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Prepared by R.R. Donnelley Financial -- Form 10-Q
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2002
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from                to                
 
Commission File Number 1-6780
 
 
Rayonier Inc.
 
Incorporated in the State of North Carolina
I.R.S. Employer Identification Number 13-2607329
 
50 North Laura Street, Jacksonville, FL 32202
(Principal Executive Office)
 
Telephone Number: (904) 357-9100
 
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
YES x     NO ¨
 
As of April 30, 2002, there were outstanding 27,718,065 Common Shares of the Registrant.
 

RAYONIER INC.
 
FORM 10-Q
 
MARCH 31, 2002
 
TABLE OF CONTENTS
    
PAGE
Part I—FINANCIAL INFORMATION
     
Item 1.    Financial Statements
     
  
1
  
2
  
3
                 Notes to Consolidated Financial Statements
  
4
  
7
  
11
Part II—OTHER INFORMATION
     
  
12
  
14
  
14
  
15

i

PART I—FINANCIAL INFORMATION
 
ITEM I.    FINANCIAL STATEMENTS
 
RAYONIER INC. AND SUBSIDIARIES
 
STATEMENTS OF CONSOLIDATED INCOME
(unaudited)
(thousands of dollars, except per share data)
 
    
Three Months Ended
  
    
March 31,
  
    
2002
     
2001
  
Sales
   
$
276,267
 
   
$
276,487
 
    
  
Costs and expenses
                  
Cost of sales
   
 
236,026
 
   
 
231,521
 
Selling and general expenses
   
 
11,455
 
   
 
7,558
 
Other operating expense (income), net
   
 
604
 
   
 
(470
)
    
  
    
 
248,085
 
   
 
238,609
 
    
  
Operating income
   
 
28,182
 
   
 
37,878
 
Interest expense
   
 
(15,223
)
   
 
(18,915
)
Interest and miscellaneous income (expense), net
   
 
376
 
   
 
(523
)
    
  
Income before provision for income taxes
   
 
13,335
 
   
 
18,440
 
Provision for income taxes
   
 
(3,934
)
   
 
(6,188
)
    
  
Net income
   
 
9,401
 
   
 
12,252
 
Other comprehensive income (loss)
                  
Unrealized gain on hedged transactions, net of income tax expense of $202
   
 
345
 
   
 
—  
 
    
  
Comprehensive income
   
$
9,746
 
   
$
12,252
 
    
  
Net income per common share
                  
Basic earnings per share
   
$
0.34
 
   
$
0.45
 
    
  
Diluted earnings per share
   
$
0.33
 
   
$
0.45
 
    
  
 
 
 
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated statements.

1

RAYONIER INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(unaudited)
(thousands of dollars)
 
    
March 31,     2002    
     
December 31,
2001
  
ASSETS
                  
Current assets
                  
Cash and short-term investments
   
$
23,002
 
   
$
14,123
 
Accounts receivable, less allowance for doubtful accounts of $3,176 and $3,392
   
 
103,142
 
   
 
101,480
 
Inventory
                  
Finished goods
   
 
55,213
 
   
 
55,530
 
Work in process
   
 
9,652
 
   
 
8,570
 
Raw materials
   
 
6,857
 
   
 
9,636
 
Manufacturing and maintenance supplies
   
 
16,921
 
   
 
17,274
 
    
  
Total inventory
   
 
88,643
 
   
 
91,010
 
Timber purchase agreements
   
 
19,393
 
   
 
18,996
 
Other current assets
   
 
11,040
 
   
 
9,451
 
    
  
Total current assets
   
 
245,220
 
   
 
235,060
 
    
  
Other assets
   
 
74,197
 
   
 
77,448
 
Timber, timberlands and logging roads, net of depletion and amortization
   
 
1,116,317
 
   
 
1,131,723
 
Property, plant and equipment
                  
Land, buildings, machinery and equipment
   
 
1,376,342
 
   
 
1,371,550
 
Less—accumulated depreciation
   
 
810,171
 
   
 
790,769
 
    
  
Total property, plant and equipment, net
   
 
566,171
 
   
 
580,781
 
    
  
Total assets
   
$
2,001,905
 
   
$
2,025,012
 
    
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                  
Current liabilities
                  
Accounts payable
   
$
57,621
 
   
$
65,247
 
Bank loans and current maturities
   
 
2,600
 
   
 
7,600
 
Accrued taxes
   
 
16,679
 
   
 
13,606
 
Accrued payroll and benefits
   
 
13,232
 
   
 
14,471
 
Accrued interest
   
 
18,518
 
   
 
6,391
 
Accrued customer incentives
   
 
8,913
 
   
 
