Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x

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

For the quarterly period ended September 30, 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 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  x    NO  ¨

Indicate by check mark whether the registrant 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 October 22, 2009, there were outstanding 79,464,488 Common Shares of the Registrant.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          PAGE

PART I.

   FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
   Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2009 and 2008    1
   Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008    2
   Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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 6.

   Exhibits    36
   Signature    38


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 September 30,           Nine Months Ended September 30,    
     2009   2008   2009   2008

SALES

    $ 300,648       $ 317,465       $ 858,731       $ 906,525  
                       

Costs and Expenses

       

Cost of sales

    231,836       252,714       672,855       700,761  

Selling and general expenses

    15,972       16,192       44,962       47,998  

Other operating income, net (Note 2)

    (59,251)      (1,488)      (150,425)      (6,193) 
                       
    188,557       267,418       567,392       742,566  

Equity in loss of New Zealand joint venture

    (943)      (1,046)      (2,782)      (878) 
                       

OPERATING INCOME

    111,148       49,001       288,557       163,081  

Interest expense

    (12,789)      (11,829)      (37,630)      (37,438) 

Interest and miscellaneous income, net

    310       341       594       2,462  
                       

INCOME BEFORE INCOME TAXES

    98,669       37,513       251,521       128,105  

Income tax expense

    (17,529)      (8,611)      (36,707)      (22,941) 
                       

NET INCOME

    81,140       28,902       214,814       105,164  
                       

OTHER COMPREHENSIVE INCOME (LOSS)

       

Foreign currency translation adjustments

    2,620       (9,843)      13,568       (7,333) 

Joint venture cash flow hedges

    968       -           (1,659)      -      

Retiree benefit plan amendment, net of income tax expense of $7,668 and $7,668

    -           16,388       -           16,388  

Amortization of pension and postretirement plans, net of income tax expense of $347 and $406, and $1,013 and $1,595

    1,170       995       2,286       3,779  
                       

COMPREHENSIVE INCOME

    $ 85,898       $ 36,442       $ 229,009       $ 117,998  
                       

EARNINGS PER COMMON SHARE

       

Basic earnings per share

    $ 1.03       $ 0.37       $ 2.72       $ 1.34  
                       

Diluted earnings per share

    $ 1.01       $ 0.36       $ 2.69       $ 1.32  
                       

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

RAYONIER INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)

 

         September 30,    
2009
       December 31,    
2008
ASSETS

CURRENT ASSETS

     

Cash and cash equivalents

     $ 153,145        $ 61,685  

Accounts receivable, less allowance for doubtful accounts of $899 and $1,130

     97,072        75,657  

Inventory

     

Finished goods

     77,091        78,577  

Work in process

     10,796        7,412  

Raw materials

     9,524        8,400  

Manufacturing and maintenance supplies

     2,564        2,477  
             

Total inventory

     99,975        96,866  

Income tax and alternative fuel mixture credit receivable

     134,502        1,886  

Prepaid and other current assets

     58,944        42,929  
             

Total Current Assets

     543,638        279,023  
             

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION

     1,191,689        1,254,978  

PROPERTY, PLANT AND EQUIPMENT

     

Land

     24,877        24,445  

Buildings

     124,451        124,174  

Machinery and equipment

     1,265,028        1,244,946  
             

Total property, plant and equipment

     1,414,356        1,393,565  

Less - accumulated depreciation

     (1,068,071)       (1,042,756) 
             
     346,285        350,809  
             

INVESTMENT IN JOINT VENTURE

     48,849        42,950  

OTHER ASSETS

     161,723        154,104  
             

TOTAL ASSETS

     $ 2,292,184        $ 2,081,864  
             
LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

     

Accounts payable

     $ 49,110        $ 70,714  

Bank loans and current maturities

     660        620  

Accrued interest

     14,302        4,202  

Current liabilities for dispositions and discontinued operations (Note 12)

     9,354        8,214  

Other current liabilities

     92,939        75,871  
             

TOTAL CURRENT LIABILITIES

     166,365        159,621  
             

LONG-TERM DEBT

     809,070        746,591  

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

     90,227        96,361  

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 14)

     113,792        121,440  

OTHER NON-CURRENT LIABILITIES

     34,983        18,914  

COMMITMENTS AND CONTINGENCIES (Notes 11 and 13)

     

SHAREHOLDERS’ EQUITY

     

Common Shares, 120,000,000 shares authorized, 79,453,170 and 78,814,431 shares issued and outstanding

     555,840        527,302  

Retained earnings

     606,008        509,931  

Accumulated other comprehensive loss

     (84,101)       (98,296) 
             

TOTAL SHAREHOLDERS’ EQUITY

     1,077,747        938,937  
             

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

     $ 2,292,184        $ 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)

(Dollars in thousands)

 

         Nine Months Ended September 30,    
     2009    2008

OPERATING ACTIVITIES

     

Net income

     $ 214,814        $ 105,164  

Non-cash items included in income:

     

Depreciation, depletion and amortization

     126,834        112,037  

Non-cash cost of real estate sold

     6,295        7,638  

Non-cash stock-based incentive compensation expense

     11,952        10,187  

Amortization of convertible debt discount

     4,575        4,027  

Deferred income tax (benefit) expense

     (5,721)       10,793  

Excess tax benefits on stock-based compensation

     (2,287)       (3,406) 

Other

     9,250        4,113  

Changes in operating assets and liabilities:

     

Receivables

     (20,493)       (17,786) 

Inventories

     (4,122)       (2,095) 

Accounts payable

     (16,407)       7,254  

Income tax and alternative fuel mixture credit receivable

     (132,616)       10,342  

Other current assets

     (13,018)       (10,757) 

Accrued liabilities

     32,922        26,216  

Other assets

     15        (2,386) 

Other non-current liabilities

     8,293        (8,021) 

Expenditures for dispositions and discontinued operations

     (5,968)       (5,142) 
             

CASH PROVIDED BY OPERATING ACTIVITIES

     214,318        248,178  
             

INVESTING ACTIVITIES

     

Capital expenditures

     (65,078)       (74,852) 

Purchase of timberlands

     -            (229,525) 

Change in restricted cash

     1,243        4,604  

Other

     (7,685)       (8,400) 
             

CASH USED FOR INVESTING ACTIVITIES

     (71,520)       (308,173) 
             

FINANCING ACTIVITIES

     

Issuance of debt

     257,500        155,000  

Repayment of debt

     (185,620)       (110,585) 

Dividends paid

     (118,540)       (117,639) 

Repurchase of common shares

     (1,388)       (3,738) 

Proceeds from the issuance of common shares

     9,228        8,254  

Excess tax benefits on stock-based compensation

     2,287        3,406  

Purchase of exchangeable note hedge (Note 15)

     (23,460)       -      

Proceeds from issuance of warrant (Note 15)

     12,506        -      

Debt issuance costs

     (4,129)       -      
             

CASH USED FOR FINANCING ACTIVITIES

     (51,616)       (65,302) 
             

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     278        (792) 
             

CASH AND CASH EQUIVALENTS

     

Increase (decrease) in cash and cash equivalents

     91,460        (126,089) 

Balance, beginning of year

     61,685        181,081  
             

Balance, end of period

     $ 153,145        $ 54,992  
             

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

     

Cash paid during the period:

     

Interest

     $ 21,749        $ 22,213  
             

Income taxes

     $ 9,547        $ 765  
             

Non-cash investing activity:

     

Capital assets purchased on account

     $ 3,315        $ 5,118  
             

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”) have been 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 Financial Accounting Standards Board (“FASB”) issued new guidance related to accounting for convertible debt instruments which may be settled in cash upon conversion. This guidance requires entities with convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, to 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 this guidance on January 1, 2009 and retrospectively applied the fair value of the equity component net of accumulated amortization in 2007 and 2008. The adoption 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 $2.9 million, or $.04 per diluted share, and $2.6 million, or $0.03 per diluted share, in the nine months ended September 30, 2009 and 2008. See Note 15 – Convertible Debt for additional information on the Company’s convertible debt.

