Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x

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

For the quarterly period ended June 30, 2010

OR

 

¨

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

For the transition period from                  to                 

COMMISSION FILE NUMBER 1-6780

RAYONIER INC.

Incorporated in the State of North Carolina

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

50 North Laura Street, Jacksonville, FL 32202

(Principal Executive Office)

Telephone Number: (904) 357-9100

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES  x    NO  ¨

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

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ¨    NO  x

As of July 22, 2010, there were outstanding 80,254,551 Common Shares of the Registrant.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          PAGE
PART I.    FINANCIAL INFORMATION   

Item l.

   Financial Statements   
   Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2010 and 2009    1
   Condensed Consolidated Balance Sheets as of June 30, 2010 and December 3l, 2009    2
   Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009    3
   Notes to Condensed Consolidated Financial Statements    4

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    21

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    32

Item 4.

   Controls and Procedures    32
PART II.    OTHER INFORMATION   

Item 5.

   Other Information    33

Item 6.

   Exhibits    33
   Signature    35


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item1. Financial Statements

RAYONIER INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2010     2009     2010     2009  

SALES

     $ 312,210        $ 278,698        $ 622,410        $ 558,083   
                                

Costs and Expenses

        

Cost of sales

     242,940        216,674        475,794        441,021   

Selling and general expenses

     15,172        14,349        32,139        28,991   

Other operating income, net (Note 2)

     (1,260     (87,165     (5,828     (91,177
                                
     256,852        143,858        502,105        378,835   

Equity in income (loss) of New Zealand joint venture

     986        (602     531        (1,839
                                

OPERATING INCOME BEFORE GAIN ON SALE OF A PORTION OF THE INTEREST IN THE NEW ZEALAND JOINT VENTURE

     56,344        134,238        120,836        177,409   

Gain on sale of a portion of the interest in the New Zealand joint venture (Note 3)

     -            -            12,367        -       
                                

OPERATING INCOME

     56,344        134,238        133,203        177,409   

Interest expense

     (12,250     (12,248     (24,736     (24,840

Interest and miscellaneous income, net

     408        216        598        283   
                                

INCOME BEFORE INCOME TAXES

     44,502        122,206        109,065        152,852   

Income tax expense

     (5,944     (14,453     (13,554     (19,178
                                

NET INCOME

     38,558        107,753        95,511        133,674   
                                

OTHER COMPREHENSIVE INCOME (LOSS)

        

Foreign currency translation adjustments

     (2,045     15,825        (3,261     10,947   

Joint venture cash flow hedges

     816        (277     1,026        (2,627

Amortization of pension and postretirement benefit costs, net of income tax expense (benefit) of $221 and $200, and ($2,366) and $666

     535        691        4,639        1,116   
                                

COMPREHENSIVE INCOME

   $ 37,864      $ 123,992      $ 97,915      $ 143,110   
                                

EARNINGS PER COMMON SHARE

        

Basic earnings per share

     $ 0.48        $ 1.37        $ 1.20        $ 1.70   
                                

Diluted earnings per share

     $ 0.48        $ 1.35        $ 1.18        $ 1.68   
                                

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)

 

     June 30,
2010
    December 31,
2009
 
ASSETS   

CURRENT ASSETS

    

Cash and cash equivalents

     $ 344,184        $ 74,964   

Accounts receivable, less allowance for doubtful accounts of $1,278 and $1,150

     95,710        103,740   

Inventory

    

Finished goods

     69,170        70,548   

Work in process

     7,004        8,884   

Raw materials

     13,850        6,829   

Manufacturing and maintenance supplies

     2,269        2,243   
                

Total inventory

     92,293        88,504   

Income tax and alternative fuel mixture credit receivable

     121        192,579   

Prepaid and other current assets

     62,381        49,909   
                

Total Current Assets

     594,689        509,696   
                

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION

     1,146,216        1,188,559   

PROPERTY, PLANT AND EQUIPMENT

    

Land

     24,787        24,789   

Buildings

     125,827        126,443   

Machinery and equipment

     1,318,628        1,275,955   
                

Total property, plant and equipment, gross

     1,469,242        1,427,187   

Less - accumulated depreciation

     (1,097,801     (1,082,248
                

Total property, plant and equipment, net

     371,441        344,939   
                

INVESTMENT IN JOINT VENTURE

     63,784        50,999   

OTHER ASSETS

     176,459        158,738   
                

TOTAL ASSETS

     $ 2,352,589        $ 2,252,931   
                
LIABILITIES AND SHAREHOLDERS’ EQUITY   

CURRENT LIABILITIES

    

Accounts payable

     $ 64,261        $ 58,584   

Bank loans and current maturities

            4,650   

Accrued interest

     6,312        6,512   

Accrued customer incentives

     9,421        25,644   

Current liabilities for dispositions and discontinued operations (Note 11)

     11,038        10,648   

Other current liabilities

     85,972        69,073   
                

TOTAL CURRENT LIABILITIES

     177,004        175,111   
                

LONG-TERM DEBT

     764,057        694,999   

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

  

 

83,264

  

 

 

87,943

  

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 13)

     111,795        111,662   

OTHER NON-CURRENT LIABILITIES

     34,606        37,010   

COMMITMENTS AND CONTINGENCIES (Notes 10 and 12)

    

SHAREHOLDERS’ EQUITY

    

Common Shares, 240,000,000 and 120,000,000 shares authorized, 80,253,894 and 79,541,974 shares issued and outstanding

  

 

580,108

  

 

 

561,962

  

Retained earnings

     679,093        663,986   

Accumulated other comprehensive loss

     (77,338     (79,742
                

TOTAL SHAREHOLDERS’ EQUITY

     1,181,863        1,146,206   
                

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

     $     2,352,589        $     2,252,931   
                

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)

 

     Six Months Ended June 30,  
     2010     2009  

OPERATING ACTIVITIES

    

Net income

   $ 95,511      $ 133,674   

Adjustments to reconcile net income to total cash provided by operating activities:

    

Depreciation, depletion and amortization

     76,522        86,675   

Non-cash cost of real estate sold

     3,434        5,232   

Stock-based incentive compensation expense

     7,960        8,162   

Gain on sale of a portion of the interest in the New Zealand joint venture

     (11,545     -       

Amortization of convertible debt discount

     4,058        2,883   

Deferred income tax expense (benefit)

     385        (3,177

Excess tax benefits on stock-based compensation

     (3,951     (891

Other

     1,747        4,965   

Changes in operating assets and liabilities:

    

Receivables

     7,952        (5,802

Inventories

     (7,359     (8,383

Accounts payable

     841        (3,988

Income tax and alternative fuel mixture credit receivable

     192,458        (83,218

Other current assets

     (11,796     (19,463

Accrued liabilities

     4,459        9,446   

Other assets

     (91     (46

Other non-current liabilities

     (466     5,247   

Expenditures for dispositions and discontinued operations

     (4,319     (4,102
                

CASH PROVIDED BY OPERATING ACTIVITIES

     355,800        127,214   
                

INVESTING ACTIVITIES

    

