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 June 30, 2009

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

COMMISSION FILE NUMBER 1-6780

RAYONIER INC.

Incorporated in the State of North Carolina

I.R.S. Employer Identification Number 13-2607329

50 North Laura Street, Jacksonville, FL 32202

(Principal Executive Office)

Telephone Number: (904) 357-9100

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  ¨    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 July 24, 2009, there were outstanding 79,182,914 Common Shares of the Registrant.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         PAGE

PART I.

 

FINANCIAL INFORMATION

  

Item l.

 

Financial Statements

  
 

Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2009 and 2008

   1
 

Condensed Consolidated Balance Sheets as of June 30, 2009 and December 3l, 2008

   2
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008

   3
 

Notes to Condensed Consolidated Financial Statements

   4

Item 2.

 

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

   23

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

   34

Item 4.

 

Controls and Procedures

   34

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

   35

Item 1A.

 

Risk Factors

   35

Item 4.

 

Submission of Matters to a Vote of Security Holders

   35

Item 6.

 

Exhibits

   36
 

Signature

   37


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RAYONIER INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

             Three Months Ended June 30,                    Six Months Ended June 30,        
     2009    2008    2009    2008

SALES

     $ 278,698        $ 304,867        $ 558,083        $ 589,060  
                           

Costs and Expenses

           

Cost of sales

     216,674        237,036        441,021        448,047  

Selling and general expenses

     14,349        16,862        28,991        31,806  

Other operating income, net (Note 2)

     (87,165)       (3,420)       (91,177)       (4,706) 
                           
     143,858        250,478        378,835        475,147  

Equity in (loss) income of New Zealand joint venture

     (602)       (804)       (1,839)       168  
                           

OPERATING INCOME

     134,238        53,585        177,409        114,081  

Interest expense

     (12,248)       (13,068)       (24,840)       (25,609) 

Interest and miscellaneous income, net

     216        620        283        2,120  
                           

INCOME BEFORE INCOME TAXES

     122,206        41,137        152,852        90,592  

Income tax expense

     (14,453)       (4,573)       (19,178)       (14,330) 
                           

NET INCOME

     107,753        36,564        133,674        76,262  
                           

OTHER COMPREHENSIVE INCOME (LOSS)

           

Foreign currency translation adjustments

     15,825        (1,587)       10,947        2,509  

Joint venture cash flow hedges

     (277)       -            (2,627)       -      

Amortization of pension and postretirement plans, net of income tax expense of $200 and $627, and $666 and $1,189

     691        1,440        1,116        2,785  
                           

COMPREHENSIVE INCOME

     $ 123,992        $ 36,417        $ 143,110        $ 81,556  
                           

EARNINGS PER COMMON SHARE

           

Basic earnings per share

     $ 1.37        $ 0.47        $ 1.70        $ 0.97  
                           

Diluted earnings per share

     $ 1.35        $ 0.46        $ 1.68        $ 0.96  
                           

See Notes to Condensed Consolidated Financial Statements.

 

1


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollar in Thousands)

 

             June 30,        
2009
       December 31,    
2008
ASSETS

CURRENT ASSETS

     

Cash and cash equivalents

     $ 59,889        $ 61,685  

Accounts receivable, less allowance for doubtful accounts of $626 and $1,130

     82,150        75,657  

Inventory

     

Finished goods

     87,314        78,577  

Work in process

     8,550        7,412  

Raw materials

     8,385        8,400  

Manufacturing and maintenance supplies

     2,149        2,477  
             

Total inventory

     106,398        96,866  

Income tax and alternative fuel mixture credit receivable

     85,104        1,886  

Prepaid and other current assets

     64,722        42,929  
             

Total Current Assets

     398,263        279,023  
             

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION

     1,209,206        1,254,978  

PROPERTY, PLANT AND EQUIPMENT

     

Land

     24,781        24,445  

Buildings

     124,675        124,174  

Machinery and equipment

     1,262,019        1,244,946  
             

Total property, plant and equipment

     1,411,475        1,393,565  

Less - accumulated depreciation

     (1,057,019)       (1,042,756) 
             
     354,456        350,809  
             

INVESTMENT IN JOINT VENTURE

     47,611        42,950  

OTHER ASSETS

     154,513        154,104  
             

TOTAL ASSETS

     $ 2,164,049        $ 2,081,864  
             
LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

     

Accounts payable

     $ 66,772        $ 70,714  

Bank loans and current maturities

     620        620  

Accrued interest

     3,954        4,202  

Current liabilities for dispositions and discontinued operations (Note 12)

     8,402        8,214  

Other current liabilities

     81,313        75,871  
             

TOTAL CURRENT LIABILITIES

     161,061        159,621  
             

LONG-TERM DEBT

     749,475        746,591  

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS (Note 12)

     93,038        96,361  

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 14)

     118,029        121,440  

OTHER NON-CURRENT LIABILITIES

     28,086        18,914  

COMMITMENTS AND CONTINGENCIES (Notes 11 and 13)

     

SHAREHOLDERS’ EQUITY

     

Common Shares, 120,000,000 shares authorized, 79,170,914 and 78,814,431 shares issued and outstanding

     538,665        527,302  

Retained earnings

     564,555        509,931  

Accumulated other comprehensive loss

     (88,860)       (98,296) 
             

TOTAL SHAREHOLDERS’ EQUITY

     1,014,360        938,937  
             

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

     $ 2,164,049        $ 2,081,864  
             

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

RAYONIER INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollar in Thousands)

 

             Six Months Ended June 30,        
     2009    2008

OPERATING ACTIVITIES

     

Net income

     $ 133,674        $ 76,262

Non-cash items included in income:

     

Depreciation, depletion and amortization

     86,675        71,899  

Non-cash cost of real estate sold

     5,232        4,606  

Non-cash stock-based incentive compensation expense

     8,162        7,075  

Amortization of convertible debt discount

     2,883        2,685  

Deferred income tax (benefit) expense

     (3,177)       5,963  

Excess tax benefits on stock-based compensation

     (891)       (2,088) 

Other

     4,965        2,926  

Changes in operating assets and liabilities:

     

Receivables

     (5,802)       (17,955) 

Inventories

     (8,383)       8,126  

Accounts payable

     (3,988)       10,009  

Income tax and alternative fuel mixture credit receivable

     (83,218)       2,400  

Other current assets

     (19,463)       (16,703) 

Accrued liabilities

     9,446        1,421  

Other assets

     (46)       1,096  

Other non-current liabilities

     5,247        545  

Expenditures for dispositions and discontinued operations

     (4,102)       (3,394) 
             

CASH PROVIDED BY OPERATING ACTIVITIES

     127,214        154,873  
             

INVESTING ACTIVITIES

     

Capital expenditures

     (50,107)       (59,881) 

Purchase of timberlands

     -            (229,424) 

Change in restricted cash

     (1,144)       6,591  

Other

     (2,137)       (1,510) 
             

CASH USED FOR INVESTING ACTIVITIES

     (53,388)       (284,224) 
             

FINANCING ACTIVITIES

     

Issuance of debt

     30,000        120,000  

Repayment of debt

     (30,000)       (75,000) 

Dividends paid

     (78,929)       (78,343) 

Repurchase of common shares

     (1,388)       (3,738) 

Proceeds from the issuance of common shares

     3,698        4,335  

Excess tax benefits on stock-based compensation

     891        2,088  
             

CASH USED FOR FINANCING ACTIVITIES

     (75,728)       (30,658) 
             

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     106        (64) 
             

CASH AND CASH EQUIVALENTS

     

Decrease in cash and cash equivalents

     (1,796)       (160,073) 

Balance, beginning of year

     61,685        181,081  
             

Balance, end of period

     $ 59,889        $ 21,008  
             

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

     

Cash paid during the period:

     

Interest

     $ 21,270        $ 21,022  
             

Income taxes

     $ 4,612        $ 3,840  
             

Non-cash investing activity:

     

Capital assets purchased on account

     $ 8,644        $ 12,665  
             

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

1.

BASIS OF PRESENTATION AND NEW ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

The unaudited condensed consolidated financial statements and notes thereto of Rayonier Inc. and its subsidiaries (“Rayonier” or “the Company”) were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these financial statements and notes 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. These statements and notes should be read in conjunction with the financial statements and supplementary data included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission.

New or Recently Adopted Accounting Pronouncements

In May 2008, the FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). FSP APB 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 Company adopted FSP APB 14-1 on January 1, 2009 and retrospectively applied the fair value of the equity component net of accumulated amortization in 2007 and 2008. The adoption of FSP APB 14-1 resulted in the recognition of a $23.7 million debt discount, an $8.7 million deferred tax liability and a $15.0 million increase to shareholders’ equity, net of income taxes as of December 31, 2008. The Company recorded additional interest expense, net of tax benefits, related to the amortization of the debt discount of $1.8 million, or $.02 per diluted share, and $1.7 million or $0.02 per diluted share, in the six months ended June 30, 2009 and 2008. See Note 15 – Convertible Debt for additional information on the Company’s convertible debt.