12,935
 
Other current liabilities
   
 
16,118
 
   
 
17,360
 
Current reserves for dispositions and discontinued operations
   
 
15,255
 
   
 
15,310
 
    
  
Total current liabilities
   
 
148,936
 
   
 
152,920
 
    
  
Deferred income taxes
   
 
131,187
 
   
 
131,723
 
Long-term debt
   
 
812,120
 
   
 
842,205
 
Non-current reserves for dispositions and discontinued operations
   
 
151,613
 
   
 
153,394
 
Other non-current liabilities
   
 
37,371
 
   
 
35,976
 
Shareholders’ equity
                  
Common shares, 60,000,000 shares authorized, 27,623,356 and 27,345,395 shares issued and outstanding
   
 
71,799
 
   
 
59,721
 
Retained earnings
   
 
649,236
 
   
 
649,775
 
Accumulated other comprehensive income (loss)
   
 
(357
)
   
 
(702
)
    
  
    
 
720,678
 
   
 
708,794
 
    
  
Total liabilities and shareholders’ equity
   
$
2,001,905
 
   
$
2,025,012
 
    
  
 
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated statements.

2

RAYONIER INC. AND SUBSIDIARIES
 
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited)
(thousands of dollars)
 
    
Three Months Ended
March 31,
  
    
2002
     
2001
  
Operating activities
                  
Net income
   
$
9,401
 
   
$
12,252
 
Non-cash items included in income:
                  
Depreciation, depletion and amortization
   
 
43,942
 
   
 
40,495
 
Deferred income taxes
   
 
(1,197
)
   
 
4,117
 
Non-cash cost of land sales
   
 
2,700
 
   
 
255
 
Increase (decrease) in other non-current liabilities
   
 
3,656
 
   
 
(4,631
)
Change in accounts receivable, inventory and accounts payable
   
 
(6,973
)
   
 
5,232
 
Increase in current timber purchase agreements
and other current assets
   
 
(1,641
)
   
 
(2,024
)
Decrease in other assets
   
 
2,990
 
   
 
2,579
 
Increase in accrued liabilities
   
 
8,697
 
   
 
2,651
 
Expenditures for dispositions and discontinued operations,
                  
net of tax benefits of $661 and $754
   
 
(1,175
)
   
 
(1,274
)
    
  
Cash from operating activities
   
 
60,400
 
   
 
59,652
 
    
  
Investing activities
                  
Capital expenditures, net of sales and retirements of $762 and $74
   
 
(16,313
)
   
 
(20,998
)
    
  
Cash used for investing activities
   
 
(16,313
)
   
 
(20,998
)
    
  
Financing activities
                  
Issuance of debt
   
 
9,500
 
   
 
96,500
 
Repayment of debt
   
 
(44,500
)
   
 
(125,500
)
Dividends paid
   
 
(9,940
)
   
 
(9,768
)
Issuance of common shares
   
 
9,732
 
   
 
1,183
 
    
  
Cash used for financing activities
   
 
(35,208
)
   
 
(37,585
)
    
  
Cash and short term investments
                  
Increase in cash and short-term investments
   
 
8,879
 
   
 
1,069
 
Balance, beginning of year
   
 
14,123
 
   
 
9,824
 
    
  
Balance, end of period
   
$
23,002
 
   
$
10,893
 
    
  
Supplemental disclosures of cash flow information
                  
Cash paid during the period for:
                  
Interest
   
$
2,469
 
   
$
7,077
 
    
  
Income taxes
   
$
2,604
 
   
$
229
 
    
  
 
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated statements.

3

RAYONIER INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollar amounts in thousands unless otherwise stated)

1.    Basis of Presentation
 
The unaudited financial statements reflect, in the opinion of Rayonier Inc. and subsidiaries (Rayonier or the Company), all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results of operations, the financial position and the cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires the use of certain estimates by management (e.g., useful economic lives of assets) in determining the amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. There are risks inherent in estimating, and therefore, actual results could differ from those estimates. For a full description of accounting policies, please refer to the Notes to Consolidated Financial Statements in the 2001 Annual Report on Form 10-K.
 
Reclassifications
 
Certain items in prior year’s consolidated financial statements have been reclassified to conform to the current year presentation.
 
