Rayonier Inc. 2011 Form 10-K Summary
Business context and reporting period
Rayonier is a REIT and international forest products company reporting for the fiscal year ended December 31, 2011. Its principal businesses are Forest Resources, Real Estate, Performance Fibers, Wood Products and log trading. The company owned, leased or managed approximately 2.7 million acres of timberland and real estate in the United States and New Zealand, and operated two specialty cellulose mills and three Southern pine sawmills.
The filing is an annual report rather than a standalone fourth-quarter filing. Fourth-quarter 2011 sales were $388.4 million, operating income was $81.3 million, net income was $56.2 million and diluted EPS was $0.45.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Sales | $1,488.6 million | $1,315.2 million | 13% |
| Operating income | $356.3 million | $282.0 million | 26% |
| Net income | $276.0 million | $217.6 million | 27% |
| Diluted EPS | $2.20 | $1.79 | 23% |
| Operating margin | 23.9% | 21.4% | +2.5 points |
| EBITDA | $492 million | $425 million | 16% |
| Cash from operating activities | $432.3 million | $495.4 million | (13%) |
| Adjusted CAD | $194 million | $383 million | (49%) |
| Total debt at year-end | $847.3 million | $768.2 million | 10% |
| Cash and equivalents at year-end | $78.6 million | $349.5 million | (77%) |
Performance Fibers was the primary earnings driver. Segment sales increased to $1.020 billion from $881 million and operating income rose to $298 million from $214 million. Forest Resources operating income increased to $47 million from $33 million, while Real Estate operating income declined to $47 million from $53 million. Wood Products posted a $2 million operating loss versus $2 million of income in 2010.
Cash used for investing activities was $488.6 million, including $320.9 million for timberland purchases, $42.9 million for the Jesup cellulose specialties expansion and $144.5 million of other capital expenditures. Financing activities used $215.1 million, including $185.3 million of dividends and net debt repayments. The debt-to-capital ratio was 39%, and debt to EBITDA was 1.7 times.
Material changes versus the prior comparable period
- Rayonier acquired approximately 308,000 acres of U.S. timberlands for approximately $426 million, including assumed debt of $105 million. The acquisitions materially increased timberland assets and leverage.
- Performance Fibers benefited from higher cellulose specialties prices and volumes. Cellulose specialties sales increased to $824 million from $686 million, while absorbent materials sales were broadly stable at $196 million.
- The company began a $300 million Jesup, Georgia conversion project expected to add approximately 190,000 metric tons of cellulose specialties capacity and eliminate approximately 260,000 metric tons of absorbent-materials capacity. It spent $42.9 million on the project in 2011 and expected completion by mid-2013.
- Real Estate sales fell to $71 million from $96 million because non-strategic timberland sales declined. Development and rural higher-and-better-use sales achieved improved pricing and margins.
- Cash from operations declined because 2010 included a $189 million Internal Revenue Service refund related to the Alternative Fuel Mixture Credit. Excluding that refund, 2011 operating cash flow increased by approximately $126 million.
- The reported 2011 effective tax rate was 9.9%, compared with 6.5% in 2010. The tax rate before non-routine items rose to 24.6% from 18.2%, primarily because a greater share of earnings came from taxable REIT subsidiaries.
- The company increased its quarterly dividend to $0.40 per share during 2011, resulting in annual dividends of $1.52 per share versus $1.36 in 2010.
- Pension and postretirement liabilities increased substantially as discount rates declined. The pension plans were underfunded by $117.5 million at year-end 2011 versus $44.0 million in 2010.
Guidance, outlook, risks and unusual items
Management expected strong 2012 performance and projected operating income to increase approximately 10% over 2011. It expected EPS and Cash Available for Distribution to be comparable with 2011 because of a higher anticipated effective tax rate of 24% to 26%. Management also expected average cellulose specialties price increases of 12% to 13%, offset by weaker absorbent-materials pricing and higher input costs.
Expected 2012 spending included $150 million to $155 million of non-strategic capital expenditures, $200 million to $210 million for the Jesup expansion, approximately $197 million of dividends and $55 million to $60 million of income-tax payments. Management expected to refinance $300 million of Senior Exchangeable Notes due in October 2012 and repay a $23 million note due in June 2012. The company expected to issue approximately $300 million of long-term debt early in 2012 to restore revolving-credit capacity.
- Key market risks include weak housing and real estate markets, timber and lumber pricing, Asian export demand, cellulose and absorbent-materials pricing, energy and chemical costs, and foreign exchange exposure.
- Performance Fibers had significant customer concentration: three customers represented approximately 15%, 11% and 11% of consolidated 2011 sales.
- The company faces environmental permitting, remediation and regulatory risks. Accrued liabilities for discontinued operations and environmental obligations totaled $90.8 million at year-end, with reasonably possible additional losses estimated at up to $29 million.
- Potential compliance costs related to proposed industrial-boiler emissions regulations were estimated at $24 million to $210 million, excluding amounts already included in forecasts.
- The Jesup expansion may be delayed or cost more than expected. A $5.5 million process-equipment write-off and a $6 million operating-income impact were recorded in connection with the project in 2011.
- The company settled an EPA and Tennessee environmental notice of violation in the fourth quarter, paying penalties of $317,000 and $99,000, respectively.
- Approximately 47% of the workforce was unionized. The Jesup collective bargaining agreement covering approximately 700 employees expired in June 2012, creating potential labor-disruption risk.
- The company had $323.1 million of debt principal scheduled for 2012, including the $300 million Senior Exchangeable Notes, although $295 million was classified as long-term because management intended and expected to be able to refinance it.
Most important facts for investors to verify
- Whether the Jesup conversion was completed on schedule and within the $300 million budget, and whether committed customer volumes were realized.
- Actual refinancing or repayment of the 2012 Senior Exchangeable Notes and the resulting interest expense and leverage.
- Whether the projected 2012 operating-income growth and 24% to 26% effective tax rate were achieved.
- Performance Fibers pricing, production volumes, customer concentration and exposure to new competing specialty-cellulose capacity.
- Timber harvest volumes and pricing following the 308,000-acre acquisition, including integration costs and depletion expense.
- Real Estate entitlement progress, development-property demand and the pace of non-strategic timberland sales.
- Environmental remediation spending, potential additional liabilities and the ultimate cost of industrial-boiler compliance.
- Pension funding status, required or discretionary contributions and sensitivity to interest rates and asset returns.
- Compliance with debt covenants and the company’s ability to sustain dividends while funding acquisitions and capital projects.