In December 2008, the FASB issued FSP No. FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets. The FSP amends SFAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits – an amendment of FASB Statements No. 87, 88 and 106, to require disclosure of investment policies, strategies, categories of plan assets and information about the fair value measurements of plan assets of a defined pension or other postretirement plan. The disclosures are effective for fiscal years ending after December 15, 2009.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). This standard is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for fiscal years and interim periods ended after June 15, 2009. As such, the Company evaluated events and transactions that occurred during the period from June 30, 2009, the date of the balance sheet, through July 31, 2009, the date of issuance of the unaudited interim condensed financial statements, for potential recognition or disclosure in the accompanying unaudited interim condensed consolidated financial statements and did not identify any events or transactions that should be recognized or disclosed in the accompanying unaudited interim condensed consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140. SFAS No. 166 eliminates the concept of a “qualifying special-purpose entity” (QSPE) and associated guidance and creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale. Existing QSPEs will be evaluated for consolidation under the provisions of FASB Interpretation No. 46(R) as amended by SFAS No. 167, Amendments to FASB Interpretation No. 46-(R) (“SFAS 167”). The Standard is effective for fiscal years beginning after November 15, 2009. The Company is currently in the process of evaluating the impact, if any, the Standard may have on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167. The purpose of this standard is to improve disclosures by public entities and enterprises by replacing the quantitative-based risks and rewards calculation for determining which enterprise has a controlling interest in a variable interest entity with an approach primarily qualitative in nature. This Statement requires additional disclosures about an enterprise’s involvement in variable interest entities and is effective for financial statements issued for fiscal years beginning after November 15, 2009. The Company has not yet determined the impact of this pronouncement on its consolidated financial statements.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162 (“The FASB Codification”). The FASB Codification brings together all authoritative GAAP previously in levels A through D of the GAAP hierarchy and becomes the exclusive authoritative reference for use in U.S. GAAP financial statements issued for interim and annual periods ending after September 15, 2009. Upon adoption, the Company’s financial statements will contain FASB Codification references in place of any corresponding references to legacy accounting pronouncements. The FASB Codification will have no impact on the Company’s consolidated financial position, future results of operations or cash flows.

 

2.

ALTERNATIVE FUEL MIXTURE CREDIT

The U.S. Internal Revenue Code provides a tax credit for taxpayers that produce and use an alternative fuel in the operation of their business. Rayonier produces an alternative fuel (“black liquor”) at its Jesup, Georgia and Fernandina Beach, Florida Performance Fibers pulp mills. The credit is $0.50 per gallon for each gallon of alternative fuel used in operations. On April 8, 2009, Rayonier received notification from the Internal Revenue Service that its application for registration as an alternative fuel mixer had been approved. Accordingly, the Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2009, include a credit of approximately $92 million recorded in “Other operating income, net,” less $6.1 million of associated expenses, for black liquor used from January 19, 2009 through the end of the second quarter. The Company will continue to recognize credits as they are earned through the expiration of the tax credit, currently scheduled for December 31, 2009; however, changes in law could be proposed or enacted during 2009 that may limit or terminate the Company’s eligibility for this credit.

 

3.

INVESTMENT IN JOINT VENTURE

The Company holds a 40 percent interest in a joint venture (“JV”) that owns or leases approximately 329,000 acres of New Zealand timberlands. 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. In the third quarter of 2008, 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. Collectively, the Company’s JV interest and RNZL operations qualified 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 were segregated from continuing operations in the Condensed Consolidated Statements of Income and Comprehensive Income and reported as discontinued operations. The assets and liabilities were classified as “Assets held for sale” and “Liabilities associated with assets held for sale” in the Condensed Consolidated Balance Sheets.

In the second quarter of 2009, as a result of stressed capital markets and the weak global economic conditions, Rayonier and its joint venture partners decided to discontinue the sale process of their New Zealand holdings and continue with on-going operations. Accordingly, the interest in the JV and the operations of RNZL no longer qualify for treatment as discontinued operations. As such, the operating results are included in continuing operations in the Condensed Consolidated Statements of Income and Comprehensive Income for all periods presented. The December 31, 2008 Condensed Consolidated Balance Sheet has been restated to classify the assets and liabilities from “Assets held for sale” and “Liabilities associated with assets held for sale” to the appropriate line items.

 

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Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

4.

EARNINGS PER COMMON SHARE

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

 

    Three Months Ended
June 30,
  Six Months Ended
June 30,
    2009   2008   2009   2008

Net income (1)

    $ 107,753       $ 36,564       $ 133,674       $ 76,262  
                       

Shares used for determining basic earnings per common share

    78,913,563       78,377,396       78,860,562       78,315,808  

Dilutive effect of:

       

Stock options

    427,016       716,053       317,981       716,557  

Performance and restricted shares

    448,496       304,038       358,654       278,336  
                       

Shares used for determining diluted earnings per common share

        79,789,075           79,397,487           79,537,197           79,310,701  
                       

Basic earnings per common share: (1)

    $ 1.37       $ 0.47       $ 1.70       $ 0.97  
                       

Diluted earnings per common share: (1)

    $ 1.35       $ 0.46       $ 1.68       $ 0.96  
                       

 

(1)

2008 has been restated as a result of adopting FSP APB 14-1. See Note 1 – Basis of Presentation and New Accounting Pronouncements.

 

5.

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 corporate income taxes relates principally to current and deferred taxes on income from taxable REIT subsidiary operations and on certain property sales. In addition, the Company is subject to foreign tax on non-U.S. operations.

Provision for Income Taxes

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 like-kind exchange (“LKE”) transactions. Second quarter tax rates before discrete items were 21.5 percent and 11.1 percent in 2009 and 2008, respectively. Year-to-date effective tax rates were 20.2 percent and 16.0 percent in 2009 and 2008 respectively. The REIT income not subject to tax decreased the tax rates by 14.1 percent and 19.8 percent for the six months ending June 30, 2009 and 2008, respectively. The increased rates in 2009 were due to proportionately higher earnings from the Company’s taxable REIT subsidiary.

Including discrete items, the effective tax rates for the quarter and year-to-date were 11.9 percent and 12.6 percent compared to 11.1 percent and 15.8 percent in 2008, respectively.

FIN 48 Disclosures

In accordance with the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), the Company recognizes the impact of a tax position if the position is “more likely than not” to prevail upon examination by the IRS. In the second quarter of 2009, the Company increased its FIN 48 liability by $8.2 million to $10.7 million to reflect changes as a result of the IRS’ examination of tax years 2005 and 2006 and to record a reserve for uncertain positions to be claimed during the current year.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

6.

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 June 30, 2009 and December 31, 2008, the Company had $2.6 million and $1.5 million, respectively, of proceeds from real estate sales classified as restricted cash in Other Assets, which were on deposit with an LKE intermediary.

 

7.

SHAREHOLDERS’ EQUITY

An analysis of shareholders’ equity for the six months ended June 30, 2009 and the year ended December 31, 2008 is shown below (share amounts not in thousands):

 

     Common Shares    Retained    Accumulated
Other
  Comprehensive  
     Shareholders’  
   Shares      Amount (1)        Earnings (1)      Income (Loss)    Equity

Balance, December 31, 2007

   78,216,696       $ 506,650       $ 518,618       $ (25,638)      $ 999,630 

Net income

             148,583            148,583 

Dividends ($2.00 per share)

             (157,270)           (157,270)

Issuance of shares under incentive stock plans

   690,031       8,265                 8,265 

Stock-based compensation

        13,344                 13,344 

Excess tax benefit on stock-based compensation

        3,248                 3,248 

Repurchase of common shares

   (92,296)      (3,979)                (3,979)

Net loss from pension and postretirement plans

                  (65,527)      (65,527)

Retiree medical benefit plan amendment

                  16,377       16,377 

Foreign currency translation adjustment

                  (23,508)      (23,508)

Other

        (226)                (226)
                                

Balance, December 31, 2008

   78,814,431       $ 527,302       $ 509,931       $ (98,296)      $ 938,937 

Net income

             133,674            133,674 

Dividends ($1.00 per share)

             (79,050)           (79,050)

Issuance of shares under incentive stock plans

   405,845       3,698                 3,698 

Stock-based compensation

        8,162                 8,162 

Excess tax benefit on stock-based compensation

        891                 891 

Repurchase of common shares

   (49,362)      (1,388)                (1,388)

Amortization of pension and postretirement plans

                  1,116       1,116 

Foreign currency translation adjustment

                  10,947       10,947 

Joint venture cash flow hedges

                  (2,627)      (2,627)
                                

Balance, June 30, 2009

       79,170,914       $ 538,665       $ 564,555       $ (88,860)      $ 1,014,360 
                                

 

(1)

Restated as a result of adopting FSP APB 14-1. See Note 1 – Basis of Presentation and New Accounting Pronouncements.

 

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: Timber, Real Estate, Performance Fibers, and Wood Products. Timber sales include all activities that relate to the harvesting of timber. Real Estate sales include all property sales, 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 parcels under contract previously in the Timber segment. Allocations of depletion expense and non-cash costs of real estate sold are recorded when the Real Estate segment 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). These operations are combined and reported in “Other Operations.” Sales between operating segments are made based on fair market value, and intercompany sales, purchases and profits (losses) are eliminated in consolidation. The Company evaluates financial performance based on the operating income of the segments.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

Operating income (loss) 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 (expense) benefit, are not considered by Company management to be part of segment operations.

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

 

     June 30,
2009
   December 31,
2008
    

ASSETS

        

Timber

     $ 1,314,016        $ 1,323,111     

Real Estate

     76,245        73,021     

Performance Fibers

     534,223        495,659     

Wood Products

     23,875        26,573     

Other Operations

     21,304        26,565     

Corporate and other

     194,386        136,935     
                

TOTAL

     $     2,164,049        $     2,081,864     
                

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
    
     2009    2008    2009    2008   

SALES

              

Timber

     $ 43,591        $ 55,258        $ 78,518        $ 102,457     

Real Estate

     41,378        23,425        67,970        52,776     

Performance Fibers

     177,109        187,121        380,743        362,047     

Wood Products

     12,495        24,489        24,247        43,401     

Other Operations

     8,959        14,574        14,659        28,379     

Intersegment Eliminations

     (4,834)       -        (8,054)       -     
                              

TOTAL

     $     278,698        $     304,867        $     558,083        $     589,060     
                              

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
    
     2009     2008    2009     2008   

OPERATING INCOME (LOSS)

            

Timber

     $ 432          $ 9,485        $ (1,906)         $ 21,505     

Real Estate

     24,155          14,616        38,568          36,384     

Performance Fibers

     34,687          36,747        75,536          73,803     

Wood Products

     (2,571)         (338)       (6,144)         (2,882)    

Other Operations

     (2,068)         1,092        (1,330)         519     

Corporate and other (1)

     79,603     (1)      (8,017)       72,685     (1)      (15,248)    
                                

TOTAL

     $     134,238          $     53,585        $     177,409          $     114,081     
                                

 

  (1)

Includes $85.9 million relating to the alternative fuel mixture credit. For additional information, see Note 2 – Alternative Fuel Mixture Credit.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2009    2008    2009    2008

DEPRECIATION, DEPLETION

           

AND AMORTIZATION

           

Timber

    $     21,951       $     21,406       $     39,432       $     39,473  

Real Estate

     12,055        2,633        17,445        5,328  

Performance Fibers

     12,708        12,837        26,996        24,001  

Wood Products

     1,214        1,363        2,432        2,807  

Other Operations

     1        8        2        17  

Corporate and other

     182        149        368        273  
                           

TOTAL

    $ 48,111       $ 38,396       $ 86,675       $ 71,899  
                           

 

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 forward contracts partially mitigate the risk of a change in Performance Fibers’ margins resulting from an increase or decrease in fuel oil and natural gas prices. At June 30, 2009, the Company had hedges through the end of 2009 on 38,200 barrels of fuel oil. The Company’s commodity forward contracts do not qualify for hedge accounting under SFAS 133 and instead are required to be marked-to-market. The mark-to-market adjustments are recorded in “Other operating income, net.”