Capital expenditures

     (71,348     (50,107

Change in restricted cash

     (10,043     (1,144

Other

     4,875        (2,137
                

CASH USED FOR INVESTING ACTIVITIES

     (76,516     (53,388
                

FINANCING ACTIVITIES

    

Issuance of debt

     127,000        30,000   

Repayment of debt

     (66,650     (30,000

Dividends paid

     (79,990     (78,929

Proceeds from the issuance of common shares

     12,232        3,698   

Excess tax benefits on stock-based compensation

     3,951        891   

Debt issuance costs

     (535     -       

Repurchase of common shares

     (5,997     (1,388
                

CASH USED FOR FINANCING ACTIVITIES

     (9,989     (75,728
                

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     (75     106   
                

CASH AND CASH EQUIVALENTS

    

Increase (decrease) in cash and cash equivalents

     269,220        (1,796

Balance, beginning of year

     74,964        61,685   
                

Balance, end of period

   $ 344,184      $ 59,889   
                

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Cash paid during the period:

    

Interest

   $ 19,700      $ 21,270   
                

Income taxes

   $ 144      $ 4,612   
                

Non-cash investing activity:

    

Capital assets purchased on account

   $ 13,595      $ 8,644   
                

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 (“SEC”). Accordingly, certain information in the financial statements of the Company’s Annual Report on Form 10-K have been condensed. 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, 2009, as filed with the SEC.

Subsequent Events

The Company evaluated events and transactions that occurred after the balance sheet date but before financial statements were issued, and one subsequent event warranted disclosure. See Note 16 – Consolidating Financial Statements for information about changes in the Company’s guarantor structure.

New or Recently Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance related to consolidation which replaced 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 was effective January 1, 2010 for Rayonier. The Company’s application of this guidance had no effect on the accompanying condensed consolidated financial statements. See Note 9 – Fair Value Measurements for additional information about the Company’s variable interest entity.

Also 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. Entities formerly classified as QSPEs are now evaluated for consolidation under the provisions related to the consolidation of controlling and non-controlling interests in an entity. Under the new guidance, the Company’s investment in a special purpose entity does not require consolidation. See Note 9 – Fair Value Measurements for additional information about this entity.

 

2.

ALTERNATIVE FUEL MIXTURE CREDIT (“AFMC”)

The U.S. Internal Revenue Code allowed a tax credit for taxpayers that produced and used 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, which qualified for the $0.50 per gallon credit of alternative fuel used in operations through December 31, 2009. Accordingly, the Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2009, include income of approximately $85.9 million, net of associated expenses, recorded in “Other operating income, net” for black liquor produced and used.

 

3.

JOINT VENTURE INVESTMENT

The Company owns an interest in Matariki Forestry Group (“Matariki”), a joint venture (“JV”) that owns or leases approximately 0.3 million acres of New Zealand timberlands. In addition to this investment, Rayonier New Zealand Limited (“RNZ”), a wholly-owned subsidiary of Rayonier serves as the manager of the JV forests and operates a log trading business.

Rayonier’s investment in the JV is accounted for using the equity method of accounting. Income from the JV is reported in the Timber segment as operating income since the Company manages the forests and its JV interest is an extension of the Company’s operations. A portion of Rayonier’s investment is recorded at historical cost which generates a difference between the book value of the Company’s investment and its proportionate share of the JV’s net assets. The difference represents the Company’s unrecognized gain from RNZ’s sale of timberlands to the JV in 2005. The deferred gain is recognized on a straight-line basis over the estimated number of years the JV expects to harvest the timberlands.

 

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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)

 

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 RNZ. As a result, the operating results of the JV and RNZ 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 and continue with ongoing operations. Accordingly, the operating results of the joint venture are included in continuing operations in the Condensed Consolidated Statements of Income and Comprehensive Income for all periods presented.

In December of 2009, the JV signed an agreement to sell a 35 percent interest in the JV to a new investor for NZ$167 million. Matariki issued new shares to the investor and used the proceeds entirely to pay down a portion of its outstanding NZ$367 million debt. Consummation of this transaction occurred in February 2010. Upon closing, Rayonier’s ownership interest in Matariki declined from 40 percent to 26 percent. As a result of this transaction, results for 2010 include a gain of $11.5 million, net of $0.9 million in tax, or $0.14 per diluted share.

 

4. EARNINGS PER COMMON SHARE

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

 

    Three Months Ended
June 30,
  Six Months Ended
June 30,
    2010   2009   2010   2009

Net income

    $ 38,558         $ 107,753         $ 95,511         $ 133,674    
                       

Shares used for determining basic earnings per common share

        80,104,004             78,913,563             79,923,790             78,860,562    

Dilutive effect of:

       

Stock options

    374,768         427,016         387,399         317,981    

Performance and restricted shares

    613,931         448,496         592,281         358,654    
                       

Shares used for determining diluted earnings per common share

    81,092,703         79,789,075         80,903,470         79,537,197    
                       

Basic earnings per common share:

    $ 0.48         $ 1.37         $ 1.20         $ 1.70    
                       

Diluted earnings per common share:

    $ 0.48         $ 1.35         $ 1.18         $ 1.68    
                       

 

5. INCOME TAXES

Rayonier is a real estate investment trust (“REIT”). In general, only Rayonier TRS Holdings Inc. (“TRS”), the Company’s wholly-owned taxable subsidiary whose businesses include the Company’s non-REIT qualified activities, is subject to corporate income taxes. However, Rayonier Inc. is subject to U.S. federal corporate income tax on built-in gains (the excess of fair market value over tax basis for property held upon REIT election at January 1, 2004) on taxable sales of such 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 certain property sales and on TRS income.

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. Effective tax rates before discrete items were 19.1 percent and 21.5 percent for the three months ended June 30, 2010 and 2009, respectively. Year-to-date effective tax rates before discrete items were 17.6 percent and 20.2 percent in 2010 and 2009, respectively. The lower rate in 2010 was due to proportionately higher earnings from the REIT.

Including discrete items, the effective tax rates for the quarter and year-to-date were 13.4 percent and 12.4 percent compared to 11.9 percent and 12.6 percent in 2009, respectively.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

6.

RESTRICTED DEPOSITS

In order to qualify for LKE treatment, the proceeds from real estate sales must be deposited with a third party intermediary. These proceeds are accounted for as restricted cash until a suitable replacement property is acquired. In the event that LKE purchases are not completed, the proceeds are returned to the Company after 180 days and reclassified as available cash. As of June 30, 2010 and December 31, 2009, the Company had $10.1 million and $0.1 million, respectively, of proceeds from real estate sales classified as restricted cash in Other Assets, which were deposited with an LKE intermediary.

 

7.