In December 2008, the FASB issued new guidance related to employers’ disclosures about postretirement benefit plan assets. The guidance amended previous guidance 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. The Company will properly disclose all information required by this new guidance related to postretirement benefit plan assets in its 2009 Form 10-K.

In May 2009, the FASB issued new guidance related to the disclosure of subsequent events. 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. This guidance 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 September 30, 2009, the date of the balance sheet, through October 28, 2009, the date of issuance of the unaudited interim condensed consolidated financial statements, and did not identify any events or transactions that should be recognized or disclosed.

In June 2009, the FASB issued new guidance related to the accounting for transfers of financial assets. The new standard 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 related to the consolidation of controlling and non-controlling interests in an entity. The Standard is effective for fiscal years beginning after November 15, 2009. The Company has not yet determined the impact of this pronouncement on its consolidated financial statements.

In June 2009, the FASB issued new guidance related to enhanced 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 Standard requires additional disclosures about an enterprise’s involvement in variable interest entities and is effective 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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Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

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 and uses an alternative fuel (“black liquor”) at its Jesup, Georgia and Fernandina Beach, Florida Performance Fibers 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 nine months ended September 30, 2009, include a credit of $55.8 million and $141.8 million, net of associated expenses, recorded in “Other operating income, net” for black liquor produced and used. The Company will continue to recognize credits as they are earned through the expiration of the tax credit, currently scheduled for December 31, 2009.

 

3.

INVESTMENT IN JOINT VENTURE

The Company holds a 40 percent interest in a joint venture (“JV”) that owns or leases approximately 327,000 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. 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.

In the second quarter of 2009, as a result of distressed 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 operating results are included in continuing operations in the Condensed Consolidated Statements of Income and Comprehensive Income for all periods presented.

 

4.

EARNINGS PER COMMON SHARE

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

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008

Net income 1

     $ 81,140          $ 28,902          $ 214,814          $ 105,164    
                           

Shares used for determining basic earnings per common share

     79,145,323        78,580,895        78,956,526        78,404,815  

Dilutive effect of:

           

Stock options

     413,740        645,664        356,068        691,910  

Performance and restricted shares

     548,052        344,804        433,440        292,560  
                           

Shares used for determining diluted earnings per common share

             80,107,115            79,571,363            79,746,034            79,389,285  
                           

Basic earnings per common share: 1

     $ 1.03          $ 0.37          $ 2.72          $ 1.34    
                           

Diluted earnings per common share: 1

     $ 1.01          $ 0.36          $ 2.69          $ 1.32    
                           

 

1

2008 has been restated as a result of adopting new guidance related to accounting for convertible debt instruments that may be settled in cash upon conversion. 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 tax. However, the Company is subject to U.S. federal corporate income tax on built-in gains (the excess of fair market value over tax

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

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. Third quarter tax rates before discrete items were 25.2 percent and 14.3 percent in 2009 and 2008, respectively. Year-to-date effective tax rates before discrete items were 22.1 percent and 15.5 percent in 2009 and 2008 respectively. The increased rates in 2009 were due to proportionately higher earnings from the Company’s taxable REIT subsidiary. REIT income not subject to tax decreased the tax rates (from the statutory rate) by 13.0 percent and 19.7 percent for the nine months ending September 30, 2009 and 2008, respectively.

Including discrete items, the effective tax rates for the quarter and year-to-date were 17.8 percent and 14.6 percent compared to 23.0 percent and 17.9 percent in 2008, respectively. In the third quarter of 2008, the Company recorded discrete tax items primarily related to the Company’s decision to offer its New Zealand operations for sale.

Uncertain Tax Positions

In accordance with the provisions related to accounting for uncertainty in income taxes, the Company recognizes the impact of a tax position if the position is “more likely than not” to prevail upon examination by the IRS. At September 30, 2009 and December 31, 2008, the Company’s liability was $18.1 million and $3.9 million, respectively. The increase reflects changes as a result of the uncertain positions taken or expected to be taken during the current year and IRS’ examination of tax years 2005 and 2006.

 

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 September 30, 2009 and December 31, 2008, the Company had $0.2 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.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

7.

SHAREHOLDERS’ EQUITY

An analysis of shareholders’ equity for the nine months ended September 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

             214,814            214,814 

Dividends ($1.50 per share)

             (118,737)           (118,737)

Issuance of shares under incentive stock plans

   688,101       9,228                 9,228 

Stock-based compensation

        11,952                 11,952 

Excess tax benefit on stock-based compensation

        2,287                 2,287 

Repurchase of common shares

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

Warrants and hedge, net (Note 15)

        (2,391)                (2,391)

Equity portion of convertible debt (Note 15)

        8,850                 8,850 

Amortization of pension and postretirement plans

                  2,286       2,286 

Foreign currency translation adjustment

                  13,568       13,568 

Joint venture cash flow hedges

                  (1,659)      (1,659)
                                

Balance, September 30, 2009

       79,453,170       $ 555,840       $ 606,008       $ (84,101)      $ 1,077,747 
                                

 

1

2008 has been restated as a result of adopting new guidance related to accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – Basis of Presentation and New Accounting Pronouncements.

 

8.

SEGMENT INFORMATION

Rayonier operates 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. 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.

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.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

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

 

     September 30,
2009
   December 31,
2008
    

ASSETS

        

Timber

     $ 1,307,575        $ 1,323,111     

Real Estate

     71,762        73,021     

Performance Fibers

     527,016        495,659     

Wood Products

     23,193        26,573     

Other Operations

     22,782        26,565     

Corporate and other 1

     339,856        136,935     
                

TOTAL

     $     2,292,184        $     2,081,864     
                

 

  1

Includes $133 million in net receivables due to the alternative fuel mixture credit recorded in 2009. See Note 2 – Alternative Fuel Mixture Credit for additional information.