The following table presents the location of all assets and liabilities associated with the Company’s hedging instruments within the Condensed Consolidated Balance Sheets:

 

          Fair Value at:

Derivatives not designated as hedging

instruments under SFAS 133

   Balance Sheet Location    June 30,
2009
   December 31,
2008

 Fuel oil contracts

  

Other current liabilities

    $      (353)       $   (3,825)  

The following table presents the impact of derivative instruments and their location within the Condensed Consolidated Statements of Income and Comprehensive Income:

 

Derivatives not designated

as hedging instruments

   Location of Gain    Three Months Ended
June 30,
   Six Months Ended
June 30,

under SFAS 133

   Recognized in Income    2009    2008    2009    2008

 Fuel oil contracts

  

Other operating income, net

    $   884       $   853       $     1,221       $     1,096  

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

10.

FAIR VALUE MEASUREMENTS

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

 Asset (liability)    Carrying Value at
       June 30, 2009       
       Level 2         

 

 Commodity swap agreements

  

 

 $

 

  (353)          

  

 

 $

 

    (353)  

  

 Investment in qualified special purpose entity        

     2,757                 2,757      

The following table presents the carrying amount and estimated fair values of financial instruments held by the Company at June 30, 2009 and December 31, 2008, using market information and what the Company believes to be appropriate valuation methodologies under SFAS No. 107, Disclosures about Fair Value of Financial Instruments.

 

    June 30,
2009
   December 31,
2008
    
 Asset (liability)   Carrying
Amount
   Fair Value    Carrying
Amount
   Fair Value   

 Cash and cash equivalents        

   $         59,889        $     59,889        $         61,685        $         61,685      

 Short-term debt

    (620)        (620)        (620)        (620)     

 Long-term debt

    (749,475)        (742,478)        (746,591)        (700,369)     

Rayonier uses the following methods and assumptions in estimating the fair value of its financial instruments:

Cash and cash equivalents—The carrying amount is equal to fair market value.

Debt—The Company’s short-term bank loans and floating rate debt approximate fair value. The fair value of fixed rate long-term debt is based upon quoted market prices for debt with similar terms and maturities.

 

11.

GUARANTEES

The Company provides financial guarantees as required by creditors, insurance programs and state and non-U.S. governmental agencies. As of June 30, 2009, the following financial guarantees were outstanding:

 

      Maximum
Potential
Payment
  

Carrying

    Amount of    
Liability

    

 Standby letters of credit (1)

    $         45,005       $         39,263     

 Guarantees (2)

     3,647        53     

 Surety bonds (3)

     11,128        1,956     
                

 Total

    $     59,780       $     41,272     
                

 

  (1)

Approximately $39 million of the standby letters of credit serve as credit support for industrial revenue bonds. The remaining letter of credit supports obligations under various insurance related agreements, primarily workers’ compensation and pollution liability policy requirements. These letters of credit expire at various dates during 2009 and 2010, and will be renewed as required.

 

  (2)

In conjunction with RNZL’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 June 30, 2009, an annual payment of $1.1 million remains. This guarantee expires in 2010.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

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 June 30, 2009 and December 31, 2008, 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 Washington and Georgia. These surety bonds expire at various dates during 2009 and 2010, and are renewed as required.

 

12.

LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

An analysis of activity in the liabilities for dispositions and discontinued operations for the six months ended June 30, 2009 and the year ended December 31, 2008, is as follows:

 

           June 30, 2009                December 31, 2008           

Balance, January 1

    $         104,575        $         113,685      

Expenditures charged to liabilities

     (4,102)        (7,660)     

Increase (reduction) to liabilities

     967         (1,450)     
                

Balance, end of period

     101,440         104,575      

Less: Current portion

     (8,402)        (8,214)     
                

Non-current portion

    $ 93,038        $ 96,361      
                

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. The Company is exposed to the risk of reasonably possible additional losses in excess of the established liabilities. As of June 30, 2009, this amount could range up to $32 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.

For additional information on the Company’s environmental liabilities refer to Note 15 – Liabilities for Dispositions and Discontinued Operations in the 2008 Annual Report on Form 10-K.

 

13.

CONTINGENCIES

From time to time, Rayonier becomes subject to pending and threatened litigation in commercial, tort, regulatory and environmental matters among others. For additional information refer to Note 16 – Contingencies in the 2008 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. Note the following:

East Point, Georgia Notice of Violation (“NOV”) — On March 28, 2008, SWP received an NOV and Proposed Consent Order (the “Order”) from the Environmental Protection Division (“EPD”) of the Georgia Department of Natural Resources relating to its East Point, Georgia site. The Order asserted that SWP violated conditions in its permit issued under the Resource Conservation and Recovery Act (“RCRA”), 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 demanded 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 requested an increase in SWP’s financial assurance for the site based on a new estimate to be completed in the future. (Note that financial assurance is provided for SWP via a Rayonier Inc. guaranty.) The Company responded to the proposed NOV and denied liability for any permit violations or civil penalty. Discussions with EPD to resolve the NOV reached an impasse in the second quarter of 2009 and, on July 9, 2009, EPD

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

served SWP with an administrative order (“AO”). Among other things, the AO requires SWP to commence a new site-wide RCRA investigation (note that the site has been in the RCRA corrective action process under EPD oversight for over 20 years) and remediate all contamination on the site within three years. SWP believes that the AO is contrary to law and, based on decades of scientific data relating to sites similar to the East Point site, the ordered remedy is scientifically and technologically infeasible. No fine or penalty is included in the AO, although there can be no assurances as to future penalty actions by EPD in this matter. The Company has appealed the AO and will vigorously defend itself in this matter. The Company believes that, based on current information, its liabilities at June 30, 2009 adequately reflect the probable costs to be incurred upon the ultimate resolution of these matters.

There have been no material changes in the status of the other specific matters referenced in Note 16 – Contingencies in the 2008 Annual Report on Form 10-K.

 

14.

EMPLOYEE BENEFIT PLANS

The Company has four qualified non-contributory defined benefit pension plans covering a majority of its employees 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.

The net periodic benefit costs for the Company’s pension and postretirement plans (medical and life insurance) are shown in the following table:

 

     Pension    Postretirement
     Three Months Ended
June 30,
   Three Months Ended
June 30,
     2009    2008    2009    2008

Components of Net Periodic Benefit Cost

           

 Service cost

    $ 1,842        $ 1,718        $ 90        $ 177  

 Interest cost

     4,349         4,142         301         680  

 Expected return on plan assets

     (5,291)        (5,459)        -         -  

 Amortization of prior service cost

     354         357         22         195  

 Amortization of plan amendment

     -         -         (2,392)        -  

 Amortization of losses

     1,349         1,211         1,558         304  
                           

Net periodic benefit cost

    $         2,603        $         1,969        $         (421)       $         1,356  
                           
     Pension    Postretirement
     Six Months Ended
June 30,
   Six Months Ended
June 30,
     2009    2008    2009    2008

Components of Net Periodic Benefit Cost

           

 Service cost

    $ 3,685        $ 3,304        $ 180        $ 341  

 Interest cost

     8,698         7,966         601         1,308  

 Expected return on plan assets

     (10,582)        (10,276)        -         -  

 Amortization of prior service cost

     708         686         44         374  

 Amortization of plan amendment

     -         -         (4,784)        -  

 Amortization of losses

     2,698         2,329         3,116         585  
                           

Net periodic benefit cost

    $         5,207        $         4,009        $         (843)       $         2,608  
                           

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

The Company contributed approximately $5 million to the pension plans during the six months ended June 30, 2009. The Company is required to make pension contributions of approximately $9 million in 2009, but may elect to make additional discretionary contributions.

 

15.

CONVERTIBLE DEBT

In October 2007, TRS issued $300 million of 3.75% Senior Exchangeable Notes due 2012. The notes are guaranteed by Rayonier Inc. and are non-callable. The $300 million in principal will be settled in cash and any excess exchange value will be settled at the option of the Company in either cash or stock of Rayonier Inc. Note holders may convert their notes subject to certain conversion provisions including the market price of the Company’s common stock and the trading price of the convertible notes. The initial exchange rate is 18.24 shares per $1,000 principal based on an exchange price equal to 122 percent of the stock’s closing price of $44.93 on October 10, 2007, or $54.81 per share.

In separate transactions, TRS and Rayonier purchased an exchangeable note hedge and sold warrants, respectively, based on 5,472,991 underlying shares of Rayonier Inc. These transactions had the effect of increasing the conversion premium from 22 percent to 40 percent or to $62.90 per share. On exercise of the hedge, TRS will receive shares of Rayonier Inc. common stock equal to the difference between the then market price and the strike price of $54.81. The holders of the warrants will receive net shares from Rayonier if the share price is above $62.90 at maturity of the warrants.

