Form 10-Q
Table of Contents

 

 

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 September 30, 2008

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 (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x    Accelerated filer  ¨
Non-accelerated filer  ¨    (Do not check if a smaller reporting company)    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of October 20, 2008, there were outstanding 78,823,863 Common Shares of the Registrant.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          PAGE

PART I.

   FINANCIAL INFORMATION   

Item 1.

   Condensed Consolidated Financial Statements (Unaudited)   
   Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2008 and 2007    1
   Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007    2
   Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007    3
   Notes to Condensed Consolidated Financial Statements    4

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    25

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    37

Item 4.

   Controls and Procedures    37

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings    39

Item 1A.

   Risk Factors    39

Item 6.

   Exhibits    40
   Signature    41


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

     Three Months Ended,
September 30,
    Nine Months Ended
September 30,
 
     2008     2007     2008     2007  

SALES

   $ 308,142     $ 324,115     $ 878,232     $ 890,020  
                                

Costs and Expenses

        

Cost of sales

     243,561       217,313       673,377       646,121  

Selling and general expenses

     16,158       16,872       47,746       48,641  

Other operating income, net

     (589 )     (1,737 )     (5,141 )     (6,357 )
                                
     259,130       232,448       715,982       688,405  

OPERATING INCOME

     49,012       91,667       162,250       201,615  

Interest expense

     (10,487 )     (14,979 )     (33,411 )     (42,212 )

Interest and miscellaneous income, net

     299       1,299       2,299       3,197  
                                

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     38,824       77,987       131,138       162,600  

Benefit (provision) for income taxes

     889       (7,684 )     (13,653 )     (24,375 )
                                

INCOME FROM CONTINUING OPERATIONS

     39,713       70,303       117,485       138,225  
                                

DISCONTINUED OPERATIONS, NET (NOTE 2)

        

(Loss) income on discontinued operations, net of income tax (expense) benefit of ($9,990), $57, ($10,758), and ($695)

     (9,959 )     1,154       (9,764 )     1,623  
                                

NET INCOME

     29,754       71,457       107,721       139,848  
                                

OTHER COMPREHENSIVE (LOSS) INCOME

        

Foreign currency translation adjustment

     (9,843 )     3,116       (7,333 )     5,387  

Employee Benefit Plans

        

Benefit plan amendment, net of tax provision of $7,668 and $7,668

     16,388       —         16,388       —    

Amortization of pension and postretirement costs, net of tax provision of $406, and $579, and $1,595 and $1,653

     995       1,389       3,779       3,940  
                                

COMPREHENSIVE INCOME

   $ 37,294     $ 75,962     $ 120,555     $ 149,175  
                                

EARNINGS (LOSS) PER COMMON SHARE

        

BASIC EARNINGS (LOSS) PER SHARE

        

Continuing Operations

   $ 0.51     $ 0.90     $ 1.50     $ 1.78  

Discontinued Operations

     (0.13 )     0.02       (0.13 )     0.02  
                                

Net Income

   $ 0.38     $ 0.92     $ 1.37     $ 1.80  
                                

DILUTED EARNINGS (LOSS) PER SHARE

        

Continuing Operations

   $ 0.50     $ 0.89     $ 1.48     $ 1.75  

Discontinued Operations

     (0.13 )     0.01       (0.12 )     0.02  
                                

Net Income

   $ 0.37     $ 0.90     $ 1.36     $ 1.77  
                                

See Notes to Condensed Consolidated Financial Statements.

 

1


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)

 

     September 30,
2008
    December 31,
2007
 
ASSETS     

CURRENT ASSETS

    

Cash and cash equivalents

   $ 54,992     $ 181,081  

Accounts receivable, less allowance for doubtful accounts of $1,028 and $677

     93,842       81,068  

Inventory

    

Finished goods

     76,952       63,083  

Work in process

     8,831       9,188  

Raw materials

     7,172       10,122  

Manufacturing and maintenance supplies

     2,483       1,898  
                

Total inventory

     95,438       84,291  

Other current assets

     48,644       49,780  

Assets held for sale (Note 2)

     68,549       —    
                

Total current assets

     361,465       396,220  
                

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION

     1,273,273       1,117,219  

PROPERTY, PLANT AND EQUIPMENT

    

Land

     24,949       25,282  

Buildings

     124,417       124,030  

Machinery and equipment

     1,230,538       1,190,852  
                

Total property, plant and equipment

     1,379,904       1,340,164  

Less-accumulated depreciation

     (1,027,601 )     (994,409 )
                
     352,303       345,755  
                

INVESTMENT IN JOINT VENTURE

     —         62,766  

OTHER ASSETS

     153,924       157,081  
                
   $ 2,140,965     $ 2,079,041  
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

CURRENT LIABILITIES

    

Accounts payable

   $ 67,693     $ 66,224  

Bank loans and current maturities

     23,920       55,585  

Accrued taxes

     25,575       7,179  

Accrued payroll and benefits

     21,826       30,065  

Accrued interest

     13,643       3,481  

Accrued customer incentives

     10,324       12,350  

Liabilites associated with assets held for sale (Note 2)

     7,339       —    

Other current liabilities

     37,974       33,460  

Current liabilities for dispositions and discontinued operations (Note 11)

     10,474       10,069  
                

Total current liabilities

     218,768       218,413  
                

LONG-TERM DEBT

     770,339       694,259  

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS (Note 11)

     96,618       103,616  

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 13)

     36,793       67,217  

OTHER NON-CURRENT LIABILITIES

     16,550       14,439  

COMMITMENTS AND CONTINGENCIES (Notes 10 and 12)

    

SHAREHOLDERS’ EQUITY

    

Common shares, 120,000,000 shares authorized 78,823,863 and 78,216,696 shares issued and outstanding

     505,516       487,407  

Retained earnings

     509,185       519,328  

Accumulated other comprehensive loss

     (12,804 )     (25,638 )
                
     1,001,897       981,097  
                
   $ 2,140,965     $ 2,079,041  
                

See Notes to Condensed Consolidated Financial Statements.

 

2


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

     Nine Months Ended
September 30,
 
     2008     2007  

OPERATING ACTIVITIES

    

Net income

   $ 107,721     $ 139,848  

Non-cash items included in net income:

    

Depreciation, depletion and amortization

     112,037       114,944  

Non-cash cost of forest fire losses

     —         9,601  

Non-cash cost of real estate sold

     7,638       7,727  

Non-cash stock-based incentive compensation expense

     10,187       10,106  

Deferred income tax provision (benefit)

     12,263       (4,943 )

Excess tax benefits on stock-based compensation

     (3,406 )     (6,284 )

Other

     4,113       5,114  

Increase in accounts receivable

     (17,786 )     (5,358 )

(Increase) decrease in inventory

     (2,095 )     3,922  

Increase (decrease) in accounts payable

     7,254       (13,538 )

(Increase) decrease in other current assets

     (415 )     13,108  

Increase in accrued liabilities

     26,216       12,188  

Decrease in other non-current liabilities

     (8,021 )     (7,047 )

Increase in other non-current assets

     (2,386 )     (8,640 )

Expenditures for dispositions and discontinued operations

     (5,142 )     (7,017 )
                

CASH PROVIDED BY OPERATING ACTIVITIES

     248,178       263,731  
                

INVESTING ACTIVITIES

    

Capital expenditures

     (74,852 )     (67,398 )

Purchase of timberlands and wood chipping facilities

     (229,525 )     (12,434 )

Decrease (increase) in restricted cash

     4,604       (396 )

Other

     (8,400 )     (3,318 )
                

CASH USED FOR INVESTING ACTIVITIES

     (308,173 )     (83,546 )
                

FINANCING ACTIVITIES

    

Issuance of debt

     155,000       122,000  

Repayment of debt

     (110,585 )     (160,550 )

Dividends paid

     (117,639 )     (111,628 )

Repurchase of common shares

     (3,738 )     —    

Issuance of common shares

     8,254       15,014  

Excess tax benefits on stock-based compensation

     3,406       6,284  
                

CASH USED FOR FINANCING ACTIVITIES

     (65,302 )     (128,880 )
                

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     (792 )     669  
                

CASH AND CASH EQUIVALENTS

    

(Decrease) increase in cash and cash equivalents

     (126,089 )     51,974  

Balance, beginning of year

     181,081       40,171  
                

Balance, end of period

   $ 54,992     $ 92,145  
                

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NONCASH INVESTING ACTIVITIES:

    

Cash paid during the period:

    

Interest

   $ 22,213     $ 46,275  
                

Income taxes

   $ 765     $ 9,742  
                

Non-cash investing activity:

    

Capital assets purchased on account

   $ 5,118     $ 4,114  
                

See Notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

1.

BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of Rayonier Inc. and its subsidiaries (“Rayonier” or “the Company”) reflect all adjustments (including normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of certain estimates by management 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; therefore, actual results could differ from those estimates. For a full description of the Company’s significant accounting policies, please refer to the Notes to Consolidated Financial Statements in the 2007 Annual Report on Form 10-K.

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). This Standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It applies to other accounting pronouncements where the FASB requires or permits fair value measurements but does not require any new fair value measurements. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 for certain non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company adopted SFAS 157 for financial assets and liabilities on January 1, 2008. Adoption of SFAS 157 did not have any impact on the Company’s results of operations or financial position and did not result in any additional disclosures. We do not believe the adoption of SFAS 157 for our non-financial assets and liabilities, effective January 1, 2009, will have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities- Including an amendment of FASB Statement No. 115 (“SFAS 159”). This statement permits entities to choose to measure selected financial assets and liabilities at fair value. The Company did not elect to adopt the provisions of SFAS 159 for existing eligible instruments.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). This statement modifies certain aspects of how the acquiring entity recognizes and measures the identifiable assets, the liabilities assumed and the goodwill acquired in a business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company has not determined the impact, if any, the statement will have on its financial condition, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 is effective for fiscal years beginning after December 15, 2008. This statement addresses changes to noncontrolling interests (more commonly known as minority interests) which is the portion of equity in a subsidiary not attributable to the parent entity. Presently, the Company does not have any non-controlling interests. Therefore, the Company currently believes that the impact of SFAS 160, if any, will primarily depend on the materiality of non-controlling interests arising in future transactions, including those the Company may enter into during 2008, to which the financial statement presentation and disclosure provisions of SFAS 160 will apply.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS 161”). This Statement requires enhanced disclosures about an entity’s derivative and hedging activities, including (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is in the process of evaluating the effect SFAS 161 will have on our financial statement disclosures.