SHAREHOLDERS’ EQUITY

An analysis of shareholders’ equity for the six months ended June 30, 2010 and the year ended December 31, 2009 is shown below (share amounts not in thousands):

 

    

 

Common Shares

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

Balance, December 31, 2008

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

Net income

                 312,541               312,541   

Dividends ($2.00 per share)

                 (158,486            (158,486

Issuance of shares under incentive stock plans

   776,905        11,115                      11,115   

Equity portion of convertible debt

          8,850                      8,850   

Warrants and hedge, net

          (2,391                   (2,391

Stock-based compensation

          15,754                      15,754   

Excess tax benefit on stock-based compensation

          2,720                      2,720   

Repurchase of common shares

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

Net gain from pension and postretirement plans

                        4,879        4,879   

Foreign currency translation adjustment

                        15,980        15,980   

Joint venture cash flow hedges

                        (2,305     (2,305
                                      

Balance, December 31, 2009

   79,541,974      $ 561,962       $ 663,986      $ (79,742   $ 1,146,206   

Net income

                 95,511               95,511   

Dividends ($1.00 per share)

                 (80,404            (80,404

Issuance of shares under incentive stock plans

   847,366        12,232                      12,232   

Stock-based compensation

          7,960                      7,960   

Excess tax benefit on stock-based compensation

          3,951                      3,951   

Repurchase of common shares

   (135,446     (5,997                   (5,997

Amortization of pension and postretirement benefit costs

                        4,639        4,639   

Foreign currency translation adjustment

                        (3,261     (3,261

Joint venture cash flow hedges

                        1,026        1,026   
                                      

Balance, June 30, 2010

     80,253,894      $   580,108      $   679,093      $ (77,338   $ 1,181,863   
                                      

 

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. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of lumber operations. The Company’s remaining operations include harvesting and selling timber acquired from third parties (log trading). These operations are reported in “Other Operations.” Sales between operating segments are made based on fair market value, and intercompany sales, purchases and profits (losses) are eliminated in consolidation. The Company evaluates financial performance based on the operating income of the segments.

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

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

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

 

           June 30,     December 31,  
           2010     2009  

ASSETS

        

Timber

         $ 1,275,635        $ 1,259,675   

Real Estate

         79,550        71,118   

Performance Fibers

         543,182        517,941   

Wood Products

         21,474        21,972   

Other Operations

         25,944        19,432   

Corporate and other

         406,804        362,793   
                    

TOTAL

         $     2,352,589        $     2,252,931   
                    
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

SALES

        

Timber

     $ 48,917        $ 43,591        $ 96,025        $ 78,518   

Real Estate

     12,712        41,378        45,729        67,970   

Performance Fibers

     201,947        177,109        401,719        380,743   

Wood Products

     21,573        12,495        37,505        24,247   

Other Operations

     30,246        8,959        47,354        14,659   

Intersegment Eliminations

     (3,185     (4,834     (5,922     (8,054
                                

TOTAL

     $     312,210        $     278,698        $     622,410        $     558,083   
                                
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

OPERATING INCOME (LOSS)

        

Timber

     $ 8,663        $ 432        $ 16,872        $ (1,906

Real Estate

     4,183        24,155        21,537        38,568   

Performance Fibers

     44,990        34,687        89,847        75,536   

Wood Products

     4,270        (2,571     4,311        (6,144

Other Operations

     726        (2,068     1,336        (1,330

Corporate and other

     (6,488     79,603  (a)      (700 ) (b)      72,685 (a) 
                                

TOTAL

     $     56,344        $     134,238        $     133,203        $     177,409   
                                

 

  (a)

Includes $85.9 million relating to the AFMC. For additional information, see Note 2 – Alternative Fuel Mixture Credit (“AFMC”).

  (b)

Includes a gain of $12.4 million from the sale of a portion of the Company’s interest in its New Zealand joint venture. See Note 3 – Joint Venture Investment 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
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

DEPRECIATION, DEPLETION

AND AMORTIZATION

           

Timber

     $ 17,269        $ 21,951        $ 34,005        $ 39,432  

Real Estate

     2,486        12,055        12,002        17,445  

Performance Fibers

     12,203        12,708        28,007        26,996  

Wood Products

     1,078        1,214        2,144        2,432  

Other Operations

     1        1        2        2  

Corporate and other

     170        182        362        368  
                           

TOTAL

     $     33,207        $     48,111        $     76,522        $     86,675  
                           

 

9.

FAIR VALUE MEASUREMENTS

The following table presents the carrying amount and estimated fair values of financial instruments held by the Company at June 30, 2010 and December 31, 2009, using market information and what the Company believes to be appropriate valuation methodologies under generally accepted accounting principles:

 

             June 30, 2010             December 31, 2009  

Asset (liability)

   Carrying
Amount
    Fair Value     Carrying
Amount
    Fair Value  

Cash and cash equivalents

   $ 344,184      $ 344,184      $ 74,964      $ 74,964   

Short-term debt

                   (4,650     (4,650

Long-term debt

     (764,057     (848,298     (694,999     (790,763

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.

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

 

 Asset     
 
Carrying Value at
       June 30, 2010        
         Level 2         

 

Carrying Value at

    December 31, 2009    

         Level 2    

 Investment in special-purpose entity

    $   2,733                $     2,733        $     2,733                $     2,733   

Variable Interest Entity

Rayonier holds a variable interest in a bankruptcy-remote, limited liability subsidiary (“special-purpose entity”) which was created in 2004 when Rayonier monetized a $25.0 million installment note and letter of credit received in connection with a timberland sale. The Company contributed the note and a letter of credit to the special-purpose entity and using the installment note and letter of credit as collateral, the special-purpose entity issued $22.6 million of 15-year Senior Secured Notes and remitted cash of $22.6 million to the Company. There are no restrictions that relate to the transferred financial assets. Rayonier maintains a $2.6 million interest in the entity and receives immaterial cash payments equal to the excess of interest received on the installment

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

note over the interest paid on the Senior Secured Notes. The Company’s interest is recorded at fair value and is included in “Other Assets” in the Condensed Consolidated Balance Sheets. In addition, the Company calculated and recorded a de minimus guarantee liability to reflect its obligation of up to $2.6 million under a make-whole agreement pursuant to which it guaranteed certain obligations of the entity. This guarantee obligation is also collateralized by the letter of credit. The Company’s interest in the entity, together with the make-whole agreement, represents the maximum exposure to loss as a result of the Company’s involvement with the special-purpose entity. Upon maturity of the Senior Secured Notes in 2019 and termination of the special purpose entity, Rayonier will receive the remaining $2.6 million of cash. The Company determined, based upon an analysis under the variable interest entity guidance, that it does not have the power to direct activities that most significantly impact the entity’s economic success. Therefore, Rayonier is not the primary beneficiary and is not required to consolidate the entity.

 

10.