The purchased hedge and sold warrants are not part of the terms of the notes and will not affect the note holders’ rights. Likewise, the note holders will not have any rights with respect to the hedge or the warrants. The purchased hedge and the sold warrants meet the definition of derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. However, because these instruments have been determined to be indexed to the Company’s own stock in accordance with EITF Issue No. 01-6, The Meaning of Indexed to a Company’s Own Stock, and have been recorded in shareholders’ equity in the Condensed Consolidated Balance Sheet (as determined under EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock), the instruments meet the scope exception of SFAS No. 133 and are not subject to the mark-to-market provisions of that standard.

The amounts related to the convertible debt in the Condensed Consolidated Balance Sheets are as follows:

 

     June 30,
2009
   December 31,
2008
    

Liabilities:

        

Principal amount of debt

    $       300,000        $       300,000      

Unamortized discount

     (20,865)        (23,748)     
                

Net carrying amount of debt

    $ 279,135        $ 276,252      

 

Equity:

        

Common Stock

    $ 19,243        $ 19,243      

The unamortized discount will be amortized through October 2012.

The amount of interest related to the convertible debt recognized in the Condensed Consolidated Statements of Income and Comprehensive Income is as follows:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
    
     2009    2008    2009    2008   

Contractual interest coupon

    $ 2,812       $ 2,812       $ 5,625       $ 5,625     

Amortization of debt discount

     1,442        1,342        2,883        2,685     
                              

Total interest expense recognized

    $       4,254       $       4,154       $       8,508       $       8,310     
                              

The effective interest rate on the liability component for the three and six months ended June 30, 2009 and 2008 was 6.21%.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

16.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated Other Comprehensive Income (Loss) was comprised of the following:

 

         June 30, 2009            December 31, 2008         

Foreign currency translation adjustments

    $ 21,736        $ 10,789     

Joint venture cash flow hedges

     (2,627)        -         

Unrecognized components of employee
benefit plans, net of tax

     (107,969)        (109,085)     
                

Total

    $         (88,860)       $         (98,296)     
                

During the six months ended June 30, 2009, the increase in net foreign currency translation adjustments was due to the strengthening of the New Zealand dollar against the U.S. dollar.

 

17.

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.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars amounts in thousands unless otherwise stated) (Continued)

 

     CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Three Months Ended June 30, 2009
     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

     $      $      $ 220,184       $ 66,806       $ (8,292)      $ 278,698 
                                         

Costs and Expenses

                 

Cost of sales

               183,764       42,636       (9,726)      216,674 

Selling and general expenses

     2,409            11,101       834            14,349 

Other operating expense (income), net

     193            (85,210)      (2,148)           (87,165)
                                         
     2,602            109,655       41,322       (9,721)      143,858 

Equity in (loss) income of New Zealand joint venture

     (807)           205                 (602)
                                         

OPERATING (LOSS) INCOME

     (3,409)           110,734       25,484       1,429       134,238 

Interest expense

     (126)      (4,607)      (6,360)      (1,155)           (12,248)

Interest and miscellaneous income (expense), net

     781       (774)      (1,062)      1,305       (34)      216 

Equity in income from subsidiaries

     112,043       88,431                 (200,474)     
                                         

INCOME BEFORE INCOME TAXES

     109,289       83,050       103,312       25,634       (199,079)      122,206 

Income tax (expense) benefit

     (1,536)      1,964       (14,881)                (14,453)
                                         

NET INCOME

     $ 107,753       $ 85,014       $ 88,431       $ 25,634       $ (199,079)      $ 107,753 
                                         

 

15


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars amounts in thousands unless otherwise stated) (Continued)

 

     CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Three Months Ended June 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

     $      $      $ 263,434      $ 203,135       $ (161,702)      $ 304,867 
                                         

Costs and Expenses

                 

Cost of sales

               221,000       63,644       (47,608)      237,036 

Selling and general expenses

     2,820            13,225       817            16,862 

Other operating expense (income), net

     142            (2,481)      (1,081)           (3,420)
                                         
     2,962            231,744       63,380       (47,608)      250,478 

Equity in (loss) income of New Zealand joint venture

     (1,027)           223                 (804)
                                         

OPERATING (LOSS) INCOME

     (3,989)           31,913       139,755       (114,094)      53,585 

Interest income (expense)

     92       (4,508)      (7,299)      (1,357)           (13,068)

Interest and miscellaneous income (expense), net

     891       (774)      (661)      1,229       (65)      620 

Equity in income from subsidiaries

     40,074       17,916                 (57,990)     
                                         

INCOME BEFORE INCOME TAXES

     37,068       12,634       23,953       139,627       (172,145)      41,137 

Income tax (expense) benefit

     (504)      1,968       (6,037)                (4,573)
                                         

NET INCOME

     $ 36,564       $ 14,602       $ 17,916       $ 139,627       $ (172,145)      $ 36,564 
                                         

 

16


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars amounts in thousands unless otherwise stated) (Continued)

 

     CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Six Months Ended June 30, 2009
     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

     $      $      $ 457,859       $ 118,022       $ (17,798)      $ 558,083 
                                         

Costs and Expenses

                 

Cost of sales

               383,982       77,179       (20,140)      441,021 

Selling and general expenses

     4,898            22,413       1,675            28,991 

Other operating expense (income), net

     88            (86,779)      (4,486)           (91,177)
                                         
     4,986            319,616       74,368       (20,135)      378,835 

Equity in loss of New Zealand joint venture

     (1,560)           (279)                (1,839)
                                         

OPERATING (LOSS) INCOME

     (6,546)           137,964       43,654       2,337       177,409 

Interest expense

     (236)      (9,214)      (13,077)      (2,313)           (24,840)

Interest and miscellaneous income (expense), net

     1,576       (1,547)      (2,271)      2,588       (63)      283 

Equity in income from subsidiaries

     141,506       102,136                 (243,642)     
                                         

INCOME BEFORE INCOME TAXES

     136,300       91,375       122,616       43,929       (241,368)      152,852 

Income tax (expense) benefit

     (2,626)      3,928       (20,480)                (19,178)
                                         

NET INCOME

     $ 133,674       $ 95,303       $ 102,136       $ 43,929       $ (241,368)      $ 133,674 
                                         

 

17


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars amounts in thousands unless otherwise stated) (Continued)

 

     CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Six Months Ended June 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

     $      $      $ 492,280       $ 295,827       $ (199,047)      $ 589,060 
                                         

Costs and Expenses

                 

Cost of sales

               409,715       97,399       (59,067)      448,047 

Selling and general expenses

     5,346            24,889       1,571            31,806 

Other operating income, net

     (60)           (1,786)      (2,860)           (4,706)
                                         
     5,286            432,818       96,110       (59,067)      475,147 

Equity in (loss) income of New Zealand joint venture

     (3)           171                 168 
                                         

OPERATING (LOSS) INCOME

     (5,289)           59,633       199,717       (139,980)      114,081 

Interest income (expense)

     628       (8,990)      (13,915)      (3,336)           (25,609)

Interest and miscellaneous income (expense), net

     1,778       (1,547)      (628)      2,583       (66)      2,120 

Equity in income from subsidiaries

     80,178      27,868                 (108,046)     
                                         

INCOME BEFORE INCOME TAXES

     77,295       17,331       45,090       198,964       (248,088)      90,592 

Income tax (expense) benefit

     (1,033)      3,925       (17,222)                (14,330)
                                         

NET INCOME

     $ 76,262       $ 21,256       $ 27,868       $ 198,964       $ (248,088)      $ 76,262 
                                         

 

18


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars amounts in thousands unless otherwise stated) (Continued)

 

    CONDENSED CONSOLIDATING BALANCE SHEETS
As of June 30, 2009
    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

    $ 13,328      $     $ 5,449      $ 41,112      $     $ 59,889 

Accounts receivable, less allowance for doubtful accounts

    84          79,954      2,112          82,150 

Inventory

            121,952          (15,554)     106,398 

Intercompany interest receivable

                1,385      (1,385)    

Income tax and alternative fuel mixture credit receivable

            85,104              85,104 

Prepaid and other current assets

    5,099          57,351      2,272          64,722 
                                   

Total current assets

    18,511          349,810      46,881      (16,939)     398,263 
                                   

TIMBER AND TIMBERLANDS NET OF DEPLETION AND AMORTIZATION

    1,808          90,037      1,116,961      400      1,209,206 

NET PROPERTY, PLANT AND EQUIPMENT

    1,803          350,931      1,526      196      354,456 

INVESTMENT IN JOINT VENTURE

    70,042          (22,431)             47,611 

INVESTMENT IN SUBSIDIARIES

    1,045,893      605,230              (1,651,123)    

INTERCOMPANY/NOTES RECEIVABLE

    12,058              439      (12,497)    

OTHER ASSETS

    23,436      5,454      508,261      8,117      (390,755)     154,513 
                                   

TOTAL ASSETS

    $ 1,173,551      $ 610,684      $ 1,276,608      $ 1,173,924      $ (2,070,718)     $ 2,164,049 
                                   

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

CURRENT LIABILITIES

           

Accounts payable

    $ 3,122    $     $ 62,987      $ 663      $     $ 66,772 

Bank loans and current maturities

            620              620 

Accrued interest

    827      2,375      730      22          3,954 

Current liabilities for dispositions and discontinued operations

            8,402              8,402 

Other current liabilities

    13,204          46,987      21,122          81,313 
                                   

Total current liabilities

    17,153      2,375      119,726      21,807          161,061 
                                   

LONG-TERM DEBT

    20,000      279,136      397,760      52,579          749,475 

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

            93,038              93,038 

PENSION AND OTHER POSTRETIREMENT BENEFITS

    86,710          31,319              118,029 

OTHER NON-CURRENT LIABILITIES

    11,635          15,771      23,612      (22,932)     28,086 

INTERCOMPANY PAYABLE

    23,693          13,764      5,502      (42,959)    
                                   