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
    
     2009    2008    2009    2008   

SALES

              

Timber

     $ 46,465        $ 42,902        $ 124,957        $ 145,359     

Real Estate

     21,966        26,014        89,936        78,790     

Performance Fibers

     216,837        210,096        597,580        572,143     

Wood Products

     13,259        24,098        37,532        67,499     

Other Operations

     8,512        14,355        23,171        42,734     

Intersegment Eliminations

     (6,391)       -        (14,445)       -     
                              

TOTAL

     $     300,648        $     317,465        $     858,731        $     906,525     
                              

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
    
     2009   2008    2009   2008   

OPERATING INCOME (LOSS)

            

Timber

     $ 1,038       $ (1,414)       $ (867)      $ 20,089     

Real Estate

     12,795       14,017        51,363       50,401     

Performance Fibers

     49,524       43,029        125,060       116,832     

Wood Products

     (1,999)      327        (8,142)      (2,555)    

Other Operations

     (1,286)      463        (2,618)      982     

Corporate and other 1

     51,076       (7,421)       123,761       (22,668)    
                            

TOTAL

     $     111,148       $     49,001        $     288,557       $     163,081     
                            

 

  1

Three and nine months ended September 30, 2009 include $55.8 million and $141.8 million relating to the alternative fuel mixture credit. See Note 2 – Alternative Fuel Mixture Credit for additional information.

 

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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
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008

DEPRECIATION, DEPLETION

           

AND AMORTIZATION

           

Timber

    $     19,083       $     19,636       $     58,515       $     59,110  

Real Estate

     4,811        5,155        22,256        10,483  

Performance Fibers

     15,025        14,028        42,021        38,029  

Wood Products

     1,060        1,161        3,491        3,967  

Other Operations

     1        7        2        24  

Corporate and other

     179        151        549        424  
                           

TOTAL

    $ 40,159       $ 40,138       $ 126,834       $ 112,037  
                           

 

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 September 30, 2009, the Company had hedges through the end of 2009 on 15,700 barrels of fuel oil. The Company’s commodity forward contracts do not qualify for hedge accounting 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
   Balance Sheet Location    September 30,
2009
   December 31,
2008

 Fuel oil contracts

  

Other current liabilities

    $      (122)       $   (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    Location of (Loss)/Gain    Three Months Ended
September 30,
    Nine Months Ended
September 30,

as hedging instruments

   Recognized in Income    2009     2008     2009    2008

Fuel oil contracts

  

Other operating income, net

    $ (5 )       $ (346 )       $     1,216       $     750  

 

10.

FAIR VALUE MEASUREMENTS

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

 

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

 

 Investment in qualified special-purpose entity

  

 

 $

 

  2,757           

  

 

 $

 

    2,757   

  

 Commodity swap agreements        

     (122)                (122)     

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

The following table presents the carrying amount and estimated fair values of financial instruments held by the Company at September 30, 2009 and December 31, 2008, using market information and what the Company believes to be appropriate valuation methodologies.

 

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

 Cash and cash equivalents

   $         153,145        $     153,145        $         61,685        $         61,685      

 Short-term debt

    (660)        (660)        (620)        (620)     

 Long-term debt

    (809,070)        (912,929)        (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 federal, state and non-U.S. governmental agencies. As of September 30, 2009, the following financial guarantees were outstanding:

 

      Maximum
Potential
Payment
   Carrying
    Amount of    
Liability
    

 Standby letters of credit (1)

    $         47,745       $         39,278     

 Guarantees (2)

     3,767        53     

 Surety bonds (3)

     11,128        1,956     
                

 Total

    $     62,640       $     41,287     
                

 

  (1)

Approximately $39 million of the standby letters of credit serve as credit support for industrial revenue bonds. The remaining letters 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 September 30, 2009, a payment of $1.2 million remains. This guarantee expires in 2010.

In conjunction with a timberland sale and note monetization in the first quarter of 2004, the Company issued a make-whole agreement pursuant to which it guaranteed $2.5 million of obligations of a qualified special-purpose entity that was established to complete the monetization. At September 30, 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.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

12.

LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

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

 

           September 30, 2009                December 31, 2008           

Balance, January 1

    $         104,575        $         113,685      

Expenditures charged to liabilities

     (5,968)        (7,660)     

Increase (reduction) to liabilities

     974         (1,450)     
                

Balance, end of period

     99,581         104,575      

Less: Current portion

     (9,354)        (8,214)     
                

Non-current portion

    $ 90,227        $ 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 September 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”) — In the Company’s 2008 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the second quarter of 2009, there was a discussion of an NOV and proposed consent order received on March 28, 2008 by Southern Wood Piedmont Company (“SWP”) from the Environmental Protection Division (“EPD”) of the Georgia Department of Natural Resources, relating to SWP’s East Point, Georgia site. On October 23, 2009, EPD and SWP reached agreement to resolve this entire matter via a negotiated consent order, whereby SWP agreed, among other things, to pay a penalty of $100,000 and perform additional soil and groundwater investigatory and analysis activities on an agreed-upon timetable, and prepare an amended corrective action plan for the site, with stipulated penalties if these activities are not performed within the specified timeframes. The Company believes that, based on current information, its liabilities at September 30, 2009 adequately reflect the probable costs to be incurred based upon the ultimate resolution of this matter.

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 which 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.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

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
September 30,
   Three Months Ended
September 30,
     2009    2008    2009    2008

Components of Net Periodic Benefit Cost

           

 Service cost

    $ 1,182        $ 1,718        $ 181        $ 138  

 Interest cost

     4,864         4,142         257         287  

 Expected return on plan assets

     (5,489)        (5,215)        -         -  

 Amortization of prior service cost

     664         358         22         490  

 Amortization of plan amendment

     -         -         (2,391)        (797)  

 Amortization of losses

     1,949         1,211         1,273         139  
                           

Net periodic benefit cost

    $         3,170        $         2,214        $         (658)       $         257  
                           
     Pension    Postretirement
     Nine Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008

Components of Net Periodic Benefit Cost

           

 Service cost

    $ 4,867        $ 5,022        $ 361        $ 479  

 Interest cost

     13,562         12,109         858         1,595  

 Expected return on plan assets

     (16,071)        (15,490)        -         -  

 Amortization of prior service cost

     1,372         1,042         66         864  

 Amortization of plan amendment

     -         -         (7,175)        (797)  

 Amortization of losses

     4,647         3,540         4,389         725  
                           

Net periodic benefit cost

    $         8,377        $         6,223        $         (1,501)       $         2,866  
                           

The Company contributed approximately $9 million to the pension plans during the nine months ended September 30, 2009. The Company expects pension contributions to be approximately $10 million for full year 2009.

 

15.

CONVERTIBLE DEBT

4.50% Convertible notes issued August 2009

In August 2009, Rayonier TRS Holdings Inc. (“TRS”), a wholly-owned subsidiary of Rayonier, issued $172.5 million of 4.50 percent Senior Exchangeable Notes due 2015. The notes are guaranteed by Rayonier and are non-callable. The $172.5 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. Noteholders may convert their notes to common stock of Rayonier Inc., subject to certain conversion provisions including the market price of the stock and the trading price of the convertible notes. The initial exchange rate is 19.91 shares per $1,000 principal based on an exchange price equal to 122.5 percent of the stock’s closing price of $41.01 on August 6, 2009, or $50.24 per share.

In separate transactions, TRS and Rayonier purchased exchangeable note hedges and sold warrants, respectively, based on 3,433,699 underlying shares of Rayonier. These transactions had the effect of increasing the conversion premium from 22.5 percent to 46 percent or to $60.00 per share. The exchangeable note hedge and warrant transactions are intended to limit exposure of potential dilution to Rayonier shareholders from noteholders who could exchange the notes for Rayonier common shares. On exercise of the hedges, TRS will receive shares of Rayonier common stock equal to the difference between the then market price and the strike price of $50.24. The holders of the warrants will receive net shares from Rayonier if the share price is above $60.00 at maturity of the warrants.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

The purchased hedges and sold warrants are not part of the terms of the notes and will not affect the noteholders’ rights. Likewise, the noteholders will not have any rights with respect to the hedges or the warrants. The purchased hedges and the sold warrants meet the definition of derivatives. However, because these instruments have been determined to be indexed to the Company’s own stock and have been recorded in shareholders’ equity in the Condensed Consolidated Balance Sheet, the instruments are not subject to the mark-to-market adjustments

3.75% Convertible notes issued October 2007

In October 2007, TRS issued $300 million of 3.75 percent Senior Exchangeable Notes due 2012. The notes are guaranteed by Rayonier 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. Noteholders 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. 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 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 noteholders’ rights. Likewise, the noteholders 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. However, because these instruments have been determined to be indexed to the Company’s own stock and have been recorded in shareholders’ equity in the Condensed Consolidated Balance Sheet, the instruments are not subject to the mark-to-market adjustments.

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

 

     September 30,
2009
   December 31,
2008
    

Liabilities:

        

Principal amount of debt

        

3.75% Senior Exchangeable Notes

    $       300,000        $       300,000      

4.50% Senior Exchangeable Notes

     172,500         -      

Unamortized discount

        

3.75% Senior Exchangeable Notes

     (19,423)        (23,748)     

4.50% Senior Exchangeable Notes

     (13,687)        -      
                

Net carrying amount of debt

    $ 439,390        $ 276,252      

 

Equity:

        

Common Stock

    $ 28,093        $ 19,243      

The unamortized discounts for the 3.75 percent and 4.50 percent Senior Exchangeable Notes will be amortized through October 2012 and August 2015, respectively.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

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
September 30,
   Nine Months Ended
September 30,
    
     2009    2008    2009    2008   

Contractual interest coupon

              

3.75% Senior Exchangeable Notes

    $ 2,813       $ 2,813       $ 8,438       $ 8,412     

4.50% Senior Exchangeable Notes

     970        -        970        -     

Amortization of debt discount

              

3.75% Senior Exchangeable Notes

     1,442        1,342        4,325        4,027     

4.50% Senior Exchangeable Notes

     250        -        250        -     
                              

Total interest expense recognized

    $       5,475       $       4,155       $       13,983       $       12,439     
                              

The effective interest rate on the liability component of both issues for the three and nine months ended September 30, 2009 and 2008 was 6.21 percent.

 

16.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

 

         September 30, 2009            December 31, 2008         

Foreign currency translation adjustments

    $ 24,357        $ 10,789     

Joint venture cash flow hedges

     (1,659)        -         

Unrecognized components of employee
benefit plans, net of tax

     (106,799)        (109,085)     
                

Total

    $         (84,101)       $         (98,296)     
                

During the nine months ended September 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, TRS issued $300 million of 3.75 percent Senior Exchangeable Notes due 2012, and in August 2009 TRS issued $172.5 million of 4.5 percent Senior Exchangeable Notes due 2015. The notes for both transactions are guaranteed by Rayonier 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 incurred for the benefit of its subsidiaries.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

    CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Three Months Ended September 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

    $        $        $ 266,859         $ 47,691         $ (13,902     $ 300,648    
                                               

Costs and Expenses

           

Cost of sales

                  215,399         31,218         (14,781     231,836    

Selling and general expenses

    2,926                12,222         829         (5     15,972    

Other operating expense (income), net

    43                (57,004     (2,290            (59,251
                                               
    2,969                170,617         29,757         (14,786     188,557    

Equity in (loss) income of New Zealand joint venture

    (1,248            305                       (943
                                               

OPERATING (LOSS) INCOME

    (4,217            96,547         17,934         884         111,148    

Interest income (expense)

    209         (5,919     (5,920     (1,159            (12,789

Interest and miscellaneous income (expense), net

    1,255         (1,124     (1,087     1,296         (30     310    

Equity in income from subsidiaries

    85,757         71,305                       (157,062       
                                               

INCOME BEFORE INCOME TAXES

    83,004         64,262         89,540         18,071         (156,208     98,669    

Income tax (expense) benefit

    (1,864     2,570         (18,235                   (17,529
                                               

NET INCOME

    $ 81,140         $ 66,832         $ 71,305         $ 18,071         $ (156,208     $ 81,140    
                                               

 

15


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

    CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Three Months Ended September 30, 2008
    Rayonier Inc.
(Parent
Guarantor)
  Rayonier TRS
Holdings Inc.
(Issuer)
  Subsidiaries of
Rayonier TRS
Holdings Inc. (Non-
guarantors)
  All Other
Subsidiaries
(Non-
guarantors)
  Consolidating
Adjustments
  Total
Consolidated

SALES

    $     $     $ 294,079      $ 31,907      $ (8,521)     $ 317,465 
                                   

Costs and Expenses

           

Cost of sales

            245,697      28,418      (21,401)     252,714 

Selling and general expenses

    2,606          12,769      817          16,192 

Other operating expense (income), net

    61          (109)     (1,440)         (1,488)
                                   
    2,667          258,357      27,795      (21,401)     267,418 

Equity in (loss) income of New Zealand joint venture

    (626)         (420)              (1,046)
                                   

OPERATING (LOSS) INCOME

    (3,293)         35,302      4,112      12,880      49,001 

Interest income (expense)

    1,076      (4,507)     (7,238)     (1,161)         (11,829)

Interest and miscellaneous income (expense), net

    901      (773)     (979)     1,224      (32)     341 

Equity in income from subsidiaries

    26,987      13,315              (40,302)    
                                   

INCOME BEFORE INCOME TAXES

    25,671      8,035      27,085      4,175      (27,453)     37,513 

Income tax benefit (expense)

    3,231      1,928      (13,770)             (8,611)
                                   

NET INCOME

    $ 28,902      $ 9,963      $ 13,315      $ 4,175      $ (27,453)     $ 28,902 
                                   

 

16


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

    CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Nine Months Ended September 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

    $     $     $ 724,718      $ 165,713      $ (31,700)     $ 858,731 
                                   

Costs and Expenses

           

Cost of sales

            599,381      108,397      (34,923)     672,855 

Selling and general expenses

    7,824          34,635      2,503        44,962 

Other operating expense (income), net

    131          (143,781)     (6,775)         (150,425)
                                   
    7,955          490,235      104,125      (34,923)     567,392 

Equity in (loss) income of New Zealand joint venture

    (2,808)         26              (2,782)
                                   

OPERATING (LOSS) INCOME

    (10,763)         234,509      61,588      3,223      288,557 

Interest expense

    (27)     (15,133)     (18,998)     (3,472)         (37,630)

Interest and miscellaneous income (expense), net

    2,831      (2,671)     (3,357)     3,884      (93)     594 

Equity in income from subsidiaries

    227,265      173,441              (400,706)    
                                   

INCOME BEFORE INCOME TAXES

    219,306      155,637      212,154      62,000      (397,576)     251,521 

Income tax (expense) benefit

    (4,492)     6,498      (38,713)             (36,707)
                                   

NET INCOME

    $ 214,814      $ 162,135      $ 173,441      $ 62,000      $ (397,576)     $ 214,814 
                                   

 

17


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

    CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Nine Months Ended September 30, 2008
    Rayonier Inc.
(Parent
Guarantor)
  Rayonier TRS
Holdings Inc.
(Issuer)
  Subsidiaries of
Rayonier TRS
Holdings Inc. (Non-
guarantors)
  All Other
Subsidiaries
(Non-
guarantors)
  Consolidating
Adjustments
  Total
Consolidated

SALES

    $     $     $ 786,359      $ 327,734      $ (207,568)     $ 906,525 
                                   

Costs and Expenses

           

Cost of sales

            655,412      125,817      (80,468)     700,761 

Selling and general expenses

    7,952          37,658      2,388          47,998 

Other operating expense (income), net

            (1,894)     (4,300)         (6,193)
                                   
    7,953          691,176      123,905      (80,468)     742,566 

Equity in (loss) income of New Zealand joint venture

    (629)         (249)             (878)
                                   

OPERATING (LOSS) INCOME

    (8,582)         94,934      203,829      (127,100)     163,081 

Interest income (expense)

    1,704      (13,497)     (21,153)     (4,497)         (37,438)

Interest and miscellaneous income (expense), net

    2,679      (2,320)     (1,606)     3,807      (98)     2,462 

Equity in income from subsidiaries

    107,165      41,183              (148,348)    
                                   

INCOME BEFORE INCOME TAXES

    102,966      25,366      72,175      203,139      (275,541)     128,105 

Income tax benefit (expense)

    2,198      5,853      (30,992)             (22,941)
                                   

NET INCOME

    $ 105,164      $ 31,219      $ 41,813      $ 203,139      $ (275,541)     $ 105,164 
                                   

 

18


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

    CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 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

    $ 13,759      $     $ 91,908      $ 47,478      $     $ 153,145 

Accounts receivable, less allowance for doubtful accounts

    50          95,129      1,893          97,072 

Inventory

            108,847          (8,872)     99,975 

Intercompany interest receivable

                1,261      (1,261)    

Income tax and alternative fuel mixture credit receivable

    563          133,939              134,502 

Prepaid and other current assets

    2,769          54,015      2,160          58,944 
                                   

Total current assets

    17,141          483,838      52,792      (10,133)     543,638 
                                   

TIMBER AND TIMBERLANDS

           

NET OF DEPLETION AND AMORTIZATION

    1,807          87,931      1,101,951          1,191,689 

NET PROPERTY, PLANT AND EQUIPMENT

    1,647          343,185      944      509      346,285 

INVESTMENT IN JOINT VENTURE

    73,417          (24,568)             48,849 

INVESTMENT IN SUBSIDIARIES

    1,086,652      789,766              (1,876,418)    

INTERCOMPANY/NOTES RECEIVABLE

    16,473                  (16,473)    

OTHER ASSETS

    23,445      12,430      516,576      5,710      (396,438)     161,723 
                                   

TOTAL ASSETS

    $ 1,220,582      $ 802,196      $ 1,406,962      $ 1,161,397      $ (2,298,953)     $ 2,292,184 
                                   

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

CURRENT LIABILITIES

           

Accounts payable

    $ 2,781      $     $ 45,532      $ 797    $     $ 49,110 

Bank loans and current maturities

            660              660 

Accrued interest

    517      6,148      6,510      1,127          14,302 

Current liabilities for dispositions and discontinued operations

            9,354              9,354 

Other current liabilities

    14,404          56,255      22,280          92,939 
                                   

Total current liabilities

    17,702      6,148      118,311      24,204          166,365 
                                   

LONG-TERM DEBT

        439,390      317,100      52,580          809,070 

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

            90,227              90,227 

PENSION AND OTHER POSTRETIREMENT BENEFITS

    84,178          29,614              113,792 

OTHER NON-CURRENT LIABILITIES

    10,824          23,485      23,606      (22,932)     34,983 

INTERCOMPANY PAYABLE

    30,131          38,459      7,546      (76,136)    
                                   

TOTAL LIABILITIES

    142,835      445,538      617,196      107,936      (99,068)     1,214,437 
                                   

TOTAL SHAREHOLDERS’ EQUITY

    1,077,747      356,658      789,766      1,053,461      (2,199,885)     1,077,747 
                                   

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

    $ 1,220,582      $ 802,196      $ 1,406,962      $ 1,161,397      $ (2,298,953)     $ 2,292,184 
                                   

 

19


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar 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 Nine Months Ended September 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

    $ 122,216       $ 25,000       $ 58,394       $ 169,973       $ (161,265)      $ 214,318  
                                   

INVESTING ACTIVITIES

           

Capital expenditures

    (4)      -       (45,513)      (22,155)      2,594       (65,078) 

Change in restricted cash

    -       -       -       1,243       -       1,243  

Investment In Subsidiaries

    -       (144,911)      -       -       144,911       -  

Other

    -       -       (7,240)      (445)          (7,685) 
                                   

CASH USED FOR INVESTING ACTIVITIES

    (4)       (144,911)      (52,753)      (21,357)      147,505       (71,520) 
                                   

FINANCING ACTIVITIES

           

Issuance of debt

    -       172,500       5,000       80,000       -       257,500  

Repayment of debt

    (20,000)      -       (85,620)      (80,000)      -       (185,620) 

Dividends paid

    (118,540)      -       -       -       -       (118,540) 

Proceeds from issuance of common shares

    9,228       -       -       -       -       9,228  

Excess tax benefits on stock-based compensation

    -       -       2,287       -       -       2,287  

Repurchase of common shares

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

Purchase of exchangeable note hedge

    -       (23,460)      -       -       -       (23,460) 

Proceeds from issuance of warrant

    12,506       -       -       -       -       12,506  

Debt issuance costs

    -       (4,129)      -       -       -       (4,129) 

Distributions to / from Parent

    -       (25,000)      117,240       (106,000)      13,760       -  
                                   

CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES

    (118,194)      119,911       38,907       (106,000)      13,760       (51,616)  
                                   

EFFECT OF EXCHANGE RATE CHANGES ON CASH

    -       -       278       -       -       278  
                                   

CASH AND CASH EQUIVALENTS

           

Change in cash and cash equivalents

    4,018       -       44,826       42,616       -       91,460  

Balance, beginning of year

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

Balance, end of period

    $ 13,759       $ -       $ 91,908       $ 47,478       $ -       $ 153,145  
                                   

 

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

CASH PROVIDED BY OPERATING ACTIVITIES

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

INVESTING ACTIVITIES

           

Capital expenditures

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

Purchase of timberlands

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

Change in restricted cash

    -       -       -       4,604       -       4,604  

Investment In Subsidiaries

    -       11,030       -       -       (11,030)      -  

Other

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

CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES

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

FINANCING ACTIVITIES

           

Issuance of debt

    20,000       -       120,000       15,000       -       155,000  

Repayment of debt

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

Dividends paid

    (117,639)      -       -       -       -       (117,639) 

Repurchase of common shares

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

Proceeds from issuance of common shares

    8,254       -       -       -       -       8,254  

Excess tax benefits on stock-based compensation

    -       -       3,406       -       -       3,406  

Repayment of intercompany

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

Distributions to / from Parent

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

CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES

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

EFFECT OF EXCHANGE RATE CHANGES ON CASH

    -       -       (792)      -       -       (792) 
                                   

CASH AND CASH EQUIVALENTS

           

Change in cash and cash equivalents

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

Balance, beginning of year

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

Balance, end of period

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

 

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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.

The 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 management on our financial condition, results of operations, liquidity, and certain other factors which may affect future results. Our MD&A should be read in conjunction with the 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 fair market value and intercompany profit or loss is eliminated in consolidation.

In the second quarter of 2009, as a result of distressed 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 Nine Months Ended September 30, 2009 Compared to Three and Nine Months Ended September 30, 2008.

 

Financial Information (in millions)

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008

Sales

           

Timber

     $ 46.5        $ 42.9        $ 125.0        $ 145.4  

Real Estate

           

  Development

     -        1.6        1.4        2.4  

  Rural

     14.1        7.3        23.7        43.6  

  Non-Strategic Timberlands

     7.8        17.1        64.8        32.8  
                           

  Total Real Estate

     21.9        26.0        89.9        78.8  
                           

Performance Fibers

           

  Cellulose Specialties

     173.1        156.8        464.5        436.5  

  Absorbent Materials

     43.7        53.3        133.1        135.6  
                           

  Total Performance Fibers

     216.8        210.1        597.6        572.1  
                           

Wood Products

     13.3        24.1        37.5        67.5  

Other operations

     8.5        14.4        23.2        42.7  

Intersegment Eliminations

     (6.4)       -        (14.5)       -  
                           

Total Sales

     $ 300.6        $ 317.5        $ 858.7        $ 906.5  
                           

Operating Income (Loss)

           

Timber

     $ 1.0        $ (1.4)       $ (0.9)       $ 20.1  

Real Estate

     12.8        14.0        51.4        50.4  

Performance Fibers

     49.5        43.0        125.1        116.8  

Wood Products

     (2.0)       0.3        (8.1)       (2.6) 

Other operations

     (1.3)       0.5        (2.6)       1.0  

Corporate and other expenses / eliminations 1

     51.1        (7.4)       123.7        (22.6) 
                           

Total Operating Income

     111.1        49.0        288.6        163.1  

Interest Expense

     (12.8)       (11.8)       (37.6)       (37.4) 

Interest / Other income

     0.3        0.3        0.5        2.4  

Income tax expense

     (17.5)       (8.6)       (36.7)       (22.9) 
                           

Net Income

     $ 81.1        $ 28.9        $ 214.8        $ 105.2  
                           

Diluted Earnings Per Share

     $ 1.01        $ 0.36        $ 2.69        $ 1.32  
                           

 

1

The three and nine months ended September 30, 2009 include $56 million and $142 million, respectively, relating to the alternative fuel mixture credit. See Note 2 – Alternative Fuel Mixture Credit for additional information.

 

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TIMBER

 

Sales (in millions)

      Changes Attributable to:    
    2008   Price/Mix   Volume   Other   2009

Three months ended September 30,

         

  Eastern

    $ 23.9       $ (8.1)      $ 13.7       $ -       $ 29.5  

  Western

    16.6       (2.7)      0.9       -       14.8  

  New Zealand

    2.4       -       -       (0.2)      2.2  
                             

  Total Sales

    $ 42.9       $ (10.8)      $ 14.6       $ (0.2)      $ 46.5  
                             

Nine months ended September 30,

         

  Eastern

    $ 76.6       $ (29.2)      $ 36.9       $ -       $ 84.3  

  Western

    61.3       (10.5)              (16.0)      -       34.8  

  New Zealand

    7.5       -       -       (1.6)      5.9  
                             

  Total Sales

    $         145.4       $         (39.7)      $ 20.9       $ (1.6)      $         125.0  
                             

Operating Income (Loss) (in millions)

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

Three months ended September 30,

         

  Eastern

    $ 1.6       $ (8.1)      $ 3.4       $ 5.5       $ 2.4  

  Western

    (2.0)      (2.7)      0.1       4.2       (0.4) 

  New Zealand/Other

    (1.0)      -       -       -       (1.0) 
                             

  Total Operating Income (Loss)

    $ (1.4)      $ (10.8)      $ 3.5       $ 9.7       $ 1.0  
                             

Nine months ended September 30,

         

  Eastern

    $ 7.1       $ (29.2)      $ 12.0       $ 18.9       $ 8.8  

  Western

    13.9       (10.5)      (9.5)      (0.6)      (6.7) 

  New Zealand/Other

    (0.9)      -       -       (2.1)      (3.0) 
                             

  Total Operating Income (Loss)

    $ 20.1       $ (39.7)      $ 2.5       $         16.2       $ (0.9) 
                             

In the Eastern Region, sales and operating income increased from the prior year periods. Volumes rose 14 and 13 percent while average prices declined 17 and 18 percent for the three and nine months ended September 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, while the nine months ended September 30, 2009 benefited from increased non-timber income.

In the Western region, average prices declined three percent and 17 percent for the quarter and year-to-date periods, respectively, while volumes increased five percent for the quarter but declined 32 percent for the year-to-date period. For the quarter, sales declined as weaker prices more than offset a slight increase in volume while operating results improved due to lower logging and transportation costs. For the year-to-date results, sales and operating income declined primarily due to weak market prices and lower volumes from planned harvest reductions.

The segment’s year-to-date results were also impacted by lower equity earnings from the New Zealand joint venture due to weaker markets and a significant first quarter 2008 timberland transaction.

 

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REAL ESTATE

 

Sales (in millions)

        Changes Attributable to:          
     

 

2008

   Price/Mix    Volume    2009   

Three months ended September 30,

              

Development

     $ 1.6        $ -        $ (1.6)       $ -     

Rural

     7.3        (5.9)       12.7        14.1     

Non-Strategic Timberlands

     17.1        3.2            (12.5)       7.8     
                              

  Total Sales

     $ 26.0        $ (2.7)       $ (1.4)       $ 21.9     
                              

 

Nine months ended September 30,

              

Development

     $ 2.4        $ (0.2)       $ (0.8)       $ 1.4     

Rural

     43.6        (11.6)       (8.3)       23.7     

Non-Strategic Timberlands

     32.8        (16.5)       48.5        64.8     
                              

  Total Sales

     $ 78.8        $     (28.3)       $ 39.4        $     89.9     
                              

Operating Income (in millions)

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

Three months ended September 30,

              

  Total Operating Income

     $ 14.0        $ (2.7)       $ (1.4)       $ 2.9        $ 12.8  
                                  

 

Nine months ended September 30,

              

  Total Operating Income

     $     50.4        $ (28.3)       $ 25.5        $ 3.8        $     51.4  
                                  

Sales and operating income declined during the third quarter, compared to the prior year period as increased rural property sales were more than offset by lower non-strategic timberland and development acres, as well as reduced rural prices. Also impacting the quarter’s results were higher non-strategic timberland prices as well as lower costs per acre due to sales mix.

For the nine months ended September 30, 2009, sales and operating income increased due to higher non-strategic timberland sales partially offset by lower prices due to sales mix and a decline in rural property sales, compared to the prior year period.

PERFORMANCE FIBERS

 

Sales (in millions)

        Changes Attributable to:          
    

 

2008

   Price    Volume/Mix    2009   

Three months ended September 30,

              

Cellulose Specialties

     $ 156.8        $ 18.6        $ (2.3)       $ 173.1     

Absorbent Materials

     53.3        (10.0)       0.4        43.7     
                              

  Total Sales

     $ 210.1        $ 8.6        $ (1.9)       $ 216.8     
                              

 

Nine months ended September 30,

              

Cellulose Specialties

     $ 436.5        $ 62.7        $ (34.7)       $ 464.5     

Absorbent Materials

     135.6            (19.2)       16.7        133.1     
                              

  Total Sales

     $     572.1        $ 43.5        $     (18.0)       $     597.6     
                              

Cellulose specialties prices increased 12 percent and 16 percent for the three and nine months ended September 30, 2009 compared to the prior year periods, respectively, while volumes declined one percent and eight percent for the quarter and year, respectively, primarily due to the timing of customer orders. The higher sales prices reflect annual price increases that were effective on January 1, 2009 net of the removal of a cost-related surcharge in the third quarter of 2009.

 

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Absorbent materials prices declined 19 percent and 13 percent while volumes increased one percent and 14 percent for the quarter and year, respectively. Prices declined due to weaker markets during both comparable periods, while volumes improved primarily due to 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 September 30,

              

  Total Operating Income

     $ 43.0        $ 8.6        $ (0.5)       $ (1.6)       $ 49.5  
                                  

Nine months ended September 30,

              

  Total Operating Income

     $     116.8        $     43.5        $         (7.7)       $     (27.5)       $     125.1  
                                  

Operating income reflects higher cellulose specialties prices, declines in cellulose specialties volumes and absorbent material prices and increased production costs. The year-to-date costs were impacted by increased chemical prices, primarily caustic.

WOOD PRODUCTS

 

Sales (in millions)

        Changes Attributable to:          
    

 

2008

   Price    Volume/Mix    2009   

Three months ended September 30,

              

  Total Sales

     $ 24.1        $     (3.2)       $ (7.6)       $ 13.3     
                              

 

Nine months ended September 30,

              

  Total Sales

     $     67.5        $     (8.5)       $       (21.5)       $     37.5     
                              

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 Income/(Loss) (in millions)

        Changes Attributable to:     
     2008    Price    Volume/Mix    Costs    2009

Three months ended September 30,

              

  Total Operating Income (Loss)

     $ 0.3        $     (3.2)       $         (0.1)       $ 1.0        $ (2.0) 
                                  

 

Nine months ended September 30,

              

  Total Operating Loss

     $       (2.6)       $ (8.5)       $ 0.3        $       2.7        $       (8.1) 
                                  

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 third quarter were $6 million below the prior year period while operating income declined $2 million to an operating loss of $1 million. For the nine months ended September 30, 2009, sales of $23 million and an operating loss of $3 million were $20 million and $4 million below the prior year period, respectively. These results are primarily due to lower log trading volumes and prices, and foreign exchange losses.

Corporate and Other Expenses

In April 2009, we became certified as an alternative fuel mixer entitling us to be eligible for an 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 third quarter and year-to-date 2009 include other income of $56 million and $142 million, respectively, for the

 

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credit. The Company will continue to recognize credits as they are earned through the expiration of the tax credit, currently scheduled for December 31, 2009. See Note 2 – Alternative Fuel Mixture Credit for additional information.

Excluding the alternative fuel mixture credit, corporate and other expenses declined $3 million during the quarter, compared to the prior year period, mostly due to a favorable insurance recovery, and declined $5 million during the nine month period which also benefited from a concentrated effort to reduce costs.

Interest Expense and Other Income, Net

Interest and other expenses were $1 million and $2 million higher for the three and nine months ended September 2009 compared to 2008, respectively. The third quarter of 2008 included a $1 million favorable IRS settlement. The year-to-date results reflect higher average net debt balances, partially offset by lower interest rates.

Income Tax Expense

Third quarter effective tax rates before discrete items were 25.2 percent and 14.3 percent in 2009 and 2008, respectively. For the nine months ended, the effective tax rates before discrete items were 22.1 percent and 15.5 percent in 2009 and 2008, respectively. The increase in rates in 2009 was due to proportionately higher earnings from Rayonier TRS Holdings Inc. (“TRS”), the taxable REIT subsidiary.

Including discrete items, the effective tax rates for the quarter and year-to-date were 17.8 percent and 14.6 percent compared to 23.0 percent and 17.9 percent in 2008, respectively. In the third quarter of 2008, the Company recorded discrete tax items primarily related to the Company’s decision to offer its New Zealand operations for sale.

For the nine months ended 2009, $12 million of the alternative fuel mixture credit (“AFMC”) was used to offset the TRS’ federal estimated income tax payments. While an additional $9 million is expected to be applied against income tax payments during the fourth quarter, the majority of the cash for the AFMC is anticipated to be received in 2010 after the filing of the 2009 tax return.

Outlook

We remain encouraged by signs of economic improvement, including solid demand for our Performance Fibers products and stable pulpwood markets. Our expectation of a gradual recovery in housing leads us to continue to hold off harvest of our more valuable sawtimber until pricing improves. For the full year 2009, we anticipate EBITDA to be approximately 10 percent below 2008, and EPS (excluding AFMC) to be about 20 percent below 2008. Cash generation is expected to remain strong, with CAD comparable to 2008 and well above our $2.00 per share dividend.

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 repaying a portion of the notes with the proceeds received from the $172.5 million 4.50 percent Senior Exchangeable Notes issued in August 2009 as described below.

4.50% Convertible notes issued August 2009

In August 2009, TRS issued $172.5 million of 4.50 percent Senior Exchangeable Notes due 2015. The notes are guaranteed by Rayonier and are non-callable. The $172.5 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. Noteholders may convert their notes to common stock of Rayonier Inc., subject to certain conversion provisions including the market price of the stock and the trading price of the convertible notes. TRS used a part of the net proceeds of the offering to repay a portion of the indebtedness outstanding under its credit facility and to pay for the exchangeable note hedge transactions that TRS entered into with affiliates of the initial purchasers of the notes. TRS also intends to use part of the proceeds to repay a portion of an installment note due December 31, 2009 and make a distribution in one or more dividend transactions to Rayonier. See Note 15 – Convertible Debt for additional information.