GUARANTEES

The Company provides financial guarantees as required by creditors, insurance programs, and state and foreign governmental agencies. As of June 30, 2010, the following financial guarantees were outstanding:

 

      Maximum
Potential
Payment
   Carrying
    Amount of    
Liability
    

 Standby letters of credit (1)

    $         43,807       $         38,110     

 Guarantees (2)

     2,555        43     

 Surety bonds (3)

     11,605        1,851     
                

 Total

    $     57,967       $     40,004     
                

 

  (1)

Approximately $39 million of the standby letters of credit serve as credit support for industrial revenue bonds. The remaining letters of credit support obligations under various insurance related agreements, primarily workers’ compensation and pollution liability policy requirements. These letters of credit expire at various dates during 2010 and 2011 and will be renewed as required.

 

  (2)

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 $2.6 million of obligations of a special-purpose entity that was established to complete the monetization. At June 30, 2010 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 2010, 2011 and 2014, and are expected to be renewed as required.

 

11.

LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

An analysis of activity in the liabilities for dispositions and discontinued operations for the six months ended June 30, 2010 and the year ended December 31, 2009, is as follows:

 

           June 30, 2010          December 31, 2009     

Balance, January 1

     $                   98,591        $         104,575      

Expenditures charged to liabilities

     (4,319)        (8,095)     

Increase (reduction) to liabilities

     30         2,111      
                

Balance, end of period

     94,302         98,591      

Less: Current portion

     (11,038)        (10,648)     
                

Non-current portion

    $ 83,264        $ 87,943      
                

Subject to the factors described in the next paragraph of this footnote and in Note 16 – Liabilities for Dispositions and Discontinued Operations in the 2009 Annual Report on Form 10-K, the Company believes established liabilities are sufficient for costs expected to be incurred over the next 20 years with respect to its dispositions and discontinued operations. Remedial actions

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

for these sites vary, but can include, among other remedies, on-site (and in certain cases off-site) removal or treatment of contaminated soils and sediments, recovery and treatment/remediation of groundwater, and source remediation and/or control.

In addition, the Company is exposed to the risk of reasonably possible additional losses in excess of the established liabilities. As of June 30, 2010, it is estimated that this amount could range up to $36 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 16 – Liabilities for Dispositions and Discontinued Operations in the 2009 Annual Report on Form 10-K.

 

12. CONTINGENCIES

Rayonier is engaged in various legal actions, including certain environmental proceedings. 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.

There have been no material changes in the status of the other specific matters referenced in Note 16 – Liabilities for Dispositions and Discontinued Operations in the 2009 Annual Report on Form 10-K.

 

13. EMPLOYEE BENEFIT PLANS

The Company has four qualified non-contributory defined benefit pension plans covering the majority of its employees and an unfunded plan that provides benefits in excess of amounts allowable under current tax law in the qualified plans. Three of the qualified plans, as well as the unfunded plan, are closed to new participants. Employee benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change.

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

 

     Pension     Postretirement  
     Three Months Ended
June  30,
    Three Months Ended
June  30,
 
     2010     2009     2010     2009  

Components of Net Periodic Benefit Cost

        

 Service cost

    $ 1,452       $ 1,842       $ 146       $ 90   

 Interest cost

     4,291        4,349        257        301   

 Expected return on plan assets

     (5,416     (5,291     -        -   

 Amortization of prior service cost

     518        354        22        22   

 Amortization of plan amendment

     -        -        (2,392     (2,392

 Amortization of losses

     1,130        1,349        1,478        1,558   
                                

Net periodic benefit cost

    $         1,975       $         2,603       $         (489    $         (421
                                

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

     Pension     Postretirement  
     Six Months Ended
June 30,
    Six Months Ended
June  30,
 
     2010     2009     2010     2009  

Components of Net Periodic Benefit Cost

        

 Service cost

    $ 3,098       $ 3,685       $ 292       $ 180   

 Interest cost

     8,870        8,698        514        601   

 Expected return on plan assets

     (10,826     (10,582     -        -   

 Amortization of prior service cost

     829        708        44        44   

 Amortization of plan amendment

     -        -        (4,784     (4,784

 Amortization of losses

     3,228        2,698        2,956        3,116   
                                

Net periodic benefit cost

    $         5,199       $         5,207       $         (978    $         (843
                                

The Company made no discretionary contributions to the pension plans during the six months ended June 30, 2010. The Company’s 2010 full year discretionary pension contributions may be in the $40 million to $50 million range in order to improve funded status.

 

14. DEBT

In March 2010, TRS borrowed $75 million under a five-year term loan agreement with a group of banks at LIBOR plus 275 basis points. There were no other significant changes to the Company’s outstanding debt as reported in Note 13 – Debt of the Company’s 2009 Annual Report on Form 10-K.

 

15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

 

           June 30, 2010               December 31, 2009      

Foreign currency translation adjustments

    $ 23,508       $ 26,769   

Joint venture cash flow hedges

     (1,279     (2,305

Unrecognized components of employee benefit plans, net of tax

     (99,567     (104,206
                

Total

    $         (77,338    $         (79,742
                

 

16. CONSOLIDATING FINANCIAL STATEMENTS

In October 2007, TRS issued $300 million of 3.75% Senior Exchangeable Notes due 2012, and in August 2009 TRS issued $172.5 million of 4.50% 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.

Subsequent Event

On July 29, 2010, Rayonier Inc. reorganized its operating structure by creating a new wholly owned operating entity Rayonier Operating Company LLC (“ROC”), and entering into a contribution agreement under which Rayonier Inc. contributed all assets and liabilities to ROC. As part of this agreement, ROC guarantees the TRS notes mentioned above. Rayonier Inc.’s guarantee of the TRS notes was unchanged by the transaction.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollars in thousands unless otherwise stated)

 

The new operating structure will allow Rayonier Inc. to adopt an umbrella real estate investment trust (“UPREIT”) structure. An UPREIT structure allows for the acquisition of timberlands in exchange for ROC equity and can be attractive to timberland sellers, because by accepting ROC equity interests in exchange for their assets, sellers may be able to defer taxable gains. ROC equity interests may also offer sellers diversification and liquidity in their investments and comparable dividends to Rayonier Inc. shareholders.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

 

    CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Three Months Ended June 30, 2010
 
    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

    $ -        $ -        $ 294,765        $ 33,410        $ (15,965     $ 312,210   
                                               

Costs and Expenses

           

Cost of sales

    -        -        240,382        23,712        (21,154     242,940   

Selling and general expenses

    2,856        -        11,539        777        -        15,172   

Other operating expense (income), net

    24        -        425        (1,709     -        (1,260
                                               
    2,880        -        252,346        22,780        (21,154     256,852   

Equity in income of New Zealand joint venture

    836        -        150        -        -        986   
                                               

OPERATING (LOSS) INCOME

    (2,044     -        42,569        10,630        5,189        56,344   

Interest expense

    260        (7,333     (5,148     (29     -        (12,250

Interest and miscellaneous income (expense), net

    1,332        (1,299     (4,740     5,115        -        408   

Equity in income from subsidiaries

    39,350        23,926        -        -        (63,276     -   
                                               

INCOME BEFORE INCOME TAXES

    38,898        15,294        32,681        15,716        (58,087     44,502   

Income tax (expense) benefit

    (340     3,151        (8,755     -        -        (5,944
                                               

NET INCOME

    $ 38,558        $ 18,445        $ 23,926        $ 15,716        $ (58,087     $ 38,558   
                                               