TOTAL LIABILITIES

    159,191      281,511      671,378      103,500      (65,891)     1,149,689 
                                   

TOTAL SHAREHOLDERS’ EQUITY

    1,014,360      329,173      605,230      1,070,424      (2,004,827)     1,014,360 
                                   

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

    $ 1,173,551      $ 610,684      $ 1,276,608      $ 1,173,924      $ (2,070,718)     $ 2,164,049 
                                   

 

19


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars amounts in thousands unless otherwise stated) (Continued)

 

    CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 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

    $ 9,741      $     $ 47,082      $ 4,862      $     $ 61,685 

Accounts receivable, less allowance for doubtful accounts

            72,259      3,398          75,657 

Inventory

            102,934          (6,068)     96,866 

Intercompany interest receivable

                1,772      (1,772)    

Income tax and alternative fuel mixture credit receivable

    1,247          639              1,886 

Prepaid and other current assets

    4,519          34,025      4,385          42,929 
                                   

Total current assets

    15,507          256,939      14,417      (7,840)     279,023 
                                   

TIMBER AND TIMBERLANDS NET OF DEPLETION AND AMORTIZATION

    1,807          92,189      1,160,982          1,254,978 

NET PROPERTY, PLANT AND EQUIPMENT

    2,151          347,210      1,448          350,809 

INVESTMENT IN JOINT VENTURE

    63,046          (20,096)             42,950 

INVESTMENT IN SUBSIDIARIES

    990,391      482,206              (1,472,597)    

INTERCOMPANY/NOTES RECEIVABLE

    26,673          25,250      6,744      (58,667)    

OTHER ASSETS

    24,223      6,265      513,055      5,891      (395,330)     154,104 
                                   

TOTAL ASSETS

    $ 1,123,798      $ 488,471      $ 1,214,547      $ 1,189,482      $ (1,934,434)     $ 2,081,864 
                                   

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

CURRENT LIABILITIES

           

Accounts payable

    $ 2,943      $     $ 66,852      $ 919      $     $ 70,714 

Bank loans and current maturities

            620              620 

Accrued interest

    781      2,375      1,046              4,202 

Current liabilities for dispositions and discontinued operations

            8,214              8,214 

Other current liabilities

    15,297      (9,833)     54,342      16,065          75,871 
                                   

Total current liabilities

    19,021      (7,458)     131,074      16,984          159,621 
                                   

LONG-TERM DEBT

    20,000      276,252      397,760      52,579          746,591 

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

            96,361              96,361 

PENSION AND OTHER POSTRETIREMENT BENEFITS

    87,562          33,878              121,440 

OTHER NON-CURRENT LIABILITIES

    12,416          5,790      17,110      (16,402)     18,914 

INTERCOMPANY PAYABLE

    45,862          67,478      5,502      (118,842)    
                                   

TOTAL LIABILITIES

    184,861      268,794      732,341      92,175      (135,244)     1,142,927 
                                   

TOTAL SHAREHOLDERS’ EQUITY

    938,937      219,677      482,206      1,097,307      (1,799,190)     938,937 
                                   

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

    $ 1,123,798      $ 488,471      $ 1,214,547      $ 1,189,482      $ (1,934,434)     $ 2,081,864 
                                   

 

20


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

 

    CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2009
    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

    $ 80,210       $ 15,000       $ 11,925       $ 125,320     $ (105,241)      $ 127,214  
                                   

INVESTING ACTIVITIES

           

Capital expenditures

    (4)      -       (36,215)      (16,482)      2,594       (50,107) 

Change in restricted cash

    -       -       -       (1,144)      -       (1,144) 

Other

    -       -       (1,693)      (444)      -       (2,137) 
                                   

CASH USED FOR INVESTING ACTIVITIES

    (4)      -       (37,908)      (18,070)      2,594       (53,388) 
                                   

FINANCING ACTIVITIES

           

Issuance of debt

    -       -       -       30,000       -       30,000  

Repayment of debt

    -       -       -       (30,000)      -       (30,000) 

Dividends paid

    (78,929)      -       -       -       -       (78,929) 

Proceeds from issuance of common shares

    3,698       -       -       -       -       3,698  

Excess tax benefits on stock-based compensation

    -       -       891       -       -       891  

Repurchase of common shares

    (1,388)      -       -       -       -       (1,388) 

Distributions to / from Parent

    -       (15,000)      (16,647)      (71,000)      102,647       -      
                                   

CASH USED FOR FINANCING ACTIVITIES

    (76,619)      (15,000)      (15,756)      (71,000)      102,647       (75,728) 
                                   

EFFECT OF EXCHANGE RATE CHANGES ON CASH

    -       -       106       -       -       106  
                                   

CASH AND CASH EQUIVALENTS

           

Change in cash and cash equivalents

    3,587       -       (41,633)      36,250       -       (1,796) 

Balance, beginning of year

    9,741       -       47,082       4,862       -       61,685  
                                   

Balance, end of period

    $ 13,328       $ -       $ 5,449       $ 41,112       $ -       $ 59,889  
                                   

 

21


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated) (Continued)

 

    CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Six Months Ended June 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 (USED FOR) OPERATING ACTIVITIES

    $ 31,193       $ 26,410       $ (130,442)      $ 295,212       $ (67,500)      $ 154,873  
                                   

INVESTING ACTIVITIES

           

Capital expenditures

    -       -       (44,124)      (15,757)      -       (59,881) 

Purchase of timberlands

    -       -       (61,643)      (167,781)      -       (229,424) 

Change in restricted cash

    -       -       -       6,591       -       6,591  

Investment In Subsidiaries

    -       3,590       -       -       (3,590)      -      

Other

    -       -       460       (1,970)      -       (1,510) 
                                   

CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES

    -       3,590       (105,307)      (178,917)      (3,590)        (284,224) 
                                   

FINANCING ACTIVITIES

           

Issuance of debt

    -       -       120,000       -       -       120,000  

Repayment of debt

    -       -       (20,000)      (55,000)      -       (75,000) 

Dividends paid

    (78,343)      -       -       -       -       (78,343) 

Proceeds from issuance of common shares

    4,335       -       -       -       -       4,335  

Excess tax benefits on stock-based compensation

    -           -       2,088       -       -       2,088  

Repurchase of common shares

    (3,738)      -       -       -       -       (3,738) 

Repayment of intercompany

    50,000       -       -       (50,000)      -       -      

Distributions to / from Parent

    -       (30,000)      (33,590)      (7,500)      71,090       -      
                                   

CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES

    (27,746)      (30,000)      68,498       (112,500)      71,090       (30,658) 
                                   

EFFECT OF EXCHANGE RATE CHANGES ON CASH

    -       -       (64)      -       -       (64) 
                                   

CASH AND CASH EQUIVALENTS

           

Change in cash and cash equivalents

    3,447       -       (167,315)      3,795       -       (160,073) 

Balance, beginning of year

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

Balance, end of period

    $ 7,658       $ -       $ 5,714       $ 7,636       $ -       $ 21,008  
                                   

 

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

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.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors which may affect our future results. Our MD&A should be read in conjunction with our 2008 Annual Report on Form 10-K.

Forward - Looking Statements

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies. 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 subject to future events, risks and uncertainties (many of which are beyond our control or are currently unknown to us) as well as potentially inaccurate estimates, assumptions and judgments by us that could cause actual results to differ materially from results contemplated by our forward-looking statements. Some of these events, risks and uncertainties are set forth in Item 1A – Risk Factors in our 2008 Annual Report on Form 10-K and our 2009 reports on Form 10-Q. Forward-looking statements are not guarantees of future performance and undue reliance should not be placed on these statements.

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 2008 Annual Report on Form 10-K.

Segments

We are a leading international forest products company primarily engaged in activities associated with timberland management, the sale and entitlement of real estate, and the production and sale of high value specialty cellulose fibers and fluff pulp. We operate in four reportable business segments: Timber, Real Estate, Performance Fibers, and Wood Products. Timber sales include all activities that relate to the harvesting of timber. Real Estate sales include all property sales, 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 parcels under contract previously in 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). These operations are combined and reported in “Other Operations.” Sales between operating segments are made based on the fair market value and intercompany profit or loss is eliminated in consolidation.

In the second quarter of 2009, as a result of stressed capital markets and the weak global economic conditions, Rayonier and its joint venture partners decided to discontinue the sale process of their New Zealand holdings and continue with on-going operations. As such, the operating results are included in continuing operations (See Note 3 – Investment in Joint Venture for additional information).

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 (expense) benefit, are not considered by Company management to be part of segment operations.

 

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Results of Operations, Three and Six Months Ended June 30, 2009 Compared to Three and Six Months Ended June 30, 2008.

 

Financial Information (in millions)

   Three Months Ended
June 30,
   Six Months Ended
June 30,
     2009     2008    2009     2008

Sales

         

Timber

     $ 43.6          $ 55.3        $ 78.5          $ 102.5  

Real Estate

         

  Development

     1.2          -            1.4          0.8  

  Rural

     5.8          12.5        9.6          36.3  

  Non-Strategic Timberlands

     34.4          10.9        57.0          15.7  
                             

  Total Real Estate

     41.4          23.4        68.0          52.8  
                             

Performance Fibers

         

  Cellulose Specialties

     134.7          147.0        291.4          279.7  

  Absorbent Materials

     42.4          40.1        89.3          82.3  
                             

  Total Performance Fibers

     177.1          187.1        380.7          362.0  
                             

Wood Products

     12.5          24.5        24.3          43.4  

Other operations

     9.0          14.6        14.7          28.4  

Intersegment Eliminations

     (4.9)         -            (8.1)         -      
                             

Total Sales

     $         278.7          $         304.9        $         558.1          $         589.1  
                             

Operating Income (Loss)

         

Timber

     $ 0.4          $ 9.5        $ (1.9)         $ 21.5  

Real Estate

     24.2          14.6        38.6          36.4  

Performance Fibers

     34.7          36.7        75.5          73.8  

Wood Products

     (2.6)         (0.3)       (6.1)         (2.9) 

Other operations

     (2.1)         1.1        (1.3)         0.5  

Corporate and other expenses / eliminations

     79.6    (1)      (8.0)       72.6    (1)      (15.2) 
                             

Total Operating Income

     134.2          53.6        177.4          114.1  

Interest Expense

     (12.2)         (13.1)       (24.8)         (25.6) 

Interest / Other income

     0.3          0.7        0.3          2.1  

Income tax expense

     (14.5)         (4.6)       (19.2)         (14.3) 
                             

Net Income

     $ 107.8          $ 36.6        $ 133.7          $ 76.3  
                             

Diluted Earnings Per Share

     $ 1.35          $ 0.46        $ 1.68          $ 0.96  
                             

 

(1)

Includes $85.9 million relating to the alternative fuel mixture credit. For additional information, see Note 2 – Alternative Fuel Mixture Credit.