2.    Earnings Per Common Share
 
The following table provides details of the calculation of basic and diluted earnings per common share (share amounts actual):
 
    
Three Months Ended
March 31,
    
2002
   
2001
Net income
   
$
9,401
   
$
12,252
    
  
Shares used for determining basic earnings per common share
   
 
27,526,125
   
 
27,125,148
Dilutive effect of:
              
Stock options
   
 
309,708
   
 
166,489
Contingent shares
   
 
250,000
   
 
202,000
    
  
Shares used for determining diluted earnings per common share
   
 
28,085,833
   
 
27,493,637
    
  
Basic earnings per common share
   
$
.34
   
$
0.45
    
  
Diluted earnings per common share
   
$
.33
   
$
0.45
    
  

4

RAYONIER INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(dollar amounts in thousands unless otherwise stated)

 
3.    Shareholders’ Equity
 
An analysis of shareholders’ equity for the three months ended March 31, 2002, and the year ended December 31, 2001, follows (share amounts actual):
 
    
Common Shares
       
Accumulated
Other
Comprehensive
     
Retained
     
Shareholders’
  
    
Shares
     
Amount
       
Income/(Loss)
     
Earnings
     
Equity
  
Balance, January 1, 2001
   
27,104,462
 
   
$
48,717
 
     
$
—  
 
   
$
631,384
 
   
$
680,101
 
Net income
   
—  
 
   
 
—  
 
     
 
—  
 
   
 
57,598
 
   
 
57,598
 
Dividends paid ($1.44 per share)
   
—  
 
   
 
—  
 
     
 
—  
 
   
 
(39,207
)
   
 
(39,207
)
Issuance of shares under incentive stock plans
   
293,833
 
   
 
11,561
 
     
 
—  
 
   
 
—  
 
   
 
11,561
 
Unrealized gain on hedged transactions
   
—  
 
   
 
—  
 
     
 
7
 
   
 
—  
 
   
 
7
 
Minimum pension liability adjustments
   
—  
 
   
 
—  
 
     
 
(709
)
   
 
—  
 
   
 
(709
)
Repurchase of common shares
   
(52,900
)
   
 
(2,031
)
     
 
—  
 
   
 
—  
 
   
 
(2,031
)
Tax benefit on exercise of stock options
   
—  
 
   
 
1,474
 
     
 
—  
 
   
 
—  
 
   
 
1,474
 
    
  
    
  
  
Balance, December 31, 2001
   
27,345,395
 
   
$
59,721
 
     
$
(702
)
   
$
649,775
 
   
$
708,794
 
Net income
   
—  
 
   
$
—  
 
     
$
—  
 
   
$
9,401
 
   
$
9,401
 
Dividends paid ($0.36 per share)
   
—  
 
   
 
—  
 
     
 
—  
 
   
 
(9,940
)
   
 
(9,940
)
Issuance of shares under incentive stock plans
   
277,961
 
   
 
10,737
 
     
 
—  
 
   
 
—  
 
   
 
10,737
 
Unrealized gain on hedged transactions
   
—  
 
   
 
—  
 
     
 
345
 
   
 
—  
 
   
 
345
 
Tax benefit on exercise of stock options
   
—  
 
   
 
1,341
 
     
 
—  
 
   
 
—  
 
   
 
1,341
 
    
  
    
  
  
Balance, March 31, 2002
   
27,623,356
 
   
$
71,799
 
     
$
(357
)
   
$
649,236
 
   
$
720,678
 
    
  
    
  
  
 
4.    Identifiable Assets
 
Total assets by segment were as follows:
    
March 31,
2002
   
December 31,
2001
Performance fibers
   
$
563,771
   
$
576,265
Timber and land
   
 
1,194,725
   
 
1,210,676
Wood products and trading
   
 
203,110
   
 
205,818
Corporate and other
   
 
29,903
   
 
21,829
Dispositions
   
 
10,396
   
 
10,424
    
  
Total
   
$
2,001,905
   
$
2,025,012
    
  
 
See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for information about segment sales and operating income.

5

RAYONIER INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(unaudited)
(dollar amounts in thousands unless otherwise stated)

 
5.    Financial Instruments
 
The Company is exposed to various market risks, including changes in commodity prices, interest rates and foreign exchange rates. The Company’s objective is to minimize the economic impact of these market risks. Derivatives are used, as noted below, in accordance with policies and procedures approved by the Board of Directors and are managed by a senior executive committee, whose responsibilities include initiating, managing and monitoring resulting exposures. The Company does not enter into such financial instruments for trading purposes.
 
In our New Zealand timber operations and at our New Zealand medium density fiberboard (“MDF”) manufacturing facility, normal operating expenses include contractor and license fees, care and maintenance of timberlands, salaries and wages, wood purchases and other production costs incurred in manufacturing MDF. Rayonier hedges US/New Zealand dollar currency rate-risk with respect to these New Zealand dollar operating expenditures (cash flow hedging).
 