In May 2008, the FASB issued FSP No. ARB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP ARB 14-1”). FSP ARB 14-1 requires that entities with convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) separately account for the liability and equity components in a manner that reflects the entity’s nonconvertible debt borrowing rate when interest expense is recognized in subsequent periods. The FSP is effective for financial statements issued for fiscal years beginning after 

 

4


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

December 15, 2008 and requires prior years to be restated. The Company’s October 2007 exchangeable debt issuance is within the scope of FSP ARB 14-1. The fair value of the equity component at inception (October 17, 2007) results in approximately $30 million of debt discount, an $11 million deferred tax liability and a $19 million increase to additional paid-in-capital, net of income taxes. Retrospective application of the FSP in 2009 will result in an increase to interest expense, net of tax benefits, of approximately $3 million in 2008 and $1 million in 2007. The additional interest expense represents the amortization of the debt discount using the interest method.

 

2.

ASSETS HELD FOR SALE

The Company holds a 40 percent interest in a joint venture (“JV”) that owns approximately 340,000 acres of New Zealand timberlands. AMP Capital Investors Limited (“AMP”), a subsidiary of the Australasian corporation AMP Limited, and RREEF Infrastructure (“RREEF”), the global infrastructure investing arm of Deutsche Asset Management, own the remaining JV interests of 35 percent and 25 percent, respectively. Rayonier’s investment in the JV is accounted for using the equity method of accounting. In addition to the investment, Rayonier New Zealand Limited (“RNZL”), a wholly-owned subsidiary of Rayonier Inc., serves as the manager of the JV forests and operates a log trading business.

Rayonier’s Board of Directors approved a plan to offer to sell the Company’s 40 percent interest in the JV as well as the operations of RNZL. AMP and RREEF also are offering their investments in the joint venture for sale. As a result, the entire timber estate is being actively marketed. Collectively, the Company’s JV interest and RNZL operations qualify as a component of an entity under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As a result, the operating results of the JV and RNZL have been segregated from continuing operations in the Condensed Consolidated Statements of Income and Comprehensive Income and reported as discontinued operations for all periods presented. The assets and liabilities have been classified as “Assets Held for Sale” in the condensed Consolidated Balance Sheet at September 30, 2008. The JV and the related management activities performed by RNZL were previously reported in the Timber segment while the log trading operations of RNZL were reported in Other for segment purposes.

(Loss)/income from discontinued operations for the three and nine months ended September 30, 2007 also includes the wood products trading business, International Wood Products (“IWP”), that was closed in May 2007 and previously considered immaterial for separate discontinued operations presentation. IWP was previously reported in Other for segment reporting purposes.

Operating results of the discontinued operation are summarized below:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
     2008     2007    2008     2007  

Sales

   $ 9,323     $ 10,100    $ 28,293     $ 44,276  

Equity in (loss) income of New Zealand JV

     (1,046 )     151      (878 )     1,246  

Operating (loss) income

     (11 )     967      831       1,902  

Income tax (provision) benefit

     (9,990 )     57      (10,758 )     (695 )

Net (loss) income from discontinued operations

     (9,959 )     1,154      (9,764 )     1,623  

 

5


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

The assets and liabilities of discontinued operations as of September 30, 2008 are summarized below:

 

     September 30, 2008

Assets

  

Accounts receivable, net

   $ 5,548

Other current assets

     698

Property and equipment, net

     328

Other assets

     6,388

Investment in JV

     55,587
      

Total assets held for sale

   $ 68,549
      

Liabilities

  

Accounts payable

   $ 902

Other current liabilities

     2,008

Deferred tax liability

     4,429
      

Total liabilities associated with assets held for sale

   $ 7,339
      

 

3.

EARNINGS PER COMMON SHARE

The following table provides details of the calculation of basic and diluted earnings per common share:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2008     2007    2008     2007

Income from continuing operations

   $ 39,713     $ 70,303    $ 117,485     $ 138,225

(Loss) income from discontinued operations

     (9,959 )     1,154      (9,764 )     1,623
                             

Net income

   $ 29,754     $ 71,457    $ 107,721     $ 139,848
                             

Shares used for determining basic earnings per common share

     78,580,895       77,760,290      78,404,815       77,454,510

Dilutive effect of:

         

Stock options

     645,664       895,966      691,910       1,011,521

Performance and restricted shares

     344,804       403,218      292,560       328,173
                             

Shares used for determining diluted earnings per common share

     79,571,363       79,059,474      79,389,285       78,794,204
                             

Basic earnings (loss) per common share:

         

Continuing operations

   $ 0.51     $ 0.90    $ 1.50     $ 1.78

Discontinued operations

     (0.13 )     0.02      (0.13 )     0.02
                             

Net income

   $ 0.38     $ 0.92    $ 1.37     $ 1.80
                             

Diluted earnings (loss) per common share:

         

Continuing operations

   $ 0.50     $ 0.89    $ 1.48     $ 1.75

Discontinued operations

     (0.13 )     0.01      (0.12 )     0.02
                             

Net income

   $ 0.37     $ 0.90    $ 1.36     $ 1.77
                             

 

6


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

4.

INCOME TAXES

Rayonier is a real estate investment trust (“REIT”). In general, only the Company’s taxable REIT subsidiaries, whose businesses include the Company’s non-REIT qualified activities, are subject to U.S. federal and state corporate income taxes. However, the Company is subject to U.S. federal corporate income tax on built-in gains (the excess of fair market value over tax basis for property held by the Company upon REIT election at January 1, 2004) on taxable sales of such built-in gain property during the first 10 years following the election to be taxed as a REIT. Accordingly, the provision for U.S. corporate income taxes principally relates to current and deferred taxes on certain property sales and on income from taxable REIT subsidiary operations. In addition, the Company is subject to foreign tax on its non-U.S. operations.

Prohibited Transactions

As a REIT, the Company can be subject to a 100 percent tax on the gain resulting from “prohibited transactions.” The Company believes it has not engaged in any prohibited transactions since it elected REIT status.

Like-Kind Exchanges

Under current tax law, the built-in gain tax from the sale of REIT property can be eliminated if sale proceeds from “relinquished” properties are reinvested in similar property consistent with the like-kind exchange (“LKE”) requirements of the Internal Revenue Code of 1986, as amended, and administrative guidance, as long as the “replacement” property is owned through the built-in gain period (10-year period which began on January 1, 2004). However, this does not restrict the Company’s ability to harvest timber on a pay-as-cut basis from such replacement property during the built-in gain period.

Provision for Income Taxes from Continuing Operations

The following tables reconcile the Company’s income tax provision at the U.S. statutory tax rate to the reported provision and effective tax rate for the three and nine months ended September 30 (dollars in millions):

 

     Three months ended
September 30,
 
     2008     %     2007     %  

Income tax provision at U.S. statutory rate

   $ (13.6 )   (35.0 )   $ (27.3 )   (35.0 )

State income taxes, net of federal benefit

     0.2     0.6       (0.5 )   (0.6 )

REIT income not subject to federal tax

     7.3     18.8       20.1     25.7  

Permanent differences/other

     —       —         (0.2 )   (0.2 )
                            

Income tax provision before discrete items

   $ (6.1 )   (15.6 )   $ (7.9 )   (10.1 )

Taxing authority settlements and FIN 48 adjustments

     3.8     9.7       (5.5 )   (7.1 )

Change in valuation allowance

     —       —         3.6     4.6  

Return-to-accrual adjustments

     2.0     5.1       0.1     0.1  

Deferred tax adjustments/other

     1.2     3.1       2.0     2.6  
                            

Income tax benefit (provision) as reported

   $ 0.9     2.3     $ (7.7 )   (9.9 )
                            

 

7


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

     Nine months ended
September 30,
 
     2008     %     2007     %  

Income tax provision at U.S. statutory rate

   $ (45.9 )   (35.0 )   $ (56.9 )   (35.0 )

State income taxes, net of federal benefit

     (0.6 )   (0.5 )     (1.2 )   (0.7 )

REIT income not subject to federal tax

     25.2     19.2       33.7     20.8  

Permanent differences/other

     0.4     0.3       1.1     0.5  
                            

Income tax provision before discrete items

   $ (20.9 )   (16.0 )   $ (23.3 )   (14.4 )

Taxing authority settlements and FIN 48 adjustments

     3.6     2.8       (5.8 )   (3.5 )

Change in valuation allowance

     —       —         3.6     2.2  

Return-to-accrual adjustments

     2.4     1.8       2.0     1.2  

Deferred tax adjustments/other

     1.2     1.0       (0.9 )   (0.5 )
                            

Income tax provision as reported

   $ (13.7 )   (10.4 )   $ (24.4 )   (15.0 )
                            

The effective rate from continuing operations before discrete items was 15.6 percent and 16.0 percent for the three and nine months ended September 30, 2008 compared to 10.1 percent and 14.4 percent for the prior year periods. The increased rates were due to proportionately higher earnings from the Company’s taxable REIT subsidiary. Discrete items for the three and nine months ended September 30, 2008 were a benefit of $7.0 million and $7.2 million, respectively. The discrete items were the result of a settlement with the Internal Revenue Service (“IRS”) and other adjustments.

The Company’s effective tax rate is below the 35 percent U.S. statutory tax rate primarily due to tax benefits associated with being a REIT and LKE transactions. Partially offsetting these benefits is the loss of tax deductibility on interest expense of $0.8 million and $2.8 million for the three and nine months ended September 30, 2008, respectively, and corporate overhead expenses associated with REIT activities of $3.8 million and $9.2 million for the same periods. The Company recognized $9.0 million in LKE tax benefits during the nine months ended September 30, 2008 compared to $3.6 million in the nine months ended September 30, 2007.

Provision for Income Taxes from Discontinued Operations

For the three months ended September 30, 2008 and 2007 taxes for discontinued operations were $10.0 million and a benefit of $0.1 million, respectively. For the nine months ended September 30, 2008 and 2007 taxes for discontinued operations were $10.8 million and $0.7 million, respectively. The Company’s decision to offer its New Zealand operations for sale in the third quarter of 2008 resulted in: (i) the establishment of a $5.8 million valuation allowance on a New Zealand net operating loss carryforward, and (ii) the reversal of the Company’s Accounting Principles Board Opinion 23 election and the recognition of a $4.4 million liability for U.S. taxes on unremitted earnings.

Tax Audits

The following table provides detail of the tax years that remain subject to examination by the IRS and other significant taxing jurisdictions:

 

Taxing Jurisdiction

   Open Tax Periods

U.S. Internal Revenue Service

   2003 – 2008

State of Florida

   2003 – 2008

State of Georgia

   2003 – 2008

State of Alabama

   2003 – 2008

New Zealand Inland Revenue

   2004 – 2008

The Company is currently concluding the Appeals administrative review of the IRS examination of tax year 2003 and has other matters under review by various taxing authorities, including the examination of tax years 2005 and 2006 by the IRS. The Company believes its reported tax positions are technically sound and its “uncertain” tax position liabilities at September 30, 2008 adequately reflect the probable resolution of these items.