 

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TIMBER

 

Sales (in millions)

        Changes Attributable to:     
     2008    Price    Volume/Mix    Other    2009

Three months ended June 30,

              

  Eastern

     $        28.6        $        (8.0)       $        10.3        $        -            $        30.9  

  Western

   24.1      (4.0)     (8.9)     (0.5)     10.7  

  New Zealand

   2.6      -          -          (0.6)     2.0  
                        

  Total Sales

     $        55.3        $      (12.0)       $          1.4        $       (1.1)       $        43.6  
                        

Six months ended June 30,

              

  Eastern

     $        52.7        $      (13.4)       $        15.4        $        -            $        54.7  

  Western

   44.7      (7.5)     (15.0)     (2.2)     20.0  

  New Zealand

   5.1      -          -          (1.3)     3.8  
                        

  Total Sales

     $      102.5        $      (20.9)       $          0.4        $       (3.5)       $        78.5  
                        

Operating Income (in millions)

        Changes Attributable to:     
     2008    Price    Volume/Mix    Cost/Other    2009

Three months ended June 30,

              

  Eastern

     $          3.0        $        (8.0)     $          0.6        $          7.8        $          3.4  

  Western

   7.3      (4.0)     (5.7)     -         (2.4) 

  New Zealand

   (0.8)     -          -          0.2      (0.6) 
                        

  Total Operating Income

     $          9.5        $      (12.0)     $        (5.1)       $          8.0        $          0.4  
                        

Six months ended June 30,

              

  Eastern

     $          5.5        $      (13.4)     $          1.1        $        13.1        $          6.3  

  Western

   15.9      (7.5)     (10.9)     (3.8)     (6.3) 

  New Zealand

   0.1      -          -          (2.0)     (1.9) 
                        

  Total Operating Income

     $        21.5        $      (20.9)     $        (9.8)       $          7.3        $        (1.9) 
                        

In the Eastern Region, sales and operating income increased from the prior year periods. Volumes rose 8 percent and 13 percent while average prices declined 16 and 18 percent, for the three and six months ended June 30, 2009 from the prior year periods, respectively, reflecting a sales shift from sawtimber to lower-priced pulpwood. Additionally, the results reflect lower costs due to sales mix and increased non-timber income.

In the Western region, sales and operating income were below the prior year periods as weak demand and planned harvest reductions continued to negatively impact prices and volumes. Average prices in the region declined 17 percent and 20 percent for the quarter and year-to-date periods, respectively, while volumes declined 45 percent for both periods compared to the prior year periods, respectively. Operating income was further impacted by higher depletion costs from a second quarter 2008 timberland acquisition, somewhat offset by lower production and overhead costs. The Company plans to continue operating at reduced harvest levels until market conditions improve.

The year-to-date results were also impacted by lower equity earnings from the New Zealand joint venture due to weaker markets and the absence of a first quarter 2008 land transaction.

 

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REAL ESTATE

 

Sales (in millions)

        Changes Attributable to:          
    

 

2008

   Price      Volume/Mix      2009   

Three months ended June 30,

              

Development

     $ -            $ -             $ 1.2        $ 1.2     

Rural

     12.5        (0.6)       (6.1)       5.8     

Non-Strategic Timberlands

     10.9        (19.4)       42.9        34.4     
                              

  Total Sales

     $     23.4        $     (20.0)       $ 38.0        $ 41.4     
                              

Six months ended June 30,

              

Development

     $ 0.8        $ (2.4)       $ 3.0        $ 1.4     

Rural

     36.3        (3.1)           (23.6)       9.6     

Non-Strategic Timberlands

     15.7        (18.5)       59.8        57.0     
                              

  Total Sales

     $ 52.8        $ (24.0)       $ 39.2        $     68.0     
                              

 

Operating Income (in millions)

        Changes Attributable to:     
     

 

2008

   Price      Volume/Mix        Cost/Other      2009

Three months ended June 30,

              

  Total Operating Income

     $ 14.6        $ (20.0)       $ 28.2        $ 1.4        $ 24.2  
                                  

 

Six months ended June 30,

              

  Total Operating Income

     $ 36.4        $ (24.0)       $ 26.6        $ (0.4)       $     38.6  
                                  

Sales and operating income increased during the three and six months ended June 30, 2009, compared to the prior year periods due to higher non-strategic timberland volumes, partially offset by a decline in rural property sales and lower per acre prices due to sales mix. Second quarter of 2009 included a 29,933 acre non-strategic timberland sale in central Georgia for $33.4 million.

PERFORMANCE FIBERS

 

Sales (in millions)

        Changes Attributable to:          
    

 

2008

   Price      Volume/Mix      2009   

Three months ended June 30,

              

Cellulose Specialties

     $     147.0        $ 21.1        $ (33.4)       $     134.7     

Absorbent Materials

     40.1        (7.7)       10.0        42.4     
                              

  Total Sales

     $ 187.1        $ 13.4        $ (23.4)       $ 177.1     
                              

 

Six months ended June 30,

              

Cellulose Specialties

     $ 279.7        $ 44.0        $     (32.3)       $ 291.4     

Absorbent Materials

     82.3        (9.1)       16.1        89.3     
                              

  Total Sales

     $ 362.0        $     34.9        $ (16.2)       $ 380.7     
                              

Cellulose specialties prices increased 19 percent and 18 percent for the three and six months ended June 30, 2009 compared to the prior year periods, respectively, while volumes declined 23 percent and 12 percent for the quarter and year, respectively, primarily due to timing of customer orders. A number of customers undertook inventory destocking initiatives in the second quarter of 2009 due to global economic weakness.

 

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Absorbent materials prices declined 16 percent and 9 percent as volumes increased 26 percent and 21 percent for the quarter and year, respectively. Prices declined due to weaker markets, while volumes increased from improved production as the 2008 results were impacted by unplanned maintenance outages.

 

Operating Income (in millions)

        Changes Attributable to:     
     2008    Price    Volume/Mix    Costs    2009

Three months ended June 30,

              

Total Operating Income

     $         36.7      $         13.4      $ (7.7)      $             (7.7)      $         34.7  
                                  

Six months ended June 30,

              

Total Operating Income

     $ 73.8      $ 34.9      $             (7.1)      $           (26.1)      $         75.5  
                                  

Operating income reflects higher cellulose specialties prices, declines in cellulose specialties volumes and absorbent material prices, and higher input costs.

WOOD PRODUCTS

 

Sales (in millions)         Changes Attributable to:         
     2008    Price   

 

Volume/Mix

   2009  

Three months ended June 30,

             

Total Sales

     $         24.5      $             (3.5)      $             (8.5)      $         12.5  
                             

 

Six months ended June 30,

             

Total Sales

     $         43.4      $             (5.3)      $           (13.8)      $         24.3  
                             

Sales declined during both 2009 periods as a result of lower prices and volumes due to the weak housing market and planned production curtailments. We are operating below capacity at our lumber mills and plan to continue at these levels until market conditions improve.

 

Operating Loss (in millions)

        Changes Attributable to:     
     2008    Price    Volume/Mix    Costs    2009

Three months ended June 30,

              

Total Operating Loss

     $         (0.3)      $             (3.5)      $           (0.5)      $                 1.7      $             (2.6)
                                  

Six months ended June 30,

              

Total Operating Loss

     $         (2.9)      $             (5.3)      $             0.4      $                 1.7      $             (6.1)
                                  

Operating results declined in 2009 from the prior year periods as lower prices were partially offset by improved wood costs.

OTHER OPERATIONS

Sales of $9 million for the second quarter were $6 million below the prior year period while operating income declined $3 million to an operating loss of $2 million. For the six months ended June 30, 2009, sales of $15 million and an operating loss of $1 million were $14 million and $2 million below the prior year period, respectively. These results are primarily the result of lower log trading volumes and prices in addition to foreign exchange losses.

Corporate and Other Expenses

In April 2009, we became certified as an alternative fuel mixer entitling us to be eligible for the alternative fuel mixture credit of 50 cents per gallon of “black liquor” (a biomass based fuel) burned as part of an alternative fuel mixture at our Performance Fibers mills. The second quarter includes other income of $86 million for the credit (See Note 2 – Alternative Fuel Mixture

 

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Credit). Excluding the alternative fuel mixture credit, corporate and other expenses declined $2 million for the three and six months ended June 30, 2009 compared to the prior year periods, primarily due to general cost reductions. The Company will continue to recognize credits as they are earned through the expiration of the tax credit, currently scheduled for December 31, 2009; however, changes in law could be proposed or enacted during 2009 that may limit or terminate the Company’s eligibility for this credit.

Interest Expense and Other Income, Net

Interest expense and other income, net for second quarter 2009 was consistent with the prior year period while the year-to-date results increased $1 million, due to higher average net debt balances offset by lower average interest rates.

Income Tax Expense

The second quarter effective tax rates before discrete items were 21.5 percent and 11.1 percent in 2009 and 2008, respectively. Year-to-date effective tax rates were 20.2 percent and 16.0 percent in 2009 and 2008, respectively. The increased rates in 2009 were due to proportionately higher earnings from the Company’s taxable REIT subsidiary.