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

 

    CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Three Months Ended June 30, 2009
 
    Rayonier Inc.
(Parent
Guarantor)
    Rayonier TRS
Holdings Inc.
(Issuer)
    Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-guarantors)
    All Other
Subsidiaries
(Non-
guarantors)
    Consolidating
Adjustments
    Total
Consolidated
 

SALES

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

Costs and Expenses

           

Cost of sales

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

Selling and general expenses

    2,409               11,101        834        5        14,349   

Other operating expense (income), net

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

Equity in (loss) income of New Zealand joint venture

    (807            205                      (602
                                               

OPERATING (LOSS) INCOME

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

Interest expense

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

Interest and miscellaneous income (expense), net

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

Equity in income from subsidiaries

    112,043        88,431                      (200,474       
                                               

INCOME BEFORE INCOME TAXES

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

Income tax (expense) benefit

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

NET INCOME

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

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

 

    CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Six Months Ended June 30, 2010
 
    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

    $        $        $ 579,333        $ 134,868        $ (91,791     $ 622,410   
                                               

Costs and Expenses

           

Cost of sales

                  474,223        65,882        (64,311     475,794   

Selling and general expenses

    4,856               25,730        1,553               32,139   

Other operating expense (income), net

    20               (1,635     (4,213            (5,828
                                               
    4,876               498,318        63,222        (64,311     502,105   

Equity in income of New Zealand joint venture

    26               505                      531   
                                               

OPERATING (LOSS) INCOME BEFORE GAIN ON SALE OF A PORTION OF THE INTEREST IN THE NEW ZEALAND JOINT VENTURE

    (4,850            81,520        71,646        (27,480     120,836   

Gain on sale of a portion of the interest in the New Zealand joint venture

    4,670               7,697                      12,367   
                                               

OPERATING (LOSS) INCOME

    (180            89,217        71,646        (27,480     133,203   

Interest expense

    150        (14,723     (10,084     (79            (24,736

Interest and miscellaneous income (expense), net

    10,259        (2,598     (16,347     9,284               598   

Equity in income from subsidiaries

    86,824        44,452                      (131,276       
                                               

INCOME BEFORE INCOME TAXES

    97,053        27,131        62,786        80,851        (158,756     109,065   

Income tax (expense) benefit

    (1,542     6,322        (18,334                   (13,554
                                               

NET INCOME

    $ 95,511        $ 33,453        $ 44,452        $ 80,851        $ (158,756     $ 95,511   
                                               

 

15


Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

 

    CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the Six Months Ended June 30, 2009
 
    Rayonier  Inc.
(Parent
Guarantor)
    Rayonier TRS
Holdings Inc.
(Issuer)
    Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-guarantors)
    All Other
Subsidiaries
(Non-
guarantors)
    Consolidating
Adjustments
    Total
Consolidated
 

SALES

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

Costs and Expenses

           

Cost of sales

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

Selling and general expenses

    4,898               22,413        1,675        5        28,991   

Other operating expense (income), net

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

Equity in loss of New Zealand joint venture

    (1,560            (279                   (1,839
                                               

OPERATING (LOSS) INCOME

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

Interest expense

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

Interest and miscellaneous income (expense), net

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

Equity in income from subsidiaries

    141,506        102,136                      (243,642       
                                               

INCOME BEFORE INCOME TAXES

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

Income tax (expense) benefit

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

NET INCOME

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

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

 

    CONDENSED CONSOLIDATING BALANCE SHEETS
As of June 30, 2010
    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

    $ 41,277     $     $ 254,093        $ 48,814     $        $ 344,184

Accounts receivable, less allowance for doubtful accounts

    8         93,104        2,598            95,710

Inventory

            104,474            (12,181     92,293

Intercompany interest receivable

                   4,264     (4,264    

Income tax and alternative fuel mixture credit receivable

            121                   121

Prepaid and other current assets

    2,121     776     58,107        1,377            62,381
                                       

Total current assets

    43,406     776     509,899        57,053     (16,445     594,689
                                       

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION

    1,807         62,936        1,081,473            1,146,216

NET PROPERTY, PLANT AND EQUIPMENT

    1,344         368,513        826     758        371,441

INVESTMENT IN JOINT VENTURE

    75,233         (11,449                63,784

INVESTMENT IN SUBSIDIARIES

    1,215,080     882,980                (2,098,060    

OTHER ASSETS

    23,350     10,148     684,671        14,578     (556,288     176,459
                                       

TOTAL ASSETS

    $ 1,360,220     $ 893,904     $ 1,614,570        $ 1,153,930     $ (2,670,035     $ 2,352,589
                                       

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

CURRENT LIABILITIES

           

Accounts payable

    $ 1,284     $     $ 62,355        $ 622     $        $ 64,261

Accrued interest

    237     5,286     768        21            6,312

Accrued customer incentives

            9,421                   9,421

Current liabilities for dispositions and discontinued operations

            11,038                   11,038

Other current liabilities

    17,659         47,780        20,533            85,972
                                       

Total current liabilities

    19,180     5,286     131,362        21,176            177,004
                                       

LONG-TERM DEBT

        445,391     318,666                   764,057

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

            83,264                   83,264

PENSION AND OTHER POSTRETIREMENT BENEFITS

    87,061         24,734                   111,795

OTHER NON-CURRENT LIABILITIES

    11,112         22,886        608            34,606

INTERCOMPANY PAYABLE

    61,004         150,678        8,749     (220,431    
                                       

TOTAL LIABILITIES

    178,357     450,677     731,590        30,533     (220,431     1,170,726
                                       

TOTAL SHAREHOLDERS’ EQUITY

    1,181,863     443,227     882,980        1,123,397     (2,449,604     1,181,863
                                       

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

    $ 1,360,220     $ 893,904     $ 1,614,570        $ 1,153,930     $ (2,670,035     $ 2,352,589
                                       

 

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RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

 

    CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 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

    $ 2,895     $     $ 69,722        $ 2,347     $        $ 74,964

Accounts receivable, less allowance for doubtful accounts

            101,710        2,030            103,740

Inventory

            114,187            (25,683     88,504

Intercompany interest receivable

                   1,081     (1,081    

Income tax and alternative fuel mixture credit receivable

            192,579                   192,579

Prepaid and other current assets

    1,430     758     44,722        2,999            49,909
                                       

Total current assets

    4,325     758     522,920        8,457     (26,764     509,696
                                       

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION

    1,807         87,747        1,099,005            1,188,559

NET PROPERTY, PLANT AND EQUIPMENT

    1,493         341,790        1,147     509        344,939

INVESTMENT IN JOINT VENTURE

    75,248         (24,249                50,999

INVESTMENT IN SUBSIDIARIES

    1,173,256     869,169                (2,042,425    

OTHER ASSETS

    23,135     11,668     496,195        4,313     (376,573     158,738
                                       

TOTAL ASSETS

    $ 1,279,264     $ 881,595     $ 1,424,403        $ 1,112,922     $ (2,445,253     $ 2,252,931
                                       

