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Rayonier Inc. CEO David Nunes
Jax Daily Record Monday, Nov. 17, 201412:00 PM EST

Rayonier companies off to bad start after split

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by: Mark Basch Contributing Writer

In their first full quarters as separate companies, the two Rayoniers disappointed investors in two different ways.

A couple of weeks ago, Rayonier Advanced Materials Inc., the performance fibers company spun off from Jacksonville-based Rayonier Inc., reported lower-than-expected third-quarter earnings. That sent its stock lower.

Last week, as it reported its own earnings, the new Rayonier Inc. shook up investors by announcing a reassessment and change in strategy for its timber business, which also didn’t go over well on Wall Street.

“This strategy is best summarized as follows: today’s Rayonier is focused on sustainably managing our timberland resources, supporting cash flow generation, effectively allocating capital and driving long-term shareholder value,” CEO David Nunes said in a conference call with analysts.

The new strategies will result in lower dividend payments to shareholders and lower earnings than analysts expected.

Besides timber, Rayonier also operates a real estate development division to develop some of its vast land holdings. Its projects include a 2,900-acre development in Nassau County. (Read story here.)

However, the company’s discussion with analysts focused on the timber operations.

After a review of its operations, Rayonier determined some of its timber that was classified as “merchantable” is actually not, because it is located in “environmentally sensitive or economically inaccessible areas.” As a result, Rayonier reduced its stated level of merchantable timber inventory by about 10 percent, to 80 million tons.

Because of that, Rayonier had to restate its financial results for the first and second quarters this year.

In addition, Rayonier decided the company had been harvesting timber in the Northwest U.S. at an unsustainable rate, to keep the timberlands going into perpetuity. So the company is reducing its annual harvest level in the Northwest. Rayonier also said it intends to reduce its sales of “non-strategic” timberland.

“Aligning our harvest levels with a more appropriate sustainable yield is an important and necessary step. At the same time, it will have an obvious impact on our cash flow generation, as well as our expectation of reduced reliance on sales of non-strategic timberlands,” Nunes said.

With the expectations for lower cash flow, Rayonier reduced its quarterly cash dividend from 30 cents a share to 25 cents.

Nunes joined Rayonier in June in anticipation of the split into two companies. Former Rayonier Inc. CEO Paul Boynton became chief executive of Rayonier Advanced Materials after the companies split up at the end of the second quarter.

Nunes said he decided to take a fresh look at the company’s business as he took over.

“From the start, we had focused on two things. First, to conduct a thorough, comprehensive review, and second, once the facts became clear, to take quick and decisive action,” he said.

“With the appropriate determinations now in place, we turn to a path forward.”

The market reacted as expected. Rayonier’s stock dropped by $5.08 to $28.82 last Monday after the announcement, but that wasn’t the end of it.

“Even after yesterday’s 15 percent sell-off, we remain concerned that Rayonier shares may drift lower in the near term as investors digest 2015 guidance (and a multi-year outlook) that is far below prior expectations,” Raymond James & Associates analysts Collin Ming and Paul Puryear said in a research note Tuesday.

The average 2015 earnings forecast by analysts surveyed by Thomson Financial fell in half from $1.13 a share before the announcement to 56 cents.

Sure enough, the stock fell another $2.09 to $26.73 Tuesday as two analysts lowered their ratings on the stock.

Ming and Puryear maintained a “market perform” rating, but Bank of America analyst Michael Roxland downgraded Rayonier from “neutral” to “underperform,” and RBC Capital’s Paul Quinn downgraded the company from “outperform” to “sector perform.”

“With Rayonier’s disclosure on Monday that prior management overharvested its prized Pacific Northwest forest for the last decade, future earnings are constrained as Rayonier works to restore sustainability to its harvest,” Quinn said in his research note.

“While we view the disclosures as troubling, we note that these irregularities have been identified as quickly as one could reasonably expect since the new CEO and CFO assumed their roles following the departure of the prior CEO to the performance fibers (spinoff),” he said.

Boynton, now the CEO of the performance fibers company, was traveling last week and unavailable for comment on Rayonier Inc.’s announcement.

Vertical Research Partners analyst Chip Dillon said in a report Wednesday that the two-day drop is likely the end of it.

“With Rayonier plunging the past two days by 21 percent, we believe the shares have about adjusted sufficiently to reflect the fundamental changes revealed on Monday’s quarterly conference call with the company’s new management,” he said.

Dillon thinks Rayonier will face legal costs after saying its previous financial reports were inaccurate.

“Our best guess at the moment is that Rayonier will need to spend about $130 million defending itself from the expected civil litigation, equal to about $1 per share pretax,” he said.

“Most of these costs will be paid out to shareholders who bought or owned the stock up to last Friday, with a significant portion going to the plaintiffs’ attorneys involved in the litigation.”

However, Dillon, who maintains a “hold” rating on the stock, is confident about the company’s future.

“We are impressed by these actions taken under new CEO David Nunes, who with his team is displaying strong character and the willingness to ‘do the right thing’ without delay. We believe the decisive actions taken to right the ship of Rayonier will prove beneficial in the future,” he said.