In the Company’s Statement of Consolidated Income for the three months ended March 31, 2002, a gain of approximately $0.1 million was recorded on foreign currency contracts reflecting primarily realized gains on contracts that matured, plus the time value changes for outstanding contracts. The Company recorded an after-tax gain of approximately $0.3 million in “Accumulated other comprehensive income (loss) (AOCI)” in the Consolidated Balance Sheet as of March 31, 2002. When the forecasted transaction comes to fruition and is recorded, the amounts in AOCI are reclassified to the Statements of Consolidated Income. We expect to reclassify this amount into earnings during the next ten months.
 
At March 31, 2002, the Company held foreign currency forward contracts maturing through January 2003 totaling $11.6 million (nominal value). The largest amount of contracts outstanding during the first three months of 2002 totaled $13.1 million (nominal value).
 
On March 13, 2002, the Company entered into an interest rate swap on $50 million of 6.15% fixed rate notes payable maturing in February 2004. The swap converts the notional amount from fixed rates to floating rates and matures in February 2004. The interest rate swap qualifies as a fair value hedge under Statements of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. As such, the net effect from the interest rate swap is recorded as part of interest expense and was less than $0.1 million for the three months ended March 31, 2002. Based upon the current interest rates for similar transactions, the fair value of the interest rate swap agreement resulted in a liability of approximately $0.1 million and a decrease in debt of approximately $0.1 million at March 31, 2002.
 
6.    Sale of New Zealand East Coast Timberland Operations
 
During the first quarter of 2002, the Company received an unsolicited offer from a third party to purchase its timber operations located in New Zealand’s East Coast region for $63.5 million. All of Rayonier’s timberlands in the region, which are leased timberlands, are included in the offer, as well as all employees, capitalized improvements, business contracts, office and vehicle leases, miscellaneous assets and forestry data. The Company and the buyer signed a conditional purchase agreement on March 28, 2002, and the transaction is expected to close in the second quarter of 2002. While for accounting purposes there will be a pre-tax gain on sale in New Zealand, due to historical exchange rate treatment of the cost basis, an after-tax U.S. dollar loss of approximately 5 cents per share will be incurred from the transaction in this fiscal year based on a $0.44 U.S./NZ exchange rate. Cash proceeds from the transaction including interest in 2002 are anticipated to be approximately $65 million.

6

 
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Critical Accounting Policies
 
The preparation of Rayonier’s financial statements requires estimates, assumptions and judgements that affect the Company’s assets, liabilities, revenues and expenses. The Company bases these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information it believes are reasonable. Actual results may differ from these estimates under different conditions. For a full description of the Company’s critical accounting policies, see the Management Discussion and Analysis in the 2001 Annual Report on Form 10-K.
 
Segment Information
 
Rayonier operates in three reportable segments: Performance Fibers, Timber and Land (previously titled Timberland Management), and Wood Products and Trading. Performance Fibers includes two business units, Cellulose Specialties and Absorbent Materials. The Timber and Land segment includes two business units, Timber and Land.
 
The amounts and relative contributions to sales and operating income (loss) attributable to each of Rayonier’s reportable business segments were as follows (thousands of dollars):
 
    
Three Months Ended
March 31
  
    
2002
     
2001
  
Sales
                  
Performance Fibers
                  
Cellulose Specialties
   
$
90,555
 
   
$
89,955
 
Absorbent Materials
   
 
38,735
 
   
 
49,079
 
    
  
Total Performance Fibers
   
 
129,290
 
   
 
139,034
 
    
  
Timber and Land
                  
Timber
   
 
44,400
 
   
 
61,824
 
Land
   
 
19,077
 
   
 
1,234
 
    
  
Total Timber and Land
   
 
63,477
 
   
 
63,058
 
    
  
Wood Products and Trading
   
 
89,196
 
   
 
83,807
 
Intersegment Eliminations
   
 
(5,696
)
   
 
(9,412
)
    
  
Total Sales
   
$
276,267
 
   
$
276,487
 
    
  
Operating Income (loss)
                  
Performance Fibers
   
$
6,581
 
   
$
14,720
 
Timber and Land
                  
Timber
   
 
20,859
 
   
 
35,299
 
Land
   
 
8,582
 
   
 
844
 
    
  
Total Timber and Land
   
 
29,441
 
   
 
36,143
 
    
  
Wood Products and Trading
   
 
(1,591
)
   
 
(6,213
)
Corporate and Other
   
 
(6,249
)
   
 
(6,772
)
    
  
Total Operating Income
   
$
28,182
 
   
$
37,878
 
    
  
 
Operating income (loss) as stated in the preceding tables and as presented in the Statements of Consolidated Income is equal to Segment income (loss). The income (loss) items below “Operating income” in the Statements of Consolidated Income are not allocated to segments. These items, which include interest (expense) income, miscellaneous income (expense) and income tax (expense) benefit, are not considered by Company management to be part of segment operations.