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

CURRENT LIABILITIES

           

Accounts payable

    $ 3,057     $     $ 54,871        $ 656     $        $ 58,584

Bank loans and current maturities

            4,650                   4,650

Accrued interest

    519     5,286     707                   6,512

Accrued customer incentives

            25,644                   25,644

Current liabilities for dispositions and discontinued operations

            10,648                   10,648

Other current liabilities

    18,885         37,726        12,462            69,073
                                       

Total current liabilities

    22,461     5,286     134,246        13,118            175,111
                                       

LONG-TERM DEBT

    5,000     441,332     243,667        5,000            694,999

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

            87,943                   87,943

PENSION AND OTHER POSTRETIREMENT BENEFITS

    86,522         25,140                   111,662

OTHER NON-CURRENT LIABILITIES

    13,352         23,035        23,553     (22,930     37,010

INTERCOMPANY PAYABLE

    5,723         41,203        8,706     (55,632    
                                       

TOTAL LIABILITIES

    133,058     446,618     555,234        50,377     (78,562     1,106,725
                                       

TOTAL SHAREHOLDERS’ EQUITY

    1,146,206     434,977     869,169        1,062,545     (2,366,691     1,146,206
                                       

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

    $ 1,279,264     $ 881,595     $ 1,424,403        $ 1,112,922     $ (2,445,253     $ 2,252,931
                                       

 

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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)

 

    CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2010
 
    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

    $ 117,276        $ 25,000        $ 231,519         $ 118,793        $ (136,788     $ 355,800    
                                               

INVESTING ACTIVITIES

           

Capital expenditures

    (139            (58,842     (12,367            (71,348

Purchase of timberlands

                         (22,936     22,936          

Purchase of real estate

                  (41,254            41,254          

Change in restricted cash

                         (10,043            (10,043

Other

                  6,855        (1,980            4,875   
                                               

CASH USED FOR INVESTING ACTIVITIES

    (139            (93,241     (47,326     64,190        (76,516
                                               

FINANCING ACTIVITIES

           

Issuance of debt

                  75,000        52,000               127,000   

Repayment of debt

    (5,000            (4,650     (57,000            (66,650

Dividends paid

    (79,990                                 (79,990

Proceeds from the issuance of common shares

    12,232                                    12,232   

Excess tax benefits on stock-based compensation

                  3,951                      3,951   

Debt issuance costs

                  (535                   (535

Repurchase of common shares

    (5,997                                 (5,997

Distributions to parent

           (25,000     (27,598     (20,000     72,598          
                                               

CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES

    (78,755     (25,000     46,168        (25,000     72,598        (9,989
                                               

EFFECT OF EXCHANGE RATE CHANGES ON CASH

                  (75                   (75
                                               

CASH AND CASH EQUIVALENTS

           

Change in cash and cash equivalents

    38,382               184,371        46,467               269,220   

Balance, beginning of year

    2,895               69,722        2,347               74,964   
                                               

Balance, end of period

    $ 41,277        $        $ 254,093        $ 48,814        $        $ 344,184   
                                               

 

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Table of Contents

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(Dollar amounts in thousands unless otherwise stated)

 

    CONDENSED CONSOLIDATING STATEMENTS OF CASH  FLOWS
For the Six Months Ended June 30, 2009
 
    Rayonier
Inc.
(Parent
Guarantor)
    Rayonier
TRS
Holdings
Inc. (Issuer)
    Subsidiaries  of
Rayonier TRS
Holdings Inc.
(Non-guarantors)
    All Other
Subsidiaries
(Non-

guarantors)
    Consolidating
Adjustments
    Total
Consolidated
 

CASH PROVIDED BY OPERATING ACTIVITIES

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

INVESTING ACTIVITIES

           

Capital expenditures

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

Change in restricted cash

                         (1,144            (1,144

Other

                  (1,693     (444            (2,137
                                               

CASH USED FOR INVESTING ACTIVITIES

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

FINANCING ACTIVITIES

           

Issuance of debt

                         30,000               30,000   

Repayment of debt

                         (30,000            (30,000

Dividends paid

    (78,929                                 (78,929

Proceeds from the issuance of common shares

    3,698                                    3,698   

Excess tax benefits on stock-based compensation

                  891                      891   

Repurchase of common shares

    (1,388                                 (1,388

Distributions to Parent

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

CASH USED FOR FINANCING ACTIVITIES

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

EFFECT OF EXCHANGE RATE CHANGES ON CASH

                  106                      106   
                                               

CASH AND CASH EQUIVALENTS

           

Change in cash and cash equivalents

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

Balance, beginning of year

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

Balance, end of period

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

 

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Table of Contents
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 2009 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 2009 Annual Report on Form 10-K. 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 2009 Annual Report on Form 10-K.

Segments

We are a leading international forest products company primarily engaged in 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. The Timber sales include all activities which 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. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of 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 sales, purchases and profits or losses are eliminated in consolidation.

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

 

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Table of Contents

Results of Operations, Three and Six Months Ended June 30, 2010 Compared to Three and Six Months Ended June 30, 2009.

 

Financial Information (in millions)

   Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Sales

        

Timber

     $ 48.9        $ 43.6        $ 96.0        $ 78.5   

Real Estate

        

Development

     0.4        1.2        1.6        1.4   

Rural

     4.2        5.8        7.6        9.6   

Non-Strategic Timberlands

     8.1        34.4        36.5        57.0   
                                

Total Real Estate

     12.7        41.4        45.7        68.0   
                                

Performance Fibers

        

Cellulose specialties

     162.6        134.7        319.9        291.4   

Absorbent materials

     39.3        42.4        81.8        89.3   
                                

Total Performance Fibers

     201.9        177.1        401.7        380.7   
                                

Wood Products

     21.6        12.5        37.5        24.3   

Other operations

     30.3        9.0        47.4        14.7   

Intersegment Eliminations

     (3.2     (4.9     (5.9     (8.1
                                

Total Sales

     $ 312.2        $ 278.7        $ 622.4        $ 558.1   
                                

Operating Income (Loss)

        

Timber

     $ 8.7        $ 0.4        $ 16.9        $ (1.9

Real Estate

     4.1        24.2        21.5        38.6   

Performance Fibers

     45.0        34.7        89.9        75.5   

Wood Products

     4.3        (2.6     4.3        (6.1

Other operations

     0.7        (2.1     1.3        (1.3

Corporate and other expenses / eliminations 1

     (6.5     79.6        (0.7     72.6   
                                

Total Operating Income

     56.3        134.2        133.2        177.4   

Interest Expense

     (12.2     (12.2     (24.7     (24.8

Interest / Other income

     0.4        0.3        0.6        0.3   

Income tax expense

     (5.9     (14.5     (13.6     (19.2
                                

Net Income

     $ 38.6        $ 107.8        $ 95.5        $ 133.7   
                                

Diluted Earnings Per Share

     $ 0.48        $ 1.35        $ 1.18        $ 1.68   
                                

 

1

The six months ended June 30, 2010 includes a first quarter gain of $12.4 million from the sale of a portion of the Company’s interest in its New Zealand joint venture. See Note 3 – Joint Venture Investment for additional information. The three and six months ended June 30, 2009 include $85.9 million related to the alternative fuel mixture credit. See Note 2 – Alternative Fuel Mixture Credit (“AFMC”) for additional information.

