.0 million | $57.2 million |
Reported operating margin was approximately 24.1% in the second quarter and 25.2% for the first six months, compared with approximately 46.5% and 36.5%, respectively, in the prior-year periods. The decline primarily reflects the absence of the much larger 2016 timberland disposition. Adjusted EBITDA increased 92% in the quarter and 43% year to date, aided by adjustments for large dispositions and stronger New Zealand Timber results.
- Balance sheet: Cash and cash equivalents were $136.6 million at June 30, 2017, compared with $85.9 million at December 31, 2016. Total assets were $3.0 billion and shareholders’ equity was $1.7 billion.
- Debt and liquidity: Total debt was $1.068 billion, including $31.5 million of current maturities. The debt-to-capital ratio was 39%, versus 42% at year-end 2016. The company had $135.5 million of available borrowings under its revolving credit facility after letters of credit, and was in compliance with debt covenants.
- Capital allocation: The company issued 5.75 million shares for net proceeds of $152.4 million. It paid $62.8 million of dividends during the first six months and declared dividends of $0.25 per share per quarter.
- Cash deployment: Six-month investing cash outflows included $237.2 million for timberland acquisitions, $29.8 million of capital expenditures, $5.6 million of real estate development investments and $5.6 million for the office building under construction. The company acquired approximately 91,000 acres in coastal Florida, Georgia and South Carolina.
Material Changes Versus the Prior Comparable Period
- Sales and GAAP earnings declined because Q2 2016 included a $129.5 million Washington large disposition producing $101.3 million of operating income, while Q2 2017 did not include a comparable Real Estate disposition. The first six months of 2017 included a smaller $42.0 million Alabama disposition with a $28.2 million gain.
- New Zealand Timber improved materially. Q2 sales rose to $77.2 million from $47.7 million and operating income rose to $26.8 million from $10.0 million, supported by higher export and domestic sawtimber prices, stronger Chinese demand, favorable foreign exchange and $24.3 million of timberland sales.
- Trading grew: Q2 sales increased to $41.7 million from $30.1 million, driven by 21% higher volumes and stronger prices.
- Southern Timber was pressured by pricing. Q2 operating income declined to $9.7 million from $11.1 million despite 15% higher harvest volumes. Weighted-average stumpage pricing fell 6%, partly due to fire salvage sales, increased supply and weaker demand.
- Pacific Northwest Timber turned to an operating loss. Q2 operating loss was $1.5 million versus income of $1.1 million, primarily because of higher depletion rates associated with the Menasha acquisition, despite stronger sawtimber pricing.
- Taxes increased: Six-month income tax expense was $13.8 million versus $1.5 million, primarily due to improved New Zealand JV results. The annualized effective tax rate was 17.3% versus 1.1% in 2016.
- Shareholder litigation settlement: The company agreed to a $73 million settlement funded by insurance carriers, subject to court approval and class-member exclusions. The insurance carriers had fully funded the settlement into escrow by July 14, 2017. Rayonier reimbursed an insurer approximately $0.7 million for disputed pre-litigation expenses.
Guidance, Outlook, Risks and Unusual Items
- Management raised or established full-year 2017 expectations of $79 million to $83 million of net income attributable to Rayonier and $255 million to $270 million of Adjusted EBITDA.
- Southern Timber harvest levels were expected at the higher end of prior guidance, but near-term pricing remained exposed to fire salvage volumes and regional mix.
- Pacific Northwest sawtimber prices were expected to remain strong, while New Zealand Timber was expected to benefit from continued domestic and export demand.
- Real Estate was expected to have relatively light third-quarter closings followed by a strong fourth quarter. Management highlighted the first Wildlight closing and growing project interest.
- Expected 2017 capital expenditures were $67 million to $70 million, excluding the office building and strategic timberland acquisitions. Real estate development investments were expected at $17 million to $20 million, office construction spending at approximately $6 million to $7 million, and dividend payments at approximately $127 million.
- Key risks include timber prices and volumes, housing and construction demand, pulp and paper markets, Chinese and other export demand, New Zealand dollar fluctuations, interest rates, fire and weather conditions, acquisition-related depletion rates, real estate execution and development obligations, and litigation or indemnification costs.
- The company had approximately $243.6 million of remaining operating leases, timberland leases and other commitments disclosed in the notes, in addition to debt obligations. Standby letters of credit, guarantees and surety bonds had maximum potential payments of approximately $18.0 million.
- Rayonier early adopted income-tax guidance that reduced retained earnings by $14.4 million. The filing states that the expected adoption of new revenue-recognition guidance was not expected to materially affect reported results other than expanded disclosures.
Most Important Facts for Investors to Verify
- Whether the $73 million shareholder litigation settlement receives court approval and whether insurance funding fully covers the company’s obligations.
- The sustainability of the 2017 Adjusted EBITDA outlook after removing large timberland dispositions and other nonrecurring items.
- New Zealand Timber pricing, Chinese export demand, foreign exchange effects and the contribution from timberland sales.
- Southern Timber pricing pressure, fire salvage volumes and the effect of recent acquisitions on harvest volumes and depletion.
- Pacific Northwest Timber’s ability to offset higher depletion rates with stronger sawtimber prices.
- Funding requirements for timberland acquisitions, Wildlight development, office construction, dividends and approximately $1.0 billion of debt maturities primarily due after 2020.
- The company’s non-GAAP Adjusted EBITDA and cash available for distribution reconciliations, which should not be treated as substitutes for GAAP net income or operating cash flow.