 

8


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

FIN 48 Disclosures

There was a $3.8 million reduction to the reserve for the Company’s uncertain tax positions for the three and nine months ended September 30, 2008 due to an IRS settlement on the taxability of a timberland sale treated as an involuntary conversion. For a detail of the Company’s uncertain tax positions, please refer to Note 9 – Income Taxes in the 2007 Annual Report on Form 10-K.

 

5.

RESTRICTED DEPOSITS

For certain real estate sales to qualify for LKE treatment, the sales proceeds must be deposited with a third party intermediary and accounted for as restricted cash until qualifying replacement property is acquired. In the event that LKE purchases are not completed, the proceeds are returned to the Company and reclassified as cash after 180 days. As of September 30, 2008 and December 31, 2007, the Company had $5.4 million and $10.0 million, respectively, of proceeds from real estate sales classified as restricted cash in “Other assets,” which were on deposit with an LKE intermediary.

 

6.

SHAREHOLDERS’ EQUITY

An analysis of shareholders’ equity for the nine months ended September 30, 2008 and the year ended December 31, 2007 is shown below (share amounts not in thousands):

 

     Common Shares     Retained
Earnings
    Accumulated
Other
Comprehensive
(Loss) Income
    Shareholders’
Equity
 
     Shares     Amount        

Balance, December 31, 2006

   76,879,826     $ 450,636     $ 495,988     $ (28,646 )   $ 917,978  

Net income

   —         —         174,269       —         174,269  

Dividends ($1.94 per share)

   —         —         (150,929 )     —         (150,929 )

Issuance of shares under incentive stock plans

   1,412,781       18,891       —         —         18,891  

Stock-based compensation expense

   —         13,478       —         —         13,478  

Warrants and hedge, net

   —         (355 )     —         —         (355 )

Excess tax benefit on stock-based compensation

   —         7,907       —         —         7,907  

Repurchase of common shares

   (75,911 )     (3,150 )     —         —         (3,150 )

Net loss from pension and postretirement plans

   —         —         —         (3,997 )     (3,997 )

Foreign currency translation adjustment

   —         —         —         7,005       7,005  
                                      

Balance, December 31, 2007

   78,216,696     $ 487,407     $ 519,328     $ (25,638 )   $ 981,097  

Net income

   —         —         107,721       —         107,721  

Dividends ($1.50 per share)

   —         —         (117,864 )     —         (117,864 )

Issuance of shares under incentive stock plans

   691,663       8,254       —         —         8,254  

Stock-based compensation expense

   —         10,187       —         —         10,187  

Excess tax benefit on stock-based compensation

   —         3,406       —         —         3,406  

Repurchase of common shares

   (84,496 )     (3,738 )     —         —         (3,738 )

Amortization of pension and postretirement costs

   —         —         —         3,779       3,779  

Benefit plan amendment

   —         —         —         16,388       16,388  

Foreign currency translation adjustment

   —         —         —         (7,333 )     (7,333 )
                                      

Balance, September 30, 2008

   78,823,863     $ 505,516     $ 509,185     $ (12,804 )   $ 1,001,897  
                                      

 

9


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

7.

TIMBERLANDS ACQUISITION

In April 2008, the Company acquired approximately 56,300 acres of timberlands in the state of Washington for $213 million, funding the acquisition with $128 million of cash and borrowings from the Company’s existing credit facility. This acquisition increased the Company’s existing holdings of merchantable Douglas fir and western hemlock timber and was accounted for as an asset purchase.

 

8.

SEGMENT INFORMATION

Rayonier operates in four reportable business segments as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”): Timber, Real Estate, Performance Fibers, and Wood Products. Timber sales include all activities that relate to the harvesting of timber. Real Estate sales currently include the sale of all properties, including those designated for higher and better use (“HBU”). The assets of the Real Estate segment include HBU property held by the Company’s real estate subsidiary, TerraPointe LLC, and certain parcels previously reported in the Timber segment. Allocations of depletion expense and non-cash costs of real estate sold are recorded in the Real Estate segment when it sells an asset from the Timber segment. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of the Company’s lumber operations. The Company’s remaining operations include harvesting and selling timber acquired from third parties (log trading). As permitted by SFAS 131, these operations are combined and reported in an “Other” category. Sales between operating segments are made based on fair market value, and intercompany profit or loss is eliminated in consolidation. The Company evaluates financial performance based on the operating income of the segments.

Operating income, as presented in the Condensed Consolidated Statements of Income and Comprehensive Income, is equal to segment income (loss). Certain income (loss) items in the Condensed Consolidated Statements of Income and Comprehensive Income are not allocated to segments. These items, which include gains (losses) from certain asset dispositions, interest income (expense), miscellaneous income (expense) and income tax (provision) benefit, are not considered by Company management to be part of segment operations.

In August 2008, the Company’s New Zealand business was classified as held for sale and its operations are shown as discontinued operations (see Note 2—Assets Held for Sale). These operations were previously included in the Timber and Other segments. The operating results of the JV and RNZL have been segregated from continuing operations in the Condensed Consolidated Statements of Income and Comprehensive Income and reported as discontinued operations for all periods presented. The assets and liabilities have been classified as “Assets Held for Sale” at September 30, 2008.

Total assets, sales, operating income (loss) and depreciation, depletion and amortization by segment including Corporate were as follows:

 

     September 30,
2008
   December 31,
2007

ASSETS

     

Timber

   $ 1,297,716    $ 1,204,253

Real Estate

     85,699      65,101

Performance Fibers

     504,419      466,909

Wood Products

     30,866      29,307

Other Operations

     21,866      29,671

Assets Held for Sale

     68,549      —  

Corporate and other

     131,850      283,800
             

TOTAL

   $ 2,140,965    $ 2,079,041
             

 

10


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2008     2007     2008     2007  

SALES

        

Timber

   $ 40,486     $ 47,433     $ 137,900     $ 163,076  

Real Estate

     26,014       55,963       78,790       106,113  

Performance Fibers

     210,096       188,800       572,143       523,022  

Wood Products

     24,098       24,291       67,499       67,758  

Other Operations

     7,448       7,628       21,900       30,015  

Corporate and other

     —         —         —         36  
                                

TOTAL

   $ 308,142     $ 324,115     $ 878,232     $ 890,020  
                                
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2008     2007     2008     2007  

OPERATING INCOME (LOSS)

        

Timber (a)

   $ (582 )   $ 11,916     $ 20,362     $ 46,575  

Real Estate

     14,017       47,672       50,401       86,826  

Performance Fibers

     43,029       43,075       116,832       101,155  

Wood Products

     327       (1,461 )     (2,555 )     (5,470 )

Other Operations

     (358 )     (597 )     (122 )     (1,142 )

Corporate and other

     (7,421 )     (8,938 )     (22,668 )     (26,329 )
                                

TOTAL

   $ 49,012     $ 91,667     $ 162,250     $ 201,615  
                                
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2008     2007     2008     2007  

DEPRECIATION, DEPLETION AND AMORTIZATION

        

Timber (b)

   $ 19,636     $ 17,473     $ 59,110     $ 65,408  

Real Estate

     5,155       1,360       10,483       4,515  

Performance Fibers

     14,028       16,607       38,029       49,738  

Wood Products

     1,161       1,436       3,967       4,632  

Other Operations

     7       9       24       39  

Corporate and other

     151       63       424       213  
                                

TOTAL

   $ 40,138     $ 36,948     $ 112,037     $ 124,545  
                                

 

  (a)

Nine months ended September 30, 2007 includes a $10.1 million forest fire loss.

 

  (b)

Nine months ended September 30, 2007 includes $9.6 million of non-cash costs related to fire losses.

 

9.

FINANCIAL INSTRUMENTS

Commodity Swap Agreements

The Company enters into commodity forward contracts to fix some of its fuel oil and natural gas costs at its Performance Fibers mills. The Company’s commodity forward contracts do not qualify for hedge accounting under SFAS 133 and instead are required to be marked-to-market.

 

11


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

During the three and nine months ended September 30, 2008, the Company realized a loss of $0.3 million and a gain of $0.8 million, respectively, on fuel oil forward contracts. During the three and nine months ended September 30, 2007, the Company realized gains of $0.1 million and $0.3 million, respectively, on fuel oil forward contracts. The mark-to-market adjustments are recorded in “Other operating income, net.” The mark-to-market valuation on outstanding fuel oil forward contracts at September 30, 2008 resulted in a liability of $0.2 million. At December 31, 2007, there were no outstanding fuel oil or natural gas forward contracts.

 

10.

GUARANTEES

The Company provides financial guarantees as required by creditors, insurance programs and state and foreign governmental agencies. As of September 30, 2008, the following financial guarantees were outstanding:

 

     Maximum
Potential
Payment
   Carrying
Amount of
Liability

Standby letters of credit (1)

   $ 71,778    $ 62,491

Guarantees (2)

     4,919      63

Surety bonds (3)

     8,141      1,409
             

Total

   $ 84,838    $ 63,963
             

 

  (1)

Approximately $62 million of the standby letters of credit serve as credit support for industrial revenue bonds. The remaining letters of credit support obligations under various insurance related agreements, primarily workers’ compensation and pollution liability policy requirements. These letters of credit expire at various dates during 2008 and 2009, and will be renewed as required.

 

  (2)

In conjunction with RNZ’s sale of timberlands to the New Zealand JV in October 2005, the Company guaranteed five years of Crown Forest license obligations. The JV is the primary obligor and has posted a bank performance bond with the New Zealand government. If the JV fails to pay the obligation, the New Zealand government will demand payment from the bank that posted the bond. If the bank defaults on the bond, the Company would then have to perform. As of September 30, 2008, two annual payments, of $1.2 million each, remain. This guarantee expires in 2010.

In conjunction with a timberland sale and note monetization in the first quarter of 2004, the Company issued a make-whole agreement pursuant to which it guaranteed $2.5 million of obligations of a qualified special purpose entity that was established to complete the monetization. At September 30, 2008 and December 31, 2007, the Company has recorded a de minimus liability to reflect the fair market value of its obligation to perform under the make-whole agreement.

 

  (3)

Rayonier issued surety bonds primarily to secure timber in the State of Washington and to provide collateral for the Company’s workers’ compensation self-insurance program in that state. These surety bonds expire at various dates during 2008 and 2009, and are renewed as required.

 

11.

LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

The Company’s dispositions and discontinued operations include its Port Angeles, WA mill, which was closed in 1997; Southern Wood Piedmont Company (“SWP”), which ceased operations in 1989 except for investigation and remediation activities; the Eastern Research Division (“ERD”), which ceased operations in 1981; and other miscellaneous assets held for disposition. SWP is subject to the Resource Conservation and Recovery Act (“RCRA”), or has been designated a potentially responsible party, or has had other claims made against it, under the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) and/or other federal or state statutes relating to the investigation and remediation of environmentally-impacted sites, with respect to 10 former SWP wood treating sites which are no longer operating.

 

12


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

An analysis of activity in the liabilities for dispositions and discontinued operations for the nine months ended September 30, 2008 and the year ended December 31, 2007, is as follows:

 

     September 30,
2008
    December 31,
2007
 

Balance, January 1,

   $ 113,685     $ 122,516  

Expenditures charged to liabilities

     (5,142 )     (8,575 )

Reductions to liabilities

     (1,451 )     (256 )
                

Balance, end of period

     107,092       113,685  

Less: Current portion

     (10,474 )     (10,069 )
                

Non-current portion

   $ 96,618     $ 103,616  
                

Rayonier has identified specific liabilities for three SWP sites (Augusta, GA, Spartanburg, SC, and East Point, GA) as material and requiring separate disclosure, which were presented in the Company’s 2007 Annual Report on Form 10-K. There have not been any significant changes in these sites’ liability reserves for the nine months ended September 30, 2008. Rayonier accounts for environmental liabilities on an undiscounted basis. For an analysis of the activity for the three years ended December 31, 2007 and a brief description of these individually material sites, see the Company’s 2007 Annual Report on Form 10-K, Note 15 to Consolidated Financial Statements.

The Company charges expenditures for environmental remediation, monitoring and other costs for all dispositions and discontinued operations against its liabilities for dispositions and discontinued operations. The Company believes established liabilities are sufficient for costs expected to be incurred over the next 20 years with respect to its dispositions and discontinued operations. Remedial actions for these sites vary, but may include, among other remedies, removal or treatment of contaminated soils, recovery and treatment/remediation of groundwater, and source remediation and/or control.

In addition, the Company is exposed to the risk of reasonably possible additional losses in excess of the established liabilities. As of September 30, 2008, this amount could range up to $30 million and arises from uncertainty over the availability or effectiveness of certain remediation technologies, additional or different contamination that may be discovered, development of new or improved environmental remediation technologies, changes in applicable law and the exercise of discretion in interpretation of applicable law and regulations by governmental agencies.

The reliability and precision of cost estimates for these sites and the amount of actual future environmental costs can be impacted by various factors, including but not limited to: significant changes in discharge or treatment volumes, requirements to perform additional or different remediation, changes in environmental remediation technologies, the extent of groundwater contamination migration, additional findings of contaminated soil or sediment off-site, remedy selection, and the outcome of negotiations with federal and state agencies. Additionally, the potential for Brownfield (environmentally impacted site considered for re-development) treatment of a site, or other similar projects, could accelerate expenditures as well as impact the amount and/or type of remediation required, as could new laws, regulations and the exercise of discretion in interpretation of applicable law and regulations by governmental agencies. Based on information currently available, the Company does not believe that any future changes in estimates, if necessary, would materially affect its consolidated financial position or results of operations.

 

12.

CONTINGENCIES

From time to time, Rayonier may become liable with respect to pending and threatened litigation and environmental and other matters. The following updates or repeats commentary included in the 2007 Annual Report on Form 10-K.

The Company has been named as a defendant in various other lawsuits and claims arising in the normal course of business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, it has in certain cases retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance, and general liability. These other lawsuits and claims, either individually or in the aggregate, are not expected to have a material effect on the Company’s financial position, results of operations, or cash flow.

 

13


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

Legal Proceedings

Combe Fill South—In 1998, the U.S. Environmental Protection Agency (“EPA”) and the New Jersey Department of Environmental Protection (“DEP”) filed separate lawsuits against Rayonier Inc., and approximately 30 other defendants, in the U.S. District Court, District of New Jersey, seeking recovery of current and future response costs and natural resource damages under applicable federal and state law relating to a contaminated landfill in Chester Township, New Jersey, referred to as Combe Fill South (“Combe”). It is alleged that the Company’s former ERD in Whippany, New Jersey sent small quantities of dumpster waste, via a contract hauler, to Combe in the 1960s and early 1970s. The Company is working with other defendants in a joint defense group, which subsequently filed third-party actions against over 200 parties seeking contribution. A court-ordered mediation process has been ongoing. In second quarter of 2008, a tentative settlement of this matter was reached, subject to finalization of documentation and court approval, resulting in the Company’s liability of approximately $0.3 million, a reduction of the prior reserve by $2.1 million.

Jesup Mill Consent Decree—In November 2007, the Company and the Environmental Protection Division of the Georgia Department of Natural Resources (“EPD”) reached agreement, subject to public comment, on a consent decree that would resolve certain issues relating to the color of the Jesup mill’s permitted effluent discharged to the Altamaha River. Under the consent decree, Rayonier has agreed to implement a color reduction plan which will include installation of additional brown stock washing capacity (to better remove residual pulping liquors from cooked wood pulp) and oxygen delignification technology (which reduces the lignin content in the pulp prior to bleaching), spill recovery systems and modifications to certain operating practices. These projects will be completed over a seven year period pursuant to a time frame set forth in the consent decree, and the costs are expected to approximate $75.0 million. The consent decree also provides for decreasing color limits in the mill’s effluent over the seven year period as projects are completed. No citations, fines or penalties are imposed by the consent decree, except that stipulated penalties may be assessed by EPD in the event that the projects are not completed by the agreed schedule. The public comment period has passed and the consent decree is now final.

East Point, Georgia Notice of Violation (“NOV”)—On March 28, 2008, SWP received an NOV and Proposed Consent Order (the “Order”) from EPD relating to its East Point, Georgia site. The Order asserts that SWP violated conditions in its RCRA Part B permit, specifically related to SWP’s alleged failure to report the presence of oil (referred to as DNAPL, or dense non-aqueous phase liquid) in a monitoring well. Under the terms of the Order, EPD proposed a fine of $0.8 million and is demanding that SWP perform a facility-wide remedial investigation; also, based on such investigation, EPD has required that SWP prepare a new corrective action plan for the facility. Finally, EPD is requesting an immediate increase in SWP’s financial assurance for the site to $17.6 million from the current level of approximately $4.0 million. (Note that financial assurance is provided for SWP via a Rayonier Inc. guaranty.) The Company has conducted an analysis of the claims and is currently in discussions with EPD. If no acceptable resolution can be reached, the Company will vigorously defend this matter. The Company believes its liabilities at September 30, 2008 adequately reflect the probable costs to be incurred upon the ultimate resolution of these matters.

Environmental Matters

The Company is subject to stringent environmental laws and regulations concerning air emissions, water discharges, waste handling and disposal, and forestry operations. Such environmental laws and regulations include the Federal Clean Air Act, the Clean Water Act, RCRA, CERCLA, the Endangered Species Act, and similar state laws and regulations. Management closely monitors its environmental responsibilities, and believes that the Company is in substantial compliance with current environmental requirements. Notwithstanding Rayonier’s current compliance status, many of its operations are subject to stringent and constantly evolving environmental requirements, which are often the result of legislation, regulator discretion, regulation and negotiation. As such, contingencies in this area include, without limitation:

 

   

The Company’s manufacturing facilities operate in accordance with various permits, which often impose conditions that require significant expenditures to ensure compliance. Upon renewal and renegotiation of these permits, the issuing agencies often seek to impose new or additional conditions, which could adversely affect the Company’s operations and financial performance.

 

   

As environmental laws and regulations change, and regulatory administrative and judicial interpretations of new and existing laws and regulations are made, the Company’s operations may be adversely affected.

 

   

In Rayonier’s forestry operations, federal, state and local laws and regulations intended to protect threatened and endangered animal and plant species and their habitat, as well as wetlands and waterways, limit, and in some cases may prevent, timber harvesting, road construction and other activities on private lands. For example, Washington, where the Company holds approximately 426,000 acres of timberlands, has among the most stringent forestry laws and regulations in the country.

 

   

Environmental requirements relating to real estate development, and especially in respect of wetland delineation and mitigation, stormwater management, drainage, waste disposal, and potable water supply and protection, may significantly impact the size, scope, timing, and financial returns of the Company’s projects. Moreover, multiple permits are often required for a project, and may involve a lengthy application process.

 

   

The Company’s discontinued operations with historical environmental contamination are subject to a number of federal, state, and local laws. As these requirements change over time, they may mandate more stringent levels of soil and groundwater investigation, remediation, and monitoring. While management believes that the Company’s current estimates are adequate, future changes to these legal requirements could adversely affect the cost and timing of its activities on these sites.

 

   

Over time, the complexity and stringency of environmental laws and regulations have increased significantly, and the cost of compliance with these laws and regulations has also increased. For example, over time, states have tightened standards for the protection of groundwater and rivers and other waterways, as well as soil. In general, management believes these trends will continue.

It is the opinion of management that substantial expenditures will be required over the next 10 years in the area of environmental compliance. See Note 11—Liabilities for Dispositions and Discontinued Operations for additional information regarding the Company’s environmental liabilities.

 

13.

EMPLOYEE BENEFIT PLANS

The Company has four qualified non-contributory defined benefit pension plans and postretirement plans, which collectively cover substantially all employees hired prior to January 2006, and an unfunded pension plan that provides benefits in excess of amounts allowable under current tax law in the qualified plans. Employee benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change.

In September 2008, the Company changed its postretirement medical plan for active and retired salaried employees to shift all retiree medical costs to the plan participants over a three year phase-out period. Accordingly, at the beginning of 2012, the Company’s intent is to no longer incur retiree medical costs for any retired salary plan participants. The change was accounted for as a negative plan amendment and curtailment which resulted in a reduction to the retiree medical liability. The net impact of the reduction was an unrecognized gain in accumulated other comprehensive income of $7.7 million which will be amortized over 1.9 years, the average remaining service period of the remaining active participants.