7

Results of Operations
 
Sales and Operating Income
 
Sales for the first quarter of 2002 of $276 million were essentially equal to prior year first quarter sales. Lower absorbent materials prices, softer timber volume and prices, and weaker trading activity were offset by higher land sales and stronger lumber volume and prices. Operating income for the first quarter was $28 million, $10 million below prior year principally due to lower absorbent materials prices, and lower timber volume and prices. These unfavorable variances were partially offset by the favorable impact of higher land sales and lumber prices, along with lower lumber and Performance Fibers manufacturing costs.
 
Performance Fibers
 
Sales for the first quarter of 2002 were $129 million, $10 million lower than prior year first quarter, primarily due to lower absorbent materials prices. Operating income for the three months ended March 31, 2002, of $7 million was $8 million lower compared to the prior year period. The decline in operating income was primarily due to a 20 percent decline in average fluff pulp prices (the major component of the absorbent materials business) partially offset by lower manufacturing costs.
 
Cellulose Specialties
 
Sales of $91 million for the first quarter of 2002 were $1 million above the prior year first quarter. While prices remained steady, there was an increase in volume of 1 percent. Demand for cellulose specialty grades continued to be strong during the quarter.
 
Absorbent Materials
 
Sales of $39 million for the first quarter of 2002 were $10 million lower than the prior year first quarter. The decrease was primarily due to a 20 percent decline in average fluff pulp prices and approximately 3 percent lower sales volume.
 
Timber and Land
 
Sales of $63 million were essentially equal compared to first quarter 2001 while operating income of $29 million was $7 million below prior year first quarter. The decrease in operating income was primarily due to lower timber volume and prices, partly offset by higher land sales.
 
Timber
 
Sales for the first quarter of 2002 were $44 million, $17 million below prior year first quarter, with operating income of $21 million, $14 million lower than prior year. The decrease in sales and operating income was due to 11 percent lower average timber prices and 19 percent lower volume, primarily resulting from weak export and domestic markets in the Northwest U.S. and the timing of sales in the Southeast U.S.
 
Land
 
Sales for the first quarter of 2002 of $19 million increased by $18 million over the prior year first quarter, while operating income of $9 million increased by $8 million due to higher acreage sold in 2002.
 
Wood Products and Trading
 
Sales for the first quarter of 2002 were $89 million compared to $84 million in the first quarter of 2001. The operating loss of $2 million for the first quarter of 2002 compared favorably to $6 million in losses in the prior year’s first quarter. Sales increased due to higher lumber volume and prices partly offset by lower trading activity. The operating loss was lower due to higher lumber prices and lower manufacturing costs.
 
Corporate and Other
 
Corporate and other expenses for the first quarter of 2002 were $6 million compared to $7 million in the first quarter of 2001. The improvement resulted from the favorable impact of New Zealand foreign exchange rates and lower intersegment eliminations partly offset by higher stock price-based incentive compensation.

8

Other Income / Expense
 
Interest expense for the first quarter of 2002 was $15 million, a decrease of $4 million from the first quarter of 2001 primarily due to lower debt and interest rates.
 
Miscellaneous income (expense) for the first quarter of 2002 was income of $0.4 million compared to expense of $0.5 million in the prior year’s quarter. The improvement was due to approximately $0.9 million of higher expense in 2001 primarily from the mark to market remeasurement of New Zealand forward currency contracts. These contracts have been designated as cash flow hedges and gains or losses are recorded in AOCI until maturity. The net impact of New Zealand forward currency contracts that have matured in the first quarter of 2002 resulted in a gain of approximately $0.1 million.
 
The effective tax rate for the first quarter of 2002 was 29.5 percent compared to an effective tax rate of 33.6 percent for the prior year’s quarter. The Company’s effective tax rate continues to be below the U.S. statutory levels due to lower rates in effect for foreign subsidiaries, foreign exchange tax-related benefits and the impact of various tax credits.
 
Net Income
 
Net income for the first quarter of 2002 was $9 million, or $0.33 per diluted common share, compared to $12 million, or $0.45 per diluted common share, for the prior year first quarter. The decrease is primarily due to lower absorbent materials prices, and lower timber volume and prices. These unfavorable variances were partially offset by higher land sales and lumber prices, lower lumber and performance fibers manufacturing costs, lower interest expense and improved non-operating income principally due to a loss on the remeasurement of New Zealand dollar forward currency contracts in the prior year first quarter.
 
Other Items
 
Second quarter 2002 earnings are expected to be above first quarter 2002 earnings due to higher anticipated land sales, continued strength in the cellulose specialties business of the performance fibers segment, and seasonal price increases in lumber. Second quarter 2002 earnings are also expected to be higher than second quarter 2001 if the major land sale in 2001, which generated earnings of $0.75 per share, is excluded for comparative purposes.
 
