Rayonier Inc. 2010 Q3 Form 10-Q Summary
Business Context and Reporting Period
Rayonier is an international forest products company operating in Timber, Real Estate, Performance Fibers and Wood Products, with additional log-trading operations. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Sales | $377.5 million | $300.6 million | $999.9 million | $858.7 million |
| Operating income | $92.1 million | $111.1 million | $225.3 million | $288.6 million |
| Net income | $62.9 million | $81.1 million | $158.4 million | $214.8 million |
| Diluted EPS | $0.77 | $1.01 | $1.95 | $2.69 |
| Operating margin | 24.4% | 37.0% | 22.5% | 33.6% |
| Net margin | 16.7% | 27.0% | 15.8% | 25.0% |
| Cash provided by operations | Not provided for quarter | Not provided for quarter | $473.2 million | $214.3 million |
At September 30, 2010, cash and cash equivalents were $405.7 million, compared with $75.0 million at December 31, 2009. Long-term debt was $766.1 million, versus $695.0 million at year-end 2009. Total debt-to-capital was 39%, compared with 38%. Available capacity under the $250 million unsecured revolving credit facility was $245 million, and the company was in compliance with its debt covenants.
Capital expenditures were $95.6 million for the first nine months, compared with $65.1 million in 2009. Adjusted Cash Available for Distribution was $400.4 million, compared with $165.0 million. EBITDA was $340.9 million, compared with $415.3 million, principally reflecting the absence of the 2009 alternative fuel mixture credit.
Material Changes Versus the Prior Comparable Period
- Sales increased 25.6% in the quarter and 16.4% year to date, led by Performance Fibers, Real Estate, Timber and Other Operations.
- Operating income and net income declined because 2009 included $55.8 million of alternative fuel mixture credit income in the quarter and $141.8 million year to date. Excluding that credit, management stated that 2010 operating performance and EBITDA improved.
- Performance Fibers operating income increased to $62.3 million in the quarter and $152.2 million year to date, supported by higher cellulose specialties volumes and absorbent-material pricing.
- Timber operating income increased to $9.2 million in the quarter and $26.0 million year to date, reflecting higher prices that offset lower Eastern-region volumes.
- Real Estate operating income increased to $30.8 million in the quarter, primarily due to higher sales volumes, while year-to-date operating income was broadly stable at $52.3 million.
- Wood Products improved to a $2.9 million year-to-date operating profit from an $8.1 million loss, although the segment remained unprofitable in the third quarter.
- In February 2010, Rayonier’s ownership in its New Zealand joint venture declined from 40% to 26% after a new investor acquired a 35% interest. The transaction generated a $12.4 million pretax gain, or $0.14 per diluted share.
- The company received a $189 million cash refund related to the 2009 alternative fuel mixture credit, which was a major driver of the year-to-date increase in operating cash flow.
- Rayonier increased its quarterly dividend to $0.54 per share beginning in the fourth quarter of 2010, from approximately $0.50 previously.
Guidance, Outlook, Risks and Unusual Items
Management expected 2010 earnings to be at the upper end of its guidance range of $2.05 to $2.20 per share, excluding special items, and expected Cash Available for Distribution of $360 million to $380 million. Full-year 2010 capital expenditures were forecast at $140 million to $145 million, compared with $92 million in 2009.
Rayonier applied for the cellulosic biofuel producer credit. Following October 2010 IRS clarification, management estimated that IRS approval could increase fourth-quarter 2010 net income by approximately $23 million, or $0.28 per share. Approval and the amount of the credit were uncertain.
The Small Business Jobs Act eliminated Rayonier’s built-in gains tax for 2011. Management estimated the tax at approximately $6 million for 2010; the 2009 amount was approximately $9 million.
The company made a $50 million discretionary pension contribution on October 20, 2010 and did not expect additional discretionary contributions during 2010. Environmental and remediation obligations remain significant: recorded liabilities for dispositions and discontinued operations totaled $92.2 million, with reasonably possible additional losses estimated at up to $36 million. Outstanding guarantees had maximum potential payments of $58.1 million, including $43.8 million of standby letters of credit.
Other principal risks include commodity prices, timber supply and weather conditions, demand and pricing for specialty cellulose and absorbent materials, execution of capital projects, environmental liabilities, tax-credit approval, foreign exchange exposure and general litigation. Management reported no material change in market risk exposures and concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Reconcile reported 2010 earnings and cash flow with and without the 2009 alternative fuel mixture credit and the 2010 New Zealand joint venture gain.
- Verify IRS approval, timing and amount of the cellulosic biofuel producer credit.
- Assess whether the elevated 2010 operating cash flow is sustainable after excluding the $189 million tax refund.
- Review debt maturities, the March 2010 $75 million term loan, revolving-facility availability and covenant compliance.
- Monitor the planned $140 million to $145 million of capital expenditures and the impact of the Jesup mill environmental requirements.
- Evaluate environmental remediation exposure, including the potential additional loss estimate of up to $36 million.
- Assess pension funded status following the $50 million post-quarter contribution and the sustainability of the increased dividend.