ParkerVision expecting chip orders

As ParkerVision filed another quarterly report with no revenue, the Jacksonville-based developer of wireless technology again promised shareholders that sales of its products are coming soon.

“Based on recent feedback from target customers, we expect to see our first orders anytime now with initial shipments very early in 2015, possibly even yet late this year,” CEO Jeff Parker said in the company’s quarterly conference call last week.

Parker said the first products that will be shipped are “demodulator chips.”

ParkerVision says its technology improves performance for wireless consumer products, but the technology has produced minimal revenue since it was first developed in the 1990s. The company has talked with a number of manufacturers over the years about licensing deals, but none have come to fruition.

The company has become better known on Wall Street for its patent infringement lawsuits against Qualcomm Inc., alleging that Qualcomm has been illegally using ParkerVision’s technology in its products.

ParkerVision was awarded $173 million in damages by a jury last year after a federal court trial, but the judge in the case threw out the verdict in June. ParkerVision has appealed the judge’s decision.

“We feel confident that the documents in this case will support a decision to reverse the district court’s non-infringement decision,” Parker said last week.

Parker said the appeal will be heard by a three-judge panel, but he doesn’t expect the hearing to occur before the spring.

ParkerVision has filed a second federal lawsuit against Qualcomm, along with HTC Corp. and Samsung Electronics Co. Ltd., alleging infringement of a different set of patents. Parker said the parties have a deadline of Dec. 8 to propose a case management schedule for that lawsuit.

ParkerVision’s stock dropped sharply in June after the judge threw out its initial win. The stock, which traded at a 52-week high of $5.80 in March, has been trading a little above $1 for several weeks.

“In our view, the significant issue confronting ParkerVision’s current share price is the seemingly pervasive view that the whole value of the company is tied up in just the four patents and 11 claims that were litigated in the first Qualcomm suit and that are on appeal,” Ladenburg Thalmann analyst Jon Hickman said in a report on the company last week.

“We note that the company has now been granted more than 250 patents and that these patents encompass six separate, highly-visible technology segments,” Hickman said.

“The benefits of ParkerVision’s technology in the area of wireless communications include lower power consumption, higher performance, and smaller form factors. These characteristics are key to the development of components/products aimed at allowing devices of all types to communicate with each other, supplying the technology for the emerging Internet of Things market space,” he said.

Hickman, the only analyst who follows ParkerVision, maintains a “buy” rating on the stock with a target price of $5.25.

Fortegra earnings higher

Fortegra Financial Corp. last week reported third-quarter earnings rose 11 percent to $3.6 million, or 18 cents a share.

Revenue from continuing operations fell 3 percent to $87.6 million, but the Jacksonville-based insurance services company said its management of claims costs and operating expenses improved profit margins.

“The quarter reflects our continued focus on organically growing the business and delivering continued future growth,” Chairman and CEO Richard Kahlbaugh said in a news release.

Fortegra in August agreed to a $218 million buyout by Tiptree Financial Inc. Fortegra hopes to complete the deal next month, but the closing date could be extended to February.

Jacksonville Bancorp increases profits

Jacksonville Bancorp Inc. reported third-quarter earnings of $808,000, or 14 cents a share, more than quadrupling its earnings from the third quarter of 2013.

The parent company of The Jacksonville Bank improved its asset quality as nonperforming assets – which include overdue loans and real estate acquired through foreclosure – fell to 3.67 percent of total assets, from 4.66 percent at the end of the third quarter of 2013.

“The solid execution of our strategy is reflected in our ability to achieve operational efficiencies, ongoing asset quality improvement and stabilization in our balance sheet,” CEO Kendall Spencer said in a news release.

“We have turned the corner and remain committed to the community banking model that has served us well over the years and supports an operating strategy that meets the needs of our community, employees and investors,” he said.

Drone Aviation moving forward

Drone Aviation Holding Corp. reported revenue of $328,063 and a net loss of $76,082 for the third quarter, its first full quarter since it became public by merging with an existing company.

Jacksonville-based Drone Aviation produces specialized lighter-than-air aerostats and tethered drones.

“Since June of this year, we have been committed to a comprehensive strategic plan designed to expand our product offerings, grow our sales channels and build an efficient operational structure. I am pleased to report significant progress towards those objectives during the third quarter,” CEO Felicia Hess said in a news release.

Dick’s Wings franchisor increases revenue

ARC Group Inc., franchisor of the Dick’s Wings restaurant chain, reported a net loss of $47,562, or 1 cent a share, for the third quarter, but revenue rose 13 percent to $141,911.

In its quarterly report filed with the Securities and Exchange Commission, ARC Group said it expects to increase revenue by improving the operations of existing restaurants and the opening of new Dick’s Wings restaurants, as well as investing in other restaurant brands. That will lead to profitability, it said.

Dick’s Wings currently has 17 restaurants in operation, and ARC Group also owns a 50 percent interest in a Utah company that franchises a restaurant chain called Wing Nutz.

ARC Group is officially headquartered in Louisiana, but its corporate offices are in Jacksonville.

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