 

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TIMBER

 

Sales (in millions)

      Changes Attributable to:    
    2009   Price   Volume/Mix     Other   2010
         

Three months ended June 30,

         

  Eastern

    $ 30.9     $ 5.6     $ (7.0     $ 0.3     $ 29.8

  Western

    10.7     5.7            0.2     16.6

  New Zealand

    2.0                0.5     2.5
                               

  Total Sales

    $     43.6     $     11.3     $ (7.0     $     1.0     $     48.9
                               

Six months ended June 30,

         

  Eastern

    $ 54.7     $ 8.8     $ (4.7     $ 0.5     $ 59.3

  Western

    20.0     8.2     3.7            31.9

  New Zealand

    3.8                1.0     4.8
                               

  Total Sales

    $     78.5     $     17.0     $ (1.0     $     1.5     $     96.0
                               

In the Eastern region, average prices rose 33 percent and 35 percent in the three and six months ended June 30, 2010 compared to the prior year periods, respectively, primarily from restricted timber supply caused by wet weather conditions. Prices in 2010 were also impacted by improved timber demand and a shift in sales mix. Volumes declined 28 percent and 20 percent in second quarter and year-to-date 2010 from the prior year periods, respectively, primarily due to lower thinning volumes in second quarter 2010. Year-to-date volumes were also unfavorably impacted by the restricted hardwood supply in first quarter 2010 caused by wet weather.

In the Western region, prices increased 51 percent and 34 percent in the three and six months ended June 30, 2010 from the respective 2009 periods reflecting improved export demand and tight supply. Overall volumes declined 7 percent for second quarter but increased 15 percent for the six months as we accelerated the year’s harvest schedule to first quarter to capitalize on increased prices. The sales impact of the volume decline in second quarter 2010 was offset by a mix shift to higher-priced delivered logs.

New Zealand sales represent timberland management fees for services provided to the joint venture, of which Rayonier has a 26 percent equity interest.

 

Operating Income (Loss) (in millions)

       Changes Attributable to:    
    2009    Price   Volume/Mix   Cost/Other   2010

Three months ended June 30,

          

  Eastern

    $     3.4     $ 5.6   $ (2.1)   $ (1.5)     $ 5.4

  Western

    (2.4)      5.7     (0.6)     (0.3)     2.4

  New Zealand/Other

    (0.6)              1.5      0.9
                              

  Total Operating Income

    $ 0.4     $ 11.3   $ (2.7)   $ (0.3)     $ 8.7
                              

Six months ended June 30,

          

  Eastern

    $ 6.3     $ 8.8   $ (2.9)   $ 1.5      $ 13.7

  Western

    (6.3)      8.2     (0.2)     1.1      2.8

  New Zealand/Other

    (1.9)              2.3      0.4
                              

  Total Operating Income (Loss)

    $     (1.9)    $     17.0   $ (3.1)   $     4.9      $     16.9
                              

In the Eastern region, second quarter operating income improved from the 2009 period as higher sales prices more than offset lower volumes as well as increased costs primarily from depletion and logging expenses due to sales mix. For year-to-date 2010, operating income improved from the prior year period reflecting increased sales as well as lower costs due to geographic sales mix and improved production and transportation costs.

In the Western region, operating income in the second quarter improved from the prior year period as higher prices more than offset the decline in volume and slight increase in costs. In the six months ended June 30, 2010, operating income increased from the prior year period reflecting higher prices and favorable logging costs. Year-to-date operating income was also impacted by an unfavorable shift in sales mix.

 

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New Zealand operating income primarily represents equity earnings related to the joint venture’s timber activities which have increased from the prior year periods due primarily to improved export demand.

REAL ESTATE

 

Sales (in millions)

       Changes Attributable to:      
    

 

2009

  Price     Volume/Mix     2010

Three months ended June 30,

        

Development

     $ 1.2     $ 0.1        $ (0.9     $ 0.4

Rural

     5.8     (1.9     0.3        4.2

Non-Strategic Timberlands

     34.4     1.1        (27.4     8.1
                            

Total Sales

     $   41.4     $   (0.7     $   (28.0     $   12.7
                            

Six months ended June 30,

        

Development

     $ 1.4     $ (0.7     $ 0.9        $ 1.6

Rural

     9.6     (3.8     1.8        7.6

Non-Strategic Timberlands

     57.0     1.8        (22.3     36.5
                            

Total Sales

     $   68.0     $   (2.7     $   (19.6     $   45.7
                            

 

Operating Income (in millions)

        Changes Attributable to:      
     2009    Price     Volume/Mix     Cost/Other     2010

Three months ended June 30,

           

Total Operating Income

     $         24.2      $         (0.7     $         (17.9     $         (1.5     $         4.1
                                     

Six months ended June 30,

           

Total Operating Income

     $         38.6      $         (2.7     $         (11.8     $         (2.6     $         21.5
                                     

For second quarter 2010, sales and operating income were $29 million and $20 million below 2009, respectively. Year-to-date, sales and operating income were $22 million and $17 million below 2009, respectively. The unfavorable results were primarily driven by fewer non-strategic timberland acres sold. Second quarter 2009 included 31,000 acres of non-strategic timberland sales compared to 6,000 in second quarter 2010. The 2010 periods were also negatively impacted by a decline in rural prices primarily due to geographic mix.

PERFORMANCE FIBERS

 

Sales (in millions)

        Changes Attributable to:      
     2009    Price     Volume/Mix     2010

Three months ended June 30,

         

Cellulose specialties

     $         134.7      $ (7.9     $ 35.8        $         162.6

Absorbent materials

     42.4      6.1        (9.2     39.3
                             

Total Sales

     $         177.1      $ (1.8     $ 26.6        $         201.9
                             

Six months ended June 30,

         

Cellulose specialties

     $         291.4      $ (10.8     $ 39.3        $         319.9

Absorbent materials

     89.3      4.0        (11.5     81.8
                             

Total Sales

     $         380.7      $ (6.8     $ 27.8        $         401.7
                             

Cellulose specialties sales improved in both 2010 periods as increased volume reflecting stronger demand more than offset a decline in prices from the prior year periods due to the third quarter 2009 removal of a cost-based surcharge. Volumes rose 27

 

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percent and 14 percent for the three and six months ended June 30, 2010, respectively, while prices declined five percent and three percent for the quarter and six months ended June 30, 2010 from the prior year periods.