Liquidity and Capital Resources
 
Cash flow provided by operating activities of $60 million for the first quarter of 2002 was comparable to the prior year quarter. Cash provided by operating activities financed capital expenditures of $16 million, dividends of $10 million and debt reduction of $35 million. Cash flow used for financing activities for the first quarter 2002, was $45 million in paid down capital (debt and equity) offset by $10 million in new capital from the exercise of stock options. This reflected a decrease of $2 million from prior year first quarter, due to an increase in the issuance of common shares, partly offset by higher net debt repayments in 2002. The Company did not repurchase any of its common shares during the quarter ended March 31, 2002, or March 31, 2001.
 
At March 31, 2002, debt was $815 million, a reduction of $35 million from December 31, 2001, and the debt-to-capital ratio was 53.1 percent compared to 54.5 percent at December 31, 2001. Net Debt (debt net of cash invested) was $794 million at quarter end, giving a net debt to capital ratio of 52.5 percent.
 
As of March 31, 2002, Rayonier had $300 million available under its revolving credit facilities. In conjunction with the Company’s long-term debt, certain covenant restrictions are required on the ratio of EBITDA (defined as earnings from continuing operations before significant non-recurring items, provision for dispositions, interest expense, income taxes, depreciation, depletion, amortization and the non-cash cost of land sales) to interest expense and EBITDA to total debt. In addition, there are covenant requirements on the ratios of consolidated cash flow available for fixed charges to total debt. The covenants listed above are calculated on a trailing 12-month basis.

9

The most restrictive long-term debt covenants in effect for Rayonier as of March 31, 2002, were as follows:
 
    
Covenant
Requirement
   
Actual ratio at
March 31, 2002
EBITDA to consolidated interest expense should not be less than
   
2.50 to 1
   
5.14 to 1
Total debt to EBITDA should not exceed
   
4.00 to 1
   
2.46 to 1
Consolidated cash flow available for fixed charges to consolidated fixed charges should not be less than
   
1.65 to 1
   
2.65 to 1
Consolidated debt to consolidated cash flow for fixed charges may not exceed
   
4.25 to 1
   
2.81 to 1
 
In addition to the covenants listed above, the revolving credit agreements include customary covenants that limit the incurrence of debt, the disposition of assets and the making of restricted payments between RTOC and Rayonier. The Company is currently in compliance with all of these covenants.
 
The Company has on file with the Securities and Exchange Commission shelf registration statements to offer $150 million of new public debt securities. The Company believes that internally generated funds, combined with available external financing, will enable Rayonier to fund capital expenditures, share repurchases, working capital and other liquidity needs for the foreseeable future.
 
No material changes in guarantees or financial instruments such as letters of credit and surety bonds occurred in the first quarter of 2002.
 
Other Data
 
The discussion below is presented to enhance the reader’s understanding of Rayonier’s ability to generate cash, its liquidity and its ability to satisfy rating agency and creditor requirements. This information includes two measures of financial results: EBITDA and Free Cash Flow. These two measures are not defined by Generally Accepted Accounting Principles (GAAP). The discussion of EBITDA and Free Cash Flow is not intended to conflict with or change any of the GAAP disclosures described above, but to provide supplementary information that management deems to be relevant to analysts, investors and creditors. EBITDA and Free Cash Flow as defined may not be comparable to similarly titled measures reported by other companies.
 
EBITDA for the first quarter of 2002 was $75 million, $3 million lower than the prior year first quarter. The decrease in EBITDA was primarily due to lower absorbent materials and timber prices partly offset by higher land sales and lumber prices, and lower lumber and performance fibers manufacturing costs.
 
Below is a reconciliation of Net Income to EBITDA for the respective periods (in millions except per share amounts):
 
    
Three months ended March 31,
    
2002
   
Per Share
   
2001
   
Per Share
Net Income
   
$  9.4
   
0.33
   
$12.3
   
0.45
Add:    Income tax expense
   
3.9
   
0.14
   
6.2
   
0.23
Interest expense
   
15.2
   
0.54
   
18.9
   
0.69
                     
Depreciation, depletion and amortization
   
44.0
   
1.57
   
40.4
   
1.46
Non-cash cost of land sales
   
2.7
   
0.10
   
0.3
   
0.01
    
  
  
  
EBITDA
   
$75.2
   
2.68
   
$78.1
   
2.84
    
  
  
  

10

Free cash flow (defined as EBITDA plus or minus significant non-recurring items, changes in working capital and long-term assets and liabilities (excluding the non-cash costs of land sales), less income taxes, interest expense, custodial capital spending and prior-year dividend levels) decreased $6 million, to $27 million for the first three months of 2002 primarily due to higher working capital requirements, changes in deferred taxes and higher cash balances, partly offset by higher other liabilities and income.
 
Below is a reconciliation of Cash Provided by Operating Activities to Free Cash Flow for the respective periods (in millions except per share amounts):
 
    
Three Months Ended March 31,
  
    
2002
     
2001
  
Cash provided by operating activities
   
$
60.4
 
   
$
59.7
 
Custodial capital spending, net
   
 
(15.1
)
   
 
(16.5
)
Dividends at prior year level
   
 
(9.9
)
   
 
(9.8
)
Increase in cash and short-term investments
   
 
(8.9
)
   
 
(1.1
)
    
  
Free Cash Flow
   
$
26.5
 
   
$
32.3
 
    
  
Free Cash Flow per share
   
$
0.94
 
   
$
1.17
 
    
  
 
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Market Risk
 
The Company is exposed to various market risks, including changes in commodity prices, foreign exchange rates and interest rates. The Company’s objective is to minimize the economic impact of these market risks. Derivatives are used, as noted above, in accordance with policies and procedures approved by the Board of Directors and are managed by a senior executive committee whose responsibilities include initiating, managing and monitoring resulting exposures. The Company does not enter into financial instruments for trading purposes. See also Note 5, “Financial Instruments” included in this Form 10-Q.
 
The fair market value of long-term fixed interest rate debt is subject to interest rate risk; however, Rayonier intends to hold most of its debt until maturity. During the first quarter of 2002, the Company entered into an interest rate swap in order to achieve a desired position of fixed and floating interest rates in its portfolio. Occasionally, callable bonds will be refinanced at the Company’s option if favorable economic conditions exist. Generally, the fair market value of fixed-interest-rate debt will increase as interest rates fall and decrease as interest rates rise.
 
Circumstances surrounding the Company’s exchange rate risk, commodity price risk and interest rate risk remain unchanged from December 31, 2001. For a full description of the Company’s market risk, please refer to Item 7, Management Discussion and Analysis of Financial Condition and Results of Operations, in the 2001 Annual Report on Form 10-K.
 
Safe Harbor
 
Comments about market trends, anticipated earnings, expected pricing levels and future activities such as land sales, are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The following important factors, among others, could cause actual results to differ materially from those expressed in the forward-looking statements: changes in global market trends and world events that could impact customer demand; interest rate and currency movements; fluctuations in demand for cellulose specialties, absorbent materials, timber and wood products; adverse weather conditions; changes in production costs for wood products and performance fibers, particularly for raw materials such as wood, energy and chemicals; unexpected delays in the closing of land sale transactions; and implementation or revision of governmental policies and regulations affecting the environment, import and export controls and taxes. For additional factors that could impact results, please see the Company’s 2001 Annual Report on Form 10-K on file with the Securities and Exchange Commission.

11

 
PART II—OTHER INFORMATION
 
ITEM 5.    SELECTED OPERATING DATA
 
    
Three Months Ended
  
    
March 31, 2002
     
March 31,
2001
  
Performance Fibers
              
Sales volume
              
Cellulose specialties, in thousands of metric tons
   
104
 
   
103
 
Absorbent materials, in thousands of metric tons
   
70
 
   
72
 
Production as a percent of capacity
   
96.3
%
   
98.6
%
Timber and Land
              
Sales volume—Timber
              
Northwest U.S., in millions of board feet
   
70
 
   
88
 
Southeast U.S., in thousands of short green tons
   
1,241
 
   
1,575
 
New Zealand, in thousands of metric tons *
   
287
 
   
292
 
Timber sales volume—Intercompany
              
Northwest U.S., in millions of board feet
   
15
 
   
29
 
Southeast U.S., in thousands of short green tons
   
5
 
   
14
 
New Zealand, in thousands of metric tons *
   
179
 
   
144
 
Acres sold
   
18,900
 
   
415
 
Wood Products and Trading
              
Lumber sales volume, in millions of board feet
   
79
 
   
57
 
Medium-density fiberboard sales volume, in thousands of cubic meters
   
36
 
   
37
 
Log trading sales volume
              
North America, in millions of board feet
   
27
 
   
49
 
New Zealand, in thousands of cubic meters
   
211
 
   
214
 
Other, in thousands of cubic meters
   
118
 
   
123
 
* 2001 volume restated from cubic meters to metric tons

12

 
PART II—OTHER INFORMATION
 
ITEM 5.    SELECTED OPERATING DATA
 
SELECTED SUPPLEMENTAL FINANCIAL DATA
(millions of dollars, except per share data)
 
    
Three Months Ended
  
    
March 31,
2002
     
March 31,
2001
  
Geographical Data (Non-U.S.)
                  
Sales
                  
New Zealand
   
$
27.3
 
   
$
24.0
 
Other
   
 
13.3
 
   
 
12.0
 
    
  
Total
   
$
40.6
 
   
$
36.0
 
    
  
Operating income (loss)
                  
New Zealand
   
$
0.2
 
   
$
0.6
 
Other
   
 
(1.4
)
   
 
0.1
 
    
  
Total
   
$
(1.2
)
   
$
0.7
 
    
  
Timber and Land
                  
Sales
                  
Northwest U.S.
   
$
17.3
 
   
$
25.1
 
Southeast U.S.
   
 
35.6
 
   
 
31.7
 
New Zealand
   
 
10.6
 
   
 
6.3
 
    
  
Total
   
$
63.5
 
   
$
63.1
 
    
  
Operating income (loss)
                  
Northwest U.S.
   
$
12.8
 
   
$
20.1
 
Southeast U.S.
   
 
17.1
 
   
 
14.1
 
New Zealand
   
 
(0.5
)
   
 
1.9
 
    
  
Total
   
$
29.4
 
   
$
36.1
 
    
  
EBITDA per Share
                  
Performance Fibers
   
$
0.86
 
   
$
1.22
 
Timber and Land
   
 
1.96
 
   
 
2.02
 
Wood Products and Trading
   
 
0.07
 
   
 
(0.11
)
Corporate and other
   
 
(0.21
)
   
 
(0.29
)
    
  
Total
   
$
2.68
 
   
$
2.84
 
    
  
 

13

 
PART II—OTHER INFORMATION
 
ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K
 
(a)    See Exhibit Index
 
(b)    Rayonier, Inc. filed a report on Form 8-K dated February 27, 2002, that incorporates a news release issued by Standard and Poor’s on February 21, 2002, which revises its outlook on the Company from negative to stable based on Rayonier’s improved credit measures.
 
(c)    Rayonier, Inc. filed a report on Form 8-K dated March 18, 2002, to announce the rescission of Arthur Andersen’s appointment as independent auditors for 2002.
 
SIGNATURE
 
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
RAYONIER INC. (Registrant)
By:
  
/s/    HANS E. VANDEN NOORT        
   
Hans E. Vanden Noort
Vice President and
Corporate Controller
May 10, 2002

14

 
EXHIBIT INDEX
 
EXHIBIT NO.
   
  DESCRIPTION  
   
 LOCATION 
2
   
Plan of acquisition, reorganization, arrangement, liquidation or succession
   
None
3.1
   
Amended and restated articles of incorporation
   
No amendments
3.2
   
By-laws
   
No amendments
4
   
Instruments defining the rights of security holders, including indentures
   
Not required to be filed. The Registrant hereby agrees to file with the Commission a copy of any instrument defining the rights of holders of the Registrant’s long-term debt upon request of the Commission.
11
   
Statement re: computation of per share earnings
   
Not required to be filed
12
   
Statement re: computation of ratios
   
Filed herewith
15
   
Letter re: unaudited interim financial information
   
None
18
   
Letter re: change in accounting principles
   
None
19
   
Report furnished to security holders
   
None
22
   
Published report regarding matters submitted to vote of security holders
   
None
23
   
Consents of experts and counsel
   
None
24
   
Power of attorney
   
None
99
   
Additional exhibits
   
None

15
Prepared by R.R. Donnelley Financial -- Ratio of Earnings
EXHIBIT 12
 
RAYONIER INC. AND SUBSIDIARIES
 
RATIO OF EARNINGS TO FIXED CHARGES
(unaudited, thousands of dollars)
 
    
Three Months
Ended March 31,
    
2002
   
2001
Earnings:
              
Income from continuing operations
   
$
9,401
   
$
12,252
Add:
              
Income tax
   
 
3,934
   
 
6,188
Amortization of capitalized interest
   
 
656
   
 
644
    
  
    
 
13,991
   
 
19,084
    
  
Adjustments to earnings for fixed charges:
              
Interest and other financial charges
   
 
15,223
   
 
18,915
Interest attributable to rentals
   
 
408
   
 
432
    
  
    
 
15,631
   
 
19,347
    
  
Earnings as adjusted
   
$
29,622
   
$
38,431
    
  
Fixed charges:
              
Fixed charges above
   
$
15,631
   
$
19,347
Capitalized interest
   
 
—  
   
 
—  
    
  
Total fixed charges
   
$
15,631
   
$
19,347
    
  
Ratio of earnings as adjusted to total fixed charges
   
 
1.90
   
 
1.99