Including discrete items, the effective tax rates for the quarter and year-to-date were 11.9 percent and 12.6 percent compared to 11.1 percent and 15.8 percent in 2008, respectively.

Outlook

Our unique business mix, strong balance sheet, and conservative debt levels provide significant operating flexibility. We expect to generate strong cash flows in 2009 well above our $2.00 per share dividend and are increasing our full year guidance for CAD to be comparable to 2008. Also, we anticipate EBITDA to be only 5 percent to 10 percent below 2008 and EPS to be 15 percent to 20 percent lower.

We are encouraged by the gradual improvement recently seen in housing starts and the continued export demand for our Western and New Zealand timber; however, we will continue to reduce sawtimber harvest levels until demand and pricing improve. In Real Estate, we expect continued interest in our rural HBU and non-strategic timberlands. Performance Fibers earnings are expected to remain strong and above 2008 levels.

Liquidity and Capital Resources

Historically, our operations have generally produced consistent cash flows and required limited capital resources. Short-term borrowings have helped fund cyclicality and seasonality in working capital needs and long-term debt has been used to fund major acquisitions. We have $122 million in installment notes coming due on December 31, 2009 and anticipate refinancing these notes by accessing the corporate debt markets, or by borrowing under our revolving bank facility which has $145 million of capacity as of June 30, 2009.

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

 

     As of June 30,
2009
   As of December 31,
2008

 Cash and cash equivalents (1)

     $                         60        $                         62  

 Total debt (2)

     750        747  

 Shareholders’ equity (2)

     1,014        939  

 Total capitalization (total debt plus equity) (2)

     1,764        1,686  

 Debt to capital ratio (2)

     43%       44% 

 

(1)

Cash and cash equivalents consisted primarily of time deposits with original maturities of 90 days or less.

(2)

Restated as a result of adopting FSP APB 14-1. See Note 1 – Basis of Presentation and New Accounting Pronouncements.

Cash Provided by Operating Activities (in millions of dollars)

 

         2009            2008            Decrease    

 Six months ended June 30,

     $     127        $     155        $     28  

Cash provided by operating activities decreased $28 million primarily from increased working capital requirements due to the timing of customer payments, lower earnings from operations in the timber segment and higher inventory levels resulting from lower second quarter 2009 shipments.

 

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Cash Used for Investing Activities (in millions of dollars)

 

         2009            2008            Decrease    

 Six months ended June 30,

     $             53        $           284        $         231  

Cash used for investing activities decreased as we had no significant timberland acquisitions this year versus acquisitions of $229 million of timberlands in 2008. In addition, capital expenditures were lower by $10 million, partially offset by changes in restricted cash.

Cash Used for Financing Activities (in millions of dollars)

 

         2009            2008            Increase    

 Six months ended June 30,

     $             76        $             31        $             45  

Cash used for financing activities increased in 2009 primarily due to net borrowings of $45 million in 2008.

Expected 2009 Expenditures

We made pension contributions of $5 million in the first six months of 2009 compared to no contributions made in the same period of 2008. We have mandatory pension contributions of approximately $9 million due in 2009, although we may elect to make additional discretionary contributions. Income tax payments totaled $5 million during the first six months of 2009 compared to payments of $4 million in the same period 2008. We expect net tax payments to be approximately $9 million for full year 2009, compared to $13 million for full year 2008. We do not expect to make any estimated federal income tax payments related to our 2009 TRS operations as we anticipate offsetting the TRS federal income tax liability with the alternative fuel mixture credit. See Note 2 – Alternative Fuel Mixture Credit for additional information. Capital expenditures in 2009 are forecasted to be between $87 million and $90 million. Environmental expenditures related to dispositions and discontinued operations were $4 million for the first six months ended June 30, 2009. Full year expenditures of approximately $7 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. Adjusted CAD as defined, however, may not be comparable to similarly titled measures reported by other companies.

Below is a reconciliation of Cash Provided by Operating Activities to EBITDA for the respective periods (in millions of dollars):

 

         Three Months Ended    
June 30,
       Six Months Ended    
June 30,
    
     2009    2008    2009    2008   

 Cash provided by operating activities

     $ 62.4        $ 54.7        $ 127.2        $ 154.9     

 Non-cash cost of real estate sold

     (1.7)       (2.0)       (5.2)       (4.6)    

 Income tax expense

     14.5        4.6        19.2        14.3     

 Interest, net

     12.0        12.4        24.5        23.4     

 Balance sheet changes related to the
alternative fuel mixture credit

     79.3        -        79.3        -      

 Other balance sheet changes

     15.9        22.3        19.1        (2.1)    
                              

 EBITDA

     $     182.4        $     92.0        $     264.1        $     185.9     
                              

EBITDA is a non-GAAP measure of operating cash generating capacity. For the three months ended June 30, 2009, EBITDA was $90 million above the prior year period primarily due to the alternative fuel mixture credit of $86 million recognized in the second quarter ended June 30, 2009. The majority of the cash from the alternative fuel mixture credit is expected to be received in 2010. Increased operating results in the Real Estate segment due to higher sales were mostly offset by lower operating results in the Timber segment due to lower sawtimber demand.

 

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For the six months ended June 30, 2009, EBITDA was $264 million, $78 million above the prior year period, primarily due to the alternative fuel mixture credit and higher sales in the Real Estate segment, partially offset by lower operating earnings in the Timber segment.

A non-cash expense critical to the economics of both our Timber and Real Estate core businesses is the non-cash cost basis of real estate sold. EBITDA plus the non-cash cost basis of real estate sold for the three and six months ended June 30, 2009 and 2008 totaled $184 million and $94 million, and $269 million and $191 million, respectively.

EBITDA is also used for evaluating segment cash return on investment, allocating resources and for valuation purposes. EBITDA by segment is a critical valuation measure used by the Chief Operating Decision Maker, existing shareholders and potential shareholders to measure how management is performing relative to the assets with which they have been entrusted. EBITDA by segment was as follows (millions of dollars):

 

         Three Months Ended    
June 30,
       Six Months Ended    
June 30,
     2009    2008    2009    2008

EBITDA by Segment

           

Timber

     $ 22.4        $ 30.9        $ 37.5        $ 61.0  

Real Estate

     36.3        17.3        56.1        41.7  

Performance Fibers

     47.4        49.6        102.5        97.8  

Wood Products

     (1.3)       1.0        (3.7)       (0.1) 

Other Operations

     (2.0)       1.1        (1.3)       0.5  

Corporate and other

     79.6        (7.9)       73.0        (15.0) 
                           

Total

     $                 182.4        $                 92.0        $                 264.1        $                 185.9  
                           

 

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The following tables reconcile Cash Provided by Operating Activities by segment to EBITDA by segment (millions of dollars):

 

      Timber     Real
 Estate 
   Performance 
Fibers
  Wood
 Products 
  Other
 Operations 
   Corporate 
and other
  Total

Three Months Ended June 30, 2009

             

Cash provided by operating activities

    $ 31.2       $ 39.3       $ 31.9       $ (0.8)      $ (7.4)      $ (31.8)      $ 62.4  

Less: Non-cash cost basis of real estate sold

    -         (1.7)      -         -         -         -         (1.7) 

Add: Income tax expense

    -         -         -         -         -         14.5       14.5  

         Interest, net

    -         -         -         -         -         12.0       12.0  

         Other balance sheet changes

    (8.8)      (1.3)      15.5       (0.5)      5.4       84.9       95.2  
                                         

EBITDA

    $ 22.4       $ 36.3       $ 47.4       $ (1.3)      $ (2.0)      $ 79.6       $ 182.4  
                                         

Three Months Ended June 30, 2008

             

Cash provided by operating activities

    $ 39.9       $ 20.5       $ 21.6       $ 1.7       $ (2.9)      $ (26.1)      $ 54.7  

Less: Non-cash cost basis of real estate sold

    -         (2.0)      -         -         -         -         (2.0) 

Add: Income tax expense

    -         -         -         -         -         4.6       4.6  

         Interest, net

    -         -         -         -         -         12.4       12.4  

         Other balance sheet changes

    (9.0)      (1.2)      28.0       (0.7)      4.0       1.2       22.3  
                                         

EBITDA

    $ 30.9       $ 17.3       $ 49.6       $ 1.0       $ 1.1       $ (7.9)      $ 92.0  
                                         

Six Months Ended June 30, 2009

             

Cash provided by operating activities

    $ 45.0       $ 60.8       $ 74.1       $ (3.6)      $ (12.6)      $ (36.5)      $ 127.2  

Less: Non-cash cost basis of real estate sold

    -         (5.2)      -         -         -         -         (5.2) 

Add: Income tax expense

    -         -         -         -         -         19.2       19.2  

         Interest, net

    -         -         -         -         -         24.5       24.5  

         Other balance sheet changes

    (7.5)      0.5       28.4       (0.1)      11.3       65.8       98.4  
                                         

EBITDA

    $ 37.5       $ 56.1       $ 102.5       $ (3.7)      $ (1.3)      $ 73.0       $ 264.1  
                                         

Six Months Ended June 30, 2008

             

Cash provided by operating activities

    $ 66.4       $ 46.7       $ 79.9       $ (2.3)      $ (0.7)      $ (35.1)      $ 154.9  

Less: Non-cash cost basis of real estate sold

    -         (4.6)      -         -         -         -         (4.6) 

Add: Income tax expense

    -         -         -         -         -         14.3       14.3  

         Interest, net

    -         -         -         -         -         23.4       23.4  

         Other balance sheet changes

    (5.4)      (0.4)      17.9       2.2       1.2       (17.6)      (2.1) 
                                         

EBITDA

    $     61.0       $     41.7       $     97.8       $     (0.1)      $     0.5       $     (15.0)      $     185.9  
                                         

Adjusted CAD is a non-GAAP measure of cash generated during a period that is available for dividend distribution, repurchasing common shares, debt reduction and for strategic acquisitions net of associated financing (e.g. realizing LKE tax benefits). We define Cash Available for Distribution (“CAD”) as Cash Provided by Operating Activities adjusted for capital spending, the tax benefits associated with certain strategic acquisitions, the change in committed cash, and other items which include cash provided by discontinued operations, proceeds from matured energy forward contracts and the change in capital expenditures purchased on account. Committed cash represents outstanding checks that have been drawn on our zero balance bank accounts but have not been paid. In compliance with Securities and Exchange Commission requirements for non-GAAP measures, we reduce CAD by mandatory debt repayments which results in the measure entitled “Adjusted CAD.”