While absorbent materials prices improved by 19 percent and five percent for the three and six months ended June 30, 2010 due to strong demand, sales declined in both periods reflecting a 22 percent and 14 percent decrease in volumes for the three and six months, respectively, due to the timing of customer orders, a shift in production to cellulose specialties and pre-shutdown production issues.

 

Operating Income (in millions)

        Changes Attributable to:          
     2009    Price    Volume/Mix    Costs/Other    2010

Three months ended June 30,

              

Total Operating Income

     $         34.7      $         (1.8)      $         11.5      $         0.6      $         45.0
                                  

Six months ended June 30,

              

Total Operating Income

     $         75.5      $         (6.8)      $         11.3      $         9.9      $         89.9
                                  

Operating income improved in both 2010 periods primarily due to increased cellulose specialties volumes, higher absorbent materials prices and lower chemical costs offset in part by higher wood costs.

WOOD PRODUCTS

 

Sales (in millions)

        Changes Attributable to:          
     2009    Price    Volume    2010     

Three months ended June 30,

              

Total Sales

     $ 12.5        $ 7.4        $ 1.7        $ 21.6   
                              

Six months ended June 30,

              

Total Sales

     $ 24.3        $ 11.0        $ 2.2        $ 37.5   
                              

Operating (Loss) Income (in millions)

        Changes Attributable to:          
     2009    Price    Volume/Mix/Costs    2010     

Three months ended June 30,

              

Total Operating (Loss) Income

     $         (2.6)      $         7.4      $         (0.5)      $         4.3   
                              

Six months ended June 30,

              

Total Operating (Loss) Income

     $         (6.1)      $         11.0      $         (0.6)      $         4.3   
                              

Sales and operating income improved from the prior year periods primarily due to increased prices resulting from supply constraints caused by wet weather conditions. Prices rose 52 percent and 41 percent for the three and six months ended June 30, 2010 from the prior year periods. Although below historical averages, volumes increased 13 percent and nine percent in second quarter and year-to-date 2010 from the 2009 periods, respectively, reflecting higher production to capitalize on improved pricing. Operating income was unfavorably impacted by higher costs, primarily wood prices, in both 2010 periods.

OTHER OPERATIONS

Sales and operating income increased from the prior year periods. The improvement in operating income was primarily driven by foreign exchange gains and higher earnings from log trading.

 

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Corporate and Other Expenses

The six months ended June 30, 2010 results include a first quarter gain of $12 million from the sale of a portion of the Company’s interest in its New Zealand joint venture. See Note 3 – Joint Venture Investment for additional information. The three and six months ended June 30, 2009 results include $86 million relating to the alternative fuel mixture credit. See Note 2 – Alternative Fuel Mixture Credit (“AFMC”) for additional information. Excluding these special items, corporate and other expenses were $6 million for the three months ended June 30, 2010 and 2009 and $13 million for the six months ended June 30, 2010 and 2009.

Interest Expense and Other Income, Net

For the three and six months ended June 30, 2010, interest and other expenses were comparable to the prior year periods as higher average debt balances were offset by interest income related to a favorable IRS settlement and lower average interest rates.

Income Tax Expense

Second quarter effective tax rates before discrete items were 19.1 percent and 21.5 percent in 2010 and 2009, respectively. For the six months, the effective tax rates were 17.6 percent and 20.2 percent in 2010 and 2009, respectively. The decreased rates in 2010 were due to proportionately higher earnings from the REIT.

Including discrete items, the effective tax rates for the quarter and year-to-date were 13.4 percent and 12.4 percent compared to 11.9 percent and 12.6 percent in 2009, respectively.

Outlook

With solid performance in the first half, we are well positioned for strong full year results. In Timber, by acting quickly to pull forward stumpage volume, we effectively locked in higher prices. In Real Estate, we are expecting an increase in rural and conservation sales in the second half while reducing our sales of non-strategic timberland. With strategic investments in our mills lowering costs and enabling us to meet increasing demand for our cellulose specialties and absorbent materials products, we are on track for another strong year in Performance Fibers.

As a result we are again increasing our 2010 guidance. We now expect earnings of $2.05 per share to $2.20 per share for 2010, excluding the gain on the New Zealand joint venture transaction, and Cash Available for Distribution of $360 million to $380 million.

Employee Relations

In April 2010, collective bargaining agreements covering approximately 240 hourly employees at our Fernandina Beach, Florida Performance Fibers mill expired. Negotiations have now been successfully concluded and on July 29 the unions ratified a new four-year agreement. See Item 1 – Business and Item 1A – Risk Factors, respectively, in the 2009 Annual Report on Form 10-K for more information on employee relations.

Liquidity and Capital Resources

Historically, our operations have generally produced consistent cash flows and required limited capital resources. Short-term borrowings have helped fund cyclicality and seasonality in working capital needs and long-term debt has been used to fund major acquisitions.

$75 million Five-Year Term Loan Agreement

In March 2010, TRS borrowed $75 million under a five-year term loan agreement with a group of banks at LIBOR plus 275 basis points. We expect to use these funds for general corporate purposes.

 

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Table of Contents

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

 

     As of June 30,
2010
   As of December 31,
2009

Cash and cash equivalents 1

     $                         344        $                         75  

Total debt

     764        700  

Shareholders’ equity

     1,182        1,146  

Total capitalization (total debt plus equity)

     1,946        1,846  

Debt to capital ratio

     39%        38%  

 

1

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

Cash Provided by Operating Activities (in millions of dollars)

 

         2010            2009            Increase    

Six months ended June 30,

     $     356        $     127        $     229  

Cash provided by operating activities for the six months ended June 30, 2010 increased primarily due to a cash refund of $189 million related to the AFMC received in April 2010. See Note 2 – Alternative Fuel Mixture Credit (“AFMC”) for additional information. Excluding the impact of the AFMC, cash provided by operating activities increased by approximately $40 million primarily due to improved operating results and lower working capital requirements related to the timing of payments.

Cash Used for Investing Activities (in millions of dollars)

 

         2010            2009            Increase    

Six months ended June 30,

     $     77        $     53        $     24  

Cash used for investing activities increased primarily due to a planned increase in capital expenditures for cost reduction and efficiency projects as well as environmental expenditures at our Jesup, Georgia Performance Fibers mill required under a 2008 consent decree. Additionally, restricted cash increased over prior year due to the timing of a like-kind exchange (“LKE”) transaction.

Cash Used for Financing Activities (in millions of dollars)

 

         2010            2009            Decrease    

Six months ended June 30,

     $     10        $     76        $     66  

Cash used for financing activities decreased mainly due to higher net borrowings of $60 milli