 

14


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

The net periodic benefit cost for the Company’s pension and postretirement plans (medical and life insurance) for the three and nine months ended September 30, 2008 and 2007 are shown in the following table:

 

     Pension     Postretirement
     Three Months Ended
September 30,
    Three Months Ended
September 30,
     2008     2007     2008     2007

Components of Net Periodic Benefit Cost

        

Service cost

   $ 1,718     $ 1,571     $ 138     $ 167

Interest cost

     4,142       3,722       287       656

Expected return on plan assets

     (5,215 )     (4,840 )     —         —  

Amortization of prior service cost

     358       363       (307 )     194

Amortization of losses

     1,211       1,094       139       317
                              

Net periodic benefit cost

   $ 2,214     $ 1,910     $ 257     $ 1,334
                              

 

     Pension     Postretirement
     Nine Months Ended
September 30,
    Nine Months Ended
September 30,
     2008     2007     2008    2007

Components of Net Periodic Benefit Cost

         

Service cost

   $ 5,022     $ 5,074     $ 479    $ 489

Interest cost

     12,109       10,800       1,595      1,916

Expected return on plan assets

     (15,490 )     (13,450 )     —        —  

Amortization of prior service cost

     1,042       1,060       67      568

Amortization of losses

     3,540       3,039       725      926
                             

Net periodic benefit cost

   $ 6,223     $ 6,523     $ 2,866    $ 3,899
                             

The Company does not have any required pension plan contributions for 2008. However, the Company made a discretionary contribution of $8.0 million during the third quarter 2008.

 

14.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated Other Comprehensive Income (Loss) was comprised of the following as of September 30, 2008 and December 31, 2007:

 

     September 30,
2008
    December 31,
2007
 

Foreign currency translation adjustments

   $ 26,964     $ 34,297  

Unrecognized components of employee benefit plans, net of tax

     (39,768 )     (59,935 )
                

Total

   $ (12,804 )   $ (25,638 )
                

During the nine months ended September 30, 2008, the decrease in net foreign currency translation adjustments was due to the weakening of the New Zealand dollar against the U.S. dollar. The decrease in the unrecognized components of employee benefit plans was mainly due to a third quarter $16.4 million adjustment for the retiree medical benefit plan amendment (see Note 13—Employee Benefit Plans for further discussion). Amortization of unrecognized components of employee pension and postretirement plan expense of $1.0 million and $3.8 million was recognized during the three and nine months ended September 30, 2008, respectively.

 

15


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

15.

CONSOLIDATING FINANCIAL STATEMENTS

In October 2007, Rayonier TRS Holdings Inc. (“TRS”), a wholly-owned subsidiary of Rayonier Inc., issued $300 million of 3.75% Senior Exchangeable Notes due 2012. The notes are guaranteed by Rayonier Inc. and are non-callable. In connection with these exchangeable notes, the Company provides the following condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in wholly-owned subsidiaries which are eliminated upon consolidation and the allocation of certain expenses of Rayonier Inc., incurred for the benefit of its subsidiaries.

 

16


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands unless otherwise noted)

 

 

     Condensed Consolidating Statements of Income
For the Three Months Ended September 30, 2008
 
     Rayonier Inc.
(Parent
Guarantor)
    Rayonier TRS
Holdings Inc.
(Issuer)
    Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-guarantors)
    All Other
Subsidiaries
(Non-guarantors)
    Consolidating
Adjustments
    Total
Consolidated
 

SALES

   $ —       $ —       $ 284,756     $ 31,907     $ (8,521 )   $ 308,142  
                                                

Costs and Expenses

     —         —         —         —         —      

Cost of sales

     —         —         236,544       28,417       (21,400 )     243,561  

Selling and general expenses

     2,606       —         12,735       817       —         16,158  

Other operating expense (income), net

     60       —         791       (1,440 )     —         (589 )
                                                
     2,666       —         250,070       27,794       (21,400 )     259,130  

OPERATING (LOSS) INCOME

     (2,666 )     —         34,686       4,113       12,879       49,012  

Interest expense

     1,076       (3,165 )     (7,237 )     (1,161 )     —         (10,487 )

Interest and miscellaneous income (expense), net

     901       (773 )     (1,019 )     1,224       (34 )     299  

Equity in income from subsidiaries

     27,839       13,318       —         —         (41,157 )     —    
                                                

INCOME BEFORE INCOME TAXES

     27,150       9,380       26,430       4,176       (28,312 )     38,824  

Income tax benefit (provision)

     3,231       1,438       (3,780 )     —         —         889  
                                                

INCOME FROM CONTINUING OPERATIONS

     30,381       10,818       22,650       4,176       (28,312 )     39,713  
                                                

DISCONTINUED OPERATIONS, NET

            

Loss on discontinued operations, net

     (627 )     —         (9,332 )     —         —         (9,959 )
                                                

NET INCOME

   $ 29,754     $ 10,818     $ 13,318     $ 4,176     $ (28,312 )   $ 29,754  
                                                

 

17


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands unless otherwise noted)

 

     Condensed Consolidating Statements of Income
For the Three Months Ended September 30, 2007
 
     Rayonier Inc.
(Parent
Guarantor)
    Rayonier TRS
Holdings Inc.
(Issuer)
   Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-guarantors)
    All Other
Subsidiaries
(Non-guarantors)
    Consolidating
Adjustments
    Total
Consolidated
 

SALES

   $ —       $ —      $ 247,929     $ 87,273     $ (11,087 )   $ 324,115  
                                               

Costs and Expenses

             

Cost of sales

     407       —        199,568       28,462       (11,124 )     217,313  

Selling and general expenses

     3,667       —        12,338       867       —         16,872  

Other operating (income) expense, net

     (200 )     —        2,186       (3,723 )     —         (1,737 )
                                               
     3,874       —        214,092       25,606       (11,124 )     232,448  

OPERATING (LOSS) INCOME

     (3,874 )     —        33,837       61,667       37       91,667  

Interest expense

     (2,148 )     —        (7,888 )     (4,943 )     —         (14,979 )

Interest and miscellaneous income (expense), net

     465       —        (996 )     1,830       —         1,299  

Equity in income from subsidiaries

     84,086       24,559      —         —         (108,645 )     —    
                                               

INCOME BEFORE INCOME TAXES

     78,529       24,559      24,953       58,554       (108,608 )     77,987  

Income tax provision

     (7,214 )     —        (1,406 )     —         936       (7,684 )
                                               

INCOME FROM CONTINUING OPERATIONS

     71,315       24,559      23,547       58,554       (107,672 )     70,303  
                                               

DISCONTINUED OPERATIONS, NET

             

Income on discontinued operations, net

     142       —        1,012       —         —         1,154  
                                               

NET INCOME

   $ 71,457     $ 24,559      24,559     $ 58,554     $ (107,672 )   $ 71,457  
                                               

 

18


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands unless otherwise noted)

 

     Condensed Consolidating Statements of Income
For the Nine Months Ended September 30, 2008
 
     Rayonier Inc.
(Parent
Guarantor)
    Rayonier TRS
Holdings Inc.
(Issuer)
    Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-guarantors)
    All Other
Subsidiaries
(Non-guarantors)
    Consolidating
Adjustments
    Total
Consolidated
 

SALES

   $ —       $ —       $ 758,066     $ 327,734     $ (207,568 )   $ 878,232  
                                                

Costs and Expenses

            

Cost of sales

     —         —         628,027       125,817       (80,467 )     673,377  

Selling and general expenses

     7,952       —         37,406       2,388       —         47,746  

Other expense (income), net

     1       —         (842 )     (4,300 )     —         (5,141 )
                                                
     7,953       —         664,591       123,905       (80,467 )     715,982  

OPERATING (LOSS) INCOME

     (7,953 )     —         93,475       203,829       (127,101 )     162,250  

Interest expense

     1,704       (9,470 )     (21,152 )     (4,497 )     4       (33,411 )

Interest and miscellaneous income (expense), net

     2,679       (2,320 )     (1,768 )     3,807       (99 )     2,299  

Equity in income from subsidiaries

     109,722       41,186       —         —         (150,908 )     —    
                                                

INCOME BEFORE INCOME TAXES

     106,152       29,396       70,555       203,139       (278,104 )     131,138  

Income tax benefit (provision)

     2,198       4,383       (20,234 )     —         —         (13,653 )
                                                

INCOME FROM CONTINUING OPERATIONS

     108,350       33,779       50,321       203,139       (278,104 )     117,485  
                                                

DISCONTINUED OPERATIONS, NET

            

Loss on discontinued operations, net

     (629 )     —         (9,135 )     —         —         (9,764 )
                                                

NET INCOME

   $ 107,721     $ 33,779     $ 41,186     $ 203,139     $ (278,104 )   $ 107,721  
                                                

 

19


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands unless otherwise noted)

 

     Condensed Consolidated Statements of Income
For the Nine Months Ended September 30, 2007
 
     Rayonier Inc.
(Parent
Guarantor)
    Rayonier TRS
Holdings Inc.
(Issuer)
   Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-guarantors)
    All Other
Subsidiaries
(Non-guarantors)
    Consolidating
Adjustments
    Total
Consolidated
 

SALES

   $ —       $ —      $ 688,979     $ 228,642     $ (27,601 )   $ 890,020  
                                               

Costs and Expenses

             

Cost of sales

     268       —        572,234       101,668       (28,049 )     646,121  

Selling and general expenses

     10,750       —        35,358       2,533       —         48,641  

Other operating (income) expense, net

     (279 )     —        324       (6,402 )     —         (6,357 )
                                               
     10,739       —        607,916       97,799       (28,049 )     688,405  

OPERATING INCOME

     (10,739 )     —        81,063       130,843       448       201,615  

Interest expense

     (2,318 )     —        (25,184 )     (14,744 )     34       (42,212 )

Interest and miscellaneous income (expense), net

     1,135       —        (3,239 )     5,335       (34 )     3,197  

Equity in income from subsidiaries

     161,551       42,262      —         —         (203,813 )     —    
                                               

INCOME BEFORE INCOME TAXES

     149,629       42,262      52,640       121,434       (203,365 )     162,600  

Income tax provision

     (9,938 )     —        (11,844 )     —         (2,593 )     (24,375 )
                                               

INCOME FROM CONTINUING OPERATIONS

     139,691       42,262      40,796       121,434       (205,958 )     138,225  
                                               

DISCONTINUED OPERATIONS, NET

             

Income on discontinued operations, net

     157       —        1,466       —         —         1,623  
                                               

NET INCOME

   $ 139,848     $ 42,262    $ 42,262     $ 121,434     $ (205,958 )   $ 139,848  
                                               

 

20


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2008

(Unaudited)

(Dollars in thousands unless otherwise noted)

 

     Condensed Consolidating Balance Sheets
As of September 30, 2008
     Rayonier Inc.
(Parent Guarantor)
   Rayonier TRS
Holdings, Inc.
(Issuer)
    Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-guarantors)
    All Other
Subsidiaries
(Non-guarantors)
   Consolidating
Adjustments
    Total
Consolidated

ASSETS

              

CURRENT ASSETS

              