 

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Below is a reconciliation of Cash Provided by Operating Activities to Adjusted CAD (in millions of dollars):

 

     Six Months Ended June 30,
         2009    2008    

Cash provided by operating activities

     $             127.2        $             154.9  

Capital spending, net

     (50.1)       (59.9) 

LKE tax benefits on third-party real estate sales*

     -          (5.7) 

Change in committed cash**

     20.5        4.9  

Other

     (2.1)       2.8  
             

CAD

     95.5        97.0  

Mandatory debt repayments

     -          -    
             

Adjusted CAD

     $ 95.5        $ 97.0  
             

* Represents income taxes which would have been paid had we not completed the third-party LKE transactions.

** The change in committed cash was mainly due to the timing of accounts payable disbursements.

For the six months ended June 30, 2009, adjusted CAD was consistent with the prior period. Adjusted CAD generated in any period is not necessarily indicative of amounts that may be generated in future periods.

Liquidity Facilities

We have a $250 million unsecured revolving credit facility at an interest rate of LIBOR plus 40 basis points. The facility expires in August 2011. At June 30, 2009, the available borrowing capacity was $145 million.

In connection with our installment notes and the $250 million revolving credit facility, certain covenants must be met, including ratios based on the facility’s definition of EBITDA (“Covenant EBITDA”). Covenant EBITDA consists of earnings from continuing operations before the cumulative effect of accounting changes and any provision for dispositions, income taxes, interest expense, depreciation, depletion, amortization and the non-cash cost of real estate sold. Our dividend restriction covenant limits the sum of dividends in any period of four fiscal quarters to 90 percent of Covenant Funds from Operations (“Covenant FFO”) plus the aggregate amount of dividends permitted under Covenant FFO in excess of the amount of dividends paid during the prior four fiscal quarters. Covenant FFO is defined as Consolidated Net Income excluding gains or losses from debt restructuring and investments in marketable securities plus depletion, depreciation, amortization and the non-cash cost of real estate sold. Under a covenant relating to the $328 million of installment notes, Rayonier Forest Resources, L.P. (“RFR”), a wholly-owned REIT subsidiary, may not incur additional debt unless, at the time of incurrence, and after giving pro forma effect to the receipt and application of the proceeds of such debt, RFR meets or exceeds a minimum ratio of cash flow to fixed charges. RFR’s ability to make certain quarterly distributions to Rayonier Inc. is limited to an amount equal to RFR’s “available cash,” which consists of its opening cash balance plus proceeds from permitted borrowings. At June 30, 2009, we are in compliance with all covenants.

The covenants listed below, which are the most significant financial covenants in effect as of June 30, 2009, are calculated on a trailing 12-month basis:

 

    Covenant
    Requirement    
  Actual ratio at
    June 30, 2009    
      Favorable    

Covenant EBITDA to consolidated interest expense
should not be less than

  2.50 to 1   9.70 to 1   7.20

Total debt to Covenant EBITDA should not exceed

  4.00 to 1   1.59 to 1   2.41

RFR cash flow available for fixed charges
to RFR fixed charges should not be less than

  2.50 to 1   5.15 to 1   2.65

Dividends paid should not exceed 90 percent of Covenant FFO

  90%   40%   50%

In addition to the financial covenants listed above, the installment notes and credit facility include customary covenants that limit the incurrence of debt, the disposition of assets, and the making of certain payments between RFR and Rayonier among others. An asset sales covenant in the RFR installment note-related agreements requires us, subject to certain exceptions, to either reinvest cumulative timberland sales proceeds for individual sales greater than $10 million (the “excess proceeds”) in timberland-related investments and activities or, once the amount of excess proceeds not reinvested exceeds $50 million, to offer the note holders prepayment of the notes ratably in the amount of the excess proceeds. There were no excess proceeds as of June 30, 2009 or December 31, 2008.

 

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Contractual Financial Obligations and Off-Balance Sheet Arrangements

We have no material changes to the Contractual Financial Obligations table as presented on page 37 of our 2008 Annual Report on Form 10-K. See Note 11– Guarantees for details on the letters of credit, surety bonds and guarantees as of June 30, 2009.

Sales Volumes by Segment:

 

         Three Months Ended June 30,            Six Months Ended June 30,    
     2009    2008    2009    2008

 Timber

           

Western region, in millions of board feet

   43      77      75      136  

Eastern region, in thousands of short green tons

   2,019      1,864      3,591      3,176  

 Real Estate

           

Acres sold

           

Development

   213      -      223      47  

Rural

   2,793      5,444      4,162      11,932  

Non-strategic timberlands

   30,594      6,227      49,663      10,300  
                   

Total

   33,600      11,671      54,048      22,279  

 Performance Fibers

           

Sales Volume

           

Cellulose specialties, in thousands of metric tons

   91      118      199      225  

Absorbent materials, in thousands of metric tons

   65      51      130      107  

 Lumber

           

Sales volume, in millions of board feet

   57      87      109      161  

 

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Table of Contents
Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market and Other Economic Risks

Our exposures to market risk have not changed materially since December 31, 2008. For quantitative and qualitative disclosures about market risk, see Item 7A—Quantitative and Qualitative Disclosures about Market Risk in our 2008 Annual Report of Form 10-K.

 

Item 4. Controls and Procedures

Rayonier management is responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)), are designed with the objective of ensuring that information required to be disclosed by the Company in reports filed under the Exchange Act, such as this quarterly report on Form 10-Q, is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Because of the inherent limitations in all control systems, no control evaluation can provide absolute assurance that all control exceptions and instances of fraud have been prevented or detected on a timely basis. Even systems determined to be effective can provide only reasonable assurance that their objectives are achieved.

Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of the disclosure controls and procedures provided reasonable assurance that the controls were effective as of June 30, 2009.

In the quarter ended June 30, 2009, based upon the evaluation required by paragraph (d) of SEC Rule 13a-15, there were no changes in our internal control over financial reporting that would materially affect or are reasonably likely to materially affect our internal control over financial reporting.

 

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Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

Information regarding contingencies related to pending matters, threatened litigation, environmental and other matters is set forth in Note 13 – Contingencies of the Notes to Condensed Consolidated Financial Statements set forth in Part I of this Report, which are hereby incorporated by reference.

 

Item 1A. Risk Factors

There were no material changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2008, except as noted below. For a full description of these risk factors, please refer to Item 1A—Risk Factors, in the 2008 Annual Report on Form 10-K.

The following has been added as a risk factor:

Alternative fuel mixture credit.

The Company has disclosed information concerning its eligibility for the alternative fuel mixture credit. See Note 2 – Alternative Fuel Mixture Credit for additional information. Under current law, the tax credit may be earned through the burning of qualifying fuel mixtures on or before December 31, 2009. There can be no assurance that the IRS will not challenge the Company's eligibility for such tax credit, or that changes in law will not be proposed or enacted during calendar year 2009 that may limit or terminate the Company’s eligibility for this credit.

 

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders of the Company was held on April 6, 2009 (the “Annual Meeting”). At that meeting, five directors were elected as follows:

 

     Votes For    Votes Against    Abstain

Director of Class I, Term Expires in 2010

        

John E. Bush

   69,328,525    1,961,648    114,606

Director of Class II, Term Expires in 2011

        

David W. Oskin

   68,873,728    2,340,083    190,968

Directors of Class III, Terms Expire in 2012

        

Richard D. Kincaid

   65,520,745    5,776,614    107,420

V. Larkin Martin

   62,574,870    8,723,793    106,117

Ronald Townsend

   62,998,837    8,248,648    157,294

At the Annual Meeting, a vote was also taken to ratify the appointment of Deloitte & Touche LLP as the independent registered public accounting firm for the Company. The result of such vote was as follows:

 

Shares Voted with Regard to Ratification of Auditors

         
        Votes For   Votes Against  

 

Abstain

                   
      70,951,730       374,671   77,586          

Abstentions were not counted for or against any of the above matters or nominees.

 

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Table of Contents
Item 6. Exhibits

 

  3.1

  

Amended and Restated Articles of Incorporation

    

Incorporated by reference to Exhibit 3.1 to the

Registrant’s May 22, 2007 Form 8-K

  3.2

  

Bylaws

    

Incorporated by reference to Exhibit 3.2 to the

Registrant’s May 22, 2007 Form 8-K

31.1

  

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

    

Filed herewith

31.2

  

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

    

Filed herewith

32

  

Certification pursuant to Section 906 of the Sarbanes-Oxley Act

    

Furnished herewith

 

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Table of Contents

SIGNATURE

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

RAYONIER INC.

By:

 

/s/ HANS E. VANDEN NOORT

 

Hans E. Vanden Noort

 

Senior Vice President and Chief Financial Officer

July 31, 2009

 

37

Section 302 Certification of CEO

EXHIBIT 31.1

CERTIFICATION

I, Lee M. Thomas, certify that:

 

  1.

I have reviewed this quarterly report on Form 10-Q of Rayonier Inc.;

 

  2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a.

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b.

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c.

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d.

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a.

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b.

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 31, 2009

 

/s/ LEE M. THOMAS

Lee M. Thomas

Chairman, President and Chief Executive Officer

Section 302 Certification of CFO

EXHIBIT 31.2

CERTIFICATION

I, Hans E. Vanden Noort, certify that:

 

  1.

I have reviewed this quarterly report on Form 10-Q of Rayonier Inc.;

 

  2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (a