Rayonier Inc. 2010 Second-Quarter Form 10-Q Summary
Business context and reporting period
Rayonier is an international forest products company operating in Timber, Real Estate, Performance Fibers, Wood Products and Other Operations. The filing covers the three and six months ended June 30, 2010, compared with the corresponding 2009 periods. The financial statements are unaudited.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Sales | $312.2 million | $278.7 million | $622.4 million | $558.1 million |
| Operating income | $56.3 million | $134.2 million | $133.2 million | $177.4 million |
| Net income | $38.6 million | $107.8 million | $95.5 million | $133.7 million |
| Diluted EPS | $0.48 | $1.35 | $1.18 | $1.68 |
| Operating margin | 18.0% | 48.2% | 21.4% | 31.8% |
| Net margin | 12.4% | 38.7% | 15.3% | 24.0% |
| EBITDA | $89.5 million | $182.4 million | $209.7 million | $264.1 million |
Six-month cash provided by operating activities was $355.8 million versus $127.2 million in 2009. The increase primarily reflected a $189 million cash refund related to the alternative fuel mixture credit received in April 2010. Capital expenditures were $71.3 million, compared with $50.1 million in 2009, and cash used for investing activities was $76.5 million.
Cash and cash equivalents were $344.2 million at June 30, 2010, compared with $75.0 million at December 31, 2009. Total debt was $764.1 million, versus approximately $699.6 million at year-end, and the debt-to-capital ratio was 39%, versus 38%. The company had $245 million of available capacity under its $250 million unsecured revolving credit facility and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales increased 12% in the second quarter and 12% year to date, driven mainly by higher Performance Fibers, Timber, Wood Products and Other Operations sales.
- Operating income and net income declined sharply because second-quarter and year-to-date 2009 results included approximately $85.9 million of net alternative fuel mixture credit income. The credit applied through December 31, 2009.
- Excluding the alternative fuel mixture credit, management stated that 2010 operating performance improved. Six-month EBITDA was approximately $32 million higher than the comparable period after excluding the 2009 credit and including the 2010 joint venture gain.
- Performance Fibers operating income increased to $45.0 million in the quarter and $89.9 million year to date, benefiting from higher cellulose specialties volumes, stronger absorbent-materials pricing and lower chemical costs.
- Timber operating income improved to $8.7 million in the quarter and $16.9 million year to date, primarily because higher prices offset lower quarterly volumes and adverse mix effects.
- Real Estate operating income fell to $4.1 million in the quarter and $21.5 million year to date. Results were reduced by fewer non-strategic timberland sales: 6,000 acres in the second quarter of 2010 versus 31,000 acres in the prior-year quarter.
- Wood Products returned to operating income of $4.3 million in both the quarter and year-to-date period, compared with losses in 2009, reflecting improved pricing and volume.
- Rayonier’s ownership in the New Zealand Matariki Forestry Group declined from 40% to 26% after a February 2010 transaction. The company recognized a $12.4 million pretax gain, or $0.14 per diluted share after tax effects, in the first quarter.
- In March 2010, the taxable subsidiary borrowed $75 million under a five-year term loan at LIBOR plus 275 basis points.
Guidance, outlook, risks and unusual items
- Management increased 2010 guidance to diluted earnings of $2.05 to $2.20 per share, excluding the New Zealand joint venture gain, and Cash Available for Distribution of $360 million to $380 million.
- Management expected stronger second-half rural and conservation real estate sales, reduced non-strategic timberland sales, continued strong Performance Fibers demand and benefits from mill investments.
- Full-year 2010 capital expenditures were forecast at $140 million to $145 million, versus $92 million in 2009. Cash taxes were expected to be $18 million to $22 million, and discretionary pension contributions could be $40 million to $50 million.
- Environmental expenditures at the Jesup, Georgia Performance Fibers mill were required under a 2008 consent decree and contributed to higher investing cash needs.
- Environmental and discontinued-operation liabilities totaled $94.3 million at June 30, 2010. The company estimated reasonably possible additional environmental losses of up to $36 million.
- Outstanding guarantees had maximum potential payments of $58.0 million, including $43.8 million of standby letters of credit and $11.6 million of surety bonds.
- The company disclosed normal-course litigation and self-insurance exposures, but stated that other lawsuits and claims were not expected to materially affect financial position, results or cash flow.
- On July 29, 2010, after the balance-sheet date, Rayonier transferred its assets and liabilities to newly formed Rayonier Operating Company LLC. The restructuring was intended to facilitate an UPREIT structure and made the new entity a borrower or guarantor under certain credit facilities and exchangeable notes.
- On July 29, 2010, unions ratified a new four-year agreement covering approximately 240 hourly employees at the Fernandina Beach mill.
Most important facts for an investor to verify
- Reconcile reported earnings and EBITDA with and without the $85.9 million 2009 alternative fuel mixture credit and the $12.4 million 2010 joint venture gain.
- Assess whether the $189 million tax refund and associated working-capital benefit make 2010 cash flow and Adjusted CAD unusually high; six-month Adjusted CAD was $303.2 million versus $96.4 million in 2009.
- Evaluate the sustainability of Timber pricing, Performance Fibers volumes and margins, and the timing of Real Estate sales.
- Confirm execution against the $2.05 to $2.20 EPS and $360 million to $380 million Cash Available for Distribution guidance.
- Review debt maturities, exchangeable-note terms, the $250 million revolving facility expiration in August 2011, covenant requirements and the impact of the new UPREIT structure.
- Monitor environmental remediation liabilities, the estimated up-to-$36 million additional exposure, guarantees and future pension contributions.