Cash and cash equivalents

   $ 8,115    $ —       $ 37,416     $ 9,461    $ —       $ 54,992

Accounts receivable, less allowance for doubtful accounts

     954      —         89,016       3,872      —         93,842

Inventory

     —        —         131,000       —        (35,562 )     95,438

Other current assets

     6,131      —         40,976       1,537      —         48,644

Assets held for sale

     80,637      —         (12,088 )     —        —         68,549

Intercompany interest receivable

     —        —         0       808      (808 )     —  
                                            

Total current assets

     95,837      —         286,320       15,678      (36,370 )     361,465
                                            

TIMBER AND TIMBERLANDS NET OF DEPLETION AND AMORTIZATION

     1,807      —         98,330       1,173,136      —         1,273,273

NET PROPERTY, PLANT AND EQUIPMENT

     2,315      —         348,540       1,448      —         352,303

INVESTMENT IN SUBSIDIARIES

     969,840      469,118       —         —        (1,438,958 )     —  

INTERCOMPANY/NOTES RECEIVABLE

     24,481      —         —         1,938      (26,419 )     —  

OTHER ASSETS

     24,524      16,139       487,576       12,412      (386,727 )     153,924
                                            

TOTAL ASSETS

   $ 1,118,804    $ 485,257     $ 1,220,766     $ 1,204,612    $ (1,888,474 )   $ 2,140,965
                                            

LIABILITIES AND SHAREHOLDERS’ EQUITY

              

CURRENT LIABILITIES

              

Accounts payable

   $ 2,626    $ —       $ 62,931     $ 2,136    $ —       $ 67,693

Bank loans and current maturities

     —        —         23,920       —        —         23,920

Accrued taxes

     519      (7,634 )     25,563       7,127      —         25,575

Accrued payroll and benefits

     9,781      —         10,727       1,318      —         21,826

Accrued interest

     26      5,188       7,305       1,124      —         13,643

Accrued customer incentives

     —        —         10,324       —        —         10,324

Other current liabilities

     7,655      —         13,560       16,759      —         37,974

Payable to Rayonier

     —        —         —         —        —         —  

Current liabilities for dispositions and discontinued operations

     —        —         10,474       —        —         10,474

Liabilities associated with assets held for sale

     53        7,286       —        —         7,339
                                            

Total current liabilities

     20,660      (2,446 )     172,090       28,464      —         218,768
                                            

LONG-TERM DEBT

     20,000      300,000       397,760       52,579      —         770,339

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

     —        —         96,618       —        —         96,618

PENSION AND OTHER POSTRETIREMENT BENEFITS

     37,222      —         (429 )     —        —         36,793

OTHER NON-CURRENT LIABILITIES

     13,775      —         2,089       17,089      (16,403 )     16,550

INTERCOMPANY PAYABLES

     25,250      —         83,520       5,502      (114,272 )     —  
                                            

TOTAL LIABILITIES

     116,907      297,554       751,648       103,634      (130,675 )     1,139,068
                                            

TOTAL SHAREHOLDERS’ EQUITY

     1,001,897      187,703       469,118       1,100,978      (1,757,799 )     1,001,897
                                            

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,118,804    $ 485,257     $ 1,220,766     $ 1,204,612    $ (1,888,474 )   $ 2,140,965
                                            

 

21


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollar amounts in thousands unless otherwise stated)

 

     Condensed Consolidating Balance Sheets
As of December 31, 2007
     Rayonier Inc.
(Parent Guarantor)
   Rayonier TRS
Holdings Inc.
(Issuer)
    Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-guarantors)
    All Other
Subsidiaries
(Non-guarantors)
   Consolidating
Adjustments
    Total
Consolidated

ASSETS

              

CURRENT ASSETS

              

Cash and cash equivalents

   $ 4,211    $ —       $ 173,029     $ 3,841    $ —       $ 181,081

Accounts receivable, less allowance for doubtful accounts

     217      —         79,142       1,709      —         81,068

Inventory

     —        —         88,979       —        (4,688 )     84,291

Intercompany interest receivable

     —        —         —         1,137      (1,137 )     —  

Other current assets

     12,823      —         32,226       4,731      —         49,780
                                            

Total current assets

     17,251      —         373,376       11,418      (5,825 )     396,220
                                            

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION

     1,819      —         36,015       1,079,385      —         1,117,219

NET PROPERTY, PLANT AND EQUIPMENT

     2,147      —         342,173       1,435      —         345,755

INVESTMENT IN JOINT VENTURE

     89,933      —         (27,167 )     —        —         62,766

INVESTMENT IN SUBSIDIARIES

     918,269      494,063       —         —        (1,412,332 )     —  

INTERCOMPANY/NOTES RECEIVABLE

     53,397      —         12,851       14,819      (81,067 )     —  

OTHER ASSETS

     28,692      18,772       386,762       13,260      (290,405 )     157,081
                                            

TOTAL ASSETS

   $ 1,111,508    $ 512,835     $ 1,124,010     $ 1,120,317    $ (1,789,629 )   $ 2,079,041
                                            

LIABILITIES AND SHAREHOLDERS’ EQUITY

              

CURRENT LIABILITIES

              

Accounts payable

   $ 3,123    $ —       $ 60,673     $ 2,428    $ —       $ 66,224

Bank loans and current maturities

     —        —         585       55,000      —         55,585

Accrued taxes

     109      (1,687 )     6,483       2,274      —         7,179

Accrued payroll and benefits

     18,339      —         11,726       —        —         30,065

Accrued interest

     —        2,370       1,100       11      —         3,481

Accrued customer incentives

     —        —         12,350       —        —         12,350

Other current liabilities

     11,719      —         12,598       9,143      —         33,460

Current liabilities for dispositions and discontinued operations

     —        —         10,069       —        —         10,069
                                            

Total current liabilities

     33,290      683       115,584       68,856      —         218,413
                                            

LONG-TERM DEBT

     —        300,000       341,680       52,579      —         694,259

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

     —        —         103,616       —        —         103,616

PENSION AND OTHER POSTRETIREMENT BENEFITS

     67,606      —         (389 )     —        —         67,217

OTHER NON-CURRENT LIABILITIES

     10,333      —         3,521       16,987      (16,402 )     14,439

INTERCOMPANY PAYABLE

     19,182      —         65,935       55,486      (140,603 )     —  
                                            

TOTAL LIABILITIES

     130,411      300,683       629,947       193,908      (157,005 )     1,097,944
                                            

TOTAL SHAREHOLDERS’ EQUITY

     981,097      212,152       494,063       926,409      (1,632,624 )     981,097
                                            

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 1,111,508    $ 512,835     $ 1,124,010     $ 1,120,317    $ (1,789,629 )   $ 2,079,041
                                            

 

22


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollar amounts in thousands unless otherwise stated)

 

     Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2008
 
     Rayonier Inc.
(Parent Guarantor)
    Rayonier TRS
Holdings Inc.
(Issuer)
    Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-guarantors)
    All Other
Subsidiaries
(Non-guarantors)
    Consolidating
Adjustments
    Total
Consolidated
 

CASH PROVIDED BY OPERATING ACTIVITIES

   $ 47,027     $ 18,970     $ 126,401     $ 324,596     $ (268,816 )   $ 248,178  
                                                

INVESTING ACTIVITIES

            

Capital expenditures

     —         —         (50,784 )     (24,068 )     —         (74,852 )

Purchase of timberlands

     —         —         (241,959 )     (167,882 )     180,316       (229,525 )

Decrease in restricted cash

     —         —         —         4,604       —         4,604  

Investment in subsidiaries

     —         11,030       —         —         (11,030 )     —    

Other

     —         —         (10,270 )     1,870       —         (8,400 )
                                                

CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES

     —         11,030       (303,013 )     (185,476 )     169,286       (308,173 )
                                                

FINANCING ACTIVITIES

            

Issuance of debt

     20,000       —         120,000       15,000       —         155,000  

Repayment of debt

     —         —         (40,585 )     (70,000 )     —         (110,585 )

Dividends paid

     (117,639 )     —         —         —         —         (117,639 )

Issuance of common shares

     8,254       —         —         —         —         8,254  

Excess tax benefits on stock-based compensation

     —         —         3,406       —         —         3,406  

Repurchase of common shares

     (3,738 )     —         —         —         —         (3,738 )

Repayment of intercompany notes

     50,000       —         —         (50,000 )     —         —    

Distributions to / from Parent

     —         (30,000 )     (41,030 )     (28,500 )     99,530       —    
                                                

CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES

     (43,123 )     (30,000 )     41,791       (133,500 )     99,530       (65,302 )
                                                

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     —         —         (792 )     —         —         (792 )
                                                

CASH AND CASH EQUIVALENTS

            

Increase (decrease) in cash and cash equivalents

     3,904       —         (135,613 )     5,620       —         (126,089 )

Balance, beginning of year

     4,211       —         173,029       3,841       —         181,081  
                                                

Balance, end of period

   $ 8,115     $ —       $ 37,416     $ 9,461     $ —       $ 54,992  
                                                

 

23


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollar amounts in thousands unless otherwise stated)

 

     Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2007
 
     Rayonier Inc.
(Parent Guarantor)
    Rayonier TRS
Holdings Inc.
(Issuer)
   Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-guarantors)
    All Other
Subsidiaries
(Non-guarantors)
    Consolidating
Adjustments
    Total
Consolidated
 

CASH PROVIDED BY OPERATING ACTIVITIES

   $ 76,577     $ —      $ 58,544     $ 212,863     $ (84,253 )   $ 263,731  
                                               

INVESTING ACTIVITIES

             

Capital expenditures

     —         —        (43,126 )     (24,272 )     —         (67,398 )

Purchase of timberlands and wood chipping facilities

     —         —        (8,970 )     (36,764 )     33,300       (12,434 )

Proceeds from sale of timberlands

     —         —        33,300       —         (33,300 )     —    

Increase in restricted cash

     —         —        —         (396 )     —         (396 )

Other

     —         —        (3,318 )     —         —         (3,318 )
                                               

CASH USED FOR INVESTING ACTIVITIES

     —         —        (22,114 )     (61,432 )     —         (83,546 )
                                               

FINANCING ACTIVITIES

             

Issuance of debt

     —         —        62,000       60,000       —         122,000  

Repayment of debt

     —         —        (100,550 )     (60,000 )     —         (160,550 )

Dividends paid

     (111,628 )     —        —         —         —         (111,628 )

Issuance of common shares

     15,014       —        —         —         —         15,014  

Excess tax benefits on stock-based compensation

     —         —        6,284       —         —         6,284  

Distributions to / from Parent

     —         —        —         (86,500 )     86,500       —    
                                               

CASH USED FOR FINANCING ACTIVITIES

     (96,614 )     —        (32,266 )     (86,500 )     86,500       (128,880 )
                                               

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     —         —        669       —         —         669  
                                               

CASH AND CASH EQUIVALENTS

             

(Decrease) increase in cash and cash equivalents

     (20,037 )     —        4,833       64,931       2,247       51,974  

Balance, beginning of year

     28,551       —        13,867       —         (2,247 )     40,171  
                                               

Balance, end of period

   $ 8,514     $ —      $ 18,700     $ 64,931     $ —       $ 92,145  
                                               

 

24


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Safe Harbor

When we refer to “we”, “us”, “our”, “the Company”, or “Rayonier”, we mean Rayonier Inc. and its consolidated subsidiaries. References herein to “Notes to Financial Statements” refer to the Notes to the Condensed Consolidated Financial Statements of Rayonier Inc. included in Item 1 of this Report.

Certain statements in this document regarding anticipated financial outcomes including earnings guidance, if any, business and market conditions, outlook and other similar statements relating to Rayonier’s future financial and operational performance, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as “may”, “will”, “should”, “expect”, “estimate”, “believe”, “anticipate” and other similar language. Forward-looking statements are not guarantees of future performance and undue reliance should not be placed on these statements.

The following important factors, among others, could cause actual results to differ materially from those expressed in forward-looking statements that may have been made in this document:

 

   

The current turmoil in the credit markets could limit demand for our products and real estate, and affect the overall availability and cost of credit;

 

   

the cyclical and competitive nature of the industries in which we operate;

 

   

fluctuations in demand for, or supply of, our forest products and real estate offerings;

 

   

entry of new competitors into our markets;

 

   

changes in global economic conditions and world events, including political changes in particular regions or countries;

 

   

changes in energy and raw material prices, particularly for our performance fibers and wood products businesses;

 

   

impacts of the rising cost of fuel, including the cost and availability of transportation for our products, both domestically and internationally, and the cost and availability of third party logging and trucking services;

 

   

unanticipated equipment maintenance and repair requirements at our manufacturing facilities;

 

   

the geographic concentration of a significant portion of our timberland;

 

   

our ability to identify, finance and complete timberland acquisitions;

 

   

changes in environmental laws and regulations, including laws regarding air emissions and water discharges, remediation of contaminated sites, timber harvesting, delineation of wetlands, and endangered species, that may restrict or adversely impact our ability to conduct our business, or increase the cost of doing so;

 

   

adverse weather conditions, natural disasters and other catastrophic events such as hurricanes, wind storms and wildfires, which can adversely affect our timberlands and the production, distribution and availability of our products and raw materials such as wood, energy and chemicals;

 

   

interest rate and currency movements;

 

   

our capacity to incur additional debt, and any decision we may make to do so;

 

   

changes in tariffs, taxes or treaties relating to the import and export of our products or those of our competitors;

 

   

the ability to complete like-kind exchanges of property;

 

   

changes in key management and personnel;

 

   

our ability to continue to qualify as a REIT and to fund distributions using cash generated through our taxable REIT subsidiaries; and,

 

   

changes in tax laws that could reduce the benefits associated with REIT status.

In addition, specifically with respect to our Real Estate business, the following important factors, among others, could cause actual results to differ materially from those expressed in forward-looking statements that may have been made in this document:

 

   

the cyclical nature of the real estate business generally, including fluctuations in demand for both entitled and unentitled property;

 

   

the lengthy, uncertain and costly process associated with the ownership, entitlement and development of real estate, especially in Florida, which also may be affected by changes in law, policy and political factors beyond our control;

 

   

the potential for legal challenges to entitlements and permits in connection with our properties;

 

   

unexpected delays in the entry into or closing of real estate transactions;

 

   

the existence of competing developers and communities in the markets in which we own property;

 

   

the pace of development and the rate and timing of absorption of existing entitled property in the markets in which we own property;

 

   

changes in the demographics affecting projected population growth and migration to the southeastern U.S.;

 

   

changes in environmental laws and regulations, including laws regarding water withdrawal and management and delineation of wetlands, that may restrict or adversely impact our ability to sell or develop properties;

 

25


Table of Contents
   

the cost of the development of property generally, including the cost of property taxes, labor and construction materials;

 

   

the timing of construction and availability of public infrastructure; and,

 

   

the availability of financing for real estate development and mortgage loans.

Critical Accounting Policies and Use of Estimates

The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates under different conditions. For a full description of our critical accounting policies, see Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2007 Annual Report on Form 10-K.

Segment Information

We operate in four reportable business segments as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information: Timber, Real Estate, Performance Fibers, and Wood Products. Timber sales include all activities that relate to the harvesting of timber. Real Estate sales currently include the sale of all properties, including those designated for higher and better use (“HBU”). The assets of the Real Estate segment include HBU property held by the Company’s real estate subsidiary, TerraPointe LLC, and certain parcels previously reported in the Timber segment. Allocations of depletion expense and non-cash costs of real estate sold are recorded in the Real Estate segment when it sells an asset from the Timber segment. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of the Company’s lumber operations. Our remaining operations include harvesting and selling timber acquired from third parties (log trading). As permitted by SFAS 131, these operations are combined and reported in an “Other” category. Sales between operating segments are made based on fair market value, and intercompany profit or loss is eliminated in consolidation. We evaluate financial performance based on the operating income of the segments.

Operating income, as presented in the Condensed Consolidated Statements of Income and Comprehensive Income, is equal to segment income(loss). Certain income(loss) items in the Condensed Consolidated Statements of Income and Comprehensive Income are not allocated to segments. These items, which include gains(losses) from certain asset dispositions, interest income(expense), miscellaneous income (expense) and income tax (provision)benefit, are not considered by Company management to be part of segment operations.

In August 2008, the Company’s New Zealand business was classified as held for sale and its operations are shown as discontinued operations (see Note 2—Assets Held for Sale). These operations were previously included in the Timber and Other segments. The Timber and Other segments shown below have been restated to exclude the New Zealand operations.

 

26


Table of Contents

Results of Operations, Three and Nine Months Ended September 30, 2008 Compared to Three and Nine Months Ended September 30, 2007

 

Financial Information (in millions)

   Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2008     2007     2008     2007  

Sales

        

Timber

   $ 40.5     $ 47.4     $ 137.9     $ 163.1  

Real Estate

        

Development

     1.6       —         2.4       31.5  

Rural

     7.3       55.9       43.6       74.6  

Non-Strategic Timberlands

     17.1       —         32.8       —    
                                

Total Real Estate

     26.0       55.9       78.8       106.1  
                                

Performance Fibers

        

Cellulose Specialties

     156.8       137.6       436.5       396.1  

Absorbent Materials

     53.3       51.2       135.6       126.9  
                                

Total Performance Fibers

     210.1       188.8       572.1       523.0  
                                

Wood Products

     24.1       24.3       67.5       67.8  

Other operations

     7.4       7.7       21.9       30.0  
                                

Total Sales

   $ 308.1     $ 324.1     $ 878.2     $ 890.0  
                                

Operating Income (Loss)

        

Timber (a)

   $ (0.6 )   $ 11.9     $ 20.4     $ 46.6  

Real Estate

     14.0       47.7       50.4       86.8  

Performance Fibers

     43.0       43.1       116.8       101.2  

Wood Products

     0.3       (1.5 )     (2.6 )     (5.5 )

Other operations

     (0.3 )     (0.6 )     (0.1 )     (1.1 )

Corporate and other expenses / eliminations

     (7.4 )     (8.9 )     (22.6 )     (26.4 )
                                

Total Operating Income

     49.0       91.7       162.3       201.6  

Interest expense

     (10.5 )     (15.0 )     (33.4 )     (42.2 )

Interest and miscellaneous income, net

     0.3       1.3       2.3       3.2  

Benefit (provision) for income taxes

     0.9       (7.7 )     (13.7 )     (24.4 )
                                

Income from Continuing Operations

     39.7       70.3       117.5       138.2  
                                

Discontinued Operations, Net

     (9.9 )     1.2       (9.8 )     1.6  
                                

Net Income

   $ 29.8     $ 71.5     $ 107.7     $ 139.8  
                                

Diluted Earnings Per Share from Continuing Operations

   $ 0.50     $ 0.89     $ 1.48     $ 1.75  
                                

 

(a)

Timber segment operating income for the nine months ended September 30, 2007 includes a $10.1 million fire loss.

 

27


Table of Contents

Timber

 

Sales (in millions)

        Changes Attributable to:      
     2007    Price     Volume/Mix    Other     2008

Three months ended September 30,

            

Total Sales

   $ 47.4    $ (6.2 )   $ —      $ (0.7 )   $ 40.5
                                    

Nine months ended September 30,

            

Total Sales

   $ 163.1    $ (29.2 )   $ 5.1    $ (1.1 )   $ 137.9
                                    

Timber sales declined for third quarter and year-to-date 2008 from prior year periods as sawlog prices decreased due to the weak housing market and oversupply of salvaged timber in the Northwest from a December 2007 storm.

In the Eastern region, average stumpage prices were up 3 percent for the three months ended September 30, 2008 and down 10 percent for the nine month period. Sales volumes declined 3 percent for the three months ended September 30, 2008 but were 3 percent higher for the nine months ended September 30, 2008 due to strong pulpwood demand.

In the Western region, average prices were down 16 percent and 18 percent for the three and nine months ended September 30, 2008, respectively, from the prior year periods. Price declines were partially offset by a change in sales mix. Stumpage sales volume declined 61 percent and 40 percent for the quarter and year-to-date, respectively, while log sales volume increased 22 percent and 33 percent for the same periods due to salvaged wood sales.

 

Operating Income (Loss) (in millions)

        Changes Attributable to:        
     2007    Price     Volume/Mix     Cost*     2008  

Three months ended September 30,

           

Total Operating Income (Loss)

   $ 11.9    $ (6.2 )   $ (1.8 )   $ (4.5 )   $ (0.6 )
                                       

Nine months ended September 30,

           

Total Operating Income

   $ 46.6    $ (29.2 )   $ (5.8 )   $ 8.8     $ 20.4  
                                       

 

*

For the nine months ended September 30, 2007, operating income includes a $10.1 million charge for forest fire losses.

Operating income decreased for the three and nine months ended September 30, 2008 largely due to depressed sawlog prices and the impact of salvaged timber in the Northwest. Excluding the 2007 fire losses, costs increased during the three and nine months ended September 30, 2008 mostly from higher depletion expense ($3 million in third quarter 2008) in the Northwest related to a second quarter acquisition of timberlands.

Real Estate

 

Sales (in millions)

        Changes Attributable to:      
     2007    Price     Volume/Mix     2008

Three months ended September 30,

         

Development

   $ —      $ —       $ 1.6     $ 1.6

Rural

     55.9      (21.3 )     (27.3 )     7.3

Non-Strategic Timberlands

     —        —         17.1       17.1
                             

Total Sales

   $ 55.9    $ (21.3 )   $ (8.6 )   $ 26.0
                             

Nine months ended September 30,

         

Development

   $ 31.5    $ (0.3 )   $ (28.8 )   $ 2.4

Rural

     74.6      (48.5 )     17.5       43.6

Non-Strategic Timberlands

     —        —         32.8       32.8
                             

Total Sales

   $ 106.1    $ (48.8 )   $ 21.5     $ 78.8
                             

 

28


Table of Contents

Operating Income (in millions)

        Changes Attributable to:      
     2007    Price     Volume/Mix     2008

Three months ended September 30,

         

Total Operating Income

   $ 47.7    $ (21.3 )   $ (12.4 )   $ 14.0
                             

Nine months ended September 30,

         

Total Operating Income

   $ 86.8    $ (48.8 )   $ 12.4     $ 50.4
                             

Sales and operating income decreased for the three months ended September 30, 2008 compared to the prior year period largely due to a $47 million sale of 3,100 acres to an industrial buyer in the third quarter 2007. For the nine months ended September 30, 2008, prices decreased from 2007 due to a shift in sales mix from development properties to non-strategic timberlands. In 2008, the demand for development properties declined due to the weak housing market and we began selling non-strategic timberland holdings that did not meet our investment criteria, which accounted for our increase in volume.

Performance Fibers

 

Sales (in millions)

        Changes Attributable to:      
     2007    Price    Volume/Mix     2008

Three months ended September 30,

          

Cellulose Specialties

   $ 137.6    $ 13.3    $ 5.9     $ 156.8

Absorbent Materials

     51.2      4.7      (2.6 )     53.3
                            

Total Sales

   $ 188.8    $ 18.0    $ 3.3     $ 210.1
                            

Nine months ended September 30,

          

Cellulose Specialties

   $ 396.1    $ 34.6    $ 5.8     $ 436.5

Absorbent Materials

     126.9      13.3      (4.6 )     135.6
                            

Total Sales

   $ 523.0    $ 47.9    $ 1.2     $ 572.1
                            

Sales increased for the three and nine months ended September 30, 2008 from the prior year periods primarily due to higher prices resulting from strong market demand. Also favorably impacting the 2008 results was a net increase in sales volumes as higher cellulose specialties volumes more than offset lower absorbent materials volumes. Cellulose specialties volumes were up for the quarter and the year due to the timing of customer orders. Absorbent materials volumes were down during the third quarter due to timing of customer orders and down for the year due to a product shortage resulting from unplanned maintenance in the first quarter.

 

Operating Income (in millions)

        Changes Attributable to:      
     2007    Price    Volume/Mix    Costs     2008

Three months ended September 30,

          

Total Operating Income

   $ 43.1    $ 18.0    $ 3.1    $ (21.2 )   $ 43.0
                                   

Nine months ended September 30,

             

Total Operating Income

   $ 101.2    $ 47.9    $ 4.4    $ (36.7 )   $ 116.8
                                   

 

29


Table of Contents

Operating income was comparable for the three months and increased for the nine months as favorable price and mix and lower depreciation expense more than offset higher wood, chemical, energy and maintenance costs.

Wood Products

 

Sales (in millions)

   Changes Attributable to:
     2007    Price    Volume/Mix     2008

Three months ended September 30,

          

Total Sales

   $ 24.3    $ 0.9    $ (1.1 )   $ 24.1
                            

Nine months ended September 30,

          

Total Sales

   $ 67.8    $ 0.6    $ (0.9 )   $ 67.5
                            

Sales were consistent with the prior year periods. For the quarter, the slight price improvement reflected an increase in demand coupled with a temporary supply shortage in the market.

 

Operating (Loss) Income (in millions)

   Changes Attributable to:  
     2007     Price    Volume/Mix    Costs    2008  

Three months ended September 30,

             

Total Operating (Loss) Income

   $ (1.5 )   $ 0.9    $ —      $ 0.9    $ 0.3  
                                     

Nine months ended September 30,

             

Total Operating Loss

   $ (5.5 )   $ 0.6    $ —      $ 2.3    $ (2.6 )
                                     

Operating results improved for the three and nine months ended September 30, 2008. The 2008 periods benefited from the price increases and lower log costs compared to the prior year periods.

Other Operations

Sales of $7 million for the third quarter were comparable to the prior year period. For the nine months ended September 30, 2008, sales of $22 million were $8 million below 2007 primarily due to lower log trading prices.

Corporate and Other

Corporate and Other Expenses of $7 million and $23 million for the three and nine months ended September 30, 2008, respectively, were $2 million and $4 million below the prior year periods, respectively, mostly due to lower incentive compensation.

Other Income / Expense

Interest expense decreased $4 million and $9 million for the three and nine months ended September 30, 2008 compared to the prior year periods, respectively. The 2008 expense benefited from a favorable IRS settlement. Also impacting interest expense were lower interest rates resulting from the fourth quarter 2007 debt refinancing which more than offset higher average debt balances due to strategic timberland acquisitions.

Interest and miscellaneous income declined slightly during the three and nine months ended September 30, 2008 due to lower cash balances.

 

30


Table of Contents

Provision for Income Taxes

The effective rate from continuing operations before discrete items was 15.6 percent and 16.0 percent for the three and nine months ended September 30, 2008 compared to 10.1 percent and 14.4 percent for the prior year periods. The increased rates were due to proportionately higher earnings from the Company’s taxable REIT subsidiary.

Including discrete items, the third quarter 2008 effective rate was a benefit of 2.3 percent reflecting $4 million from a settlement with the IRS and other adjustments. In 2007 the comparable effective tax rate was 9.9 percent. See Note 4 - Income Taxes for additional information regarding the provision for income taxes.

Outlook

Given the weak outlook for sawtimber, we expect full year 2008 earnings to be below the prior year period. In Performance Fibers, full year results are expected to improve with strong demand for cellulose specialty products more than offsetting escalating raw material, energy and transportation costs. In Real Estate, we anticipate continued interest for our non-strategic timberlands. Overall, cash available for distribution in 2008 is anticipated to be well above dividend requirements.

Employee Relations

On June 30, 2008, the collective bargaining agreements covering approximately 700 hourly employees at our Jesup mill expired. The parties are working without an agreement while negotiations continue. While there can be no assurance, we expect to reach mutually satisfactory agreements with our unions. Any failure to do so accompanied by a work stoppage could have a material adverse effect on our business, results of operations and financial condition. See Item 1 – Business in the 2007 Annual Report on Form 10-K for more information on employee relations.

Liquidity and Capital Resources

Historically, our operations have generally produced consistent cash flows and required limited capital resources. Short-term borrowings help fund cyclicality and seasonality in working capital needs. Long-term debt has been used to fund major acquisitions. The current turmoil in the financial markets may impact our ability to obtain, and may increase the costs of, future short-term and long-term borrowings. However, on October 1, 2008 we paid $23 million of debt that had matured and we have no other major debt coming due until December 31, 2009 when $122 million in installment notes will mature. See Part II, Item 1a – Risk Factors for more information.

Summary of Liquidity and Financing Commitments (in millions of dollars)

 

     As of September 30,
2008
    As of December 31,
2007
 

Cash and cash equivalents

   $ 55     $ 181  

Total debt

     794       750  

Shareholders’ equity

     1,002       981  

Total capitalization (total debt plus equity)

     1,796       1,731  

Debt to capital ratio

     44 %     43 %

Cash and cash equivalents consisted primarily of marketable securities with maturities at date of acquisition of 90 days or less.

Cash Provided by Operating Activities (in millions of dollars)

 

     2008    2007    Decrease  

Nine months ended September 30,

   $ 248    $ 264    $ (16 )

Cash provided by operating activities decreased $16 million primarily from lower earnings partially offset by reduced working capital requirements due to the timing of interest and tax payments.

Cash Used for Investing Activities (in millions of dollars)

 

     2008     2007     Increase  

Nine months ended September 30,

   $ (308 )   $ (84 )   $ (224 )

 

31


Table of Contents

Cash used for investing activities increased $224 million primarily due to the purchase of $229 million of timberlands in 2008 versus $12 million of timberlands and wood chipping facilities purchased in 2007.

Cash Used for Financing Activities (in millions of dollars)

 

     2008     2007     Decrease

Nine months ended September 30,

   $ (65 )   $ (129 )   $ 64

Cash used for financing activities decreased $64 million primarily due to a $45 million increase in outstanding debt in 2008 to fund timberland acquisitions compared to a $37 million reduction in 2007, partially offset by a decrease in cash proceeds on stock options exercised and an increase in dividend payments.

Expected 2008 Expenditures

We made an $8.0 million discretionary pension contribution in the third quarter of 2008 compared to $20 million last year. No additional contributions are expected in fourth quarter 2008. Income tax payments totaled $1 million in the first nine months of 2008 compared to $10 million in 2007. We expect net tax payments to be $17 million for full year 2008, compared to $26 million for full year 2007. Capital expenditures are expected to range from $105 million to $110 million in 2008. Environmental costs related to dispositions and discontinued operations were $5 million for the nine months ended September 30, 2008; full year expenditures of $8 million are anticipated.

Liquidity Performance Indicators

The discussion below is presented to enhance the reader’s understanding of our liquidity, ability to generate cash and satisfy rating agency and creditor requirements. This information includes two measures of financial results: Earnings before Interest, Taxes, Depreciation, Depletion and Amortization (“EBITDA”) and Adjusted Cash Available for Distribution (“Adjusted CAD”). These measures are not defined by Generally Accepted Accounting Principles (“GAAP”) and the discussion of EBITDA and Adjusted CAD is not intended to conflict with or change any of the GAAP disclosures discussed above. Management considers these measures to be important to estimate the enterprise and shareholder values of the Company as a whole and of its core segments, and for allocating capital resources. In addition, analysts, investors and creditors use these measures when analyzing our financial condition and cash generating ability. EBITDA is defined by the Securities and Exchange Commission (“SEC”); however, Adjusted CAD as defined may not be comparable to similarly titled measures reported by other companies.

EBITDA is a non-GAAP measure of our operating cash generating capacity. For the nine months ended September 30, 2008, EBITDA was $275 million, $53 million below the prior year period primarily due to softness in sawlog prices and lower real estate sales, partially offset by strong demand for Performance Fibers. Below is a reconciliation of Cash Provided by Operating Activities to EBITDA for the respective periods (in millions of dollars):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2008     2007     2008     2007  

Cash Provided by Operating Activities

   $ 93.4     $ 132.2     $ 248.2     $ 263.7  

Non-cash cost of real estate sold

     (3.0 )     (4.1 )     (7.6 )     (7.7 )

Provision for income taxes

     9.1       7.6       24.4       25.1  

Interest, net

     10.2