 

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

 

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

 Cash and cash equivalents 1

     $                         153        $                         62  

 Total debt 2

     810        747  

 Shareholders’ equity 2

     1,078        939  

 Total capitalization (total debt plus equity) 2

     1,888        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

2008 has been restated as a result of adopting new guidance related to accounting for convertible debt instruments that may be settled in cash upon conversion. See Note 1 – Basis of Presentation and New Accounting Pronouncements.

Cash Provided by Operating Activities (in millions of dollars)

 

         2009            2008            Decrease    

Nine months ended September 30,

     $     214        $     248        $     34  

Cash provided by operating activities decreased $34 million primarily from lower earnings from operations in the timber segment and the timing of vendor payments.

Cash Used for Investing Activities (in millions of dollars)

 

         2009            2008            Decrease    

Nine months ended September 30,

     $     72        $     308        $     236  

Cash used for investing activities decreased $236 million as 2008 included the purchase of $230 million of timberlands as well as higher capital expenditures.

Cash Used for Financing Activities (in millions of dollars)

 

         2009            2008            Decrease    

Nine months ended September 30,

     $     52        $     65        $     13  

Cash used for financing activities decreased $13 million primarily due to higher net borrowings of $72 million in 2009 versus $44 million in 2008, partially offset by costs related to the issuance of the August 2009 convertible notes. See Note 15 – Convertible Debt for further information.

Expected 2009 Expenditures

We made pension contributions of $9 million in the first nine months of 2009 compared to $8 million made in the same period of 2008. We expect pension contributions to be approximately $10 million for full year 2009. Income tax payments totaled $10 million during the first nine months of 2009 compared to payments of $1 million in the same period 2008. We expect net tax payments to be approximately $11 million for full year 2009, compared to $13 million for full year 2008. We will not make any estimated federal income tax payments related to our 2009 TRS operations as we will offset 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 $90 million and $95 million compared to $105 million in 2008. Environmental expenditures related to dispositions and discontinued operations were $6 million for the first nine months ended September 30, 2009 versus $5 million in the same period 2008. Full year 2009 expenditures of approximately $8 million are anticipated.

Liquidity Performance Indicators

The discussion below is presented to enhance the reader’s understanding of our liquidity, ability to generate cash and satisfy rating agency and creditor requirements. This information includes two measures of financial results: Earnings before Interest, Taxes, Depreciation, Depletion and Amortization (“EBITDA”) and Adjusted Cash Available for Distribution (“Adjusted CAD”). These measures are not defined by Generally Accepted Accounting Principles (“GAAP”) and the discussion of EBITDA and Adjusted CAD is not intended to conflict with or change any of the GAAP disclosures discussed above. Management considers

 

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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    
September 30,
       Nine Months Ended    
September 30,
    
     2009    2008    2009    2008   

 Cash provided by operating activities

     $ 87.1      $ 93.4      $ 214.3      $ 248.2     

 Non-cash cost of real estate sold

     (1.1)       (3.0)       (6.3)       (7.6)    

 Income tax expense

     17.5        8.6        36.7        22.9     

 Interest, net

     12.5        11.5        37.0        35.1     

 Balance sheet changes related to the alternative fuel mixture credit

     49.1        -          128.3        -       

 Other balance sheet changes

     (13.9)       (21.3)       5.3        (23.3)    
                              

 EBITDA

     $     151.2        $     89.2        $     415.3        $     275.3     
                              

EBITDA is a non-GAAP measure of operating cash generating capacity. 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 nine months ended September 30, 2009 and 2008 totaled $152 million and $92 million, and $422 million and $283 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 our 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    
September 30,
       Nine Months Ended    
September 30,
     2009    2008    2009    2008

EBITDA by Segment

           

Timber

     $ 20.1        $ 18.3        $ 57.6        $ 79.4  

Real Estate

     17.5        19.2        73.6        60.9  

Performance Fibers

     64.6        57.1        167.1        154.9  

Wood Products

     (1.0)       1.5        (4.7)       1.4  

Other Operations

     (1.3)       0.4        (2.6)       1.0  

Corporate and other

     51.3        (7.3)       124.3        (22.3) 
                           

Total

     $                 151.2        $                 89.2        $                 415.3        $                 275.3  
                           

For the three and nine months ended September 30, 2009, EBITDA was $62 million and $140 million above the prior year periods, respectively, primarily due to the AFMC of $56 million and $142 million, respectively. The majority of the cash from the AFMC is expected to be received in 2010. Excluding the impact of the AFMC, EBITDA for third quarter 2009 was $6 million above 2008 due to higher operating results in the Performance Fibers segment, while EBITDA for the nine month period was $2 million below 2008. For the nine months ended September 30, 2009, lower operating results in the Timber segment, due to a decline in sawtimber demand, were mostly offset by increased operating results in the Performance Fibers segment due to higher cellulose specialties prices.

 

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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 September 30, 2009

             

Cash provided by operating activities

    $ 23.9       $ 19.2       $ 56.9       $ (1.5)      $ 0.2       $ (11.6)      $ 87.1  

Less: Non-cash cost basis of real estate sold

    -         (1.1)      -         -         -         -         (1.1) 

Add: Income tax expense

    -         -         -         -         -         17.5       17.5  

         Interest, net

    -         -         -         -         -         12.5       12.5  

         Other balance sheet changes

    (3.8)      (0.6)      7.7       0.5       (1.5)      32.9       35.2  
                                         

EBITDA

    $ 20.1       $ 17.5       $ 64.6       $ (1.0)      $ (1.3)      $ 51.3       $ 151.2  
                                         

Three Months Ended September 30, 2008

             

Cash provided by operating activities

    $ 25.2       $ 24.4       $ 47.3       $ (0.3)      $ 8.4       $ (11.6)      $ 93.4  

Less: Non-cash cost basis of real estate sold

    -         (3.0)      -         -         -         -         (3.0) 

Add: Income tax expense

    -         -         -         -         -         8.6       8.6  

         Interest, net

    -         -         -         -         -         11.5       11.5  

         Other balance sheet changes

    (6.9)      (2.2)      9.8       1.8       (8.0)      (15.8)      (21.3) 
                                         

EBITDA

    $ 18.3       $ 19.2       $ 57.1       $ 1.5       $ 0.4       $ (7.3)      $ 89.2  
                                         

Nine Months Ended September 30, 2009

             

Cash provided by operating activities

    $ 68.9       $ 80.0       $ 131.0       $ (5.1)      $ (12.4)      $ (48.1)      $ 214.3  

Less: Non-cash cost basis of real estate sold

    -         (6.3)      -         -         -         -         (6.3) 

Add: Income tax expense

    -         -         -         -         -         36.7       36.7  

         Interest, net

    -         -         -         -         -         37.0       37.0  

         Other balance sheet changes

    (11.3)      (0.1)      36.1       0.4       9.8       98.7       133.6